Fraud, Group Pleading and ParticularityPrint Article
- Posted on: Jul 13 2022
By: Jeffrey M. Haber
In Yunjie Yang v. Knights Genesis Group, 2022 N.Y. Slip Op. 32126(U) (Sup. Ct., N.Y. County July 6, 2022) (here), the court was asked to consider various matters associated with the particularity requirement for pleading fraud. In this regard, by the court examined the group pleading doctrine and the specificity needed to maintain a fraud claim.
The motion court was also asked to consider alter ego liability and the factual bases for piercing the corporate veil.
Yang involved investors who each invested $500,000 in 1989 Investor LLC (the “Company”), an entity whose purpose was to fund a real estate development project that was being managed by the Knights Genesis Group (“Knights Genesis”). Both the Company and Knights Genesis were managed by defendant Jiangcheng Yuan (“Yuan”). According to the investors (who had intervened in the action (the “Intervenors”), Yuan guaranteed them a minimum 60% return on their investment within three years regardless of whether the project was completed. Based on this guaranteed minimum return, Intervenors invested money in the Company and executed a subscription agreement. By executing the subscription agreement, the Intervenors each received an ownership interest and preferred stock in the Company. The subscription agreements were countersigned on behalf of the Company by defendant Tina Tang (“Tang”).
Intervenors alleged that, as the three-year deadline approached, defendants advised them that the Company’s real estate project had been highly profitable and encouraged Intervenors to reinvest their capital into KG Bayside, LLC (“KG Bayside”), which was another entity controlled by Knights Genesis, Yuan, and defendant Katie Chen. Defendants Yuan and Chen allegedly represented that the Intervenors would be given an ownership interest in KG Bayside and earn a guaranteed 9% return per year to be paid out within the next two years. Intervenors alleged that instead of reinvesting the money as defendants promised, defendants fraudulently transferred some of those funds without consideration to Yuan’s father-in-law, Jianfei Chen, and his company, Silver City Capital Inc.
Intervenors also claimed that Yuan and Tang failed to advise them of all material developments and provide them with financial information and reporting in connection with the Company and its real estate project. Instead, defendants allegedly offered false assurances and information about the profitability of the Company’s project and the ability of the Company to make redemptions when due.
Finally, Intervenors alleged that defendants dominated and controlled the corporate entities such that the entities were their alter egos.
Intervenors asserted causes of action for, inter alia, fraudulent inducement, breach of fiduciary duty and breach of contract. All but defendant Tang answered the complaint. Tang moved to dismiss. The court denied the motion.
We examine the Court’s decision with regard to the fraud claim, veil piercing and the breach of fiduciary duty claim.
Tang moved to dismiss the fraud claim, arguing that, inter alia, Intervenors engaged in impermissible group pleading by asserting certain allegations against defendants generally or as the “Fraud Defendants”.
Group pleading is the practice of grouping multiple defendants together in a complaint when they are alleged to have collectively committed the wrong complained of. Courts routinely dismiss a complaint that lumps together numerous defendants without differentiation on particularity grounds because each defendant is not informed of the wrongs he/she is alleged to have committed.1 [Ed. Note: This Blog wrote about the group pleading doctrine here.]
Both the Federal Rules of Civil Procedure and the Civil Practice Law and Rules require a plaintiff to provide sufficient notice of the claims asserted against the defendants. Rule 8(a)(2) provides that a complaint “must contain” “a short and plain statement of the claim showing that the pleader is entitled to relief.” CPLR § 3013 requires the pleader to provide the court and the parties notice of the transactions or occurrences intended to be proved together with the material elements of the plaintiff’s cause of action or the defendant’s defense. Generally, a motion to dismiss under Fed. R. Civ. P. 12(b)(6) or CPLR § 3211(a)(7) may be granted if a court concludes that the plaintiff has failed to set forth fair notice of what the claim is and the grounds upon which it rests.
The court held that Intervenors did not run afoul of the group pleading doctrine.2 The court explained that Intervenors were not referencing a diverse group of defendants to which entirely different acts giving rise to the action could be attributed. Instead, Intervenors were referring to three individuals who were alleged to have engaged in the same acts.3
Tang also argued that, inter alia, Intervenors failed to plead their fraud claims with particularity. Under CPLR § 3016(b), a plaintiff alleging fraud must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true.4 Conclusory allegations will not suffice.5 The motion court held that Intervenors satisfied the particularity requirement:
The Intervenors allege that Ms. Tang, along with the other “Fraud Defendants”, represented to the Plaintiffs that they would earn 9% interest per year over two years if they invested the proceeds of their investment in the Company into KG Bayside. They also allege that Ms. Tang and the other Defendants never intended for that money to remain in KG Bayside. Instead, they always intended to transfer the money without consideration to Mr. Chen and Silver City. The Intervenors further allege that Ms. Tang acted as a manager of and exercised control over the Company and KG Bayside, and that she used this position to induce the Intervenors to make their investments. Ms. Tang also undisputedly signed the subscription agreements on behalf of the Company, which set forth the agreement that the Intervenors allege the Defendants never intended to honor. The Intervenors also allege that Ms. Tang worked with Mr. Yuan and Ms. Chen and as a manager of the Company, Knights Genesis, and KG Bayside to help perpetuate the underlying fraud.6
The court also found that the alleged false statements were misrepresentations of fact intended to induce Intervenors to invest in the Company; they were not mere statements of future performance.7 Because the court found that the alleged misrepresentations did not implicate defendants’ performance obligations under the agreements with Intervenors, the court rejected the argument that the fraud claims duplicated the breach of contract claims.8
In support of her argument for dismissal of the breach of fiduciary duty claim, Tang claimed that, among other things, she did not owe Intervenors a fiduciary duty. The motion court rejected the argument.
To state a claim for breach of fiduciary duty, a plaintiff must allege that a defendant owed him/her a fiduciary duty, that the defendant committed misconduct, and that the plaintiff suffered damages caused by that misconduct.9
The motion court held that Intervenors sufficiently alleged a fiduciary relationship between themselves and defendant because of defendant’s status as a managing member and their ownership interests in the Company and KG Bayside. Under New York law, managing members of an LLC owe its members fiduciary duties.10
Finally, the court held that Intervenors adequately pleaded alter ego liability against defendants.11 To pierce the corporate veil, a plaintiff must demonstrate that (i) the defendants exercise complete domination of the corporation in respect to the transaction attacked, and (ii) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff’s injury.12 At the pleading stage, a plaintiff must do more than merely allege that a defendant engaged in improper acts or acted in bad faith; plaintiff must allege facts that, if proved, indicate that the defendant exercised complete domination or control and abused the privilege of doing business in the corporate form to perpetuate a wrong or injustice.13
The court found that defendants exercised dominion and control over Knights Genesis, KG Bayside, and the Company and that they abused the corporate form to perpetrate the alleged fraud.14 In this regard, Intervenors alleged that the three entities (i) all share a single office, (ii) have overlapping personnel, ownership, and directors, (iii) all use Knights Genesis emails to conduct business, and (iv) comingle funds.15 The court also found that defendants allegedly used these entities to fraudulently induce investments and then transferred them to another for their own personal use.16
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
- See, e.g., DiVitorrio v. Equidyne Extractive Indus., Inc., 822 F.2d. 1242, 1247 (2d Cir. 1987) (“[w]here multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of [its] alleged participation in the fraud.”); Regnante v. Sec & Exch. Officials, 134 F. Supp. 3d 749, 771 (S.D.N.Y. 2015) (granting motion to dismiss for failing to particularize each defendant’s misconduct) (“Rule 9(b) requires that when fraud is alleged against multiple defendants, a plaintiff must set forth separately the acts complained of by each defendant”); Aetna Cas. & Sur. Co v. Merchants Mut. Ins. Co., 84 A.D.2d 736 (1st Dept. 1981) (affirming a dismissal of a complaint where the claims were “pleaded against all defendants collectively without any specification”); Ritchie v. Carvel Corp., 180 A.D.2d 786, 787 (2d Dept. 1992) (“allegations of fraud that refer only to the ‘defendants’ without connecting particular misrepresentations to the particular defendants are insufficient”); Excel Realty Advisers LP v. SCP Capital, Inc., 2010 N.Y. Slip Op. 33447 (U) (Sup Ct. Nassau Co. Dec. 2, 2010), aff’d, 101 A.D.3d 669 (2d Dept. 2012) (dismissing fraud claim “primarily based upon a series of oblique averments which . . . lump the defendants together without any specification as to the precise fraudulent conduct attributed to each….”).
- Slip Op. at *6.
- Id. (citing, Stewart Tit. Ins. Co. v. Liberty Tit. Agency, LLC, 83 A.D.3d 532, 533 (1st Dept. 2011)).
- Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559-60 (2009).
- Slip Op. at *8.
- Besen v. Farhadian, 195 A.D.3d 548, 549-550 (1st Dept. 2021).
- Pokoik v. Pokoik, 115 A.D.3d 428, 429 (1st Dept. 2014).
- Slip Op. at *7.
- Franklin v. Daily Holdings, Inc., 135 A.D.3d 87, 95 (1st Dept. 2015).
- East Hampton Union Free School Dist. V. Sandpebble Builders, Inc., 16 N.Y.3d 775, 776 (2011).
- Slip Op. at *7.