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For those unfamiliar with what today’s young kids are listening to, Aubrey “Drake” Graham is one of the most commercially-successful recording artists of all time, with multiple multiple-platinum records to his credit. For frame of reference, Drake’s recent album “Scorpion,” on its first day of release, was streamed over 300 million times on Apple Music and Spotify alone. In other words, Drake generates enough revenue to rap about his taxes: “Nowadays it’s six-figures when they tax me/ Oh well, guess you lose some and win some, long as the outcome is income.”

Aspire Music Group (“Aspire”) was the fortunate record label with the foresight to enter into an Exclusive Recording Artist Agreement with Drake in 2008, when he was still relatively unknown. In 2009, Aspire provided Drake’s services to a joint venture between Cash Money Records (“Cash Money”) and Dwayne Carter’s (aka rapper “Lil Wayne”) company Young Money Entertainment (“Young Money”), in exchange for a third of net profits from Drake’s albums and a third of the copyrights, and for monthly accounting statements.

The sordid history between Cash Money and Lil Wayne is a story for another blog, but suffice it to say that by 2015, Cash Money’s principals were short on both cash and money. Lil Wayne sued Cash Money and its principals for $51 million in January 2015. Universal Music Group (“Universal”) stepped in. Since its inception in 1998, Universal Music Group (“Universal”) had served as Cash Money’s music distributor. However, as alleged by Aspire, in 2015 Universal advanced large sums of money to Cash Money and agreed to take on certain of Cash Money’s liabilities in exchange for unfettered control over a significant portion of Cash Money’s business operations.

Aspire filed a lawsuit in New York County Supreme Court in April 2017 against Cash Money and its principals, Young Money, and Universal. According to Aspire, Cash Money and Young Money had failed to pay Enough Money to Aspire for Drake-related profits, and Universal was liable as Cash Money’s alter ego.

Universal moved to dismiss, arguing that (i) Universal did not own Cash Money, so could not be its alter ego; (ii) Universal was not alleged to be the alter ego of Young Money and therefore not responsible for Young Money’s actions; (iii) Aspire’s rights are governed by a contract to which Universal was not a party; and (iv) Aspire’s allegations of domination and control are conclusory.

In an Order entered on July 3, 2018, Justice Barry R. Ostrager denied Universal’s motion to dismiss. Although recognizing that New York courts do not apply alter-ego liability on non-owners, the court found that Aspire had sufficiently alleged facts suggesting that Universal had obtained “equitable ownership” over Cash Money. Aspire had alleged that, pursuant to contracts, Universal shared offices with Cash Money, operated its website, intermingled its business affairs, and kept Cash Money undercapitalized and entirely dependent on advances and direct payments from Universal. Citing the First Department’s 2000 decision in Trans. International Corp. v. Clear View Technologies, Ltd., the court found that such allegations were sufficient to confer equitable ownership, and thus alter-ego liability, on a non-owner.

It is not clear that the Clear View Technologies decision involved a non-owner, non-director defendant. In its reply brief, Universal cited allegations in the complaint that “each invidividual defendant is and at all relevant times, was an officer, director and shareholder of Clear View.” After acknowledging a long line of New York decisions declining to impose alter ego liability against non-owners, Justice Ostrager concluded that such liability was nonetheless permitted under New York law. However, the court cited only federal cases from the Second Circuit in support.

As for Universal’s other arguments, the court held that Cash Money was liable for Young Money’s acts in furtherance of their joint venture partnership, and therefore Universal need not be alleged to be Young Money’s alter-ego. And Universal’s absence from Aspire’s contract with the joint venture was irrelevant, because Universal did not become Cash Money’s alter ego until 2015. Aspire did not know of Universal’s role at the time it entered the contract with Cash Money.

It remains to be seen whether sufficient evidence exists of Universal’s alleged control over Cash Money. Either way, be forewarned: too much contractual control over a borrower can potentially give rise to liability for that borrower’s obligations.

 

On June 5, 2018, in RKA Film Financing, LLC v. Kavanaugh et al., the First Department unanimously affirmed the Supreme Court, New York County’s decision absolving the United States Secretary of the Treasury, Steven Mnuchin, of fraud claims brought by RKA Film Financing LLC (“RKA”), a media financing company.

By way of background, in 2014, RKA, a media financing company, lent money to Relativity, a global media company. RKA alleged that it was misled into believing that it was investing in a low-risk lending facility and that the funds would be used for print and advertising expenses related to the release of motion picture films by special purpose entities (“SPE”). Specifically, RKA alleged that certain representatives of Relativity caused certain SPEs to enter into a print and advertising funding agreement with RKA (“Funding Agreement”). RKA alleged that the Funding Agreement contained misrepresentations, including that the funds would be used for print and advertising expenses for specific movies, to induce RKA to invest large sums of money. However, unbeknownst to RKA, Relativity used the funds to pay for general corporate expenses.

Mnuchin joined Relativity’s board as a non-executive director and chairman in October of 2014 after his private investment firm invested $104 million in Relativity. Mnuchin also served as the CEO and Chairman of OneWest, a commercial lender that lent millions to Relativity. RKA alleged that by way of Mnuchin’s position at OneWest, he was privy to the “inner-workings” of Relativity’s finances.

On April 10, 2015, in response to RKA’s request, members of Relativity informed RKA that only “$1.7 million had actually been spent” on print and advertising. On April 13, 2015, Relativity admitted that it misappropriated RKA’s funds.

Mnuchin, who did not participate in the execution or performance of the Funding Agreement, resigned from the Relativity board on May 29, 2015. Thereafter, on May 30, 2015, after Relativity defaulted on a loan from OneWest, Mnuchin began seizing $50 million from Relativity’s account to recoup OneWest’s loan.

RKA commenced suit against several defendants, including Mnuchin, alleging that they misled RKA into lending Relativity millions of dollars for print and advertising of major movie releases. Mnuchin moved to dismiss. The Supreme Court, New York County dismissed RKA’s claims against Mnuchin.

The Court held that RKA failed to establish its claim for fraud because “absent substantive allegations that Mnuchin was responsible for, aware of, or participated in the purported fraud surrounding the Funding Agreement, liability cannot attach.” Specifically, a plaintiff seeking to recover for fraud must “set forth specific and detailed factual allegations that the defendant personally participated in, or had knowledge of any alleged fraud.” To allege a cause of action for fraud, a plaintiff must also establish causation, showing that “defendant’s misrepresentations were the direct and proximate cause of the claimed losses.” Accordingly, Justice Charles E. Ramos concluded that despite allegations that Mnuchin had inside access to the way in which Relativity used the funds, that was insufficient to establish fraud absent evidence of representations made by Mnuchin.

Similarly, Justice Ramos held that RKA’s negligent misrepresentation claim fails because of an absence of a privity-like relationship between Mnuchin and RKA. To plead a claim for negligent misrepresentation, a plaintiff must show: “(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on such information.” In that regard, the Court also held that RKA failed to allege a relationship between RKA and Mnuchin or that Mnuchin owes a fiduciary duty to RKA.

Finally, Justice Ramos dismissed RKA’s fraudulent inducement claim because it was impossible for Mnuchin to have fraudulently induced RKA to enter into the Funding Agreement, as he had not joined Relativity’s board until months after RKA and Relativity entered into their agreement. To prevail on a fraudulent inducement claim, a plaintiff must establish: 1) a misrepresentation of material fact, 2) known to be false, 3) made with the intention of inducing reliance, 4) that is justifiably relied upon, and 5) results in damages. In light of that, Justice Ramos further held that the Complaint was silent as to any allegations that Mnuchin was involved in the execution of the Funding Agreement or made any representations to RKA.

The First Department came to the same conclusions as the lower court.

First, the Court held that the allegations that the board of directors of Relativity was involved in the financial transactions and the daily operations of the company are not enough to conclude that Mnuchin personally participated in, or had knowledge of, the fraud as a result of his position on Relativity’s board.

Second, the Court determined that the fact that Mnuchin became aware of the fact that RKA’s funds were used for working capital and not solely for print and advertising expenses was insufficient to establish that he was aware that misrepresentations were made by the other defendants or that the other defendants were part of the fraud scheme.

The First Department also affirmed the Supreme Court’s holding that RKA’s negligent misrepresentation claim against Mnuchin was insufficient, because RKA failed to allege any direct contact between Mnuchin and RKA, giving rise to the requisite special relationship.

 

In sum, mere knowledge or awareness of a company’s finances, without more information, is insufficient to establish that a company’s board member is liable for a fraud committed by the company.

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In 2015, Guo Wengui, a/k/a Kwok Ho Wan, a Chinese citizen, billionaire investor and political provocateur, fled China for the United States amid reported investigations by the Chinese government involving several of his businesses and business partners. Mr. Guo reportedly left behind approximately $17 billion in Chinese assets, which have been frozen. Despite living an opulent lifestyle on the 18th floor of the Sherry Netherland hotel on Fifth Avenue, he is now facing some financial pressure.

Among Mr. Guo’s international creditors is Pacific Alliance Asia Opportunity Fund (“Pacific Alliance”), a Hong Kong investment fund formed under Cayman Islands law. In 2008, Pacific Alliance loaned $30 million to Mr. Guo’s Hong Kong company in connection with the development of Pangu Plaza, site of a “7 Star Hotel” in Beijing near the Olympic arenas. In connection with the loan, Mr. Guo signed a personal guarantee. All of the documents and transactions were executed in Hong Kong or China.

According to Pacific Alliance, Mr. Guo now owes approximately $88 million in principal and accrued interest on the loan. However, Pacific Alliance’s efforts over the years to collect against Mr. Guo have been unsuccessful. Accordingly, in April 2017, Pacific Alliance brought suit against Mr. Guo in the Commercial Division of New York County, where Mr. Guo now resides and is seeking asylum from the United States government. (Mr. Guo’s membership at President Trump’s Mar-a-Lago resort does not appear to have expedited his application. It’s complicated.)

Mr. Guo moved before Judge Barry Ostrager to dismiss the complaint on grounds of forum non conveniens (inconvenient forum) pursuant to CPLR 327. New York courts (e.g., Islamic Rep. of Iran v. Pahlavi, 62 NY2d 474, 479 [1984]; Shin-Etsu Chem. Co. v. ICICI Bank Ltd., 9 AD3d 171, 178 [1st Dept 2004]) generally consider the following factors: (i) the availability of an alternative forum; (ii) the burden on the New York courts; (iii) whether the transaction out of which the cause of action arose occurred primarily in a foreign jurisdiction; (iv) the applicability of foreign law; (v) the potential hardship to the defendant; and (vi) whether a foreign forum has a substantial interest in adjudicating the action.

Mr. Guo argued that New York was an inconvenient forum because the dispute involved contracts between a Hong Kong investment fund and a Chinese citizen that were governed by Hong Kong law and related to Chinese real estate. Moreover, all of the relevant evidence was located in China and Hong Kong. Pacific Alliance responded that Mr. Guo was a fugitive from China and would never appear there for a legal proceeding; therefore, New York was the only forum available for Pacific Alliance to pursue its claims.

Judge Ostrager granted Mr. Guo’s motion to dismiss. The court reasoned that the State of New York had no interest in resolving a breach of contract dispute between Hong Kong and Chinese parties involving a Hong Kong agreement relating to Chinese real estate. Notwithstanding Mr. Guo’s residence in New York, the foreign site of the disputed transaction was most important to determining the proper forum. As for Pacific Alliance’s argument that Mr. Guo would not appear at a proceeding in Hong Kong or China, the court found “that circumstance would likely benefit plaintiff rather than be a detriment to plaintiff,” presumably because it would be easier for Pacific Alliance to obtain a default judgment.

The Appellate Division, First Department reversed, noting Mr. Guo’s “heavy burden” of establishing that New York is an inconvenient forum. Contrary to Judge Ostrager, the First Department found that Hong Kong was “not a suitable or adequate alternative, because defendant cannot return there due to his pending asylum claim and fugitive status.” This concern for Mr. Guo is somewhat strange because Mr. Guo had explicitly endorsed Pacific Alliance pursuing a judgment in China or Hong Kong against Mr. Guo without Mr. Guo’s appearance. Perhaps Mr. Guo agrees with commenters in China who believe that Chinese judgments are more difficult to enforce in the United States due to fears that such judgments are politically motivated.

Ultimately, the First Department found that there was insufficient evidence that it would be a hardship for Mr. Guo to litigate in New York, especially because he previously had brought suit against others in New York. However, the First Department’s decision did not appear to state a clear reason why certain factors were being weighed more heavily than others. Future litigants confronting inconvenient forum issues should take note of the unpredictability of the multi-factor balancing test.

Under Delaware law, the decision to commence litigation on behalf of a corporation is, of course,  a fundamental exercise of business judgment, which decision rests with the Board of Directors.  A shareholder, therefore, cannot bring a derivative action without pleading that a demand on the corporation to do so had been made, or that such demand would have been “futile.”  The shareholder, therefore, has an initial decision to make:  make the demand, or plead futility. 

Recently, in Reese v. Andreotti, Justice O. Peter Sherwood dismissed a derivative action brought by a shareholder who made the demand, which was rejected by the Board.    Relying on Delaware law, the court noted that the mere making of a demand is a tacit acknowledgment by the shareholder that there is an absence of facts that would support a “futility” argument (citing Spiegel v. Buntrock).  Mere disagreement with the Board’s conclusion is simply not sufficient to raise doubts about the Board’s good faith and whether it acted on an informed basis.  Similarly, the court held that by making a demand, a shareholder is effectively conceding that his demand can be fairly assessed and thereby waives any later claim that the Board members were conflicted.

How about the availability of discovery to determine the reasonableness of the Board’s rejection of the demand?  “No” says the court, relying on both Delaware law and New York law, which come to the same conclusion:  plaintiffs are not entitled to discovery to assess the reasonableness of the Board’s rejection.

Making a demand or pleading futility becomes an important, strategic first step in any derivative action.  There are presumptions and ramifications that must be considered before the chosen course is charted and demand is made.

 

 

If you commence an action by way of summons with notice, you must bear in mind the strict time limitations imposed by CPLR 3012(b). When the other party timely serves a written demand for a complaint, you have exactly twenty (20) days from service of the demand to serve the complaint. This is a strict, statutory deadline that should be calendared immediately upon receipt of the demand. If a litigant fails to serve a complaint within the twenty-day period, the action could be dismissed. Statutory Deadlines

This is precisely what occurred in Javoroski v. SelectQuote Ins. Service, Inc., et al., 2017 N.Y. Slip Op 50465(U)(Sup Ct, Albany County Feb. 21, 2017). Ms. Javoroski commenced an action against SelectQuote and other defendants by serving a summons with notice. The summons with notice indicated that Ms. Javoroski would be alleging, among other things, breach of contract as a result of defendants’ alleged failure to pay life insurance proceeds following the death of plaintiff’s husband. Shortly after plaintiff served the summons with notice, defendants SelectQuote and Charan Singh (“Singh”) filed a notice of appearance and demanded service of the complaint. When plaintiff did not serve the complaint within the twenty-day deadline imposed by CPLR 3012(b), Defendants moved to dismiss the action. Ms. Javoroski cross-moved for an extension of time to complete service, claiming that she had both a reasonable excuse for the delay and a meritorious claim.

First, Plaintiff’s counsel argued that his delay in serving the complaint was due to his need to “conduct further research to ascertain the identity of the correct defendant or defendants.” According to Plaintiff, there were multiple entities that included “SelectQuote” in their names and Singh was affiliated with all of them.

Next, Plaintiff’s counsel explained that, upon receiving Defendants’ notice of appearance in the mail, he undertook additional research in order to ascertain whether the appearing SelectQuote was in fact the entity that sold the life insurance policy to Plaintiff’s late husband. Notably, Plaintiff’s attorney admitted that the 20-day notice deadline was never calendared as a result of a “law office failure.”

Defendants pointed out that Plaintiff’s delay in serving the complaint was anything but short. In fact, Plaintiff served her complaint 79 days after Defendants’ demand, 118 days after service of the summons with notice, and two full weeks after Defendants served their motion to dismiss.

Defendants further argued that the excuse for the delay proffered by Plaintiff’s attorney was unreasonable because the notice of appearance identified the correct defendant and hence, there was no need for additional research.

Defendants also pointed out that the complaint pled identical, repetitive allegations against all five SelectQuote entities and hence, it was not necessary for Plaintiff to identify the correct corporate name in order to prepare the complaint.

The Court agreed with Defendants, finding that Plaintiff’s purported excuses were unreasonable under the circumstances. Importantly, the Court noted that “[e]ven if plaintiff’s attorney had a legitimate need to research the name of the correct corporate entity, it did not absolve plaintiff of the obligation to serve a duly demanded complaint within the time allowed by statute.”

Additionally, the Court noted that the complaint Plaintiff finally served “was not limited to allegations against the ‘correct’ SelectQuote defendant” and hence, Plaintiff had all of the necessary information at the time the summons was served to assert the general allegations that were ultimately put into her complaint.

Finally, the Court found that Plaintiff’s affidavit of merit fell “well short” of establishing her prima facie case, and dismissed the action.

Moral of the story? Calendar your deadlines – especially the statutory ones.