United States District Court, S.D. New York
OPINION & ORDER
VALERIE E. CAPRONI, District Judge.
Teras International Corp., as assignee for Yick Bo Trading Limited, brings suit on a variety of theories against Yick Bo's former sole shareholder, Worldwide Dreams LLC, and five individuals who were officers and directors of Yick Bo or Worldwide Dreams. Defendants move to dismiss the complaint in its entirety, and Plaintiff moves for summary judgment as to its third cause of action. Because Yick Bo would lack standing to assert the first cause of action, so too does Teras; Count One is therefore DISMISSED and the case is DISMISSED as against Steven Brookner, Mark Kastenbaum, and Norman Abramson. Defendants' motion is DENIED as to Counts Two and Three, Teras's motion to strike the Lewington Declaration is DENIED, and Teras's motion for partial summary judgment is DENIED.
This case is brought by Teras, the assignee of Yick Bo. Yick Bo is now bankrupt, but when it was operative it was wholly owned by Defendant Worldwide Dreams and run by the individual defendants, inter alia. First Am. Compl. ("FAC") ¶¶ 1-2, 4, 16. Teras alleges that the individual defendants established Worldwide Dreams in 1997 as a wholesaler of women's accessories to large retail stores in the United States. Id. ¶¶ 2, 14. From Worldwide Dreams' New York offices, the individual defendants established Yick Bo as a wholly-owned subsidiary to act as the parent company's purchasing agent in Hong Kong. Id. ¶¶ 15-16. According to the complaint, the individual defendants "made all of Yick Bo's corporate decisions from their New York offices." Id. ¶¶ 17-18.
Pursuant to an agency agreement, see FAC Ex. A (the "Agency Agreement"), Yick Bo purchased merchandise from Chinese suppliers for Worldwide Dreams to sell in New York, FAC ¶ 18. The Agency Agreement provided that Yick Bo would find merchandise, negotiate pricing, perform basic quality control duties, and arrange for delivery to Worldwide Dreams. Agency Agreement § 2(a)-(h). In return, Yick Bo would earn a seven percent commission on all merchandise and services. Id. § 3. Although suppliers would frequently submit invoices directly to Worldwide Dreams, Yick Bo would pay those invoices and then submit weekly invoices to Worldwide Dreams for reimbursement. FAC ¶ 19. Kastenbaum, Worldwide Dreams' Chief Operating Officer ("COO"), would authorize Abramson, Worldwide Dreams' Chief Financial Officer ("CFO"), to pay Yick Bo.
At some point in either 2007 or 2009, Worldwide Dreams stopped reimbursing Yick Bo for the purchases that Yick Bo had made on its account. See id. ¶¶ 20, 63. Rather than stop purchasing merchandise for Worldwide Dreams, Yick Bo continued to order merchandise, apparently building larger and larger payables to the Chinese merchants with which it was doing business. Although the complaint is not a model of clarity, it alleges that Yick Bo was able to continue to buy on credit because it prepared financial statements that falsely represented that its accounts receivable from Worldwide Dreams would be paid "in the normal course of business." Id. ¶ 22-1. By falsely representing the credit situation between Yick Bo and Worldwide Dreams, "Yick Bo [was able] to continue purchasing on credit from its Chinese suppliers, which in turn  allow[ed] Worldwide Dreams to continue selling the merchandise to customers in the U.S." Id. ¶ 22-2.
The complaint alleges that false financial statements were sent to Reddy Chu, Yick Bo's CFO and Director, and to Mazars CPA Ltd., Yick Bo's Hong Kong auditor. Id. ¶¶ 24-25. Similarly fraudulent financial statements were issued regarding the 2008, 2009, and 2010 fiscal years. Id. ¶¶ 24, 32, 36. Each one of these fraudulent financial statements allegedly perpetuated Yick Bo's existence, leaving it "another day older and deeper in debt." Tennessee Ernie Ford, Sixteen Tons (Capitol Star Line 1955); see FAC ¶¶ 31, 35, 38-40.
By October 2011, Yick Bo's extension of credit to Worldwide Dreams caught up to it - although Worldwide Dreams owed Yick Bo more than Yick Bo owed its creditors, the individual defendants put Yick Bo into liquidation. Id. ¶ 42. Concerned that they would be unable to collect their receivables, the vendors who had been supplying Yick Bo with merchandise on credit demanded payment. Id. ¶ 43. Pursuant to an agreement among all of the individual defendants, and despite the fact that Yick Bo was in liquidation, Brookner promised Yick Bo's suppliers to resume paying amounts due,  thereby "fraudulently inducing [the Chinese venders] to continue producing and shipping orders to both companies based upon goodwill developed over several years." Id. ¶ 44. By the time Yick Bo ceased doing business in 2011, its suppliers were due nearly $9 million. Id. ¶¶ 45-46.
The suppliers initiated a number of actions in New York state court. Id. ¶ 48. Some suppliers sued Worldwide Dreams directly, asserting "that Yick Bo was Worldwide Dreams' agent." Id. Kastenbaum, in an effort to protect the allegedly still-solvent parent corporation, submitted sworn affidavits that falsely depicted the relationship between Yick Bo and its sole shareholder. Id. ¶¶ 49-51. Ultimately Kastenbaum (on the agreement of all individual defendants) submitted four such fraudulent affidavits between November 2011 and January 2012. Id. ¶ 51.
II. Procedural History
The unusual procedural history of this case merits a separate discussion. Teras filed its initial complaint in September 2013. Defendants moved to dismiss for failure to state a claim in February 2014, and the case was transferred to the undersigned shortly thereafter. In March, over Defendants' objection, the Court issued an order permitting Teras to amend its complaint in response to the then-pending Motion to Dismiss or lose the opportunity to amend altogether. Dkt. 35, 36. Teras indicated that it did not intend to file an amended complaint. Dkt. 37. In April the Court held oral argument on the Motion to Dismiss. Prior to argument, the Court issued an order requiring the parties to be prepared to discuss at oral argument, inter alia, whether Yick Bo would have had standing to bring the complaint, what injury Yick Bo suffered that was distinct from the injury to its creditors, and whether there was precedent for holding that an entity was defrauded when its directors, officers, and sole shareholder were all aware of the misrepresented facts. Dkt. 47.
At oral argument, the Court continued a stay of discovery as to Counts One and Two but permitted discovery to proceed as to Count Three. Dkt. 50. After a prolonged oral argument, the Court required Teras to brief, inter alia, the harm "that Yick Bo suffered as a result of the conduct described in the first two claims in the Complaint" and the applicability of the adverse interest exception to the imputation of knowledge. Id.
After oral argument, Teras moved to amend its complaint. Dkt. 53. Over Defendants' objection, the Court granted leave to amend. Dkt. 64. The Amended Complaint alleges a civil RICO claim against all individual defendants (Count One); breach of fiduciary duty against Gimbel and Feldman (Count Two); and a claim for money due and owing against Worldwide Dreams (Count Three).
Defendants moved to dismiss Plaintiff's amended complaint for failure to state a claim and lack of standing, now relying on the questions of Wagoner standing and the doctrine of in pari delicto that the Court had raised during oral argument. Dkt. 66, 67. Five days after the Motion to Dismiss was fully briefed Teras moved for summary judgment as to Count Three. In opposition to that motion, Defendants submitted a Declaration from Robert Lewington, a Hong Kong solicitor and consultant on Hong Kong law who is familiar with the events surrounding Yick Bo's liquidation. Dkt. 85. Plaintiff moved to strike the Lewington Declaration; the Court therefore addresses each of these three motions in turn.
I. Motion to Dismiss
This case is mired in the thorny intersection of three tangled jurisprudential vines - constitutional standing, the so-called " Wagoner rule" from Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991),  and the doctrine of in pari delicto. Although the three have been conflated at times, the Wagoner rule is "a prudential limitation on standing under federal law, " while standing is a constitutional requirement and " in pari delicto is an affirmative defense, not a matter of standing." Kirschner v. KPMG LLP, 15 N.Y.3d 446, 459 n.3 (2010).
"To pursue a claim in federal court, a plaintiff must satisfy the requirements of constitutional standing, a principle established by the case or controversy' requirement of Article III of our Constitution." In re Methyl Tertiary Butyl Ether (MTBE) Prods. Liability Litig., 725 F.3d 65, 104 (2d Cir. 2013). "Litigants have Article III standing if they have suffered an injury in fact' that is fairly traceable to the challenged action' and likely to be redressed by a favorable decision.'" United States v. Technodyne LLC, 753 F.3d 368, 380 (2d Cir. 2014) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)) (alterations omitted). "Article III standing is the threshold question in every federal case, determining the power of the court to entertain the suit.'" Liberty Mut. Ins. Co. v. Donegan, 746 F.3d 497, 502 n.2 (2d Cir. 2014) (quoting Warth v. Seldin, 422 U.S. 490, 498 (1975)).
The standing "inquiry involves both constitutional limitations on federal-court jurisdiction and prudential limitations on its exercise.'" Hillside Metro Assocs., LLC v. JPMorgan Chase Bank, Nat'l Ass'n, 747 F.3d 44, 48 (2d Cir. 2014;) (quoting Kowalski v. Tesmer, 543 U.S. 125, 128-29 (2004)) (other quotation marks omitted). "The prudential standing rule normally bars litigants from asserting the rights or legal interests of others in order to obtain relief from injury to themselves.'" Rajamin v. Deutsche Bank Nat'l Trust Co., 757 F.3d 79, 86 (2d Cir. 2014) (quoting Warth, 422 U.S. at 509) (alteration omitted); see also Lexmark Int'l, Inc. v. Static Control Components, Inc., 572 U.S. ___, ___, 134 S.Ct. 1377, 1386 (2014); Sprint Commc'ns Co., L.P. v. APCC Servs., Inc., 554 U.S. 269, 289-92 (2008).
Flowing from these prudential limitations is the Wagoner rule, which holds that "[a] bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's creditors, but may only assert claims held by the bankrupt corporation itself.'" Bennett Funding Grp. v. Kirkpatrick & Lockhart LLP (In re Bennett Funding Grp.), 336 F.3d 94, 99-100 (2d Cir. 2003) (quoting Wagoner, 994 F.2d at 118)); see also Bernard L. Madoff Inv. Sec. LLC v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC), 721 F.3d 54, 58 (2d Cir. 2013) (" BLMIS I ") (confirming that the Wagoner rule is "rooted" in "prudential limitations" on standing). The Wagoner rule applies even where "there is at least a theoretical possibility that some independent financial injury to the Debtors might be established." Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1094 (2d Cir. 1995) (" Hirsch II "), aff'g 178 B.R. 40 (D. Conn. 1994) (Cabranes, C.J.) (" Hirsch I ").
The Wagoner rule relies heavily on agency law and specifically "the fundamental principle of agency that the misconduct of managers within the scope of their employment will normally be imputed to the corporation." Wight v. BankAmerica Corp., 219 F.3d 79, 86 (2d Cir. 2000). "Underlying the rule is the presumption that an agent has discharged his duty to disclose to his principal all the material facts coming to his knowledge with reference to the subject of his agency.'" Center v. Hampton Affiliates, 66 N.Y.2d 782, 784 (1985) (quoting Henry v. Allen, 151 N.Y. 1, 9 (1896)). As a result, the Wagoner rule admits of exceptions from state agency law, such as the "adverse interest exception." See Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822, 827 (2d Cir. 1997). The adverse interest "exception provides that when an agent is engaged in a scheme to defraud his principal, either for his own benefit or that of a third person, the presumption that knowledge held by the agent was disclosed to the principal fails because he cannot be presumed to have disclosed that which would expose and defeat his fraudulent purpose." Center, 66 N.Y.2d at 784. "To come within the exception, the agent must have totally abandoned his principal's interests and be acting entirely for his own or another's purposes. It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal.'" Kirschner, 15 N.Y.3d at 466 (quoting Center, 66 N.Y.2d at 784-85) (emphasis in Kirschner ). "So long as the corporate wrongdoer's fraudulent conduct enables the business to survive - to attract investors and customers and raise funds for corporate ...