Chow v. Canyon Bridge Capital Partners, LLC

1

BENJAMIN BIN CHOW, Plaintiff, v. CANYON BRIDGE CAPITAL PARTNERS, LLC, a Cayman Islands Limited Liability Company, CANYON BRIDGE CAPITAL MANAGEMENT, LLC, a Delaware Limited Liability Company, CANYON BRIDGE FUND I, LP, a Cayman Islands Limited Partnership, HONG JOHN KAO, HEBER RAYMOND BINGHAM, and PETER CHIN KUO, Defendants.

C. A. No. 1:22-cv-00947-JLH-SRF

United States District Court, D. Delaware

July 22, 2024

REPORT AND RECOMMENDATION

SHERRY R. FALLON UNITED STATES MAGISTRATE JUDGE

Plaintiff Benjamin Bin Chow, brought this suit against Defendants Canyon Bridge Capital Partners, LLC (hereinafter “Capital Partners-CI”), Canyon Bridge Fund I, LP (hereinafter “Fund-CI”) (collectively the “Cayman Entities”), Canyon Bridge Capital Management, LLC (hereinafter “Management LLC-DE”), Hong John Kao, Heber Raymond Bingham, and Peter Chin Kuo (collectively the “Individual Defendants”) for alleged fraud, breach of contract breach of fiduciary duties, and fraudulent transfers effectively eliminating Plaintiff's financial and ownership interests in a private equity fund he established. (D.I. 1-1 at 46-100) Pending before the court are the following: a Motion to Dismiss for insufficiency of service and lack of personal jurisdiction, pursuant to Federal Rules of Civil Procedure 12(b)(5) and 12(b)(2), filed by the Cayman Entities and the Individual Defendants (D.L 12);^[1] Plaintiff's related Motion for leave to file a sur-reply (D.I. 35);^[2] and a Motion to Dismiss pursuant to Rule 12(b)(6) for failure to state a claim filed by Management LLC-DE. (D.I. 15)^[3] For the reasons that follow, the court recommends that:

• The Cayman Entities and the Individual Defendants' Motion to Dismiss pursuant to Rules 12(b)(5) and 12(b)(2) be DENIED;

• Plaintiff's Motion for leave to file a sur-reply brief in response to the Cayman Entities and the Individual Defendants' Motion to Dismiss be DENIED AS MOOT; and

• Management LLC-DE's Motion to Dismiss pursuant to Rule 12(b)(6) be GRANTED WITHOUT PREJUDICE.

I. BACKGROUND

A. Facts

In August of 2016, Plaintiff founded and was the sole owner of a Delaware corporation known as Canyon Bridge Capital Partners, Inc., a private equity fund focusing on global technology investments. (Kg., D.I. 1-1 at 46-100 (hereinafter “FAC”) at ¶¶ 17, 53)^[4] Plaintiff alleges that his friend, Defendant Kao, acted as his attorney in the formation of a series of business entities associated with Plaintiff's investments. (Kg., id. at ¶ 31) Kao is a domiciliary of Beijing, China and was a partner in the Beijing office of the law firm, Jones Day. (Id. at ¶ 27; D.I. 4 at ¶3)^[5]

In September and October of 2016, Kao drafted the documents to convert Canyon Bridge Capital Partners, Inc. to a Delaware limited liability company (hereinafter “Capital Partners- LLC-DE”) and the business formation documents for the following entities, which were filed at his direction with the Delaware Secretary of State: Canyon Bridge Capital Management Corp., a Delaware corporation (hereinafter “Management Corp.-DE”), and Canyon Bridge Fund I, LP, a Delaware limited partnership (hereinafter “Fund-DE”) (collectively the “CB Entities”). (FAC at ¶¶ 56-58, 66) Management Corp.-DE was the named manager of Capital Partners-LLC-DE and the investment manager of Fund-DE. (Id. at ¶¶ 23-24) Capital Partners-LLC-DE was the general partner of Fund-DE. (E.g., id. at ¶ 19)

In October of 2016, Plaintiff met with Kao and the other Individual Defendants, Bingham and Kuo, in Jones Day's San Francisco office and asked them to join the CB Entities. (Id. at ¶ 67) They agreed, and Kao began drafting a limited liability company (“LLC”) Operating Agreement that set forth the rights and obligations of the Individual Defendants and Management Corp.-DE in managing Capital Partners-LLC-DE. (See id. at ¶¶ 66, 68; see also D.L 28-1 at 27-65 (hereinafter “Operating Agreement”)) In addition to the Operating Agreement, Kao drafted a limited partnership agreement governing Fund-DE. (See FAC at ¶¶ 57, 59, 66; see also D.L 28-1 at 66-136 (hereinafter “LP Agreement”))^[6]

In November of 2016, Kao became aware that Plaintiff was under investigation by the Financial Industry Regulatory Authority (“FINRA”). (FAC at ¶ 63) Therefore, Kao allegedly drafted the Operating Agreement so that the Individual Defendants would each be enriched through the forfeiture of Plaintiff's financial and ownership interests in the CB Entities in the event of a final and non-appealable felony conviction. (Id. at ¶¶ 71-74) Namely, Kao drafted a provision triggering forfeiture of a member's ownership interest in the event that member's employment with Management Corp.-DE was terminated for “Cause[.]” (Id. at ¶ 71) The

Operating Agreement provides in relevant part:

[I]f [Management Corp.-DE] terminates the employment or consultancy of a Member ... for Cause, whether before, on or after the full vesting date thereof, all of the Class A Units and/or Class B Units owned by the respective Member ... shall be treated as Non-Vested Class A Units or Class B Units (as applicable) and shall be automatically forfeited and cancelled as of the date of the termination of employment or consultancy of the Member ... with [Management Corp.-DE] for “Cause”....

(Operating Agreement § 6.5(c)) In the Operating Agreement, Cause was defined as “(c) the commission of any activity pertaining to ... any other Member... that constitutes fraud or a felony (as determined by a court of competent jurisdiction in a final, non-appealable judgment or in a final non-appealable arbitration).” (Id. § 1.1) Kao also drafted a provision for forfeiture of a member's entire interest in Capital Partners-LLC-DE if that member ceased to be an employee or consultant of Management Corp.-DE prior to October 23,2019. (FAC at ¶ 72) The relevant portion of the Operating Agreement states:

(a) The Class A Units shall be subject to a tenure-based vesting schedule and risk of forfeiture as follows:

(i) Subject to Section 6.5(c) below, 50% of the Class A Units of such Member shall vest and become non-forfeitable on the third anniversary of the Effective Date ... provided that such Member ... is still an employee of, or consultant to, [Management Corp.-DE] on such third anniversary date;....

(iii) If such Class A Member ceases to be an employee of, or consultant to, [Management Corp.-DE] on or prior to the full vesting of Class A Units hereunder for any reason (whether voluntarily or involuntarily), that portion of his or her Class A Units that has not vested under this Section 6.5(b) as of the effective date of his or her termination of employment or cessation of consultancy with [Management Corp-DE] ... shall be automatically forfeited and cancelled as of the date of such termination or cessation.

(Operating Agreement at §§ 6.5(a)(i), (iii)) Kao allegedly had a conflict of interest because he drafted these provisions while allegedly acting as Plaintiff's attorney and as a co-member with his client in the business operations of the CB Entities. (See, e.g., FAC at ¶¶ 34-36)

Plaintiff and the Individual Defendants executed the Operating Agreement on December 23,2016, but its effective date was stated as October 18,2016. (Id. at ¶ 69; see also D.L 28-1 at 31)^[7] Plaintiff transferred a 20% ownership interest in Capital Partners-LLC-DE and Management Corp.-DE to each Individual Defendant, leaving Plaintiff with a 40% ownership interest in both. (FAC at ¶ 68) The Individual Defendants each made a capital contribution of $3,030,303.03. (See id. at ¶ 70) Plaintiff's capital contribution was $9,090,909.09. (Id.) Prior to the events allegedly stripping Plaintiff of his financial and ownership interests in the CB Entities, Plaintiff was an employee of Management Corp.-DE, a “Key Person” under the LP Agreement, and an authorized signatory on all of the CB Entities' bank accounts. (See id. at ¶¶ 128-31)

On September 1, 2017, Plaintiff was criminally charged with securities fraud in the Southern District of New York as a result of the FINRA investigation. (Id. at ¶ 84; see also United States v. Chow, Case No. 1:17-cr-00667-GHW D.L 1) On April 24, 2018, Plaintiff was found guilty of insider trading. (See FAC at ¶ 86; see also United States v. Chow, Case No. 1:17-cr-00667-GHW at D.L 113)^[8]

Between August and October of 2018, the Individual Defendants unsuccessfully attempted to secure Plaintiff's voluntary divestment of ownership in the CB Entities. (See FAC at ¶¶ 119-23) Until Plaintiff's felony conviction became final and non-appealable, his ownership interests could not be forfeited for “Cause[.]” (See Operating Agreement § 1.1) Therefore, on October 8, 2018, allegedly to effectuate forfeiture, the Individual Defendants executed a “Written Consent of the Stockholders of [Management Corp.-DE]” implementing a recommendation of the Board of Directors of Management Corp.-DE for a stock vesting schedule. (FAC at ¶ 124) Pursuant to the schedule, stock would not vest until September 14, 2019, and if a stockholder “‘cease[d] to be an employee of, or consultant to, [Management Corp.-DE] on or prior to the full vesting of Common Stock... for any reason', the non-vested stock would be forfeited.” (Id.) The next day, Plaintiff was terminated from his employment with Management Corp.-DE, thus triggering forfeiture of his ownership interest. (Id. at ¶¶ 126- 27) The Individual Defendants also removed Plaintiff as a signatory to the CB Entities' bank accounts and passed a supplement to the LP Agreement removing Plaintiff as a “Key Person[.]” (Id. at ¶¶ 129-31).

Allegedly to prevent Plaintiff from recovering his financial interests in the CB Entities, the Individual Defendants authorized the change of domicile for Capital Partners-LLC-DE and Fund-DE from Delaware to the Cayman...