Zou v. Han

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KENN ZOU et al., Plaintiffs, v. XIAO HAN et al., Defendants.

No. 23-CV-02370 (JMA) (JMW)

United States District Court, E.D. New York

August 6, 2024

Ming Hai, Esq. Law Offices of Ming Hai P.C. Attorney for Plaintiffs and Counter Defendants Kenn Zou and Chunlan Li.

Alexander Paykin, Esq. The Law Office of Alexander Paykin Attorney for Defendant and Counter Claimant Xiao Han.

Mingyuan Zhang, Esq. Robert Hawkins, Esq. The Law Office of Alexander Paykin Attorneys for Defendant and Counter Claimant Xiao Han.

Carolyn Shields, Esq. Ying Liu, Esq. Liu & Shields LLP Attorneys for Defendant Jun Tang.

REPORT AND RECOMMENDATION

JAMES M. WICKS United States Magistrate Judge.

Plaintiffs Kenn Zou and Chunlan Li (“Plaintiffs”), commenced this action on March 28, 2023, alleging: (i) violation of the Racketeer Influence and Corrupt Organizations Act (“RICO”), 18 U.S.C §1962(c), (ii) violation of RICO, 18 U.S.C. §1962(d), (iii) common law fraud, (iv) breach of contract, (v) conversion, (vi) unjust enrichment, and (vii) breach of duty against Defendants Xiao Han and Jun Tang (“Defendants”), seeking a declaratory judgment, injunction, treble damages, compensatory damages in the amount of $8,000,000, and punitive damages in the amount of $3,000,000.

On referral from the Hon. Joan M. Azrack are (1) Plaintiff's motion to amend the complaint (ECF No. 53) which seeks to add claims under §1962(a) and (b), and supplement facts with respect to all claims including newly discovered facts regarding three additional RICO predicate acts (id.), and (2) Defendants' cross-motions to dismiss the operative complaint for failure to state a claim, lack of subject matter jurisdiction, and to strike allegations of punitive damages and diversity jurisdiction (ECF Nos. 54 and 55). For the reasons that follow, the undersigned recommends that both Defendant Tang's motion to dismiss (ECF No. 54) and Plaintiffs' motion to amend (ECF No. 53) be GRANTED IN PART AND DENIED IN PART and that Defendant Han's motion (ECF No. 55) to dismiss both the Second and Third Amended Complaints be GRANTED in its entirety.

TABLE OF CONTENTS

I. FACTUAL BACKGROUND…………………………………………………………5

A. The Parties and the Enterprise………………………………………………………...5

B. Mail and Wire Frauds-Loans and Sales of Motels………………………………….6

C. Immigration Fraud………………………………………………………………...…12

D. Tax Fraud…………………………………………………………………………….13

E. Facts Related to Fraud Claim………………………………………………………...16

F. Facts Related to Breach of Contract…………………………………………………16

G. Facts Related to Conversion Claim……………………………………………….….17

H. Facts Related to Unjust Enrichment Claim………………………………………..…17

I. Facts Related to Breach of Duty………………………………….………………….17

J. Prior Pending Actions………………………………………………………………..18

K. False Statements in E.D.N.Y. Filings……………………………………………..…18

II. PROCEDURAL BACKGROUND……………………………………………….….20

III. THE PARTIES' CONTENTIONS…………………………………………………..21

A. Motion to Dismiss……………………………………………………………………21

a. Tang's Motion to Dismiss……...…………………………………………….21

i. Plaintiffs' Opposition to Tang's Motion…………...………………...23

ii. Tang's Reply…………………………………………………………24

b. Han's Motion to Dismiss…………………………………….………………26

i. Plaintiffs' Opposition to Han's Motion………………...……………26

ii. Han's Reply…………………………………………….……………28

B. Motion to Amend the Second Amended Complaint…...…………………………….28

IV. DISCUSSION………………………………………………………………………..30

A. Motion to Dismiss……………………………………………………………………30

a. Legal Standard……………………………………………………………….30

b. Application…………………………………………………………………...31

i. Subject Matter Jurisdiction…………………………………………..31

ii. Standing Under Article III…………………………………………...32

iii. Standing under RICO………………………………………………...36

1. Domestic Injury……………………………………………...37

2. Injury to Business or Property…………………………….…38

iv. Conflicts of Interest and Derivative Claims………………………….39

v. Substantive RICO Violations………………………………...………41

1. Statute of Limitation…………………………………………41

2. Securities Fraud Exception…………………………………..44

3. Merits of Claims Under Count One: 18 U.S.C. § 1962(c)…...46

a. Defendants' Conduct of Racketeering Activity…...…47

b. Enterprise…………………………………………….50

c. Pattern of Racketeering Activity……………………..54

4. The Remaining RICO Claims………………………………..55

a. Mail and Wire Fraud…………………………………55

b. Money Laundering…………………………………...57

c. Transportation of Stolen Property……………………57

5. Han's Involvement in the Crimes……………………………58

6. Proximate Causation and Subsequent Injury………………...59

7. Count Two: RICO Conspiracy: 18 U.S.C. § 1962(d)………..61

vi. State Law Claims…………………………………………………….63

1. Standing for Derivative State Law Claims…………………..63

2. Statute of Limitation for State Law Claims………………….65

3. Count Three: Common Law Fraud…………………………..66

4. Count Four: Breach of Contract/Promises………………...…67

5. Count Five: Conversion……………………………………...68

6. Count Six: Unjust Enrichment……………………………….69

7. Count Seven: Breach of Fiduciary Duty……………………..70

vii. Motion to Strike……………………………………………………...72

1. Diversity Allegations……………...…………………………72

2. Punitive Damages Claims……………………………………74

B. Motion to Amend……………………………………………………………….……74

a. Legal Context…………………………………………………...........………74

b. Application…………………………………………………………...………76

i. Bad Faith………………………………………………..……………76

ii. Undue Prejudice…………………………………………...…………77

iii. Futility……………………………………………………..…………78

1. Tolling of the Statute of Limitations…………………………78

2. Whether Plaintiffs Cured the Deficiencies…………………..80

3. Merits of the Newly Added Facts and Causes of Action…….82

V. CONCLUSION………………………………………………………………………85

VI. OBJECTIONS……………………………………………………………………….86

I. FACTUAL BACKGROUND^[1]

This case arises out of a series of alleged RICO acts committed by Defendant Tang and her son as well as other family members in an effort to defraud Plaintiffs and other unwitting Chinese investors through immigration, tax, and mail and wire frauds. As a result, Plaintiffs allege they have lost over $1 million in loaned monies to the Defendants as well as a multitude of business opportunities associated with Plaintiff Zou's interest in his company.

A. The Parties and The Enterprise

Plaintiff, Kenn Zou aka Kang Zou, is a U.S. citizen and resident of South Carolina. (See ECF. No. 33 ¶ 9.) Plaintiff established JLK Holdings, INT, LLC (“JLK”) on or about June 19, 2015, to purchase two motels, Summer Sands Motel and Carousal Motel, located in South Carolina, from ZWT LLC. (Id. ¶ 44.) At its inception, Plaintiff Zou was the 100% owner and sole founder of JLK. (Id. ¶ 9). The second plaintiff, Chunlan Li, Kenn Zou's mother, is a citizen of China, and a lawful permanent resident of the United States with her permanent residency in Roslyn, NY. (Id. ¶ 10.) Li frequently travels between the U.S. and China attending to her businesses. (Id. ¶ 10.) Defendants include Xiao Han and Jun Tang or Judy Tang, Xiao's mother. (Id. ¶¶ 11, 12.)

The alleged association in fact enterprise (“organization”) “launched at a date unknown to the plaintiffs, has lasted for more than 10 years and still functions up to the present day.” (ECF No. 33 ¶ 13.) The organization consists of members of Defendants' family. (Id. ¶¶ 13, 112). The members include: Audrey Tang, Defendant Han's aunt and Defendant Tang's sister, the day to day manager of the organization; Yuan Yuan aka Yuan Li, Defendant Han's cousin, and Defendant Tang's niece; Jing Jing, Defendant Tang's niece; Defendant Tang's parents in China; Nan Ying, associate in China; Jia Jia, Defendant Han's sister, and Defendant Tang's daughter; Travel Home LLC, owned by Defendant Tang; and TL403 LLC, owned by Defendant Tang. (Id. ¶ 14.) The purpose of the enterprise was to: enrich members of the organization including Defendant Han and Tang, defraud unsuspecting investors, profit off of “immigration visa fraud,” tax evasion, smuggle in family relatives from China, advertise the organizations illegal business operations domestically and internationally, “transfer large sums of funds interstate and internationally in money laundering schemes,” to protect members of the organization from law enforcement; tax authorities; private lawsuits, and “to punish organization's victims who dare to fight back.” (Id. ¶ 23.). Defendants allegedly used various methods to achieve its purpose including: aiding other members, soliciting unsuspecting wealthy Chinese nationals, using fraudulent promises to secure large investments and loans from victims with no intention of repayment, threatening victims from speaking out, using large cash transaction to avoid IRS detection and reporting rules, and using China as an intermediate money transfer for money laundering purposes. (Id. ¶ 24.)

B. Mail and Wire Frauds-Loans and Sales of Motels

Beginning “some time in late 2015”, Defendants allegedly began their scheme to defraud Plaintiffs and enrich the family organization. (ECF No. 33 ¶ 40.) Defendant Tang approached Plaintiff, Kenn Zou, at a Chinese community gathering in New York, offering herself as his godmother, and setting Zou up in a romantic relationship with Jing Jing. (Id.) At this time, Defendant Tang was a 10% owner of ZWT LLC, which owned and operated the Summer Sands Motel and the Carousal Motel. (Id. ¶ 41.) “Some time in the late of summer 2015,” Defendants and Jing Jing persuaded Zou to purchase “all real estate assets” from ZWT LLC. (Id. ¶ 42.) It is alleged Defendant Tang promised to pay half of the purchase price for the real estate acquisition Zou and Jing Jing's married. (Id.) “After a while”, the two did not marry as Plaintiff Zou lost interest in Jing, prompting Defendant Tang to set him up in a romantic with Yuan Yuan, thus continuing to entrap Plaintiff Zou in Defendants' scheme. (I...