N.A. Sales Company, Inc. v. Lee

Background

N.A. Sales Company, Inc., a wholesale distributor of Japanese restaurant supplies, alleged that several Madfish Restaurant Companies failed to pay amounts owed for supplies purchased on credit. N.A. Sales Company alleged that Hae-Suk Lee provided a $200,000 check as a personal promise to pay if the restaurant companies did not pay, and that Moon Joo Lee also promised personal responsibility for the debts. The restaurant companies allegedly closed or entered bankruptcy while money and business assets were transferred to other people and entities.

The case began in state court and was later removed to federal court after N.A. Sales Company added federal civil claims under the Racketeer Influenced and Corrupt Organizations Act, commonly called RICO. The operative Fifth Amended Complaint asserted claims including fraudulent transfer, conspiracy to commit fraudulent transfer, civil RICO, RICO conspiracy, and successor-in-interest liability. JHK Pacific Common, Clayton Swartz, Haeng Cha Swartz, and JYK Investment Consulting Corporation moved to dismiss claims against them.

RICO Claims

The court concluded that N.A. Sales Company adequately alleged some parts of an underlying RICO claim, including an associated-in-fact enterprise involving the Lees and bookkeeper June Kim and a pattern of alleged bank fraud. But the court found that N.A. Sales Company did not adequately allege proximate cause—the required direct connection between the alleged RICO conduct and the company’s inability to collect the debt. The allegations did not show that the transfers left the alleged debtors without assets or otherwise directly caused the loss.

Because the underlying RICO violation was not adequately pleaded, the RICO conspiracy claim could not proceed. The court also found that the allegations did not plausibly show that the Swartz defendants or JYK Investment knowingly joined a scheme to hide assets from creditors. The allegations concerning JHK Pacific Common sufficiently suggested an intent to participate, but the conspiracy claim still failed because the underlying RICO violation was inadequately pleaded.

The court granted the motion to dismiss the RICO conspiracy claim and granted leave to amend if N.A. Sales Company had a good-faith basis to state a plausible claim. The court declined to decide whether the RICO claim was barred by the statute of limitations.

Fraudulent-Transfer Claims

The court declined to reconsider the state court’s earlier denial of JHK Pacific Common’s and the Swartz defendants’ challenge to the fraudulent-transfer and fraudulent-transfer-conspiracy claims. Because the case had been removed, the federal court generally gave the prior state court ruling the same effect it would have had in state court. The court therefore denied those defendants’ motion to dismiss those claims.

The court granted JYK Investment’s motion to dismiss the fraudulent-transfer and fraudulent-transfer-conspiracy claims for failure to state a claim. Assuming the claims arose under California’s Uniform Voidable Transactions Act, the court found that JYK Investment was neither the debtor nor the transferee. The allegations also did not plausibly show that JYK Investment knew about the alleged fraudulent transfers or knowingly participated in a conspiracy.

The court did not decide the statute-of-limitations defense to those claims. It noted that the allegations described different possible transfer dates and that the defendants had not established the limitations defense as a matter of law.

Successor-in-Interest Claim

JHK Pacific Common’s motion to dismiss the successor-in-interest claim was granted with leave to amend. The court found the claim’s central allegation conclusory, but also recognized allegations that the Little Madfish business may have been transferred to JHK Pacific Common without consideration. The court held that the complaint was too imprecise about which Lee-related business or entity was the predecessor and therefore did not adequately state the claim.

Disposition and Further Proceedings

Judge Corley’s order granted in part and denied in part the motions to dismiss. The RICO conspiracy and successor-in-interest claims were dismissed; JYK Investment’s motion to dismiss the fraudulent-transfer and fraudulent-transfer-conspiracy claims was granted; and JHK Pacific Common’s and the Swartz defendants’ motion to dismiss the fraudulent-transfer and fraudulent-transfer-conspiracy claims was denied. N.A. Sales Company was allowed to amend the dismissed claims, but could not add new defendants or claims. The amended complaint was due November 1, 2019. Other proceedings, including discovery, were stayed pending a settlement conference, subject to possible permission for limited discovery.