Talece Inc. v. Zhang

Background

Talece Inc. sued Zheng Zhang, its former chief executive officer and former chief financial officer. Talece alleged four causes of action: breach of fiduciary duty, unjust enrichment, conversion, and accounting. It alleged that, during the period from February 4, 2019, through February 14, 2020, Zhang concealed business information, misappropriated company funds, property, and trade secrets, used company assets for self-dealing, transferred funds to accounts he controlled, and took software, website code, accounting books, checkbooks, and other assets. Talece also alleged that Zhang caused the company to engage in transactions violating the Immigration and Nationality Act and other employment regulations.

The case was originally filed in Superior Court and later removed to federal court. Talece’s motion to remand was denied. Zhang then moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal for failure to state a legally sufficient claim. Zhang argued that Talece’s allegations were based on fraud and therefore had to satisfy Rule 9(b), which requires fraud to be pleaded with particularity. Zhang also objected to portions of material Talece submitted with its opposition.

Legal Standard

Under Rule 8, a complaint must provide enough factual content to make the claim plausible. Rule 9(b) imposes a more demanding standard when a party alleges fraud: the complaint generally must identify the circumstances of the alleged misconduct, including the who, what, when, where, and how. Rule 9(b) can apply to claims that do not formally require fraud as an element when the claims are based on a unified course of fraudulent conduct.

The court also explained that, when deciding a Rule 12(b)(6) motion, it generally cannot consider material outside the complaint. The court found that neither the incorporation-by-reference doctrine nor judicial notice applied to the attachments and documents Zhang referenced, so it did not consider them in evaluating the motion.

Court’s Analysis

The court concluded that all four claims were based on the same alleged fraudulent conduct and therefore were subject to Rule 9(b)’s heightened pleading requirement.

For breach of fiduciary duty, the court found that Talece alleged fraud and fraudulent conduct but did not provide enough detail about when, where, or how Zhang allegedly misappropriated funds, property, trade secrets, software, codes, accounting books, and other assets. The court granted the motion to dismiss this claim with leave to amend.

For unjust enrichment, the court found that the claim relied on the same alleged fraudulent course of conduct. Talece had not provided sufficient details about which funds, property, and trade secrets were allegedly misappropriated or approximately when and how the conduct occurred. The court granted the motion to dismiss this claim with leave to amend.

For conversion, the court found that the claim likewise relied on allegations that Zhang transferred assets into accounts he controlled or used for his own benefit and obscured those transfers. Talece did not provide enough detail about which assets were transferred, the accounts involved, or when and how the transfers occurred. The court granted the motion to dismiss this claim with leave to amend.

For accounting, the court found that Talece relied on allegations that Zhang had failed to return business records and account information and had failed to account for the company’s financial management and transactions. The court held that Talece needed more detail about when and how the allegedly unlawful conduct occurred. The court granted the motion to dismiss this claim with leave to amend.

The court rejected Talece’s arguments that Rule 9(b) did not apply because fraud was not an element of its claims or because the allegations covered a period of about one year. The court also found that Talece had not shown that the information was exclusively within Zhang’s control in a way that excused the need for additional detail.

Disposition

The court granted Zhang’s motion to dismiss with leave to amend. Talece could file an amended complaint no fewer than 21 days after the order’s issuance. The court denied Zhang’s objection to evidence because Talece had not submitted evidence with its opposition; Zhang had objected only to Talece’s restatement of allegations from the complaint.