KYKO GLOBAL, INC. v. BHONGIR

Background

Kyko Global, Inc. and Kyko Global GmbH sued Omkar Bhongir, asserting nine claims: fraud, fraudulent concealment, fraud by omission, aiding and abetting fraud, aiding and abetting conversion, negligence, negligent misrepresentation, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty.

Kyko alleged that Bhongir served as a director of Prithvi Information Solutions Ltd. from 2005 to 2009. According to Kyko, Bhongir and other Prithvi executives and directors created fake accounts receivable. Kyko alleged that Prithvi later used those accounts to induce Kyko to enter an accounts-receivable factoring agreement in November 2011. Kyko said it discovered in March 2013 that the accounts were not legitimate and later obtained a judgment against Prithvi and others in the amount of $134,318,640 plus interest. Bhongir was not a defendant in that earlier lawsuit.

Motion to dismiss

Bhongir moved under Rule 12(b)(6), which permits dismissal when a complaint does not allege enough facts to state a legally recognized and plausible claim. The court had previously dismissed Kyko’s First Amended Complaint, finding that all but one of the claims were barred by the applicable statutes of limitations and that the remaining claim was inadequately pleaded. The court allowed Kyko to amend.

Statute of limitations

The court held that the Second Amended Complaint did not cure the previously identified defects. Under California law, the relevant limitations periods were three years for fraud and conversion, two years for negligence, and four years for breach of fiduciary duty, except that a fraud-based fiduciary-duty claim was subject to a three-year period. The court had previously determined that Kyko’s claims against Bhongir accrued in March 2013, while Kyko filed its initial complaint on February 14, 2017. As a result, all but part of Count VIII were outside the applicable limitations periods.

Kyko argued that Bhongir should be prevented from relying on the statute of limitations because he denied knowing about or participating in the alleged fraud. The court rejected that argument because Kyko’s own evidence showed that it did not believe Bhongir’s denials. The court also rejected Kyko’s alternative argument for equitable tolling, which would have extended the limitations period while Kyko allegedly tried to learn Bhongir’s role. The court found that Kyko again failed to allege with particularity how Bhongir or people acting for him concealed his role, what information Kyko obtained in March 2015, or why Kyko could not have learned that information earlier.

Negligent breach of fiduciary duty

The negligence-based portion of Count VIII was not barred by the limitations period because Kyko filed its initial complaint within four years after that claim accrued. Kyko alleged that Bhongir failed to discover that others had created false accounts receivable and failed to take action to withdraw those accounts after they were transmitted to third parties.

The court explained that, as a general rule, a director owes no fiduciary duty to a corporation’s creditors under California law. A limited exception applies when a corporation is insolvent and the director takes actions that divert, dissipate, or unduly risk corporate assets that could otherwise be used to pay creditors, including self-dealing or preferential treatment of creditors.

Kyko added allegations that Prithvi gave Bhongir equity shares as part of his compensation and that his involvement with the false accounts artificially increased the shares’ value. The court held that these allegations did not adequately show self-dealing. Any increase in Prithvi’s value would have benefited all shareholders equally, and compensation paid to a director was not, as a matter of law, a self-dealing transaction under the cited California statute. The court therefore dismissed the negligence-based portion of Count VIII for failure to allege sufficient facts supporting a legally cognizable claim.

Disposition

The court found that Kyko had not cured the deficiencies identified in the earlier order and had not indicated that additional factual allegations could cure them. Judge Maxine M. Chesney granted Bhongir’s motion to dismiss and dismissed the Second Amended Complaint without further leave to amend. The court also vacated the scheduled hearing.