Cipciao, LLC v. M Chow One, LLC

Background

In January 2020, Cipciao, LLC agreed to purchase a 90% interest in M Chow One, LLC, which owns the Mr. Chow restaurants and licensing rights to the Mr. Chow name. The purchase price was $68 million. Cipciao paid M Chow One a $5 million “good faith non-refundable payment.” Michael Chow, who controlled M Chow One, was not a party to the purchase agreement. The complaint alleged that M Chow One transferred the payment, in whole or in part, to Chow.

The agreement made Cipciao’s obligation to close conditional on M Chow One obtaining certain restaurant-lease consents. It also required each party to use reasonable best efforts to obtain necessary consents. The agreement allowed termination in several circumstances. Under Section 8.2(b), M Chow One had to return the $5 million payment only if the restaurant-lease consents were not obtained and Cipciao terminated under Section 8.1(c). That termination provision required a breach, inaccurate statement, or failure by M Chow One to perform an agreement obligation that caused a closing condition to fail. In other termination circumstances, M Chow One could keep the payment.

M Chow One did not obtain the restaurant-lease consents by the closing date. Cipciao sent a termination letter stating that the failure required repayment. M Chow One later sent its own termination letter, citing Cipciao’s failure to obtain financing, and stated that it would retain the payment. Cipciao sued under New York law for breach of contract and other claims. Both defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient and plausible claim.

Issues

The court considered whether Cipciao adequately alleged that M Chow One breached the purchase agreement by refusing to return the $5 million payment. It also considered Cipciao’s unjust-enrichment and constructive-trust claims against M Chow One and Chow, and its fraudulent-transfer and fraudulent-conveyance claims against Chow.

Court’s analysis

Breach of contract

The court held that the purchase agreement unambiguously required both conditions for repayment: the restaurant-lease consents had to be missing, and Cipciao had to validly terminate under Section 8.1(c). Although the first condition was met, Cipciao did not allege the second. The complaint alleged that a closing condition failed, but it did not allege that M Chow One breached, made an inaccurate statement, or failed to perform an agreement obligation that caused the condition to fail.

The court noted that Cipciao expressly stated in its opposition brief that it was relying on the failure of a closing condition, not on a breach by M Chow One. The court rejected Cipciao’s interpretation that the missing consents alone required repayment because that reading would make the breach requirement in Section 8.1(c) unnecessary. The court also rejected Cipciao’s argument that the agreement should be read differently to avoid an absurd or commercially unreasonable result. The agreement allowed Cipciao to terminate without paying the remaining purchase price if the consents were missing, but it did not provide for return of the non-refundable payment unless the separate requirements for Section 8.1(c) termination were met.

Cipciao alternatively argued in its opposition brief that M Chow One breached its duty to use reasonable best efforts to obtain the consents. The court rejected that argument because the complaint did not allege such a breach, and a party cannot add a new claim through a brief opposing dismissal. The court also rejected a later argument based on alleged breaches of representations about the leases. That argument was raised too late, relied on facts not alleged in the complaint, and was not shown to have been supported by the required written notice. The court concluded that Cipciao did not validly terminate under Section 8.1(c) and therefore was not entitled to repayment under Section 8.2(b).

Unjust enrichment and constructive trust

The court dismissed the unjust-enrichment and constructive-trust claims against M Chow One and Chow. It found that Cipciao did not allege facts showing that equity required either defendant to return the payment, given M Chow One’s contractual entitlement to retain it. The allegation that Chow used the money to fund his lifestyle did not change that conclusion.

The court gave an additional reason for dismissing the constructive-trust claim against M Chow One: under New York law, a valid written contract generally prevents recovery against another party to that contract through unjust-enrichment or constructive-trust theories when the contract governs the dispute.

Fraudulent-transfer and fraudulent-conveyance claims

Cipciao also alleged that transfers from M Chow One to Chow violated New York fraudulent-transfer and fraudulent-conveyance laws. The court explained that those laws protect creditors—people with a right to payment—from transactions that make a debtor’s assets unreachable.

The court held that Cipciao was not a creditor of M Chow One or Chow because, under the purchase agreement, Cipciao had no present or possible right to repayment of the $5 million payment. As a result, any transfer from M Chow One to Chow could not have been fraudulent as to Cipciao, and those claims failed as a matter of law.

Disposition

Judge Jesse M. Furman granted both defendants’ motions to dismiss in full. The court dismissed all of Cipciao’s claims, declined to grant leave to amend the complaint again, directed the Clerk to enter judgment for the defendants, and closed the case. The court did not reach the defendants’ alternative arguments for dismissal.