New Oriental Enterprise, PTE, Ltd. v. Mission Critical Solutions LLC

Background

New Oriental Enterprise, PTE, Ltd. alleged that it transferred $800,000 to Mission Critical Solutions LLC for the purchase of Bitcoin. It alleged that representations made by Cristel Ferreto, whom the complaint described as acting on behalf of defendants, were false; that no Bitcoin was purchased; and that a bogus invoice was issued. The amended complaint asserted claims for fraud and deceit, rescission, conversion, money had and received, unjust enrichment, and specific performance against Mission Critical Solutions LLC, Mark-Anthony Phillips, Transactrade, LLC, Trigon Trading Party Ltd., and John Does 2 and 3.

Defendants moved to dismiss the amended complaint under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. Defendants also moved for sanctions under Rule 11 based on statements in the plaintiff’s original opposition papers, the plaintiff’s alleged failure to post a $40,000 bond ordered by the state court, and alleged factual problems in the complaint.

Motion to Dismiss

The court granted the motion to dismiss. Because the claims were based on alleged fraud, the complaint had to satisfy Rule 9(b), which requires a plaintiff to describe the alleged fraudulent statements or omissions, identify who made them, state where and when they were made, and explain why they were fraudulent. The complaint also had to allege facts supporting a strong inference of fraudulent intent.

The court held that the amended complaint did not allege that any named defendant made a fraudulent statement to New Oriental on which it relied in transferring the money. The complaint alleged that Ferreto made the representations, but Ferreto was not a defendant. The allegation that she acted on defendants’ behalf was made on information and belief and was too conclusory to satisfy the pleading requirements. Because all of the claims were based on the alleged fraudulent taking, the court concluded that the other claims could not survive either.

The court separately held that rescission and specific performance are remedies for breach of contract, not independent causes of action. New Oriental had not adequately alleged that it had a contract with defendants and had not asserted a breach-of-contract claim. Those claims therefore failed for that additional reason.

Leave to Amend

Although New Oriental had already amended once after receiving notice of defendants’ objections, the court granted another opportunity to amend. It dismissed the amended complaint without prejudice and with leave to amend. The court ordered New Oriental to file a second amended complaint by April 25, 2022, and warned that it would be reluctant to grant another opportunity if the second amended complaint also failed to state a claim.

Sanctions

The court granted defendants’ sanctions motion in part. It denied sanctions based on the filing of the complaint because the materials defendants cited did not establish that the complaint was so baseless that it must have been filed for an improper purpose. It also denied sanctions based on the alleged failure to post the $40,000 state-court bond, explaining that Rule 11 sanctions were not the appropriate remedy for that issue.

The court found sanctions appropriate for plaintiff’s counsel’s handling of the opposition papers. The papers stated that Mark-Anthony Phillips had been arrested and pleaded guilty in 1994 to embezzling union pension funds. After defense counsel informed Jack Dweck that the criminal case involved a different person and provided information supporting that position, Dweck refused to withdraw or correct the filing. The court concluded that this conduct warranted a Rule 11 sanction.

The court imposed the sanction only on Dweck, not on New Oriental, because Dweck was the attorney who received the information showing that the statement was inaccurate and nevertheless refused to investigate or withdraw it. The sanction was $2,000, payable to the Clerk of Court within thirty days.

Disposition

Defendants’ motion to dismiss was granted, and New Oriental’s amended complaint was dismissed without prejudice and with leave to amend. Defendants’ motion for sanctions was granted in part, with a $2,000 sanction imposed on attorney Jack Dweck.