Boustead Securities, LLC v. Leaping Group Co., Ltd

Background

Boustead Securities, LLC brought breach-of-contract claims against Leaping Group Co., Ltd and ATIF Holdings Limited. The opinion addressed only ATIF’s motion to dismiss; Leaping had not moved to dismiss.

In May 2018, ATIF and Leaping entered into a consulting agreement concerning support services for Leaping’s potential public offering in the United States, which Boustead had been hired to underwrite. Boustead later entered separate agreements with ATIF and Leaping. Under the ATIF agreement, Boustead was ATIF’s exclusive financial advisor for its application to list on NASDAQ or the New York Stock Exchange. Under the Leaping agreement, Boustead was to underwrite Leaping’s initial public offering and facilitate fundraising transactions.

The agreements included provisions concerning a twelve-month period after termination or expiration, future services, and success fees for equity investment transactions. The ATIF agreement conditioned success-fee payments on approval by the Financial Industry Regulatory Authority, or FINRA, for Boustead to conduct ATIF’s initial public offering. Boustead alleged that it obtained FINRA approval for the underwriting terms on February 6, 2019. ATIF and Boustead amended their agreement on April 23, 2019; the amendment changed the success fee and removed the future-services provision but left the twelve-month provision intact.

Leaping withdrew the registration statement for its planned initial public offering on March 13, 2020. Around April 23, 2020, ATIF acquired a majority stake in Leaping through a debt conversion and share purchase agreement and a share exchange agreement. Boustead alleged that these transactions qualified as equity investment transactions under its agreements and that ATIF and Leaping breached their agreements by failing to pay cash and warrants. Boustead also alleged that ATIF and Leaping entered additional undisclosed transactions for which Boustead was owed compensation.

ATIF’s Arguments

ATIF moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legal claim. ATIF argued that Boustead failed to allege that it obtained FINRA approval, an alleged condition precedent to receiving success fees. A condition precedent is an event that must occur before a contractual duty to perform arises.

ATIF also argued that Boustead had not adequately alleged its own performance because Boustead described services connected to ATIF’s initial public offering but did not allege that it performed services related to the ATIF-Leaping transactions.

Court’s Analysis

To state a breach-of-contract claim, a plaintiff must allege an agreement, its own adequate performance, the defendant’s breach, and damages. At the motion-to-dismiss stage, the court accepts well-pleaded factual allegations as true and draws reasonable inferences for the plaintiff. The complaint must contain enough facts to make the claim plausible, rather than merely reciting legal elements.

The court held that Boustead plausibly alleged its own performance. Boustead identified specific services it performed under the ATIF agreement, including reviewing corporate documents and ATIF’s business prospects, negotiating with key shareholders, advising on the offering structure and registration filings, reviewing investor materials, engaging third-party firms and an investment-banking team, and assisting with ATIF’s NASDAQ listing application. The court found that these allegations cured deficiencies identified when it previously dismissed an earlier complaint.

The court rejected ATIF’s argument that Boustead had to allege that it performed services specifically connected to the ATIF-Leaping transactions. The agreement stated that Boustead could receive success fees for certain equity investment transactions involving parties that became aware of ATIF, or became known to ATIF, before the agreement ended. The court found it unclear whether Boustead had to facilitate the introduction to the third party or perform other services to receive those fees. Because that ambiguity had to be construed in Boustead’s favor at this stage, Boustead’s interpretation that its obligations were limited to actions related to ATIF’s initial public offering was plausible.

The court also held that Boustead plausibly alleged satisfaction of the FINRA-approval condition. Boustead alleged that it worked with FINRA, submitted materials, and obtained approval for the ATIF initial public offering and success fees. ATIF argued that the approval applied only to the initial public offering, that the amendment also required approval, and that the approval letter did not constitute approval. The court held that these were factual arguments not properly resolved on the motion to dismiss.

The court further found that the agreement was unclear about whether FINRA approval was required only once or whenever the agreement was amended. Boustead’s interpretation that approval of the initial agreement was sufficient was plausible, although the court described that interpretation as barely plausible for purposes of the motion.

Disposition

The court denied ATIF’s motion to dismiss. It lifted the stay on discovery, scheduled an initial pretrial conference for July 29, 2022, and directed the parties to submit a proposed case-management plan and joint letter. The Clerk of Court was directed to close the open motion at docket entry 117.