M&K Imports, LLC v. Rejuveneda Medical Group, Inc.

Background

M&K Imports, LLC sued Rejuveneda Medical Group, Inc., doing business as Regeneveda; Thom E. Lobe; Patrick D. Crocker; and Crocker Law Firm PLLC. M&K asserted breach of contract and aiding and abetting breach of fiduciary duty claims against Regeneveda and Lobe, negligence, breach of fiduciary duty, and breach of escrow agreement claims against Crocker and Crocker Law Firm, and conversion claims against all defendants.

The pending motion was the Seller Defendants’ partial motion to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether the complaint adequately states a claim. The court accepted the complaint’s well-pleaded factual allegations as true for purposes of the motion and drew reasonable inferences in M&K’s favor.

M&K alleged that it and Regeneveda entered into agreements for Regeneveda to supply four million COVID-19 tests for $23.6 million. M&K allegedly paid a $7.08 million deposit into an escrow account managed by Crocker. The agreement required shipping documentation before the funds could be released and required the deposit to be returned if the documentation was not provided by January 20, 2022. M&K alleged that Crocker nevertheless sent $6.2 million to Regeneveda’s Chinese supplier on January 18, based on instructions from Lobe and Regeneveda, without M&K’s authorization. M&K alleged that $6.2 million remained unpaid.

Breach-of-Contract Claim Against Lobe

The Seller Defendants argued that Lobe could not be personally liable for Regeneveda’s alleged breach because M&K had not adequately pleaded grounds to disregard the corporation’s separate legal status. This process is commonly called piercing the corporate veil.

The court applied California law to that issue because the parties agreed Regeneveda was organized in California. Under the applicable standard, M&K had to plausibly allege both a unity of ownership and interests between Lobe and Regeneveda and that respecting the corporation’s separate existence would result in fraud or injustice.

The court held that M&K had not adequately alleged either condition. Allegations that Lobe controlled Regeneveda, conducted his medical practice and personal business through it, owned it, and directed the disbursement of the deposit were consistent with his being the corporation’s owner and manager. The court found those allegations insufficient, without more, to establish the required unity of interest. The court also found that allegations that Regeneveda had not paid M&K did not necessarily show that the corporation was undercapitalized or unable to pay its debts. The court therefore dismissed M&K’s breach-of-contract claim against Lobe.

Conversion Claim

The Seller Defendants argued that M&K had not plausibly alleged that they wrongfully took or detained M&K’s money. The court disagreed. Under New York law, conversion involves intentionally exercising unauthorized control over another person’s specific property and interfering with that person’s right to possess it.

The court held that M&K plausibly alleged that the Seller Defendants exercised control over the deposit by instructing the Crocker Defendants to release $6.2 million to a third party without M&K’s authorization or the required shipping documentation. The court also held that the conversion claim was not duplicative of the contract claim. The contract claim concerned the failure to deliver the tests and return the deposit, while the conversion claim concerned the allegedly wrongful disbursement of the deposit. The claims also sought different damages, including potential punitive damages on the conversion claim. The conversion claim against the Seller Defendants therefore could proceed.

Aiding and Abetting Breach of Fiduciary Duty

The Seller Defendants argued that M&K had not plausibly alleged that they knowingly induced or participated in the Crocker Defendants’ alleged breach of fiduciary duty. The court rejected that argument.

The court explained that an aiding-and-abetting claim requires an underlying fiduciary breach, knowing participation or inducement by the alleged aider and abettor, and resulting damages. An escrow agent owes fiduciary duties to the parties to the escrow transaction.

The court found it plausible that Lobe and Regeneveda knowingly induced the alleged breach by instructing Crocker to release the deposit without M&K’s authorization and then failing to inform M&K of the disbursement for almost two months. At this stage, the court also could not determine whether Lobe acted for Regeneveda or in his individual capacity. The aiding-and-abetting claims against the Seller Defendants could therefore proceed.

Disposition

The court granted in part and denied in part the Seller Defendants’ motion to dismiss. M&K’s breach-of-contract claim against Lobe was dismissed. All of M&K’s other claims against the Seller Defendants could proceed. The Seller Defendants were ordered to file an answer by January 25, 2023, and the scheduled case-management conference was to proceed.