Wang v. Xinyi Liu, Yuanlong Huang, Zhaonan Wang, Bling Entm't, LLC

Citation: 584 B.R. 427Docket: Civil Action No. 16–cv–12581

Court: District Court, District of Columbia; March 13, 2018; Federal District Court

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Yiming Wang has initiated legal proceedings against Defendants Xinyi Liu, Yuanlong Huang, Zhaonan Wang, Bling Entertainment, LLC, Shengxi Tina Tian, and MT Law, LLC, asserting multiple claims including breach of fiduciary duty, civil conspiracy, fraud, breach of contract, violation of the Securities Act of 1933, and professional malpractice, among others. The Bling Defendants—Liu, Huang, and Wang—filed a motion to dismiss several counts under Federal Rules of Civil Procedure 12(b)(6) and 12(b)(7). The Court granted the motion to dismiss Counts VI (violation of the Securities Act) and VII (violation of the Massachusetts Uniform Securities Act), while denying it for the remaining claims.

In evaluating the motion to dismiss, the Court applies a two-step analysis: first, distinguishing between well-pleaded factual allegations, which are accepted as true, and conclusory legal allegations, which are disregarded; second, determining if the accepted facts plausibly support a claim for relief.

The factual background indicates that the Bling Defendants are the controlling members of Bling, a Massachusetts LLC aimed at developing a bar and restaurant. Liu and Huang are married, and Wang is their cousin. In 2013, they incorporated Bling, with Liu as manager and Huang involved in daily operations. Yiming, a Chinese citizen seeking U.S. permanent residency through the EB-5 Program, expressed interest in investing in a financially stable business with existing EB-5 investors. In 2014, after learning of Yiming's investment interest, Wang communicated with Liu and Huang regarding this, and during a meeting with Yiming, Wang claimed that Huang would manage the project, despite Huang's absence from the meeting. Wang insisted he represented both Liu and Huang in these discussions, despite Yiming's request to speak directly with Huang.

Wang presented Bling's $5 million business plan at a meeting, detailing funding sources: $1.5 million from the Bling Defendants, $1.5 million from two original members, and $1 million each from two EB-5 investors. He urged Yiming to invest $1 million to complete final upgrades for the project, which was set to finish in December 2014, and suggested this investment was critical for EB-5 eligibility. Wang showed Yiming a business plan prepared by Huang and Liu, which Yiming claims echoed Wang's verbal assurances. The business plan indicated a budget of $4.5 million to be raised from three EB-5 investors, including Yiming, with the remaining $1.5 million from founding members. Yiming alleges the plan contained fabricated financial projections without risk analysis.

After seeking legal advice for his EB-5 application, Yiming invested $1 million in August 2014, acquiring a 5% ownership interest. He later discovered that the original members had contributed only $470,340.39 and that of the claimed $2 million from EB-5 investors, only $500,000 had been received. Huang later confessed that the remaining $1.5 million were loans rather than equity investments. Yiming alleges Huang and Liu inflated investment figures and misrepresented the funding status to USCIS, which received false documentation in September 2014, claiming $3.5 million had been raised before Yiming's investment.

Yiming's escrow agreement stipulated his investment be used for construction, but he contends it was misappropriated for suspicious payments to the Bling Defendants. They allegedly forged documents, including letters from fictitious investors, to support Yiming's EB-5 petition. In January 2016, Bling falsely reported a $3 million investment to USCIS on Yiming's behalf. During a June 2016 meeting, Huang admitted to creating this fraudulent document to secure petition approval. Yiming asserts that the terms of his investment required repayment if USCIS denied his petition, which was conditionally approved, but neither he nor his wife have progressed towards obtaining a green card through the EB-5 Program.

Work on the Project, initially expected to be completed by December 2014, remains unfinished, with no activity in almost a year. The Bling Defendants claim that the project’s budget needs to double. On December 5, 2016, Yiming requested an accounting from the Bling Defendants, who declined and indicated a new investor would only invest if Yiming signed a release of claims against them. Wang initiated legal action on December 22, 2016, and filed an amended complaint on March 17, 2017. Shortly thereafter, on March 29, 2017, Bling filed for Chapter 7 bankruptcy, automatically staying claims against it under 11 U.S.C. § 362(a). The Bling Defendants subsequently moved to dismiss all claims against them. 

The Court considered whether to stay proceedings against the Bling Defendants due to the bankruptcy but decided against it, noting that the claims against the Bling Defendants are not dependent on the outcome of the bankruptcy case. The Court emphasized that the requesting party must demonstrate a clear case of hardship for a stay to be granted, which the Bling Defendants failed to do.

Regarding allegations of fraud, the Court highlighted that Rule 9(b) requires a party to plead fraud with particularity, detailing the who, what, when, where, and how. General claims of scienter must be supported by specific facts indicating the defendants knew their statements were false. This requirement aims to allow defendants to prepare effective defenses, prevent frivolous claims, and protect reputations. As Yiming’s allegations are rooted in fraud, they will be evaluated under the heightened pleading standards of Rule 9(b) for Counts I, II, III, and VI.

Under Massachusetts law, a fraud claim requires a knowingly false statement about a material matter that induces reliance and results in injury, with reasonable reliance by the plaintiff. Yiming's fraud claim centers on alleged misrepresentations by the Bling Defendants about the company's financial status, which he relied upon while investing $1 million. The Bling Defendants seek dismissal, arguing Yiming has not pled the fraud with sufficient specificity. However, Yiming's claims survive based on two key allegations: Wang's assertion at a May 2014 meeting that the Project was funded with $5 million, and the existence of fabricated financial information in the business plan prepared by Huang and Liu.

Yiming has adequately alleged fraud against Wang, as he claims Wang knowingly misrepresented the funding amount, bolstered by Wang's connections to Huang and Liu. The court defers the resolution of the reasonableness of Yiming's reliance to the jury. In contrast, Yiming's claims against Huang and Liu are less clear; while he asserts they prepared Wang for the meeting and fabricated documentation, he fails to pinpoint specific misrepresentations in the business plan. Although Huang's later admission of inflating investment figures does not clarify prior misstatements, the claim that Huang and Liu's business plan contained implausible financial projections offers a potential basis for fraud. The distinction between actionable misstatements and non-actionable puffery is noted, with the likelihood of materiality increasing with the specificity of the statements.

The financial statements in question are characterized as not just overly optimistic but as fraudulent, allowing Yiming's fraud claim against Bling Defendants Huang and Liu to proceed. Under Count I, Yiming asserts that the Bling Defendants, as managers and members of Bling, breached their fiduciary duty of good faith and loyalty through fraudulent actions, embezzlement, and mismanagement. Although Bling is a limited liability corporation and not a partnership, the court recognizes that the fiduciary duty applies as if it were a closely held corporation, which Yiming implicitly asserted. The Bling Defendants did not dispute their fiduciary duty, leading the court to deny dismissal of this claim.

In Count II, Yiming must demonstrate that the Bling Defendants conspired to harm him by acting in concert, which can encompass vicarious liability for the wrongful acts of others. Yiming has presented a plausible fraud claim against the Bling Defendants, alleging sufficient factual support for their substantial assistance in Wang's fraudulent activities, thereby allowing the claim to survive dismissal.

Count VI addresses Yiming's allegations under the Securities Act of 1933, claiming the Bling Defendants failed to meet financial disclosure requirements and misrepresented the company's financial status. However, Yiming's allegations lack specificity regarding which provisions of the Securities Act were violated, and he fails to establish a clear basis for the individual defendants' liability. Notably, Yiming's arguments regarding individual liability under the Securities Act are undermined by the context of his own complaint, which indicates that Bling was subject to Regulation D governing private offerings, not public ones. Consequently, the court finds the claims under Count VI insufficient and dismisses them.

Yiming's claims against the Bling Defendants under the Securities Act and Massachusetts Uniform Securities Act (MUSA) are dismissed due to deficiencies. For the Securities Act claim (Count VI), Yiming failed to cite Section 12 in his pleadings and did not establish its applicability to the defendants, given that private offerings are exempt. He did not identify any prospectus or related documents necessary for Section 12's enforcement, nor did he meet the heightened pleading standards of Rule 9(b) for fraud claims, as he did not specify the misstatements, relevant documents, or speakers. 

For the MUSA claim (Count VII), Yiming alleged fraud and failure to disclose financial information, but the court found that MUSA does not provide a private right of action, as established by precedent. Yiming did not cite a valid provision for this claim, leading to its dismissal. 

In contrast, Yiming’s demand for accounting (Count VIII) is permitted to proceed, as he argued an equitable basis for this demand and established a fiduciary relationship with the Bling Defendants, which allows for such a claim under Massachusetts law. The court denied the motion to dismiss this claim.

Bling Defendants filed a motion to dismiss all claims against them under Rule 12(b)(7), arguing that Yiming failed to join an indispensable party, his wife Yumei Zhang. The motion hinges on a two-part inquiry: first, whether Zhang is a necessary party under Rule 19(a), and second, whether she is an indispensable party under Rule 19(b). A necessary party is defined as one whose absence prevents the court from granting complete relief to the existing parties. Bling Defendants contend that Yiming's request for rescission relates to Zhang's conditional visa approval linked to his investment, thus necessitating her presence in the case. In contrast, Yiming asserts that rescission does not pertain to Bling Defendants but solely to Bling, and any issues regarding Zhang’s visa are between her and the U.S. government. The Court finds Zhang is not a necessary party since she is not involved in any contract with the Bling Defendants and her visa approval is independent of their actions. The Court concludes that it can address any expenses related to her visa without requiring her to be joined in the case. Consequently, the motion to dismiss is denied.

The Court has granted the Defendants' motion to dismiss Counts VI (Securities Act violation) and VII (MUSA violation) while denying dismissal for Counts I, II, III, and VIII. A typographical error in the motion, which sought dismissal of Count IV instead of Count III, has been clarified and allowed by the Court. Count V has been voluntarily dismissed by Yiming against the Bling Defendants. An amended complaint has been filed, including a business plan that closely mirrors the original but adds Yiming as an investor. Yiming contends that Rule 9(b) should not apply to Counts I and II; however, the Court disagrees, noting that Yiming's supporting arguments are based on irrelevant cases and that his factual allegations of embezzlement and fraud are similar to those in his fraud claim. Yiming has not demonstrated reliance on fraudulent activity post-investment, which is a necessary element for fraud claims. The Court emphasizes that only pre-investment false representations are pertinent to Yiming's claims. Although the Securities Act claim has been dismissed, the Court retains jurisdiction over the federal claim against the Bling Defendants and supplemental jurisdiction over the remaining state claims, despite the claims being stayed due to the company's bankruptcy proceedings.