Moon v. Promise Easy Limited

• Court: Supreme Court of Delaware
• Decided: June 18, 2024
• Docket: 328, 2023
• Status: Published

Opinion

IN THE SUPREME COURT OF THE STATE OF DELAWARE

CHULSO MOON, JS YOON § MEMORIAL CANCER § RESEARCH INSTITUTE, LLC, § No. 328, 2023 FORECAST GENETICS, INC., § FORECAST GENETICS HOLDING § Court Below—Court of Chancery CO., INC., PROSPECT GENETICS, § of the State of Delaware INC., PROSPECT RESEARCH, § INC., and PROSPECT § C.A. No. 12438 OPERATIONS, INC., § § Defendants Below, § Appellants, § § v. § § PROMISE EASY LIMITED, § § Plaintiff Below, § Appellee. §

Submitted: April 17, 2024 Decided: June 18, 2024

Before SEITZ, Chief Justice; TRAYNOR, and LEGROW, Justices.

ORDER

The Court has considered the issues raised in this appeal and rules as follows:

1. In a five-count complaint, Promise East Limited filed suit in the Court

of Chancery against Dr. Chulso Moon and other defendants. Promise Easy claimed

that the defendants breached an investment agreement and otherwise misled Promise

Easy into investing in a breast cancer diagnostic test for high-risk individuals. After a two-day trial over Zoom, the Court of Chancery agreed with Promise Easy. The

court held that what the defendants represented turned out to be a Potemkin Village.

In addition to other relief, the court awarded Promise Easy almost $1.4 million plus

post-judgment interest. The defendants raise several issues on appeal. We are not

persuaded that the Court of Chancery’s fact-finding was clearly wrong or that it made

legal errors to reach the judgment in favor of the plaintiff. Thus, as explained below,

we affirm.

2. As found after trial, Dr. Chulso Moon was a Seoul National University

and Johns Hopkins University educated oncologist who created the JS Yoon

Memorial Cancer Research Institute (“JS Yoon”) in honor of his mother, who died

of breast cancer.1 New York Global Capital (“NYG Capital” or the “Group”)

engages in private equity investing and business consulting services.2 Moon gave

frequent presentations on his cancer research, including to NYG Capital in January

of 2015.3

3. The pitch was simple. In exchange for its investment, NYG Capital

would receive a stake in the proceeds from Moon’s new breast cancer detection test.

1 A312; A366. (Moon Dep. Tr). The court has been notified that Dr. Moon passed away sometime in April of 2024. 2 A971 (Defendants’ Opening Post-Trial Brief). 3 A326. 2 Moon represented that this test was “95 percent effective….”4 Although NYG

Capital decided not to invest, it found investors for Moon’s research. The research

would be conducted under the entity name Prospect Genetics, Inc (“Prospect”).5

4. Benjamin Wey, the Group’s CEO, contacted his friend Roger Li, who

found the prospect enticing. Li created Promise Easy, a Virgin Islands entity, to

invest in Prospect, which was formalized in a Convertible Note Purchase Agreement

(the “NPA) on May 29, 2015.6 Under the NPA, Prospect issued a $2 million

Convertible Promissory Note to Promise Easy (the “Promissory Note” or “Note”).7

Consistent with the Note’s terms, Prospect would receive a $500,000 advance, as

well as other potential, as-needed draws up to an aggregate sum of $2 million.8

5. The $2 million figure arose out of a Product Timeline Budget Summary

(the “Timeline”) prepared by Moon and Warren Raiti (“Raiti”), the assistant general

counsel to the Group who also served as Prospect’s CFO. The Timeline set forth an

18-month plan to commercialize Moon’s tests at a cost of $1,986,658. The Court of

Chancery credited Wey and Raiti’s testimony that the Timeline was both concrete

and critical for budgetary purposes. At the same time, the court discredited Moon’s

4 A942 (Benjamin Wey Cross-Examination Tr.). Moon recalled things differently, but the Court of Chancery determined his recollection “is not the most reliable one.” Promise Easy Ltd. v. Moon, 2023 WL 5152173, at *2 (Del. Ch. Aug. 10, 2023). 5 And related sub-entities Prospect Research, Inc. and Prospect Operations, Inc. A364. 6 A190; A946. 7 A445. 8 A446. 3 claim “that the numbers he supplied for the Product Timeline were unattainable ‘bare

bones’ estimates that assumed a best-case scenario without any hiccups[.]”9

6. The transaction closed on June 1, 2015. Moon was named CEO, Raiti

became CFO, and nine days later Promise Easy distributed $500,000 to Prospect’s

bank account. Shortly after the ink dried and the cash cleared, things went sideways.

Less than a year later, Promise Easy would bring this action in the Court of

Chancery.

7. The Product Timeline required Moon to establish monitored research

locations known as IRB sites, sign a contract with Total CRO Clinical Trial

Management to develop these sites, lease space to freeze and store samples, hire a

lab technician, contract with AI Biotech within a month to extract and sequence

DNA from existing samples, and retain counsel to submit a new patent application.10

Moon failed to complete the first three tasks, which fell to Raiti.11 Meanwhile, Wey,

who had not invested in the venture, was embroiled in a sexual harassment scandal,

9 Promise Easy Ltd. v. Moon at *5. 10 A59; A884; A833; A751; A603; A497. 11 A608. 4 which Moon claimed caused his delay.12 These concerns went “into overdrive”

when Wey was indicted for securities fraud, wire fraud, and money laundering.13

8. Raiti became increasingly agitated as Moon went “on a ‘break’ between

April and September 2015.”14 During that period, Moon worked only 20-30% of his

normal hours, communicated poorly, and continued to receive his $20,000 monthly

compensation.15 Three months into the venture, the only milestone Moon met was

his obligation to contact the same patent counsel he had already retained for JS

Yoon.16 At that point, the IRB sites were supposed to be operational. But they did

not exist, “nor would they ever[.]”17 Moon did not procure lab space or hire lab

technicians.

9. On October 5, 2015, Moon requested an advance of an additional

$498,175 from Promise Easy. Of the requested funds, $349,425 “related to

milestones that were supposed to be completed in the project’s first four months.” 18

The venture was in its fifth month. Li was dismayed and began to contemplate suit.

Raiti denied the request for additional funds and resigned as CFO. In response to

that denial, Prospect sent Promise Easy a Notice of Purchaser Default on October

12 A854. 13 The Department of Justice dismissed these charges. Promise Easy Ltd. v. Moon at *11. 14 A774. 15 Promise Easy Ltd. v. Moon at *10. 16 A756. 17 Promise Easy Ltd. v. Moon at *10. 18 Id. at *11. 5 30, 2015. In response, Moon refiled a patent under his own name that he had

previously transferred to Prospect. Promise Easy, in turn, sent notice to Prospect

that it was in breach of the NPA.

10. Promise Easy filed its complaint against the defendants on June 9, 2016,

and asserted five counts. First, Promise Easy alleged that Moon, Prospect, and

Forecast Genetics violated the Delaware Securities Act (“DSA”) by misrepresenting

the Product Timeline, which induced Promise Easy into entering the NPA.19 Second,

Promise Easy sought a declaratory judgment that Moon, JS Yoon, and Prospect must

indemnify Promise Easy for the Initial Advance and any losses incurred thereafter,

and also assign Promise Easy its rights under the Patent License Agreement, because

Prospect breached the Transaction Documents.20 Third, Promise Easy alleged that

Moon breached the Consulting Agreement.21 Fourth, Promise Easy alleged that

Moon and Prospect requested the additional advancement of funds in bad faith, thus

breaching the implied covenant of good faith and fair dealing.22 And fifth, Promise

19 Id. at *13. 20 Id. 21 Id. 22 Id. 6 Easy alleged that it was fraudulently induced to enter into the NPA by Moon’s

material misrepresentations of Product Timeline inputs.23

11. After a two-day trial, the Court of Chancery found in favor of Promise

Easy on all but Count IV. The court set forth its DSA analysis in two thorough

sections. It concluded that “Promise Easy’s reliance on Dr. Moon’s

misrepresentations proximately caused it to enter into the failed investment” and that

the defendants’ arguments to the contrary were “specious[.]”24 The court reached

the same conclusion as to fraudulent inducement. Because Moon “provided the false

inputs behind the Product Timeline while knowing that the estimates were

unattainable[,]” and Promise Easy justifiably relied on those inputs in a damaging

investment, Promise Easy was entitled to relief.25 The court also found that the

defendants’ violations of “myriad provisions in the Transaction Documents” entitled

Promise Easy to declaratory relief.26 Moon also breached the Consulting

Agreement, as he “did not definitively complete any tasks within the Product

Timeline.”27 But Moon’s request for an additional disbursement was not in bad faith,

the court held, as “Promise Easy failed to show that the request was so unrelated to

legitimate needs of the project as to violate the implied covenant of good faith and

23 The defendants filed counterclaims but dropped them before post-trial briefing. 24 Promise Easy Ltd. v. Moon at *16. 25 Id. at *21. 26 Id. at *18. 27 Id. at *19. 7 fair dealing.”28 Overall, the court awarded Promise Easy compensatory damages,

including the return of Promise Easy’s initial advance, costs, interests, and attorney

fees, as well as declaratory relief, “including enforcing its right to indemnification

under the NPA.”29

12. The defendants have raised five issues on appeal. They describe the

issues as primarily legal in nature. Our review, however, shows that they are, with

limited exceptions, essentially disputes with the court’s factual findings. We review

legal error de novo and overturn the court’s factual determinations only if they are

clearly wrong.30

13. First, the defendants argue that the Promissory Note was not a security

covered by the DSA. But the Court of Chancery concluded correctly that the Note

is just that. “The Delaware Securities Act authorizes a private cause of action for

the purchaser of a security against the seller if the seller makes an untrue statement

or omission regarding the security.”31 The DSA applies to “any note” “unless the

28 Id. at *20. 29 Id. at *21. 30 Coster v. UIP Cos., Inc., 300 A.3d 656, 663 (Del. 2023); Levitt v. Bouvier, 287 A.2d 671, 673 (Del. 1972). 31 Promise Easy Ltd. v. Moon at *14, citing 6 Del. C. § 73-605(a)(2) (“Any person who: . . . Offers . . . a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they are made, not misleading (the buyer . . . not knowing of the untruth or omission), and who does not sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known of the untruth or omission, is liable to the person buying . . . the security from . . . him or her, who may sue either at law or in equity to recover the consideration paid for the security, together with the interest at the legal rate from the date of payment costs, and 8 context otherwise requires.”32 In dispute here is a “10% Convertible Promissory

Note.”

14. The defendants bear the burden of proving that the Note is not covered

by the DSA. They argue that contextual evidence demonstrates that the Note was

not a security. They cite as examples “Wey’s shared personal interest in breast cancer

research, . . . bargained-for protections in the form of several seats on the Company’s

board of directors and the appointment of a CFO of its choosing, and the note being

in the form of a line of credit.”33 But contrary to Moon’s claim that the court

“provide[d] scarce, if any, insight into the deductive process it applied[,]” the issue

received more than adequate treatment.

15. In Reves v. Ernst & Young, we set forth the test to determine whether a

note should be exempt from the DSA. A note is exempt if it does not (1) fit into one

of seven enumerated categories, or (2) resemble instruments that do.34 The

defendants only argued for the latter exception, so the Court of Chancery’s analysis

reasonable attorneys’ fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he or she no longer owns the security.”). 32 6 Del. C. § 73-103(a)(23). 33 Appellants’ Opening Brief (known hereinafter as “Opening Br.”) at 15. 34 The seven types of notes that are exempted are “(1) a note delivered in consumer financing, (2) a note secured by a mortgage on a home, (3) a short-term note secured by a lien on a small business or some of its assets, (4) a note evidencing a character loan to a bank customer, (5) a short-term note secured by an assignment of accounts receivable, (6) a note which simply formalizes an open- account debt incurred in the ordinary course of business and (7) notes evidencing loans by commercial banks for current operations.” State v. Attarian, 2014 WL 4782859, at *2 (Del. Super. Ct. Sept. 8, 2014). 9 was limited to the “family resemblance” factors. Those four factors are as follows:

“(1) the motivations of the parties to enter into the note (whether they were for

investment purposes); (2) the note’s plan of distribution (whether it was for common

trading); (3) the reasonable expectations of the investing public (that such was an

investment); and (4) whether there is other non-Securities Act protection available

to the alleged victims.”35 Here, all four factors support the court’s conclusion that

this Note was a security covered by the DSA.

16. For the first factor, the Note was issued in pursuit of profit. For the

third, a financial return was Promise Easy’s reasonable expectation. It may be true

that Moon, Wey, Raiti, and every other individual involved cared about breast cancer

research. But this Note was not a charitable gift; it reflected Promise Easy’s

demonstrable profit motive. The court credited Wey’s testimony that Moon

projected $2 billion worth of upside from his research. The first and third factors

suggest the Note is a security.

17. The court was equally correct that the second and fourth factors support

its conclusion. The Note was transferable. The Transfer Restriction defendants rely

upon is a boilerplate legend that simply requires any transfer of the Note to comply

with the securities laws. And it is of no import that Promise Easy’s leadership team

was sophisticated. The presence of non-Securities Act protection for alleged victims

35 Id. 10 hinges on our legal scheme, not the relative knowledge of individuals tasked with

running an investment vehicle. The DSA is the protection our General Assembly

implemented for situations like this one.

18. Next, the defendants argue that Promise Easy never met its burden of

proving the six elements required for a DSA claim.36 The defendants’ argument is

twofold. First, the defendants contend that the court put too much stock in “the

incorrect statement that ‘Moon testified that these goals never were actually

achievable.’” Second, the defendants claim that the court improperly weighed Wey’s

testimony.

19. For the first argument, Prospect creates a distinction without a

difference. It is correct that Moon never explicitly testified that the project could not

be completed on time. But it would require an exceedingly unrealistic reading of his

testimony to conclude that Moon had any faith that the figures provided to Raiti were

realistic.37 Moon knew they were inaccurate and signed off on them anyway. The

court credited Raiti’s testimony that he relied on the timeline milestones. And

36 The defendant must have “(1) made a misstatement or omission (2) of material fact (3) with scienter (4) in connection with a purchase or sale of a security (5) upon which the plaintiff . . . relied and (6) that reliance proximately caused the plaintiff’s (or other person’s) injury.” Hubbard v. Hibbard Brown & Co., 633 A.2d 345, 349 (Del. 1993). 37 A727- A731. 11 accepting Raiti’s reliance as real, those representations are material. Moon passed

along material information he did not believe to be true.

20. For the second, it is undisputed that we give the trial court “great

deference” in assessing the credibility of conflicting witness accounts.38 Moon

argues only that, because of Wey’s potentially problematic personal life, this usual

deference would be inappropriate. But the court employed an orderly and logical

process to conclude that Wey’s testimony was credible. There is no rule by which

this Court affords our trial courts less deference as their task becomes more difficult.

The clear error standard of review applies.39 There was no clear error here.

21. The defendants argue next that Prospect could not complete its tasks in

accordance with the Product Timeline because Promise Easy refused to furnish

further funds after only three months. As the defendants see it, the Court of

Chancery’s conclusion was “largely based on the fallacy that, in order not to be in

breach of the Consulting Agreement, Dr. Moon would have . . . had to undertake and

finish” his responsibilities before Promise Easy terminated the NPA. 40

22. But the court said no such thing. Instead, it held Moon accountable for

not meeting the milestones that should have been completed well before Promise

38 Adams v. Jankouskas, 453 A.2d 148, 151 (Del. 1982). 39 Olson v. Halvorsen, 986 A.2d 1150, 1157 (Del. 2009). 40 Opening Br. at 25. 12 Easy terminated the NPA.41 The court evaluated contradictory witness accounts and

made reasonable credibility determinations. Upon doing so, the court compared

what was promised with what was delivered and found a major discrepancy. There

was no error in that process.42 The defendants’ quarrels with the court’s findings of

fact are not legal mistakes. And it was not up to the court to examine witnesses to

create a trial record.43

23. Finally, Promise Easy met its burden of proving the six elements

required to support a fraudulent inducement claim under the DSA. Speculative

conclusions about Promise Easy’s purported shortcomings, which the court

concluded were factually unfounded, do not contribute to the mix of relevant

considerations as to how Moon’s fraudulent inducement harmed Promise Easy. This

court will not revisit the Court of Chancery’s factual findings based on the

unreasonable assumption that Promise Easy would intend to hurt itself financially

without any clear incentive to do so.

24. In summary, the Court of Chancery did not err when it concluded that:

the Note was a security covered by the DSA, Promise Easy proved the elements of

41 Promise Easy Ltd. v. Moon at *19. 42 Indeed, that same analysis proves conclusive as to whether Moon breached the Consulting Agreement, which the court correctly answered in the affirmative. 43 For instance, it is not the Court of Chancery’s responsibility to ensure Moon was “questioned [about] what taking [his] break entailed” by Promise Easy’s counsel. Opening Br. at 24. 13 both a DSA claim and fraudulent inducement, Moon breached the Consulting

Agreement, and frustration of purpose does not excuse his failings.

NOW, THEREFORE, IT IS ORDERED that the judgment of the Court of

Chancery is affirmed.

BY THE COURT:

/s/ Collins J. Seitz, Jr. Chief Justice