Seiden v. Kaneko

• Court: Court of Chancery of Delaware
• Decided: November 3, 2015
• Docket: CA 9861-VCN
• Status: Published

Opinion

EFiled: Nov 03 2015 11:55AM EST Transaction ID 58105196 Case No. 9861-VCN IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

ROBERT W. SEIDEN, ESQ., in his capacity as : Receiver for Southern China Livestock, Inc., : : Plaintiff, : : v. : C.A. No. 9861-VCN : SHU KANEKO a/k/a JOSEPH KANEKO, : LIQIANG SONG a/k/a LIQUANG SONG, : a/k/a LI SONG a/k/a SONG LIQIANG a/k/a : LI QIANG SONG a/k/a RICHARD LEE, : : Defendants. :

MEMORANDUM OPINION AND ORDER

Date Submitted: June 10, 2015 Date Decided: November 3, 2015

Jonathan M. Stemerman, Esquire of Elliott Greenleaf, Wilmington, Delaware, and Douglas E. Spelfogel, Esquire and Katherine R. Catanese, Esquire, of Foley & Lardner LLP, New York, New York, Attorneys for Plaintiff.

Andrew D. Cordo, Esquire and Toni-Ann Platia, Esquire of Ashby & Geddes, Wilmington, Delaware, and Adrienne M. Ward, Esquire and John B. Horgan, Esquire of Ellenoff Grossman & Schole LLP, New York, New York, Attorneys for Defendant Shu Kaneko.

NOBLE, Vice Chancellor I. INTRODUCTION

Plaintiff Robert W. Seiden, Esq. (“Plaintiff” or the “Receiver”) in his

capacity as receiver for Southern China Livestock, Inc. (“SCLI” or the

“Company”), brought this action against Defendants Shu Kaneko (“Kaneko” or

“Defendant”) and Liqiang Song (“Song” and together with Kaneko, the

“Defendants”). Plaintiff seeks $7,594,965 plus pre- and post-judgment interest and

legal expenses in compensation for Defendants’ allegedly fraudulent transfers of

stock, Company funds, and personal real estate. Plaintiff’s seventeen-count

Complaint alleges, in connection with the above transfers, breach of fiduciary duty,

aiding and abetting breach of fiduciary duty, conversion, aiding and abetting

conversion, fraud, conspiracy to defraud and convert property, four counts of

fraudulent transfer, corporate waste, and unjust enrichment, and seeks imposition

of a constructive trust and an accounting. The Court now addresses Kaneko’s

Motion to Dismiss under Court of Chancery Rule 12(b)(6).

1 II. BACKGROUND1

A. Corporate Structure

Plaintiff brings this action against Kaneko and Song, former directors and

officers of SCLI and Southern China Livestock International, Inc. (“SCL

International”) for allegedly fraudulent transfers made in violation of their

fiduciary duties.2 SCLI, formerly known as Expedite 4, Inc. (“Expedite”), is a

Delaware corporation that wholly owns SCL International, a Nevada corporation

incorporated on July 28, 2009.3 SCL International is the holding company for

Beijing Huaxin Tianying Livestock Technology, Limited (“Beijing Huaxin”). 4

Beijing Huaxin is in the business of breeding, raising, and selling live hogs in the

People’s Republic of China (“PRC”), and holds a 100% interest in Jiangxi Yingtan

Huaxin Livestock Limited (“Jiangxi Huaxin”), an operating subsidiary.5 Kaneko

was at one time President, Treasurer, Director of Business Development, and

Secretary of SCLI, and President, Treasurer, Director, Secretary, and Chief

1 The factual background is based on allegations in the First Amended Verified Complaint (“Complaint” or “Compl.”) and on documents integral to or incorporated into the Complaint. In re Gardner Denver, Inc., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014). 2 Compl. ¶ 1. 3 Id. ¶ 3. 4 Id. 5 Id. 2 Financial Officer of SCL International.6 He is currently President, Director, and

sole officer of Dyna Flo International, Inc. (“Dyna Flow”) and LKD International,

Inc. (“LKD”).7 Song was the Vice President and principal shareholder of SCLI,

part of the management of SCLI, and custodian for the majority of the SCLI

shares.8 Non-party Blue Moon Irrevocable Family Trust (“Blue Moon Trust”) is a

family trust benefitting Kaneko and his family with Song as trustee.9

B. Reverse Merger

Expedite was incorporated in Delaware on September 27, 2007 for the

purpose of acquiring an operating company.10 On March 29, 2010, Expedite

acquired 100% of SCL International’s outstanding stock—ten million shares—in

return for 99.97% of Expedite’s total common stock—5,623,578 shares—pursuant

to the “Share Exchange Agreement.”11 Under the Share Exchange Agreement,

Song received 90% of the Expedite shares transferred to SCL International

6 Id. ¶ 4. 7 Id. 8 Id. ¶ 5. 9 Id. ¶ 6. 10 Id. ¶ 9. As of October 29, 2009, Sheila Hunter (“Hunter”) was the sole director and officer of Expedite. Expedite 4, Inc., Annual Report (Form 10-K) (Oct. 29, 2009). Hunter owned 100,000 Expedite shares. Id. “At the time of a business combination, [however,] management expect[ed] that some or all of the shares of common stock owned by Sheila Hunter[] [would] be purchased by the target company or retired by the Company.” Id. 11 Compl. ¶ 10; Southern China Livestock, Inc., Current Report (Form 8-K) Ex. 2.1 (Apr. 1, 2010) (“Share Exch. Agmt.”). 3 (5,061,220 of the 5,623,578 shares).12 Of the 5,061,220 shares Song received,

4,386,438 (the “Song Held Shares”) were transferred to him as custodian for the

former shareholders of the operating subsidiary Jiangxi Huaxin (the “Jiangxi

Shareholders”) because certain PRC laws and regulations prevented the Jiangxi

Shareholders’ direct acquisition of such shares.13 The Jiangxi Shareholders and

Song agreed that Song would acquire the Song Held Shares on their behalf, and

they would receive options to purchase the shares for nominal consideration.14 On

the same day, and as part of the same transaction, Expedite and Song entered into a

lockup agreement (the “Lockup Agreement”) whereby Song agreed not to sell any

Expedite common stock for eighteen months following May 6, 2010—the equity

financing closing date.15 Upon the completion of the merger, Expedite owned

100% of SCL International, and therefore wholly owned the operating subsidiary

Jiangxi Huaxin.16 On April 8, Expedite appointed Kaneko as its CFO and

Director.17

12 Compl. ¶ 11; Share Exch. Agmt. 20. The remaining 10% of Expedite shares were allocated between seven individuals and entities in quantities ranging from 843 shares to 261,377 shares. Share Exch. Agmt. 20. 13 Compl. ¶ 11. 14 Id. 15 Id. ¶ 12; Southern China Livestock, Inc., Current Report (Form 8-K) Ex. 10.8 (Apr. 1, 2010). 16 Compl. ¶ 13. 17 Id. ¶ 14. 4 C. Alleged Fraudulent Activity

1. Private Placement Proceeds

On May 6, 2010, Expedite closed its equity financing through a private

placement (the “Private Placement”) by which it raised $7,594,965 (the “Private

Placement Proceeds”) to fund the merger with SCL International.18 The Private

Placement Proceeds were deposited into three separate SCL International bank

accounts (the “Bank Accounts”), each naming Kaneko as a signatory. 19 While

Kaneko’s successor as director and CFO of SCLI, Wei He, is listed on the

signature cards of two of the three Bank Accounts, only Kaneko signed checks

from the Bank Accounts.20 On May 28, Expedite registered the Private Placement

shares, but the United States Securities and Exchange Commission (the “SEC”)

never declared them effective.21 On July 9, Expedite changed its name to Southern

China Livestock, Inc.22

In January 2010, Kaneko began transferring from the Bank Accounts

millions of dollars of Private Placement Proceeds, much of which Plaintiff alleges

18 Id. ¶ 15. 19 Id. ¶ 19. 20 Id. 21 Id. ¶ 17. 22 Id. ¶ 18. To the extent the Court refers to actions taken by SCLI, the Court infers, for purposes of this Motion to Dismiss, that such actions were taken, whether or not approved by the remainder of the seven-member board, under Kaneko’s alleged influence and control. 5 was paid for improper or personal use or is still unaccounted for.23 Specifically,

Plaintiff alleges that from March 2010 to July 2011 Kaneko illicitly transferred

over one million dollars in Private Placement Proceeds for personal uses, including

“lawn service, maid service, and condo maintenance fees.”24 Other alleged

improper transfers include a payment of $125,000 on June 28, 2010 to Meirong

Song, a “possible relative of Song,” and a payment of $51,000 on July 9, 2010 to

Liqiang Song Ltd (Song’s company).25

2. Transfer of the Song Held Shares and Going Dark

Further, in September 2010, Song, in an alleged breach of the Lockup

Agreement, transferred the Song Held Shares to a British Virgin Islands company,

Shu Mei Yu, Ltd. (“Shu Mei,” named after Song’s mother), for no consideration.26

23 Id. ¶ 20. Kaneko disputes the impropriety of such transfers. Opening Br. in Supp. of Def. Shu Kaneko’s Mot. to Dismiss First Am. Compl. (“Def.’s Opening Br.”) 10-13. The Court, however, accepts as true well-pleaded factual allegations in the Complaint and draws reasonable inferences therefrom. Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011). Plaintiff has pleaded facts sufficient to infer that Defendant’s transfer of the Private Placement Proceeds was improper. 24 Compl. ¶ 20. 25 Id. ¶¶ 21-22. 26 Id. ¶ 23. Kaneko argues that Song’s transfer of the Song Held Shares to Shu Mei did not violate the Lockup Agreement or the Share Exchange Agreement because the transfer was “subject to [the Lockup Agreement], which, among other provision[s], prohibits any further transfer of the Shares.” Southern China Livestock, Inc., Amendment to S-1 Registration Statement (Form S-1/A) Ex-10.14 (“Oct. 1 Registration Statement”) 1 (Oct. 1, 2010); Def.’s Opening Br. 13-14. 6 Kaneko is the director of Shu Mei.27 The transfer of the Song Held Shares to Shu

Mei is disclosed in SCLI’s February 2011 annual report filed with the SEC, as is

Song’s justification for making the transfer, namely, “not wanting to be personally

responsible for the administration of voting . . . when he has no pecuniary interest

with respect to the shares.”28 Plaintiff alleges that Song’s transfer of the Song Held

Shares damaged SCLI by preventing it from “not only collapsing the offshore

structure but from taking any action including selling SCLI to private investors.”29

On October 8, 2010, Wei He replaced Kaneko as CFO and director of SCLI,

and Kaneko was appointed instead as “Director of Business Development.”30

Kaneko, however, remained Director, President, Treasurer and Secretary of SCL

International, SCLI’s wholly-owned subsidiary, from incorporation in July 2009 to

dissolution in March 2012.31 Kaneko also represented himself as CEO of SCLI on

the Bank Accounts, despite Luping Pan being listed as CEO on SCLI’s SEC

disclosures.32 The Company filed a Form S-1 registration statement on

October 19, 2010 in preparation for an initial public offering (“IPO”) of its

27 Compl. ¶ 23. 28 Southern China Livestock, Inc., Amendment No. 1 to 2010 Annual Report (Form 10-K/A) (“2010 Annual Report”) 39-40 (Feb. 7, 2011); accord Compl. ¶ 24. 29 Compl. ¶ 25. 30 Id. ¶ 26; Southern China Livestock, Inc., Current Report (Form 8-K) (Oct. 14, 2010) (“Oct. 14 Form 8-K”). 31 Compl. ¶ 26. 32 Id.; see Oct. 14 Form 8-K. 7 common stock on the NASDAQ Capital Market, as was promised during the

Private Placement to induce investment.33 The registration statement further stated

that the Company intended to use the IPO proceeds “to increase [its] inventory of

both sows and hogs, to enter into the organic fertilizer business and for other

general corporate purposes.”34 Over one year later, SCLI withdrew its registration

statement pursuant to SEC Form 15 filed on August 15, 2011, and thus “went

dark.”35 In a letter filed with the SEC on the same day, SCLI indicated the

withdrawal was “because it has elected not to pursue the sale of the securities

included therein at this time.”36

3. Private Real Property

Song and Kaneko shared at least five addresses throughout the United

States.37 On March 26, 2012, Kaneko gifted two properties to the Blue Moon

Trust for no consideration; one located at 15 Warren Street, Unit 113, Jersey City,

New Jersey (the “Jersey City Property”), and one located at 11990 Market Street,

33 Compl. ¶¶ 27-28; Southern China Livestock, Inc., Registration Statement (Form S-1/A) (Oct. 19, 2010) (“Oct. 19 Form S-1/A”). 34 Oct. 19 Form S-1/A at 25; Compl. ¶ 28. 35 Southern China Livestock, Inc., Certification and Notice of Termination of Registration (Form 15-12G) (Aug. 15, 2011); Compl. ¶ 31. 36 Southern China Livestock, Inc., Registration Withdrawal Request (Form RW) (Aug. 15, 2011) (Letter from Luping Pan, CEO of SCLI, to Lauren Nguyen, Attorney-Advisor to the SEC). 37 Compl. ¶ 42. 8 Reston, Virginia (the “Reston Property”).38 On April 12, 2012, Kaneko gifted to

the Blue Moon Trust for no consideration property located at 3476 Lloyd Hill

Court, Oakton, Virginia (the “Oakton Property”).39 Song gifted the Oakton

Property to Kaneko on August 30, 2010, five days after Song was sued in the

United States District Court for the Southern District of New York (the “Carret

Lawsuit”) for alleged self-dealing, fraud, and breach of fiduciary duty with respect

to a series of transactions unrelated to the pending matter.40 The Complaint

suggests the Carret Lawsuit was withdrawn for failure to locate Song for service of

the complaint.41

The Blue Moon Trust then sold all three properties: the Reston Property on

June 18, 2013 for $748,000; the Jersey City Property on June 19, 2013 for

$675,160; and the Oakton Property on July 3, 2013 for $1,168,000.42 Song, in his

personal capacity and in his capacity as trustee of the Blue Moon Trust, then

purchased property located at 28 Hedgerow, Irvine, California, for $1.55 million,

38 Id. ¶¶ 42-44. 39 Id. ¶ 45. 40 Id. ¶¶ 34-38. The suit was captioned Carret (Beijing) Investment Management and Advisory Company Ltd., Carret China Opportunity Investment Co., Ltd. v. Yu Xiaohong (a/k/a Sean Yu) and Song Liqiang (a/k/a Li Song), Case No. 10-CIV- 06358. Id. ¶ 34. 41 Id. ¶ 39. 42 Id. ¶ 47. 9 which Song and the Blue Moon Trust still own.43 On September 12, 2013,

Kaneko, through the newly-registered entity LKD, purchased property located at

2372 Morse Avenue, Unit 416, Irvine, California for $1.2 million, which LKD

currently owns.44 The Complaint alleges that such “transfers were made with the

effect, if not the intent[,] of[] removing these assets from the reach of SCLI and

Kaneko’s and Song’s creditors.”45

D. The Alleged Settlement and Release

The Complaint acknowledges Kaneko’s argument that an alleged release

agreement (the “Release”) bars all of the Receiver’s claims.46 According to

Kaneko, an SCLI consultant, Alan Lewis (“Lewis”), contacted him in January

2013 to negotiate a settlement that would release him from all liability for the

allegedly fraudulent activity enumerated in the Complaint in exchange for his

cooperation in returning to SCLI the Song Held Shares.47 Kaneko signed the

Release in February 2013, though by this point the Song Held Shares were “lost,”

and so he could return them only by sending Lewis an affidavit of loss and a stock

43 Id. ¶ 48. 44 Id. ¶ 49. 45 Id. ¶ 50. 46 Id. ¶ 51; Aff. of Def. Shu Kaneko in Supp. of his Mot. to Dismiss Compl. or, in Alternative, Mot. for Summary Judgment (“Kaneko Aff.”) Ex. 3 (email from Lewis to Kaneko attaching the Release). 47 Id. ¶ 52. 10 power signed by the shareholders.48 Plaintiff, however, alleges potential defects in

the substance and execution of the Release, including SCLI’s failure to authorize

the transaction, fraudulent transfer to the extent SCLI did authorize the transaction,

and lack of consideration.49

E. Procedural Posture

Frustrated over SCLI’s failed IPO and general management conduct, the

Private Placement investors (the “Investors”) filed a Section 220 action on

August 29, 2013 seeking inspection of SCLI’s books and records (the “Section 220

Complaint”).50 SCLI failed to respond to both the Investors’ July 30, 2013 demand

and the August 29, 2013 Section 220 Complaint.51 The Court accordingly entered

a default judgment requiring SCLI to permit inspection of the requested books and

records by November 26, 2013 (the “Default Judgment”).52 Upon SCLI’s failure

to do so, the Court, on January 17, 2014, entered an order holding SCLI in

48 Opening Resp. to Def.’s Mot. to Dismiss First Am. Compl. (“Pl.’s Answering Br.”) 20-21; Compl. ¶ 51. 49 Compl. ¶¶ 53, 121-31. 50 Id. ¶¶ 54-55; Verified Compl. for Inspection of Books and Records, 2013 WL 6003017 (Del. Ch. Nov. 12, 2013) (“Section 220 Compl.”). 51 The Complaint states that the demand was served on SCLI’s registered agent on August 30, 2013, Compl. ¶ 56, but the Section 220 Complaint dates service of the demand “[o]n or about July 30, 2013”). Section 220 Compl. ¶ 2. 52 Compl. ¶ 56; Order Granting Default Judgment, 2013 WL 6003017 (Del. Ch. Nov. 12, 2013). 11 contempt, appointing a receiver pursuant to 8 Del. C. § 322, and allowing the

Investors to “put” their SCLI shares at fair market value.53

The Contempt Order invested in the Receiver all “powers generally

available to a receiver appointed pursuant to 8 Del. C. §§ 291 & 322,” except as

inconsistent with the Contempt Order, including authority and control over SCLI

property and assets as necessary to comply with the Contempt Order (including the

authority to deal or dispose of the property), unrestricted access to the books and

records specified in the Default Judgment, control over Company Bank Accounts

as necessary to comply with the Contempt Order, authority to bring suit in the

name of the Company including proceedings to avoid transactions that may hinder

the Company’s compliance with the Court’s past orders, authority to enlist the help

of Company employees, and authority to exercise power that the Company

possesses with respect to its wholly owned subsidiaries necessary to ensure

compliance with the Court’s orders including exercising voting rights and

replacing directors.54 Because Kaneko held effective control of SCLI, the

Complaint alleges, it was not until the Receiver’s January 17, 2014 appointment

53 Compl. ¶¶ 57-58; Order Granting Plaintiffs’ Motion for Contempt, In re Southern China Livestock, Inc. Litig., C.A. No. 8851-VCN, 2 (Del. Ch. Jan. 17, 2014) (“Contempt Order”). 54 Contempt Order 3-5. 12 that the Company had knowledge or reason to know of the alleged fraudulent

transactions.55

III. CONTENTIONS

The Complaint asserts seventeen causes of action against Defendants,

thirteen of which implicate Kaneko and are therefore relevant to this Motion to

Dismiss. The first, third, fourth and sixth causes of action allege, respectively:

breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conversion,

and aiding and abetting conversion by improperly diverting the Private Placement

Proceeds and assisting in the transfer of the Song Held Shares while Kaneko was

director of Shu Mei.56 The seventh, eighth, and ninth causes of action allege,

respectively: fraud; conspiracy to defraud and convert property; and fraudulent

transfer with respect to Kaneko’s allegedly improper diversion of the Private

Placement Proceeds.57 The tenth and eleventh causes of action allege fraudulent

transfer and waste with respect to the Release, arguing that SCLI entered into the

Release intending to hinder or delay creditors and that the Release was not

supported by consideration.58 The twelfth cause of action alleges fraudulent

transfer against Kaneko for improperly “gift[ing]” personal real property to the

55 Compl. ¶ 61. 56 Id. ¶¶ 63-68, 75-85, 92-97. 57 Id. ¶¶ 98-120. 58 Id. ¶¶ 121-136. 13 Blue Moon Trust intending to hinder, delay or defraud his creditors.59 Finally, the

fourteenth, fifteenth, and sixteenth causes of action seek, respectively, equitable

relief in the form of unjust enrichment, imposition of a constructive trust, and an

accounting with regard to the allegedly improper diversion of the Private

Placement Proceeds and transfer of the Song Held Shares.60

Kaneko filed this Motion to Dismiss Plaintiff’s claims under Court of

Chancery Rule 12(b)(6), contending that the Release bars all of Plaintiff’s claims,

and in the alternative, that each claim fails for one or a combination of laches,

failure to state a claim, or failure of standing.61 The Court addresses in turn each of

Defendant’s arguments below.

IV. ANALYSIS

A. Procedural Standard of Review under Court of Chancery Rule 12(b)(6)

On a motion to dismiss under Court of Chancery Rule 12(b)(6), the pleading

standards are minimal.62 The Court must accept all well-pleaded factual

allegations in the Complaint—including “vague allegations” so long as they

provide sufficient notice of the claim—and “draw all reasonable inferences in

59 Id. ¶¶ 137-148. 60 Id. ¶¶ 157-175. 61 Def.’s Opening Br. 62 Cent. Mortg., 27 A.3d at 536. 14 favor of the plaintiff.”63 The Court is not, however, “required to accept conclusory

allegations” or inferences not logically linked to the alleged facts.64 The Court will

grant Defendant’s Motion to Dismiss only if Plaintiff “could not recover under any

reasonably conceivable set of circumstances susceptible of proof.”65 Therefore, the

Court will deny Defendant’s motion to the extent that any of Plaintiff’s claims are

reasonably conceivable.66

B. The Release Fails for Lack of Consideration

Delaware law recognizes that releases are “an important tool for settling

disputes precisely because they are designed to provide ‘complete peace.’” 67 As

such, Delaware courts generally “recognize the validity of general releases.”68

Defendant argues that the Release bars all claims against Kaneko the Company

possessed as of the date of the Release, including those alleged in the Complaint.69

The parties are in general agreement regarding the facts surrounding the Release:

in January 2013, Lewis contacted Kaneko offering to release any potential claim

the Company had against Kaneko in consideration for Kaneko facilitating the

63 Id. 64 In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006). 65 Cent. Mortg., 27 A.3d at 536. 66 Id. 67 Seven Invs., LLC v. AD Capital, LLC, 32 A.3d 391, 397 (Del. Ch. 2011). 68 Deuley v. DynCorp Int’l, Inc., 8 A.3d 1156, 1163 (Del. 2010). 69 Def.’s Opening Br. 25. 15 return of the Song Held Shares.70 Because the shares had been “lost,” Kaneko

replied in February 2013 by signing the Release and returning not the shares, but

an affidavit of loss and stock power signed by the shareholders. 71 As Plaintiff

contends, however, the Release is invalid due to lack of consideration.72

Plaintiff argues that because the Song Held Shares were not permitted to be

transferred under the Lockup Agreement, SCLI was already entitled to return of

the Song Held Shares, and therefore their return does not constitute consideration

for the Company releasing claims worth potentially $7.5 million in Private

70 In an email attached as Exhibit 1 to Kaneko’s affidavit supporting his Motion to Dismiss Plaintiff’s original complaint, Lewis stated that SCLI had retained outside counsel to “initiate a lawsuit against you in the US to seize your properties that you conveyed to the Blue Moon Trust in April, in an attempt to recoup some of the alleged misappropriated funds, along with” the Song Held Shares. Kaneko Aff. Ex. 1 (January 2013 email from Lewis to Kaneko). Lewis further stated that he “convince[d] the [C]ompany that it’s in their best interest . . . to come to a peaceful resolution,” and that “management seems open to offering you . . . a full liability waiver . . . in exchange for your cooperation in turning over the [Song Held Shares].” Id. Other than this email from Lewis to Kaneko, however, the record is largely devoid of information surrounding the relationship among Lewis, Kaneko, and SCLI, and the Court is therefore unable, at this stage in the proceeding, to develop an opinion regarding the propriety of the relationship, the Release negotiations, or the Release itself. 71 Pl.’s Answering Br. 20-21; Compl. ¶ 51; Def.’s Opening Br. 20. Such documents provide the same rights and privileges as would the return of the stock itself. 8 Del. C. § 167; Corrected Reply Br. in Further Supp. of Def. Shu Kaneko’s Mot. to Dismiss First Am Compl. (“Def.’s Reply Br.”) 8 n.3. 72 Pl.’s Answering Br. 22-31. 16 Placement Proceeds.73 Defendant offers two arguments in response. First,

Defendant notes that Lewis approached Kaneko with the alleged agreement,

insinuating that Lewis would not offer a deal to Kaneko that would result in the

Company receiving no consideration.74 Plaintiff’s allegations regarding Kaneko’s

extended control over SCLI and SCL International,75 however, cast doubt on this

reasoning and, with all reasonable inferences drawn in Plaintiff’s favor, suggest

that the Company may have offered this deal intending to insulate Kaneko from

liability for his alleged fraudulent scheme while receiving in return only a portion

of its entitlement, that is, possession of the Song Held Shares.76 Second,

73 Id. at 25; Sabatoro Const. Co. v. Formosa Plastics Corp. USA, 1996 WL 453460, at *3 (Del. Super. June 10, 1996) (“A releaser . . . must receive something of value to which it is otherwise not previously entitled.”), aff’d, 692 A.2d 415 (Del. 1997). The Release identifies, as additional consideration, Kaneko’s release of the Company from any lawsuit or other legal proceeding Kaneko had against the Company at the time of the Release. Id.; Kaneko Aff. Ex. 3 (email from Lewis to Kaneko attaching the Release). While the Court refrains from questioning the “adequa[cy]” of bargained-for consideration, it may still inquire as to its “existence.” Newell Rubbermaid Inc. v. Storm, 2014 WL 1266827, at *9 (Del. Ch. Mar. 27, 2014). Defendant never contends, however, that Kaneko had any viable claims against SCLI. Pl.’s Answering Br. 25. This alleged consideration is therefore nonexistent and accordingly insufficient to support the Release. 74 Def.’s Opening Br. 18. 75 Pl.’s Answering Br. 35-36; Compl. ¶ 133 (the Release was “one-sided, part of a broader scheme, orchestrated by a financially incentivized ‘advisor,’ with Kaneko providing no consideration to SCLI while SCLI allegedly released significant claims against Kaneko”). 76 In making his argument, Plaintiff assumes that, if Song’s transfer of the Song Held Shares to Shu Mei violated the Lockup Agreement, SCLI is entitled to possession of the shares. Plaintiff, however, offers no basis for this assumption, 17 Defendant argues that Kaneko’s assistance in transferring the Song Held Shares to

SCLI was, in fact, valuable consideration sufficient to validate the Release.77 He

bases this conclusion on the fact that SCLI had no “possessory right” to the shares,

and therefore receiving possession amounts to sufficient consideration.78

Defendant’s arguments fail for two reasons. First, instead of pointing to a

specific benefit resulting from the transfer to SCLI of the Song Held Shares,

Defendant simply states that the transfer must have had value because Plaintiff

claims that the transfer of the shares to Shu Mei caused the Company $7,594,965

in damages.79 This reasoning assumes, however, that simply because Song’s initial

transfer to Shu Mei caused damages by preventing SCLI from collapsing its U.S.

operations,80 the transfer to SCLI of the Song Held Shares would increase the

Company’s value. To the contrary, Plaintiff based his decision to allege over

$7 million in damages on factors additional to the Company’s alleged inability to

and the Court, in accepting Plaintiff’s argument regarding lack of consideration, makes no finding with respect to entitlement of the Song Held Shares upon any breach of the Lockup Agreement and notes that, for purposes of this Motion to Dismiss, the Release fails for lack of consideration whether or not the allegedly improper transfer somehow imbued SCLI with the right to possession of the Song Held Shares. 77 Def.’s Opening Br. 29. 78 Id. 79 Id. 80 The Court expresses no opinion regarding the validity of this claim. 18 collapse its operations, including a reduction in SCLI’s share price.81 Defendant

fails to reason how Kaneko’s return of the Song Held Shares to SCLI would

remedy such a reduction. Second, the Song Held Shares were held by Song in a

custodial capacity on behalf of the Jiangxi Shareholders.82 Accordingly, the

economic interest was, at all times after the reverse merger (including after the

transfer to Shu Mei), held by the Jiangxi Shareholders.83 Defendant fails to

identify any benefit SCLI would receive by holding the Song Held Shares in a

custodial capacity on behalf of the Jiangxi Shareholders. Therefore, the Release

transaction lacks consideration, and the Motion to Dismiss is denied to the extent

that it argues the Release bars Plaintiff’s claims.84

C. Laches Bars Plaintiff’s Claims to the Extent they Rely on Song’s Transfer of the Song Held Shares, but Does Not Bar the Remaining Claims

Defendant claims that the doctrine of laches (and the three year statute of

limitations applicable by analogy) bars all claims based on fraud, breach of

fiduciary duty, conversion, and unjust enrichment.85 Specifically, this argument

81 Pl.’s Answering Br. 42. 82 Oct. 1 Registration Statement 10, 54. 83 Id. 84 Plaintiff also argues that the Release is invalid, in addition to lack of consideration, because it constitutes a fraudulent transfer and corporate waste, Compl. ¶¶ 121-31, and implicates factual issues not ripe for decision at this stage in the proceeding. Pl.’s Answering Br. 19-21. Because the Release fails for lack of consideration, however, the Court does not reach these arguments. 85 Def.’s Opening Br. 33. 19 attempts to bar Plaintiff’s first (breach of fiduciary duty), third (aiding and abetting

breach of fiduciary duty), fourth (conversion), sixth (aiding and abetting

conversion), seventh (fraud), eighth (conspiracy to defraud and convert property),

and fourteenth (unjust enrichment) causes of action. Defendant’s Reply Brief also

argues laches as a defense to Plaintiff’s requests for a constructive trust and an

accounting,86 and challenges his claim for fraudulent transfer of the Private

Placement Proceeds87 under the applicable four year statute of limitations.88

1. Legal Standard

Unless late filing is excused by a tolling doctrine, “a plaintiff must file a

claim for breach of fiduciary duty within three years of the conduct that gives rise

to the claim.”89 The same limitations apply with regard to fraud90 and unjust

enrichment.91 To bar a cause of action under a laches argument, a defendant must

prove (1) the plaintiff “unreasonabl[y] delay[ed] in bringing a claim . . . with

86 Plaintiff’s fifteenth and sixteenth causes of action. 87 Plaintiff’s ninth cause of action. 88 6 Del. C. § 1309(1); Def.’s Reply Br. 16 & n.8. 89 In re Sirius XM S’holder Litig., 2013 WL 5411268, at *4 (Del. Ch. Sept. 27, 2013); 10 Del. C. § 8106. 90 Van Lake v. Sorin CRM USA, Inc., 2013 WL 1087583, at *6 (Del. Super. Feb. 15, 2013) (“Pursuant to 10 Del. C. § 8106, claims ‘arising from a promise,’ including fraud, must be brought within three years after the claim has accrued.”); see also Krahmer v. Christie’s Inc., 903 A.2d 773, 783 (Del. Ch. 2006). 91 Vichi v. Koninklijke Philips Electronics N.V., 62 A.3d 26, 42 (Del. Ch. 2012) (“In this case, the analogous statute of limitations under Title 10, Section 8106 of the Delaware Code for both unjust enrichment and fraud is three years.”). 20 knowledge thereof, and [(2)] resulting prejudice to the defendant.”92 Though this

Court’s equitable jurisdiction is not subject to rigid application of the statute of

limitations,93 “a limitations period analogous to the statute of limitations will

presumptively bar equitable relief, and conclusively bar legal relief.”94 The

general rule in Delaware is that “the cause of action accrues[] at the time of the

alleged wrongful act, even if the plaintiff is ignorant of the cause of action.”95

Plaintiff filed the Complaint on July 7, 2014, and therefore, Defendant contends,

all conduct prior to July 8, 2011 is shielded by laches.96

Plaintiff responds by arguing that his claims remain valid, notwithstanding

their origin prior to July 8, 2011, because the statute of limitations has been tolled.

92 Levey v. Brownstone Asset Mgmt., LP, 76 A.3d 764, 769 (Del. 2013). 93 See O’Brien v. IAC/Interactive Corp., 2009 WL 2490845, at *7 n.39 (Del. Ch. Aug. 14, 2009). 94 Lehman Bros. Hldgs. Inc. v. Spanish Broad. Sys., Inc., 2014 WL 718430, at *7 (Del. Ch. Feb. 25, 2014) (footnote omitted), aff’d, 105 A.3d 989 (Del. 2014); accord Levey, 76 A.3d at 769 (“A filing after the expiration of the analogous limitations period is presumptively an unreasonable delay for purposes of laches.”). 95 In re Dean Witter P’ship Litig., 1998 WL 442456, at *4 (Del. Ch. July 17, 1998), aff’d, 725 A.2d 441 (Del. 1999); Jepsco, Ltd. v. B.F. Rich Co., 2013 WL 593664, at *8 (Del. Ch. Feb. 14, 2013). 96 The Receiver is subject to the same statute of limitations and laches defenses as the Company. Haas v. Sinaloa Exploration & Dev. Co., 152 A. 216, 218 (Del. Ch. 1930) (“As a general rule, the mere appointment of a receiver to take charge of property in dispute will not suspend the operation of the statute . . . .”); Stewart v. Wilmington Trust SP Servs., Inc., 112 A.3d 271, 312-13 (Del. Ch. 2015) (“I see no cogent reason for sparing the innocent Receiver the effect of in pari delicto while equally innocent stockholders or policyholders would be barred from relief in the derivative context.”), aff’d, __ A.3d __ (Del. 2015). 21 Delaware recognizes three situations that may result in the tolling of the applicable

statute of limitations: fraudulent concealment, an “inherently unknowable” injury,

or where equitable tolling is warranted.97 Plaintiff’s argument for tolling the

statute of limitations focuses on equitable tolling. The doctrine of equitable tolling

suspends the statute of limitations for the duration of a plaintiff’s reasonable

reliance “upon the competence and good faith of a fiduciary.”98 While no evidence

of actual concealment of wrongdoing is necessary, “the statute is only tolled until

the investor ‘knew or had reason to know of the facts constituting the wrong.’”99

Though the Complaint need not plead equitable tolling as such, it must, at a

minimum, “plead facts that support the existence of equitable tolling.”100

2. Kankeo May Have Remained a Fiduciary of SCLI After Resigning in October 2010.

To succeed on its equitable tolling claims, Plaintiff must allege facts

sufficient for the Court to infer reasonably that Kaneko was a fiduciary at the time

of his alleged acts, and that “[P]laintiff has reasonably relied upon [his]

97 Krahmer, 903 A.2d at 778-79. 98 In re Tyson Foods, Inc., 919 A.2d 563, 585 (Del. Ch. 2007). 99 Id. (“[N]o theory will toll the statute beyond the point where the plaintiff was objectively aware, or should have been aware, of facts giving rise to the wrong.”). 100 In re Am. Int’l Gp., Inc., 965 A.2d 763, 812 (Del. Ch. 2009), aff’d sub nom., Teachers’ Ret. Sys. of La. v. PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011). 22 competence and good faith.”101 Defendant argues that Plaintiff has made only

“conclusory allegations” that Kaneko was a fiduciary or insider of SCLI after his

October 2010 resignation, and that Kaneko did nothing that the Company could

have relied on after Kaneko’s resignation became public.102 The Complaint,

however, alleges that Defendant, even after resigning as director and CFO,

continued to “loot” the Company’s Bank Accounts (and was the only person to

sign checks therefrom), remained as a signatory on the Bank Accounts, represented

himself as CEO of SCLI on the Bank Accounts, and held executive positions in

SCL International, SCLI’s wholly-owned subsidiary, including director, president,

treasurer and secretary, until its dissolution on March 6, 2012.103 While Kaneko

resigned from his director and officer positions at SCLI in October 2010, the fact

that he remained as a director and officer of SCL International, SCLI’s wholly

owned subsidiary, suggests that his fiduciary relationship to SCLI may have

survived his resignation.104 Therefore, the Complaint alleges facts sufficient for

101 Am. Int’l Gp., 965 A.2d at 812 (quoting Tyson, 919 A.2d at 585). 102 Def.’s Reply Br. 20-21. 103 Compl. ¶¶ 19-20, 26, 143. 104 Hamilton P’rs, L.P. v. Englard, 11 A.3d 1180, 1208 (Del. Ch. 2010) (“The fiduciary duties owed by directors of . . . wholly owned subsidiaries run only to the parent.”). 23 the Court, on Defendant’s Motion to Dismiss, to infer reasonably that Kaneko’s

fiduciary relationship with SCLI survived his October 2010 resignation.105

3. Laches Bars All Claims Related to the Transfer of the Song Held Shares

Defendant argues that laches bars Plaintiff’s claims related to the transfer of

the Song Held Shares because such transfer occurred in September 2010, more

than three years prior to the filing of the Complaint.106 Plaintiff responds,

unsuccessfully, that such claims should be equitably tolled due to lack of

knowledge or reasonable reliance on a fiduciary.107 SCLI reported, in its annual

report filed in February 2011, that Shu Mei held the Song Held Shares, and that

“Song transferred these shares to Shu Mei . . ., subject to the terms of the option

[agreement] and [the Lockup Agreement].”108 Therefore, SCLI had “reason to

105 While the case cited by Plaintiff suggesting that effective control of the corporation imputes fiduciary duties to the controller relates to controlling shareholders, Quadrant Structured Products Co. v. Vertin, 102 A.3d 155, 183-84 (Del. Ch. 2014), Plaintiff has alleged sufficient facts to infer reasonably, on a motion to dismiss, that while Kaneko was not a controlling shareholder, he sufficiently controlled SCLI and its subsidiaries to maintain his fiduciary capacity. Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113 (Del. 1994) (“[A] shareholder owes a fiduciary duty only if it owns a majority interest in or exercises control over the business affairs of the corporation.”). 106 Compl. ¶ 23. 107 Pl.’s Answering Br. 37. 108 2010 Annual Report 39-40; Jepsco, 2013 WL 593664, at *8 (“To toll the time at which an analogous statute of limitations begins to run, a plaintiff must plead specific facts to demonstrate that the facts underlying his claim were so hidden that a reasonable plaintiff could not have discovered them within the limitations 24 know” of the transfer of the Song Held Shares prior to July 8, 2011.109 Further,

given SCLI’s public disclosure of the Lockup Agreement in April 2011, Plaintiff is

charged with notice of not only the fact of the transfer, but also its impropriety.

Plaintiff claims that, once equitable tolling is argued in the context of a

motion to dismiss, Defendant’s statute of limitations defense necessarily fails

because such an argument implicates factual issues not yet ripe for

determination.110 Here, however, Plaintiff has alleged no facts disputing the timing

of the Company’s public disclosure of Song’s allegedly improper transfer of the

Song Held Shares, and, to be sure, bases his entire equitable tolling argument on

Kaneko’s fraudulent concealment of the Private Placement Proceed transfers.

Plaintiff’s equitable tolling argument therefore fails with respect to his claims

regarding the transfer of the Song Held Shares, and the Court accordingly grants

Defendant’s Motion to Dismiss with respect to the following claims against

Kankeo: breach of fiduciary duty to the extent that it relies on the transfer of the

Song Held Shares; aiding and abetting breach of fiduciary duty; aiding and

abetting conversion; fraud to the extent that it relies on the transfer of the Song

period. . . . But, even if tolling applies, once the information underlying the plaintiff's claim is readily available, that plaintiff is on inquiry notice.”). 109 Jepsco, 2013 WL 593664, at *11 (“The public filings . . . provided Jepsco ample notice that the Underlying Action had been resolved in a way that materially could affect its rights as a shareholder of RRI.”). 110 Pl.’s Answering Br. 33. 25 Held Shares; conspiracy to defraud and convert property to the extent it relies on

the transfer of the Song Held Shares; and imposition of a constructive trust to the

extent it relies on the transfer of the Song Held Shares (the “Dismissed Claims”).111

4. Laches Does Not Bar Claims Related to Kaneko’s Alleged Diversion of the Private Placement Proceeds

a. Breach of Fiduciary Duty, Fraud, Accounting, and Constructive Trust

The Complaint contains facts sufficient to state a claim that Kaneko

breached his fiduciary duty and committed fraud by improperly diverting the

Private Placement Proceeds, and that he concealed this alleged diversion thereby

precluding SCLI’s knowledge of such transfers. Plaintiff concedes that these

actions took place more than three years prior to the filing of the Complaint. He

argues, however, and the Court agrees, that such claims remain viable due to

equitable tolling for two reasons. First, as established above, Kaneko owed

fiduciary duties to SCLI, and therefore SCLI’s shareholders were entitled to

111 Additionally, Plaintiff’s claims related to the transfer of the Song Held Shares would fail notwithstanding Plaintiff’s laches argument. The Receiver, standing in SCLI’s shoes, had no possessory interest in the Song Held Shares. Such shares were transferred to Song as custodian for the Jiangxi Shareholders, and then to Shu Mei subject to the same ownership restrictions. As this Court has held, to recover for conversion, Plaintiff must prove he had a property interest in the allegedly converted property and had a right to possession in the same. Facciolo Const. Co. v. Bank of Delaware, 514 A.2d 413, 1986 WL 17356, at *2 (Del. 1986) (TABLE). Therefore, the claims against Kaneko based on Song’s transfer to Shu Mei of the Song Held Shares are dismissed for lack of standing in addition to Defendant’s laches argument. 26 reasonably rely on his competence and good faith in operating the Company. As

this Court has held, “it would be corrosive and contradictory for the law to punish

reasonable reliance on that good faith by applying the statute of limitations

woodenly or automatically to alleged self-interested violations of trust.”112

Second, Plaintiff has alleged facts sufficient to infer reasonably that Kaneko

concealed the alleged fraudulent transfers of the Private Placement Proceeds to the

extent that SCLI did not “kn[o]w or ha[ve] reason to know”113 of such transfers

until after July 7, 2011 (three years prior to Plaintiff’s filing of the Complaint). For

example, the Complaint states that Kaneko was the only party acting as signatory

on the Bank Accounts,114 the Private Placement Proceed transfers were concealed

from SCLI,115 and Kaneko controlled and dominated SCLI.116 The Complaint is

therefore sufficient to allow the inference that SCLI had no knowledge of

Kaneko’s allegedly illicit transfers of the Private Placement Proceeds, and that

SCLI shareholders justifiably relied on Kaneko to discharge his fiduciary duties

112 Kahn v. Seaboard Corp., 625 A.2d 269, 275 (Del. Ch. 1993). 113 Tyson Foods, 919 A.2d at 585. 114 Compl. ¶ 19. 115 Compl. ¶ 116; Pl.’s Answering Br. 8 (“The bank statements for the Bank Accounts were sent to SCLI c/o Kaneko in Virginia, and SCLI may have not seen the bank statements until late 2012 at the earliest . . . .”). 116 Compl. ¶ 83. 27 appropriately.117 Plaintiff’s equitable tolling argument is therefore valid at this

stage in the proceeding, and the Motion to Dismiss is accordingly denied to the

extent it relies on laches as a defense to Plaintiff’s claims for breach of fiduciary

duty and fraud for improperly diverting the Private Placement Proceeds.

Because Plaintiff’s fiduciary duty claim survives Defendant’s laches

argument, his request for an accounting survives as well. As Defendant

recognizes, the basis for the accounting claim is to identify wrongfully-transferred

Bank Account proceeds, which is “indistinguishable from the bases for the

fiduciary claim.”118 Defendant bases his argument that laches bars Plaintiff’s

constructive trust claim on the fact that a constructive trust is tantamount to a

mandatory injunction, which precludes the sale of property subject to the claim,

and therefore “necessarily invokes a stricter requirement for prompt action.”119

This argument, however, does not address the concern that arises where a

117 The Court notes for completeness Defendant’s argument that the SCLI directors signed SCLI’s audited financial statements, and therefore had notice of the transfer of the Private Placement Proceeds. Def.’s Opening Br. 9, 40. The Court recognizes that signing an audited financial statement generally serves as notice to directors of the contents of the statement. See City of Roseville Employees’ Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404, 417 & n.19 (D. Del. 2009). Here, however, the Complaint alleges facts sufficient to infer reasonably that, though the directors knew of the expenses’ existence, they were unaware of the allegedly illicit nature of the transfers. See supra notes 114-17 and accompanying text; see infra notes 145, 174 and accompanying text. 118 Def.’s Opening Br. 36. 119 Id. at 37 (quoting Quill v. Malizia, 2005 WL 578975, at *15 n.51 (Del. Ch. Mar. 4, 2005)). 28 defendant is alleged to have concealed a claim from a plaintiff justifying tolling of

the statute of limitations. Accordingly, Defendant’s Motion to Dismiss is denied to

the extent it relies on laches as a defense to Plaintiff’s accounting and constructive

trust claims.

b. Conversion and Unjust Enrichment

Defendant argues that Plaintiff’s claims against Kaneko for conversion of

the Private Placement Proceeds, aiding and abetting Song’s conversion, and

conspiring to defraud and convert property are barred by laches as analogized to

Delaware’s three year statute of limitations.120 Defendant cites authority

supporting the general rule under Delaware law that lack of knowledge of a cause

of action for conversion does not toll the three year statute of limitations.121 This

general rule is, however, subject to certain exceptions, including where the

plaintiff’s lack of knowledge can be attributed to concealment or fraud.122 As

discussed above, Plaintiff has alleged sufficient facts for the Court, on this Motion

to Dismiss, to infer reasonably that Kaneko concealed the alleged conversion from

Plaintiff.123 Defendant’s Motion to Dismiss is therefore denied to the extent that it

relies on laches as a defense to Plaintiff’s conversion claims. The unjust

120 Id. 121 Id. at 37-38; Layton v. Allen, 246 A.2d 794, 799 (Del. 1968); Mastellone v. Argo Oil Corp., 76 A.2d 118, 121 (Del. Super. 1950). 122 Isaacson, Stolper & Co. v. Artisans’ Sav. Bank, 330 A.2d 130, 132 (Del. 1974). 123 See supra notes 114-17 and accompanying text. 29 enrichment claim likewise survives the Motion to Dismiss. As Defendant

acknowledges, “[t]he same analysis and three year limitations period under 10 Del.

C. § 8106 applies to the Receiver’s claim for unjust enrichment.”124

In sum, Defendant’s laches defense bars the Dismissed Claims. Plaintiff’s

remaining claims are not affected by Defendant’s laches argument at this stage in

the proceeding.125

D. The Complaint Sufficiently States a Claim for Breach of Fiduciary Duty, Fraud, and Unjust Enrichment

With the exception of Plaintiff’s fraud claim, the Complaint need only meet

Delaware’s “rather forgiving notice pleading standard of Court of Chancery Rule 8

in order to state a claim and survive a motion to dismiss under Rule 12(b)(6).”126

Plaintiff’s fraud claim necessitates, under Court of Chancery Rule 9(b), application

of a heightened pleading standard requiring particularized facts.127

124 Def.’s Opening Br. 38. 125 Defendant also asserts that Plaintiff’s claim for fraudulent transfer of the Private Placement Proceeds is barred under the applicable four year statute of limitations. Def.’s Reply Br. 16 n.8; 6 Del. C. § 1309(1). This argument, however, fails for the same reasons the laches argument fails with respect to the fraud and conversion claims for improper transfer of the Private Placement Proceeds, namely, that for purposes of this Motion to Dismiss, the applicable statute of limitations, and laches by analogy, has been equitably tolled. 126 Anglo Am. Sec. Fund, L.P. v. S.R. Global Int’l Fund, L.P., 829 A.2d 143, 155- 56 (Del. Ch. 2003) (footnote omitted); accord Ct. Ch. R. 8. 127 Ct. Ch. R. 9(b); Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 207 (Del. Ch. 2006), aff’d sub nom., Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007). 30 1. Breach of Fiduciary Duty

Defendant argues that he owed no fiduciary obligation to SCLI upon and

after his resignation as director and CFO of SCLI in October 2010, and therefore is

immune from liability for breach of fiduciary duty for actions taken subsequent to

such withdrawal.128 As discussed in the context of Defendant’s laches argument

above, however, Kaneko, for purposes of this Motion to Dismiss, remained a

fiduciary of the Company after his resignation due to his continued access to and

use of the Bank Accounts and fiduciary relationship with SCLI’s wholly-owned

subsidiary SCL International.129 Therefore, Defendant’s argument that Kaneko is

not liable for actions taken after October 8, 2010 is unavailing.

Plaintiff also claims that Kaneko aided and abetted Song’s alleged breach of

fiduciary duty. First, as discussed above, the Court dismissed this claim under

Defendant’s laches argument.130 Song’s alleged underlying breach—transferring

the Song Held Shares to Shu Mei for no consideration in violation of the Lockup

Agreement—occurred in September 2010, more than three years prior to Plaintiff’s

filing of the Complaint, and is therefore presumptively shielded by the doctrine of

laches.131 Because the underlying breach is dismissed, the aiding and abetting

128 Def.’s Opening Br. 41. 129 See supra notes 103-05 and accompanying text. 130 See supra text accompanying note 111. 131 See supra text accompanying notes 106-11. 31 claim must be dismissed as well.132 However, even assuming the underlying

breach is not barred by laches, Plaintiff’s aiding and abetting claim necessarily

fails. To succeed on a claim for aiding and abetting a breach of fiduciary duty, a

plaintiff must prove each prong of a four-prong test: “(1) the existence of a

fiduciary relationship; (2) a breach of that fiduciary’s duty; (3) [a non-fiduciary’s]

knowing participation in that breach; and (4) damages.”133 As Defendant argues,

and Plaintiff fails to dispute, Kaneko was a fiduciary at the time of the transfer.134

Song’s transfer of the Song Held Shares to Shu Mei occurred in September 2010—

over one week before Kaneko’s withdrawal as director and CFO of SCLI early the

following October. As stated, a successful aiding and abetting claim necessitates

improper conduct by a non-fiduciary.135 Therefore, Plaintiff’s aiding and abetting

claim fails because of, in addition to laches, Defendant’s fiduciary relationship

with SCLI at the time of the alleged underlying breach.136

132 In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *27 (Del. Ch. Oct. 24, 2014). 133 Id.; accord Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1038- 39 (Del. Ch. 2006) (“Like the test for civil conspiracy, the test for stating an aiding and abetting claim is a stringent one, turning on proof of scienter—a plaintiff must prove: (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty and (3) knowing participation in that breach by the non-fiduciary.”). 134 Def.’s Opening Br. 42. 135 Allied Capital Corp., 910 A.2d at 1038-39. 136 Plaintiff argues that Kaneko was acting his “personal capacity” in his involvement with the transfer of the Song Held Shares. Pl.’s Answering Br. 45. The Court, however, fails to see the distinction—one would assume that a 32 2. Fraud

To succeed on a fraud claim, Plaintiff must meet heightened pleading

standards requiring particularized facts.137 Pleading fraud requires allegations of

(1) a false representation of material fact; (2) the defendant’s knowledge that the

representation was false or reckless indifference to the truth; (3) an intent to induce

action or inaction; (4) “the plaintiff’s action or inaction taken in justifiable reliance

upon the representation;” and (5) resulting damages.138

Here, Plaintiff alleges that Kaneko exercised complete “dominion and

control” over the Private Placement Proceeds,139 was the only person who signed

checks from the Bank Accounts,140 concealed the transfers from SCLI,141 and

failed to account for what remained of the Private Placement Proceeds,142 and that

the transfer of the Private Placement Proceeds was for Kaneko’s and Song’s

personal benefit.143 Further, while particularized facts are generally required for

fraud claims, “[c]ourts must be sensitive to the fact that application of Rule 9(b)

prior to discovery ‘may permit sophisticated defrauders to successfully conceal the

director’s breach of the duty of loyalty generally, if not always, furthers the director’s personal interests. 137 Ct. Ch. R. 9; Trenwick, 906 A.2d at 207. 138 Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992). 139 Compl. ¶ 83. 140 Id. ¶ 19. 141 Id. ¶ 116. 142 Id. ¶ 101. 143 Id. ¶ 112. 33 details of their fraud.’”144 Defendant argues that Plaintiff’s claims are too broad in

that they fail to allege the specific beneficiaries of the allegedly fraudulent

transfers; however, as Defendant himself admits, Plaintiff’s records consist of a

mere list of withdrawals noting the date, account number, check number, payor,

payee, and transfer amount—information regarding the diverted funds’ ultimate

use and destination allegedly remains within Kankeo’s control.145 Plaintiff’s fraud

claim therefore satisfies each of the elements above,146 and Defendant’s Motion to

Dismiss with respect thereto is denied.

3. Unjust Enrichment

Plaintiff’s unjust enrichment claim likewise survives Defendant’s Motion to

Dismiss. Defendant argues that, to pursue an unjust enrichment claim, the claim

144 Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 645 (3d Cir. 1989). 145 Def.’s Opening Br. 44; Compl. Ex. C; Pl.’s Answering Br. 8. Plaintiff argues, and Defendant accepts, that the Court may, where facts are “peculiarly within the defendant’s knowledge or control,” relax the particularity requirements for pleading fraud. Craftmatic, 890 F.2d at 645; Def.’s Reply Br. 24; Pl.’s Answering Br. 9. Without assessing the validity of this argument, the Court finds that Plaintiff’s claims are sufficiently particularized to satisfy the heightened pleading requirements under Rule 9. 146 As to the first element, a false representation can be by silence. Valansi v. Ashcroft, 278 F.3d 203, 220 n.9 (3d Cir. 2002). Therefore, Kaneko’s alleged failure to inform Plaintiff of the purpose of the transfers satisfies, for purposes of this Motion, the first element. The second, third, and fourth elements are met by Plaintiff’s allegations that Kaneko knew he was engaged in an illicit transfer of corporate assets and that the Company’s inaction was due to Kankeo’s concealment of the transfers’ impropriety. 34 must have an “independent factual basis.”147 Defendant, however, misinterprets

the scope of BAE Systems. There, the Court held that, to bring a proper claim for

unjust enrichment, the Plaintiff must allege a factual basis independent from an

alleged breach of contract.148 Because the dispute here is not confined to a

contract, Defendant’s argument is unavailing and Plaintiff’s unjust enrichment

claim survives. Therefore, Defendant’s Motion to Dismiss is denied to the extent it

attempts to dispense with Plaintiff’s fiduciary duty, fraud, and unjust enrichment

claims.

E. Plaintiff’s Fraudulent Transfer Claims Survive Defendant’s Motion to Dismiss

Plaintiff maintains fraudulent transfer claims for Kaneko’s transfer of the

Private Placement Proceeds and the real property. To maintain a cause of action

for fraudulent transfer, Plaintiff must show that the transfer was made, whether

before or after the creditor’s claim arose, “(1) with actual intent to hinder, delay or

defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent

value in exchange for the transfer or obligation, and the debtor” either: (a) was

insolvent or became insolvent as a result of the transfer, (b) was about to engage in

a transaction for which its remaining assets were unreasonably small, or

(c) intended to or reasonably should have believed it would incur debts beyond its

147 Def.’s Opening Br. 46 (citing BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., 2009 WL 264088, at *8 (Del. Ch. Feb. 3, 2009)). 148 BAE Sys., 2009 WL 264088, at *8. 35 ability to pay.149 Whether the debtor exhibited “actual intent” can be inferred from

the circumstances, including whether the debtor “became insolvent shortly after the

transfer was made or the obligation was incurred.”150 Whether the debtor received

“reasonably equivalent value” depends on “(1) whether the transaction was at

arm’s length, (2) whether the transferee acted in good faith, and (3) the degree of

difference between the fair market value of the asset transferred and the price

paid.”151

Plaintiff claims that Kaneko’s transfer of the Private Placement Proceeds

constituted a fraudulent transfer of SCLI’s assets because SCLI “had creditors at

the time the $7.5 million in funds flowed in and out of the Bank Accounts.”152

With respect to this cause of action, the Receiver has authority to act on behalf of

the Corporation to recover funds wrongfully transferred.153 The factual record at

this point in the litigation, however, is insufficient to ascertain whether this claim is

149 6 Del. C. § 1304(a)(1)-(2); In re Plassein Int’l Corp., 428 B.R. 64, 67 (D. Del. 2010). 150 6 Del. C. § 1304(b)(9). 151 Plassein, 428 B.R. at 67. 152 Pl.’s Answering Br. 41. 153 Haas, 152 A. at 219; Contempt Order 4 (granting Receiver authority to bring suit “in the name of the Company or otherwise” as necessary to “avoid transactions . . . that may hinder the Company’s compliance with this Court’s orders.”). This proposition holds whether recovery of the Private Placement Proceeds ultimately inures to the benefit of the Company or directly to the Investors as the Company’s creditors. 36 most appropriately characterized as (1) a direct claim by the Investors for their own

benefit in recouping the Private Placement Proceeds (as Plaintiff alleges154), (2) a

derivative claim brought by the investors as creditors of SCLI for the benefit of the

Company, or (3) a direct claim by the Company to recoup the Private Placement

Proceeds to be used for Company purposes.

First, the Complaint alleged facts sufficient for the Court to infer that

Kaneko transferred the Private Placement Proceeds with an actual intent to defraud

SCLI and the Investors.155 Second, a determination as to whether Kaneko received

“reasonably equivalent value” in return for the allegedly improper transfers

requires additional factual development.156 For example, whether the Private

Placement Proceeds were distributed in accordance with a proper corporate

purpose and in return for valuable consideration is a fact subject to dispute, the

determination of which may illuminate to a greater extent the Company’s post-

transfer solvency.157 Such factual disputes necessitate denial of Defendant’s

154 Id. at 41. 155 Compl. ¶ 83. 156 See supra notes 73-76, 80-83 and accompanying text. 157 Pl.’s Answering Br. 8 n.3 (“Upon information and belief, based upon the Receiver’s investigation, serious questions exist as to the verification of the $125,000 paid to Tieling Bo Yi Feed Ltd. that Kaneko argues was justified because the SEC filings disclose this transaction but which merely stated that there was a land use agreement with Tieling, while the owner of Tieling said that he only received $3,000 USD.”). 37 Motion to Dismiss with respect to Plaintiff’s claim for Fraudulent Transfer of the

Private Placement Proceeds.

2. Real Property

With respect to Plaintiff’s claim of fraudulent transfer against Kaneko for his

transfers of real property to the Blue Moon Trust, the Receiver, as Kaneko’s direct

creditor, acts in place of SCLI directly, given that any relief obtained inures to the

benefit of the Company. Plaintiff argues that Defendant’s transfer of his real

property to the Blue Moon Trust defrauded SCLI by shielding his assets from a

potential judgment arising from this litigation.158 Defendant responds that the

absence of a debtor-creditor relationship between Kaneko and SCLI precludes any

fraudulent transfer claim. Such an absence exists, Defendant continues, because

SCLI is not Kaneko’s creditor “[u]nless and until [it] obtain[s] a judgment against

Kaneko.”159 To the contrary, however, 6 Del. C. § 1304(a) permits a creditor’s

claim to arise “before or after the transfer was made or the obligation was

incurred,”160 and applies so long as Defendant’s transfer was made with the intent

to incur or under reasonable belief that he would incur, debts beyond his ability to

pay.161 Plaintiff pleaded facts sufficient from which the Court, on this Motion to

158 Compl. ¶¶ 137-48. 159 Def.’s Opening Br. 54. 160 6 Del. C. § 1304(a). 161 Id. § 1304(a)(2). 38 Dismiss, may infer reasonably that Kaneko had a “reasonable belief” when

transferring the Private Placement Proceeds that he would incur future debts such

as a potential judgment in this action.162

Defendant further argues that the Court must dismiss Plaintiff’s fraudulent

transfer claim because “a plaintiff is not permitted to sequester a defendant’s assets

without a lien or some other equitable interest in the actual assets sought to be

sequestered, simply on the prospect that the defendant may otherwise be unable to

satisfy a judgment that might later be entered.”163 In Grupo, the United States

Supreme Court held that “[b]ecause such a remedy was historically unavailable

from a court of equity, . . . the District Court had no authority to issue a

preliminary injunction preventing petitioners from disposing of their assets

pending adjudication of respondents’ contract claim for money damages.”164 Here,

however, Plaintiff is not seeking a preliminary injunction in anticipation of a later

judgment. Plaintiff is bringing a claim, on the merits, for fraudulent transfer. That

a plaintiff may not enjoin a potential debtor’s transfer of his assets prior to

obtaining a judgment does not preclude that plaintiff from later claiming that such

transfer was fraudulent. As stated, Delaware law supports a claim for fraudulent

162 Compl. ¶¶ 137-48. 163 Def.’s Opening Br. 54-55 (citing Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 318-33 (1999)). 164 Grupo Mexicano, 527 U.S. at 333. 39 transfer so long as the transfer was made with the intent to incur or under

reasonable belief that he would incur debts beyond his ability to pay.165 Such

language in the statute anticipates transfers made prior to the vesting of a creditor’s

claims. Thus, Defendant’s Motion to Dismiss is denied with respect to Plaintiff’s

claim for fraudulent transfer of the Private Placement Proceeds.

F. Plaintiff’s Constructive Trust and Accounting Claims Survive Defendant’s Motion to Dismiss

As discussed above, Plaintiff’s claim for imposition of a constructive trust is

dismissed under the doctrine of laches to the extent that it is based on Song’s

transfer of the Song Held Shares. The remaining arguments for imposition of a

constructive trust and an accounting, however, survive.166

1. Constructive Trust

A constructive trust is an equitable remedy whereby the court determines

whether, due to a defendant’s wrongdoing, “equitable title to property properly lies

in the plaintiff and, [if so], . . . deem[s] the defendant to have been simply holding

165 6 Del. C. § 1304(a)(2). 166 To clarify, Plaintiff’s constructive trust and accounting “causes of action” are viewed by the Court as requests for specific remedial relief. Cochran v. F.H. Smith Co., 174 A. 119, 121 (Del. Ch. 1934) (discussing “the equitable remedy of an accounting.”); Hogg v. Walker, 622 A.2d 648, 652 (Del. 1993) (“The constructive trust is a remedy . . . .”). As such, their viability depends upon the success of Plaintiff’s claims above. 40 the property as a constructive trustee for the plaintiff.”167 A constructive trust does

not arise by mutual agreement or intent of the parties, but by “wrongful conduct of

the defendant, which induces a court to adjudge him a trustee; they are remedial in

character, and ordinarily bear little, or no, relationship to resulting trusts.”168

Defendant’s argument favoring dismissal of Plaintiff’s claim for imposition

of a constructive trust centers on his contention that Plaintiff has not identified

sufficiently specific property to which Plaintiff is entitled.169 Under Delaware law,

as Defendant argues, a “constructive trust may be imposed ‘upon specific property

[or] identifiable proceeds of specific property.’”170 Defendant concludes that

Plaintiff’s constructive trust claim must fail, as it requests a constructive trust over

“all assets owned or controlled by Kaneko.”171 This argument fails for two

reasons.

167 Heller v. Kiernan, 2002 WL 385545, at *3 (Del. Ch. Feb. 27, 2002), aff’d, 806 A.2d 164 (Del. 2002); accord Adams v. Jankouskas, 452 A.2d 148, 152 n.4 (Del. 1982). 168 Greenly v. Greenly, 49 A.2d 126, 129 (Del. Ch. Oct. 11, 1946) (citation omitted) (internal quotation marks omitted). 169 Def.’s Opening Br. 47. 170 B.A.S.S. Gp., LLC v. Coastal Supply Co., 2009 WL 1743730, at *7 (Del. Ch. June 19, 2009) (quoting Donald J. Wolfe, Jr., & Michael A. Pittenger, Corporate & Commercial Practice in the Delaware Court of Chancery § 12-7[b] at 12-75, 76 (2008)); Def.’s Opening Br. 47 (citing Hogg, 622 A.2d at 652). 171 Def.’s Opening Br. 47. 41 First, Plaintiff’s claim requests a constructive trust in “all assets owned or

controlled by Kaneko and Song as detailed hereunder.”172 As noted, Plaintiff

alleged claims against Kaneko to recover, among other property, $7.5 million in

improperly diverted Private Placement Proceeds including $1 million diverted for

personal use. Therefore, the “as detailed hereunder” qualifier sufficiently limits

the scope of Plaintiff’s request to satisfy the specificity requirement. Second, to

the extent Plaintiff has not plead specific facts regarding the use and final

destination of the allegedly improperly transferred funds, such an omission is not

fatal at this stage in the proceeding as the factual record is subject to further

development.173 As noted above, while the Receiver is in possession of Bank

Account records disclosing a list of withdrawals, the list omits the diverted funds’

destination and details regarding their final use—information allegedly in

Kaneko’s possession.174 Defendant’s Motion to Dismiss with respect to Plaintiff’s

claims for imposition of a constructive trust is therefore denied.

2. Accounting

“An accounting is an equitable remedy that consists of the adjustment of

accounts between parties and a rendering of a judgment for the amount ascertained

172 Compl. ¶ 169 (emphasis added). 173 McMullin v. Beran, 765 A.2d 910, 926 (Del. 2000). 174 Compl. Ex. C.; Def.’s Opening Br. 44; Pl.’s Answering Br. 8. 42 to be due to either as a result.”175 Accounting is generally limited to the context of

fiduciaries acting as such.176 Specifically, fiduciaries must account to their

beneficiaries regarding the fact and propriety of all dispositions of property

managed in that capacity.177 Further, “included within the duty to account is a duty

to maintain records that will discharge the fiduciaries’ burden, and . . . if that duty

is not observed, every presumption will be made against the fiduciaries.”178

As discussed in the context of Defendant’s laches argument, the Complaint

sufficiently alleges facts from which the Court may infer that Kaneko, at all

relevant times, acted as a fiduciary of the Company. 179 Further, as with all

equitable remedies, a “necessary prerequisite” to a successful accounting claim is

the lack of an adequate remedy at law.180 Here, Defendant contends that the

money damages sought by the Receiver qualify as an adequate legal remedy

sufficient to abrogate Plaintiff’s accounting claim. The Receiver, Defendant

continues, need only examine the Company’s Bank Account statements and sum

175 Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *11 (Del. Ch. Aug. 26, 2005). 176 IBM v. Comdisco, Inc., 602 A.2d 74, 78 (Del. Ch. 1991). 177 Technicorp Int’l II, Inc. v. Johnston, 2000 WL 713750, at *2 (Del. Ch. May 31, 2000). 178 Id. 179 See supra notes 103-05 and accompanying text. 180 Dairy Queen, Inc. v. Wood, 369 U.S. 469, 478 (1962). 43 the total converted monies.181 To the contrary, as stated above, the Bank Account

records do not contain sufficient detail to determine which transfers were in fact

improper.182 Such records, as Defendant acknowledges, contain only a list of

checks noting the date, account number, check number, payor, payee and transfer

amount.183 Defendant attempts to argue that such records are insufficiently

detailed to support Plaintiff’s fraud claims, but sufficiently detailed to abrogate

Plaintiff’s accounting cause of action.184 Defendant cannot have it both ways, and

his specificity argument accordingly fails.

Defendant also argues that Plaintiff may sustain a claim for equitable

accounting only where damages at law would be “too complex for the finder of

fact.”185 First, the opinion upon which Defendant relies merely states that the

plaintiffs in the case claim that complexity is a factor affecting the validity of an

accounting cause of action—it does not definitively so hold.186 Further, in arguing

that the calculations required of Plaintiff are not unduly complex, Defendant relies

on his assertion that Plaintiff can simply review the Bank Account records to

181 Def.’s Opening Br. 49-50. 182 See supra text accompanying notes 145, 174. 183 Def.’s Opening Br. 44; see supra text accompanying notes 145, 174. 184 Def.’s Opening Br. 44, 49. 185 Id. at 48 (quoting IBM, 602 A.2d at 78-79). 186 IBM, 602 A.2d at 78. 44 determine appropriate damages.187 Plaintiff, however, without additional

information allegedly in Kaneko’s possession, is unable to ascertain the propriety

of the dispositions listed in the records.188 Without providing information

sufficient to conduct his suggested calculations, Defendant’s complexity argument

must fail. Therefore, Defendant’s Motion to Dismiss with respect to Plaintiff’s

claims for imposition of a constructive trust and an accounting is accordingly

denied.

V. CONCLUSION

The doctrine of laches bars—and Defendant’s Motion to Dismiss is

accordingly granted with respect to—the Dismissed Claims. Defendant’s Motion

to Dismiss is otherwise denied.

IT IS SO ORDERED.

/s/ John W. Noble Vice Chancellor

187 Def.’s Opening Br. 49. 188 See supra text accompanying notes 145, 174. 45