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Kexuan Yao v. Crisnic Fund

August 29, 2011

KEXUAN YAO, PLAINTIFF,
v.
CRISNIC FUND, S.A., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Andrew J. Guilford United States District Judge

ORDER DENYING MOTION TO QUASH SERVICE, DENYING MOTION FOR SERVICE BY PUBLICATION, AND GRANTING MOTION TO DISMISS

Plaintiff Kexuan Yao ("Plaintiff") filed a complaint ("Complaint") against Defendants Crisnic Fund, S.A., Anthony Gentile (together, "Defendants"), and Ed Furman, who has not appeared in this action so far. The Complaint alleges several federal claims for violations of the Securities Exchange Act, along with multiple state law claims. Defendants now move to quash service of the summons and complaint and dismiss the case ("Motion to Quash"). They also move to dismiss for lack of jurisdiction and for failure to state a claim ("Motion to Dismiss"). Plaintiff recently filed a "Motion for Rulings on Pending Motions, Or, In the Alternative, For Order Authorizing Alternative Means of Service Under Federal Rules of Civil Procedure 4(h)(2) and 4(f)(3)." Plaintiff provides no authority for filing a "Motion for Rulings on Pending Motions," so the Court DENIES that portion of the motion. The Court deems the remainder of the recently-filed motion to be a "Motion for Service by Publication." After considering all papers and arguments submitted, the Court DENIES the Motion to Quash, DENIES the Motion for Service by Publication and GRANTS the Motion to Dismiss with leave to amend.

BACKGROUND

The following facts come from the Complaint and admissible evidence. Plaintiff is a citizen of China and holds a business visa to work temporarily in the United States. (Compl. ¶ 1.) Plaintiff is the Chief Executive Officer and a director of China Armco Metals ("China Armco"). (Id.) China Armco is a Nevada corporation. (Id. ¶ 2.) Defendant Crisnic is a Costa Rican corporation with its principal place of business in San Jose, Costa Rica. (Affidavit of Anthony Gentile in Support of Reply to Motion to Dismiss ¶ 2.) Defendant Gentile is the founder and principal of Defendant Crisnic. (Declaration of Anthony Gentile in Support of Motion to Dismiss, ¶ 3.) Defendant Crisnic has brokerage accounts in other parts of the world, including the United Kingdom and the United States. (Id. ¶ 3.) Defendant Gentile moved to Costa Rica in 2007. (Id. ¶ 4.) By 2009, Defendant Gentile resided in Costa Rica and intended to stay there permanently. (Id.) Defendant Gentile states that he still "openly reside[s] and spend[s] most of [his] time" at his home in Costa Rica. (Affidavit of Anthony Gentile In Support of Opposition to Motion for Service by Publication, ¶ 5.)

This case arises from a "Structured Transaction" between Crisnic and Plaintiff. "Crisnic . . . through its agent [Ed] Furman, offered to lend Yao $2.5 million if Yao would pledge 1.3 million of his China Armco unregistered shares as collateral for the loan." (Compl. ¶ 12.) Plaintiff's 1.3 million shares represented 9% of the total outstanding issued shares of China Armco and had a then-current value of almost $5 million. (Id.) When held by Plaintiff, the shares had legal restrictive legends on them. (Id. ¶ 13, 15.) The restrictive legends would have limited the sale of the stock. But Plaintiff transferred them to Defendant Crisnic's brokerage account at Transcend Capital, LP free of any restrictions. (Id. ¶ 13, 15.) The transfer to Defendant Crisnic allowed Defendant Crisnic to hold the China Armco shares as collateral for the promised loan. The parties signed a Structured Transaction Agreement that governed the transfer of the shares from Plaintiff to Defendant Crisnic. (Declaration of Stanley Morris in Opposition to Motion to Dismiss, Ex. 5.) In the Structured Transaction Agreement, Plaintiff stated that the shares were freely transferable. (Id.)

Because of changes in the stock price soon after the transfer to Defendant Crisnic, Plaintiff became suspicious that Defendant Crisnic had begun selling Plaintiff's stock before providing the loan amount to Plaintiff. (Id. ¶ 16.) Defendant Crisnic then wired $1 million to Plaintiff's bank account as the loan, even though the loan was supposed to be for $2.5 million. (Id. ¶ 18.)

Although Defendant Gentile lives in Costa Rica, he has some personal contacts with the state of Georgia and elsewhere in the United States. He used to live in Roswell, Georgia, with his now-estranged wife, and his name remains on the mortgage. (Affidavit of Anthony Gentile in Support of Reply to Motion to Dismiss ¶ 4.) He comes back to the United States to visit his children, who live in Georgia. (Id.) Defendant Gentile has a valid Georgia drivers license, which expires in 2013. (Declaration of Stanley Morris in Opposition to Motion to Quash, Ex. 8.) In addition, Defendant Gentile has a former business, IFG Opportunity Fund ("IFG"), which is a Georgia corporation located in Irvine, California, but has not had any active business since 2008. (Affidavit of Anthony Gentile in Support of Reply to Motion to Dismiss ¶ 6.) Also, Defendant Gentile holds a U.S. passport and files income tax returns in the United States, although not in Georgia. (Id. ¶ 5.)

ANALYSIS

As noted, Defendants filed two motions, and Plaintiff has filed a Motion for Service by Publication. The Court first reviews Defendants' Motion to Quash.

1. MOTION TO QUASH

Plaintiff has attempted to serve two defendants in this case, Defendant Crisnic and Defendant Gentile. It appears from the record that Defendant Furman may not have been served, and Defendant Furman does not join in this Motion to Quash. The federal rules for service are more complicated because Defendant Crisnic is a foreign citizen and Defendant Gentile, while a U.S. citizen, is a foreign resident.

Defendants move both to quash service and to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(5), which provides for dismissal for insufficient service of process. Defendants argue that Plaintiff's attempts at service did not satisfy the requirements of Rule 4(f), which provides for serving an individual in a foreign country. Plaintiff presents multiple theories of service in his Opposition to the Motion to Quash. When a defendant files a motion to dismiss challenging sufficiency of service of process, plaintiff bears the burden of proving adequacy of service. Beatie and Osborn LLP v. Patriot Scientific Corp., 431 F.Supp.2d 367 (S.D.N.Y. 2006). Thus, the Court considers whether Plaintiff has met this burden under any of the rules with which Plaintiff argues compliance. Dismissal of a complaint for insufficiency of process is inappropriate when there is a reasonable prospect that service may be obtained. In such instances, the district court should, at most, quash service, leaving the plaintiffs free to effect proper service. Mitchell v. Theriault, 516 F.Supp.2d 450 (M.D. Pa. 2007).

So, the Court now considers the various Federal Rules and other statutes Plaintiff relies on for demonstrating proper service of Defendants. The Court turns first to Rule 4(e.)

1.1 Fed.R.Civ.P. 4(e)

Federal Rule of Civil Procedure 4(e) governs service of an individual within a judicial district of the United States. "Unless federal law provides otherwise, an individual . . . may be served in a judicial district of the United States by [the following means]." Fed.R.Civ.P. 4(e). But Plaintiff does not allege that either Defendant Crisnic or Defendant Gentile were in the United States. Also, Plaintiff argues that, specifically, Rule 4(e)(3) applies, and quotes the supposed language of this section. But no such rule exists. Nor does the quote provided by Plaintiff exist in any part of Rule 4. Such perplexing citations have made a just and efficient review of Plaintiff's position difficult, to say the least. Plaintiff's argument based on Rule 4(e) fails.

1.2 Section 22 and Section 27 of the Securities Exchange Act

Section 22 of the Securities Exchange Act of 1933 and Section 27 of the Securities Exchange Act of 1934 provide for federal jurisdiction over violations of the securities laws. But neither section provides new rules for how service can be effected. Section 22 states that "process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found." Section 27 states the same thing.

Plaintiff seems to suggest that these sections allow for service of any type, unrestricted by the provisions of Rule 4. But Plaintiff acknowledges that Section 22 and Section 27 must be read in conjunction with Rule 4. Plaintiff states in his Opposition that "when read together with Rule 4 of the Federal Rules of Civil Procedure [these sections] permit[] service in a foreign country." (Opp'n to Motion to Quash at 10:13-14.) It is undisputed that service may be effected in a foreign country. But Plaintiff fails in his attempt to use Section 22 and Section 27 as a substitute for Rule 4's requirements.

Even assuming that Section 22 and Section 27 are relevant to this case, the Court still needs to consider whether service was proper under Rule 4. Accordingly, the Court rejects Plaintiff's arguments for service under Section 22 and Section 27 and turns now to Plaintiff's next argument for why his attempts at service were successful, based on Rule 4(k)(2).

1.3 Fed.R.Civ.P. 4(k)(2)

In his Opposition, Plaintiff argues that Rule 4(k)(2) applies. But this Rule addresses jurisdiction only after effective service and does not provide alternative means of service. Therefore, this Rule is inapplicable to the Motion to Quash. The Court notes that Rule 4(k)(2) applies only when "(A) the defendant is not subject to jurisdiction in any state's courts of general jurisdiction; and (B) exercising jurisdiction is consistent with the United States Constitution and laws." Fed.R.Civ.P. 4(k)(2). After reviewing the evidence and arguments submitted, the Court has concerns that Georgia courts may be able to exercise general jurisdiction over Defendant Gentile, although perhaps not over Defendant Crisnic. But because this jurisdictional question is beyond the scope of the Motion to Quash, the Court need not resolve such issues at this time. For now, the Court rejects Plaintiff's arguments that Rule 4(k)(2) applies to the issues raised in this Motion to Quash, and moves on to Plaintiff's next argument, based on another provision of Rule 4.

1.4 Fed.R.Civ.P. 4(f)(1) and (2)

Federal Rule of Civil Procedure 4(f) specifically applies to serving an individual "at a place not within any judicial district of the United States." Fed.R.Civ.P. 4(f). Because Defendant Gentile was not in the United States when service was attempted, this is the Federal Rule that applies to him. And because Defendant Crisnic is a corporation, not an individual, this rule does not apply. For Defendant Crisnic, in Section 1.5 the Court will assess service under Rule 4(h). The Court will also later look to Rule 4(f)(3), which allows Court-ordered service.

Rule 4(f) sets forth several ways in which an individual can be served in a foreign country. First, under Rule 4(f)(1), "by any internationally agreed means of service that is reasonably calculated to give notice, such as those authorized by the Hague Convention on the Service Abroad of Judicial and Extra-judicial Documents." But Costa Rica is not a party to that Hague Convention. See Hague Conference on Private International Law, Hague Service Convention, Status Table, available at http://www.hcch.net/index_en.php?act=conventions.status&cid=17 (last visited August 24, 2011). Because Costa Rica is not a member to that Hague Convention, Rule 4(f)(1) is inapplicable. Plaintiff does not identify other internationally agreed means.

So the Court looks to the next subsection of Rule 4(f). Rule 4(f)(2) allows for service in the following ways:

(2) if there is no internationally agreed means, or if an international agreement allows but does not specify other means, by a method that is reasonably calculated to give notice:

(A) as prescribed by the foreign country's law for service in that country in an action in its courts of general jurisdiction;

(B) as the foreign authority directs in response to a letter rogatory or letter of request; or

(C) unless prohibited by the foreign country's law, by:

(i) delivering a copy of the summons and of the complaint to the individual personally; or

(ii) using any form of mail that the clerk addresses and sends to the individual and that requires a signed receipt;

Neither party addresses the Costa Rican laws for service, nor does Plaintiff allege that he tried to serve a letter rogatory or a letter of request. But neither party argues that Costa Rican law prohibits service by personal delivery or by a form of mail that requires a signed receipt. Thus, the Court considers whether Plaintiff has shown service of Defendant Gentile under either provision of Rule 4(f)(2)(C). As stated above, Rule 4(f)(2)(C) allows for service either by delivery of the summons and complaint personally to the defendant, or by using any form of mail sent to the individual that requires a signed receipt.

1.4.1 Personal Service of Defendant Gentile

In his declaration supporting the Opposition to the Motion to Quash, Plaintiff's counsel recites several attempts at service. The Court now reviews those stated attempts at personal service of Defendant Gentile, then the Court assesses whether any of those attempts were compliant with Rule 4(f).

First, Plaintiff's counsel alleges that he emailed Defendant Gentile with a link to counsel's server where Defendant Gentile could download the summons and complaint. (Declaration of Stanley Morris in Opposition to Motion to Quash ("Stanley Quash Decl."), ¶ 3, Ex. 1.)

Second, Plaintiff's counsel asserts that Cody Gear, a private investigator, visited the offices of Defendant Gentile. (Id. ΒΆ 11.) Gear attested under oath that Gavridge Perez Porras, who identified himself as the attorney for Defendant Gentile, agreed to accept service of ...


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