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N.A. Sales Company, Inc. v. Seo

United States District Court, N.D. California

September 18, 2019

N.A. SALES COMPANY, INC., Plaintiff,
v.
MARY SEO, et al., Defendants.

          ORDER RE: MOTIONS TO DISMISS RE: DKT. NOS. 42, 46, 53

          JACQUELINE SCOTT CORLEY, UNITED STATES MAGISTRATE JUDGE

         Plaintiff N.A. Sales Company, Inc., a wholesaler of frozen fish meat and other related supplies, filed this civil action in 2013 in San Mateo County Superior Court. Following several rounds of motion practice, Plaintiff added additional defendants and a federal civil RICO[1] claim, and the recently added defendants removed the action to this Court based on federal question jurisdiction. Defendants JHK Pacific Common, Clayton Swartz, Haeng Cha Swartz, and JYK Investment Consulting Corporation have all moved to dismiss Plaintiff’s Fifth Amended Complaint (“FAC”).[2] (Dkt. Nos. 42, 46 & 53.) Having considered the parties’ briefs and having had the benefit of oral argument on August 22, 2019, the Court GRANTS IN PART and DENIES in PART the motions to dismiss. Plaintiff’s RICO, RICO conspiracy, and successor-in-interest claims fail to state a claim on which relief can be granted. Defendants JHK Pacific Common, Clayton Swartz, and Haeng Cha Swartz’s motion to dismiss the fraudulent transfer and fraudulent transfer conspiracy claim is denied as the state court already denied Defendants’ demurrer on those claims and Defendants have not moved for reconsideration. Defendant JYK Investment Consulting Corporation’s motion to dismiss the fraudulent transfer and fraudulent transfer conspiracy claim is granted for failure to state a claim.

         BACKGROUND

         A. FAC Allegations

         Plaintiff N.A. Sales Company, Inc. is a wholesale distributor of Japanese restaurant supplies, including frozen fish meat and related supplies. (FAC ¶ 1.) Plaintiff sells to about 600 restaurants in the greater Bay Area. (Id.) Plaintiff often does so through unsecured credit accounts for which it “requires and receives in writing from the restaurants the promises to pay timely finance charges and collection costs as well as personal guarantees.” (Id. at ¶ 2.)

         In 2008 and 2010, Plaintiff entered into written agreements with several restaurants collectively known as the Madfish Restaurant Companies to provide supplies on credit. (Id. at ¶ 31.) Under these agreements, the Madfish Restaurant Companies agreed to pay 1.5% per month in interest for past due invoices and pay “reasonable attorney(s) fees, collection fees, court costs and other expenses incurred by N.A. Sales.” (Id. at ¶ 32.) In August 2010, Hae-Suk Lee issued Plaintiff a check whereby he agreed to pay $200, 000 in the event Madfish Restaurant Companies failed to pay the then-outstanding open book balance of approximately $216, 000. (Id. at ¶¶ 35, 50.) That same month, Moon Joo Lee, Hae-Suk Lee’s son, also “promise[d] that he would be personally responsible for the debts.” (Id. at ¶¶ 30, 50.) Plaintiff relied on this promise and delayed collection actions against the Madfish Restaurant Companies. (Id. at ¶ 36.) However, the Madfish Restaurant Companies did not pay and instead “sold or closed businesses, and filed for bankruptcy.” (Id. at ¶ 38.) As of July 31, 2013, the balance due on the supply credit agreement was $171, 217 (without interest). (Id. at ¶ 57.)

         While these outstanding balances were owed, the Lees (Hae-Suk, his wife Soon Bok Park, and son Moon Joo Lee (collectively referred to as “the Lees”)) caused the Madfish Restaurant Companies “to make regular, continuous and substantial distributions to [Soon Bok] Park, Hyeong Geon Lee and Seraphina Jang.” (Id. at ¶ 60.) Using these transferred funds, Defendants “acted in concert” to purchase a house “effectively controlled” by Hae-Suk Lee and Soon Bok Park where Moon Joo Lee eventually resided. (Id. at ¶ 61.) In addition, the Lees “used accounts set up in the name of June Kim, the bookkeeper, to transfer funds from the Madfish Restaurant Companies, rather than using the funds to pay off the trade payables then-owed to Plaintiff NAS.” (Id. at ¶ 62.) The Lees thereafter “used the transferred funds of the Madfish Restaurant Companies for their expenses and also periodically withdrew from the accounts.” (Id. at ¶ 65.) The Lees did so under false pretenses writing checks with forged signatures from June Kim and using her debit card under false pretenses. (Id. at ¶ 114.)

         In September 2014, Junho Kim (who previously worked as a waiter for the Lees) incorporated JHK Pacific Common and the Lees “transferred the Little Madfish business, right to use his federally registered trademark ‘Little Madfish’, an Internet domain name (i.e., www.littlemadfish.com), certain business system and the right to conduct Japanese restaurant business at 43337 Christy Street, Fremont, California” “without receiving anything from JHK Pacific Common of Jun Ho Kim; that is, he made the Transfer for free.” (Id. at ¶ 72 (emphasis in original).) Alternatively, in October 2014, the Lees transferred these same “interest or/and the right to use the above-mentioned properties to Defendants Swartzs (‘Alternative Transfer’) without receiving anything from the Swartzs.” (Id. at ¶ 73.) Plaintiff is “informed and believes and thereon alleges that the Transfers were made, or obligation was incurred with an intent to hinder, delay, or defraud” creditors including Plaintiff in the collection of claims. (Id. at ¶ 75.)

         However, it is elsewhere alleged that Junho Kim entered into a business sale and purchase agreement with the Swartzs in October 2014 to “sell the business by way of stock sale” such that the Swartzs were to acquire the entire issued and outstanding shares of Defendant JHK Pacific Common from Defendant JH Kim for “$600, 000, a bit more than half, i.e., $307, 989.22 of which was paid in escrow check at the closing and the other roughly half by owner-carry, i.e., a promissory note issued by Swartz secured by a deed of trust.” (Id. at ¶ 78.) Shortly after this agreement was closed, Junho Kim transferred the cash portion of the purchase price to Moon Joo Lee. (Id. at ¶ 79.)

         “From or about September 1, 2014 to November 23, 2014, Defendants Lees, JH Kim, JHK Pacific Common, Swartz, Mary Seo and JYK agreed and knowingly and willfully conspired among themselves to hinder, delay, and defraud Plaintiff NAS in the collection of the personal guarantees and other liabilities that the Lees owed to Plaintiff NAS.” (Id. at ¶ 82.)

         By October 27, 2014, the Swartzs, JYK Investment Consulting Corp. (a real estate agency), and Mary Seo (a real estate salesperson with Titan Real Estate Services, Inc.) “knew that JHK Pacific Common did not have an ABC license and that [Moon Joo] Lee owned (through his wholly owned entities) the ABC license and let JHK Pacific Common use it.” (Id. at ¶ 84.) “Defendants stipulated that the transfer of the ABC license was the condition for Defendants Swartzs to purchase the business Little Madfish at the location.” (Id.) A few weeks later, the Swartzs, JYK Investment Consulting, and Mary Seo discovered that Junho Kim “the purported owner of JHK Pacific Common…was only a waiter, an employee, of Defendant MJ Lee at the business.” (Id. at ¶ 85.)

         Defendants nonetheless “agreed to structure the transfer of [Moon Joo] Lee’s Little Madfish business that utilizes the ABC license into a two-part transfer. The first part was (after the Lees have already transferred the business opportunity to JHK Pacific Common) for the waiter J[un Ho] Kim to transfer the stock in JHK Pacific Common to Swartzs, and the second part was for M[oon Joo] Lee to cause his wholly owned entity, the bankruptcy corporation, to transfer the ABC license to JHK Pacific Common.” (Id. at ¶ 86.) JYK Investment Consulting and the Swartzs agreed to the stock purchase “as a means to purchase the business opportunity of ‘Little Mad Fish.’” (Id. at ¶ 89.) Moon Joo “Lee and Defendant Swartz negotiated and agreed that the value of the ABC license was $500 and exchanged the amount; however, upon information and belief, the true market value is over $20, 000.” (Id. at ¶ 96.) This was all done to avoid creditors such as Plaintiff. (Id. at ¶¶ 92-96.)

         B. Procedural Background

         In December 2013, Plaintiff filed this action in the Superior Court of San Mateo County.[3] The original complaint pled two claims for relief against Hae-Suk Lee, Moon Joo Lee, and Soon Bok Park (collectively “the Lees” or “Lee Defendants”): (1) promissory estoppel and (2) alter ego. (Dkt. No. 1 a ¶ 1.) Plaintiff then filed a first amended complaint adding claims and defendants. (See N.A. Sales Company Inc. v. Hae-Suk Lee, et al., CIV525758 (San Mateo Supr. Crt. Feb. 20, 2014 filing).) Over the next several years, there was considerable motion practice including an appeal of the denial of the motions to vacate and set aside defaults of Hae-Suk Lee, Soon Bok Park, Moon Joo Lee, Junho Kim and Seraphina Jang. (Dkt. Nos. 56-3; 56-9.) The appellate court reversed the denial of these defendants’ motions to vacate and set aside default. See N.A. Sales Co., Inc. v. Hae-Suk Lee, No. A145359, 2018 WL 1444523 (Cal.Ct.App. Mar. 23, 2018). Plaintiff thereafter filed a second amended complaint on June 27, 2018 which added claims including a civil RICO claim against Hae-Suk Lee, Soon-Bok Park, Moon Joo Lee, Junho Kim, and JHK Pacific Common, Inc. (See N.A. Sales Company Inc. v. Hae-Suk Lee, et al., CIV525758 (San Mateo Supr. Crt. June 27, 2018 filing).) Two months later, Plaintiff filed yet another amended complaint which again added claims and defendants including Clayton and Haeng Cha Swartz. (Dkt. No. 56-4 (Third Amended Complaint).) On December 20, 2018, the superior court denied the Swartzs and JHK Pacific Common’s demurrer to the third amended complaint stating that their “demurrer to the Eighth and Ninth Causes of Action set forth in Plaintiff’s Third Amended Complaint is OVERRULED.” (Dkt. No 56-7 at 2.)

         On January 9, 2019, Plaintiff filed a fourth amended complaint which again added claims and parties, including a civil RICO conspiracy claim. (Dkt. No. 1 at 9.) Defendants Davis Berk Realty, Mary Seo and Mohammad Siddique removed the action to this Court based on federal question jurisdiction in light of the federal civil RICO claims. (Id. at ¶ 18.) The action was originally assigned to District Judge Donato; however, at the parties’ Case Management Conference, the appearing parties consented to the reassignment of the action to a magistrate judge. (Dkt. No. 33, 36, 43.)

         Plaintiff thereafter filed the now operative Fifth Amended Complaint which pleads the following claims: (1) promissory estoppel (as to Hae-Suk Lee); (2) breach of personal guarantees (as to Hae-Suk Lee and Moon Joo Park); (3) fraud – promise made without the intent to perform (as to Hae-Suk Lee and Moon Joo Park); (4) alter ego (as to Hae-Suk Lee, Moon Joo Park, and Soon Bok Park); (5) conspiracy to fraudulent transfer (as to Hae-Suk Lee, Moon Joo Park, Soon Bok Park, Junho Kim, JHK Pacific Common, Clayton and Haeng Cha Swartz, Mary Seo, Mohammad Siddique, Davis Berk Realty Inc., JYK Investment Consulting Corp., and Yi Soo John Kim); (6) fraudulent transfer (as to Hae-Suk Lee, Moon Joo Park, Soon Bok Park, Junho Kim, JHK Pacific Common, Clayton and Haeng Cha Swartz, Mary Seo, Mohammad Siddique, Davis Berk Realty Inc., JYK Investment Consulting Corp., and Yi Soo John Kim); (7) civil RICO (as to Hae-Suk Lee, Moon Joo Park, Soon Bok Park, and June Kim); (8) conspiracy to civil RICO (as to Clayton and Haeng Cha Swartz, JHK Pacific Common, JYK Investment Consulting Corp., ); (9) vicarious liability (as to Mohammad Siddique and Davis Berk Realty Inc.) and (10) successor-in-interest liability (as to JHK Pacific Common). (Dkt. No. 38.)

         Defendants Mary Seo, Davis Berk Realty Inc, Mohammad Siddique, the Lees, Junho Kim, and June Kim all answered the FAC. (Dkt. Nos. 44, 45.) Defendants JHK Pacific Common (“JHK Pacific”), Clayton and Haeng Cha Swartz (collectively “the Swartzs”), and JYK Investment Consulting Corporation (“JYK Investment”) have moved to dismiss and join in the others’ motions.[4] (Dkt. Nos. 42, 46, 53, 54.)

         DISCUSSION

         Four of the defendants-the Swartzs, JHK Pacific, and JYK Investment-have moved to dismiss the claims pled against them; namely, the fraudulent conveyance claim, the fraudulent conveyance conspiracy claim, the civil RICO conspiracy claim, and the successor-in-interest claim as to JHK Pacific. These defendants insist that these claims fail to state a claim upon which relief could be granted and that the statute of limitations has run on the first three claims. Although JHK Pacific and the Swartzs filed a motion separate from that of JYK Investment, the arguments overlap substantially so the Court addresses the adequacy of claims as pled to all parties jointly and hereafter refers to these defendants collectively as “Moving Defendants.”

         A. Civil RICO Claims

         The civil RICO Act makes it “unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.” 18 U.S.C. § 1962(c). To state a civil RICO claim, a plaintiff must allege facts showing: “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity (known as predicate acts) (5) causing injury to plaintiff’s business or property.” Living Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 353, 361 (9th Cir. 2005) (internal quotation marks and citation omitted). To state a civil RICO conspiracy claim under § 1962(d), “Plaintiffs must allege either an agreement that is a substantive violation of RICO or that the defendants agreed to commit, or participated in, a violation of two predicate offenses.” Howard v. America Online Inc., 208 F.3d 741, 751 (9th Cir. 2000). “[T]he failure to adequately plead a substantive violation of RICO precludes a claim for conspiracy.” Id.; see also Turner v. Cook, 362 F.3d 1219, 1231 n.17 (9th Cir. 2004) (same).

         RICO claims are subject to Federal Rule of Civil Procedure 9(b)’s heightened pleading requirements. See Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 541 (9th Cir. 1989); see also Edwards v. Marin Park, Inc., 356 F.3d 1058, 1065–66 (9th Cir. 2004) (“Rule 9(b)’s requirement that ‘[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity’ applies to civil RICO fraud claims.”). In the context of RICO, Rule 9(b) requires that a plaintiff “detail[s] with particularity the time, place, and manner of each act of fraud, plus the role of each defendant in each scheme.” In re Toyota Motor Corp., 785 F.Supp.2d 883, 919 (C.D. Cal. 2011) (citing Lancaster Cmty. Hosp. v. Antelope Valley Hosp. Dist., 940 F.2d 397, 405 (9th Cir. 1991)). “A plaintiff may not simply lump together multiple defendants without specifying the role of each defendant in the fraud.” In re Toyota Motor Corp. 785 F.Supp.2d at 919.

         Here, Plaintiff pleads a civil RICO claim against the Lees and June Kim (their bookkeeper), and a civil RICO conspiracy claim against the Swartzs, JHK Pacific, and JYK Investment. Moving Defendants seek dismissal of the RICO conspiracy claim. Plaintiff urges the Court to reject the motion as an improper attempt to seek reconsideration of the state court’s denial of the Lee Defendants’ demurrer to the third amended complaint. (Dkt. No. 56-9.) The problem with Plaintiff’s argument is that the demurrer was brought by the Lee ...


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