Tera Res. Co., Ltd. v. Lee (In re Cuzco Dev. U.S.A., LLC)
| Decision Date | 27 August 2018 |
| Docket Number | Adv. Pro. No. 17-90009,Case No. 16-00636 |
| Citation | 592 B.R. 352 |
| Parties | IN RE CUZCO DEVELOPMENT U.S.A., LLC, Debtor. Tera Resource Co., Ltd., etc., Plaintiff, v. Dong Woo Lee, et al., Defendants. |
| Court | U.S. Bankruptcy Court — District of Hawaii |
Jade Lynne Ching, Ryan B. Kasten, David A. Nakashima, Nakashima Ching LLC, Simon Klevansky, Klevansky Piper, LLP, Honolulu, HI, for Plaintiff.
Paul D. Alston, John S. Rhee, Dentons US LLP, Chuck C. Choi, Allison A. Ito, Choi & Ito, Honolulu, HI, Gary W. Marsh, Dentons US LLP, Atlanta, GA, for Defendants.
Soo Kyung Yang, pro se.
Defendants Dong Woo Lee, Cuzco Development U.S.A., LLC ("Cuzco USA"), Newco, LLC ("Newco"), and Cuzco Development Korea, Inc. ("Cuzco Korea") moved to dismiss the Third Amended Verified Complaint filed on May 15, 2018, by plaintiff Tera Resource Co., Ltd. ("Tera").1 A hearing was held on June 29, 2018. Appearances were made by Chuck C. Choi, Esq., for Cuzco USA; John Rhee, Esq., for Dong Woo Lee, Cuzco USA, and Newco; and David Nakashima, Esq., for Tera. The matter was taken under advisement pending additional briefing.
I will grant dismissal as to counts IV and VII but will deny the rest of the motion.
Cuzco USA is the debtor in the main chapter 11 proceeding. It is a Hawaii limited liability company that owns real property on Keeaumoku Street in Honolulu (the "Keeaumoku Property"). Cuzco Korea is a Korean corporation that is the sole member of Cuzco USA. Defendant Dong Woo Lee claims to be the manager of Cuzco USA and the representative director of Cuzco Korea. Defendant Soo Kyung Yang is a shareholder and creditor of Cuzco Korea and an ally of Mr. Lee.
Cuzco USA proposed, and the court confirmed, a Third Amended Plan of Reorganization. Briefly summarized, the Third Amended Plan provided that Cuzco USA would transfer the Keeaumoku Property to defendant Newco, a Hawaii limited liability company of which Mr. Lee was to be the sole member, that Newco would attempt to raise enough money through a refinancing to repay all of Cuzco USA's creditors in full, and that if the refinancing did not occur by a date certain, Newco would sell the Keeaumoku Property at auction and distribute the proceeds to Cuzco USA's creditors.
Tera and others filed timely motions for reconsideration of the order confirming the Third Amended Plan. Tera is a shareholder of Cuzco Korea. It also holds a judgment, entered by a Korean court, against Ms. Yang, and orders from a Korean court that, according to Tera, resulted in the seizure of Ms. Yang's interests in and claims against Cuzco Korea. Tera argued (among other things) that the Third Amended Plan was the product of a fraudulent scheme by Mr. Lee, Ms. Yang, and others to divert the equity in Cuzco USA from Cuzco Korea to themselves and to render Tera's interests in Cuzco Korea worthless.
While the motions for reconsideration were pending, Cuzco USA moved to replace the Third Amended Plan with a Fourth Amended Plan. Briefly summarized, the Fourth Amended Plan eliminated the transfer of the Keeaumoku Property to Newco; instead, Cuzco USA would retain the property, either refinance it or sell it at auction, and pay its creditors. Tera and others vigorously objected to plan confirmation on multiple grounds, including those stated in the motion for reconsideration. The court confirmed the Fourth Amended Plan. Cuzco USA carried out the plan, obtained the refinancing, and paid all creditors with allowed claims. (Litigation over disputed claims is ongoing.)
In the meantime, Tera filed the complaint, the third amended version of which is before me now.2 Tera asserts claims directly, derivatively on behalf of Cuzco Korea, and "double-derivatively" on behalf of Cuzco USA. Very briefly summarized, Tera alleges that the defendants made fraudulent misrepresentations to Tera about their intentions in Cuzco USA's bankruptcy case (count I), that the defendants conspired to divest Cuzco Korea of its claims against and interests in Cuzco USA (count II); that Mr. Lee, Ms. Yang, and Cuzco USA breached fiduciary duties they owed to Cuzco Korea and Cuzco USA (count III), that the defendants engaged in actions to convert the Keeaumoku Property and other assets of Cuzco USA (count IV), that the defendants are liable for unjust enrichment (count V), that Tera is entitled to recover its attorneys' fees and costs (count VI), and that the corporate veil between Cuzco USA and Cuzco Korea should be pierced (count VII).
All defendants (other than Ms. Yang, who has not been served) moved the court to dismiss the complaint.
The moving defendants argue that the court should dismiss the complaint under Fed. R. Civ. P. 12(b)(1) and (6), which apply to this adversary proceeding by virtue of Fed. R. Bankr. P. 7012.3
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face."4 A formulaic recitation of the elements of a cause of action does not suffice.5 A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."6 Plausibility is more than "sheer possibility."7 Furthermore, when ruling on a motion to dismiss, the court "must accept as true all the factual allegations contained in the complaint."8
The motion to dismiss relies on an attached exhibit, which is a copy of a decision of the South Korean Supreme Court (in Korean and in an English translation). "In ruling on a 12(b)(6) motion, a court may generally consider only the allegations contained in the pleadings, exhibits attached to the complaint, and matters properly subject to judicial notice."9 If outside matters are presented to the court on a rule 12(b)(6) motion, and the court does not exclude them, the court must treat the motion to dismiss as a motion for summary judgment,10 unless the court does not rely on the outside matters in reaching its conclusion, or if documents were purposely omitted to prevent a plaintiff from overcoming a rule 12(b)(6) motion and the authenticity of the documents has not been controverted.11 Although I might be able to take judicial notice of the Korean court's decision, I can and will dispose of the motion without relying on the exhibit.
The motion argues that the bankruptcy court lacks subject matter jurisdiction, that the court must or should abstain if it has jurisdiction, and that the complaint fails to state any plausible claims.
The federal district courts have "original and exclusive jurisdiction" over all title 11 cases (i.e., the bankruptcy case itself) and "original but not exclusive jurisdiction" over "all civil proceedings arising under title 11, or arising in or related to cases under title 11."12 The district court may refer to the bankruptcy court some or all of the matters covered by the grant of bankruptcy jurisdiction.13 The district court for this district has referred all such matters to the bankruptcy court.14
The phrases "arising under title 11" and "arising in a case under title 11" are terms of art. A proceeding "arises under" title 11 if it presents claims for relief created or controlled by title 11. In contrast, "arising in" jurisdiction applies to a proceeding where the claims are not explicitly created or controlled by title 11, but would have no existence outside of a bankruptcy case.15
The remaining category of bankruptcy jurisdiction, "related to" jurisdiction, is an exceptionally broad category encompassing virtually any matter either directly or indirectly related to the bankruptcy case.16
The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or against the debtor's property. An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.17
Confirmation of a plan narrows the bankruptcy court's jurisdiction over "related to" proceedings. After a plan is confirmed, the bankruptcy court has jurisdiction only over those "related to" proceedings that have a "close nexus to the bankruptcy plan or proceeding ...."18 Claims affecting "the interpretation, implementation, comsummation, execution, or administration of the confirmed plan will typically have the requisite close nexus."19
In this case, the bankruptcy court has subject matter jurisdiction to adjudicate Tera's direct and derivative claims against Cuzco USA. First, all of those claims arise out of the conduct of Cuzco USA, its manager, Mr. Lee, and others, after or in preparation for the filing of the bankruptcy case. All of those claims, if proven, could amount to administrative claims. The allowance of administrative claims is governed by section 503 of the Bankruptcy Code ; thus, that issue "arises under" the Bankruptcy Code. Second, even if one disregards the fact that these claims could amount to administrative expenses, they all turn on the conduct of Cuzco USA and its manager, during the bankruptcy case, in the course of administering the estate's assets. Thus, the claims "arose in" Cuzco USA's chapter 11 case.20 Third, even if the claims did not "arise under" the Bankruptcy Code or "arise in" Cuzco USA's bankruptcy case, they are closely related to that case. If Tera prevails and establishes that it holds administrative claims, those claims must, under the confirmed plan, be paid in full. Thus, Tera's claims against Cuzco USA relate to "the...
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