Tera Res. Co. v. Lee (In re Cuzco Dev. United Statesa., LLC), Case No. 16–00636

• Decision Date: 20 March 2018
• Docket Number: Case No. 16–00636, Adv. Pro. No. 17–90009, Related Dkt. No. 62 and 65
• Citation: 585 B.R. 870
• 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

585 B.R. 870

IN RE CUZCO DEVELOPMENT U.S.A., LLC, Debtor.

Tera Resource Co., Ltd., etc., Plaintiff,

v.Dong Woo Lee, et al., Defendants.

Case No. 16–00636

Adv. Pro. No. 17–90009

Related Dkt. No. 62 and 65

United States Bankruptcy Court, D. Hawai‘i.

Signed March 20, 2018

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, Alston Hunt Floyd & Ing, Chuck C. Choi, Allison A. Ito, Choi & Ito, Honolulu, HI, for Defendants.

Soo Kyung Yang, Cerritos, CA, pro se.

MEMORANDUM OF DECISION ON MOTION TO DISMISS SECOND AMENDED COMPLAINT

Robert J. Faris, United States Bankruptcy Judge

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 Second Amended Verified Complaint filed on July 18, 2017, by plaintiff Tera Resource Co., Ltd. ("Tera").¹ A hearing was held on September 15, 2017. Appearances were made by Chuck C. Choi, Esq., for Cuzco USA; John Rhee, Esq., for Dong Woo Lee, Cuzco USA and Newco; and Simon Klevansky, Esq. and David Nakashima, Esq., for Tera. The matter was taken under advisement pending additional briefing of the issues by the parties.

I will grant the motion in part, to the extent set forth below.

I. FACTS

Cuzco USA is the debtor in this 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 Newco, a Hawaii limited liability company of which Mr. Lee is 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 modify the Third Amended Plan and replaced it with a Fourth Amended Plan. Briefly summarized, the Fourth Amended Plan eliminates the transfer of the Keeaumoku Property to Newco; instead, Cuzco USA will retain the property and either refinance it or sell it at auction. 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.

In the meantime, Tera filed the complaint, the second amended version of which is before me now. Tera asserts claims directly, derivatively on behalf of Cuzco Korea, and "double-derivatively" on behalf of Cuzco USA. Very briefly summarized, Tera alleges on behalf of itself, Cuzco Korea, and Cuzco USA, that Cuzco USA and Mr. Lee committed fraud on the court (Counts I and II), that the corporate veil between Cuzco USA and Cuzco Korea should be pierced (Count III), that the defendants defrauded Tera in various respects (Count IV), that the defendants conspired to strip Cuzco Korea's creditor claims and interests in Cuzco USA for the purpose of injuring Tera, Cuzco Korea, and Cuzco USA (Count V), that the defendants breached fiduciary duties to Tera, Cuzco Korea, and Cuzco USA (Count VI), that the defendants engaged in actions to convert the Keeaumoku Property (Count VII), and that the defendants are liable for unjust enrichment (Count VIII). Tera also seeks recognition of its foreign money judgment against Ms. Yang (Count IX), enforcement of the judgment (Counts X and XI), an injunction restraining Cuzco USA, Ms. Yang, and Mr. Lee from transferring assets (Counts XII and XIII), the imposition of a constructive trust on the Keeaumoku Property (Count XIV), the appointment of a receiver for the Keeaumoku Property (Count XV), and the recovery of attorneys' fees and costs (Count XVI).

All defendants (other than Ms. Yang, who has not been served) moved the court to dismiss the complaint.

II. LEGAL STANDARD

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. 7012.²

"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."³ A formulaic recitation of the elements of a cause of action does not suffice.⁴ 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."⁵ Plausibility is more than "sheer possibility."⁶ Furthermore, when ruling on a motion to dismiss, the court "must accept as true all the factual allegations contained in the complaint."⁷

The motion to dismiss relies on attached exhibits. "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."⁸ 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,⁹ 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.¹⁰ I have not relied on any of the exhibits attached to the motion (other than papers in this court's files) in reaching this decision.

III. DISCUSSION

The motion makes four principal arguments, all of which I will address. I will also address issues that I raised at the hearing on the motion that bear on the court's subject matter jurisdiction.

In their post-hearing memorandum, the defendants make additional arguments for dismissal. Those arguments may have merit but I will not consider them because Tera did not have an opportunity to respond.

A. Fraud on the Court Claims

The defendants argue that Tera's fraud on the court claims (Counts I and II) are "not actionable." Tera argues that, by the time the court confirmed the Fourth Amended Plan, Tera had vigorously and repeatedly laid out all of the ways in which it contends that Mr. Lee, Cuzco Korea, and Cuzco USA lied about the effect of the plan. Tera responds that, "The Fourth Amended Plan is a modification of the Third Amended Plan and relies on the submissions in support of the Third Amended Plan. As such, the Fourth Amended Plan was procured through the same fraud on the Court as the Third Amended Plan."¹¹

Under section 1144, the court may revoke an order confirming a chapter 11 plan "if and only if such order was procured through fraud." For purposes of this section, fraud has its usual common law meaning: fraud exists if "(1) ... the debtor made a representation regarding ... compliance with the Code which was materially false; (2) ... the representation was either known by the debtor to be false, or was made without belief in its truth, or was made with reckless disregard for the truth; (3) ... the representation was made to induce the court to rely upon it; (4) the court did rely upon it; and (5) ... as a consequence of such reliance, the court entered the confirmation order."¹²

The complaint does not plausibly allege that confirmation of the Third Amended Plan was procured through fraud. In the first place, the court had Tera's evidence and contentions before it, when it confirmed the Fourth Amended Plan. Tera repeatedly made the same claims of fraud on the court, when it sought reconsideration of the order confirming the Third Amended Plan¹³ and objected to confirmation of the Fourth Amended Plan.¹⁴ Tera believes the court erred and appealed the plan confirmation order.¹⁵ But there is no basis for a claim that confirmation of the Fourth Amended Plan was procured through fraud; the court reviewed both Tera's and Cuzco USA's versions of the facts and selected the one which it found believable.

Second, the Fourth Amended Plan eliminates the provisions that Tera alleges were part of the fraudulent scheme. In a nutshell, Tera claims that Mr. Lee, Ms. Yang, and others wanted to capture all of the value of the Keeaumoku Property for themselves, and not share any of it with Tera. To this end, according to Tera, they formulated the Third Amended Plan, which transferred the Keeaumoku Property from Cuzco USA to Newco, Mr. Lee's company. But the Fourth Amended Plan superseded the Third Amended Plan and left the Keeaumoku Property with Cuzco USA. In short, confirmation of the Fourth Amended Plan undid the provision of the Third Amended Plan that Tera says was the cornerstone of the alleged fraud.

Third, the order confirming the Fourth Amended Plan contains a provision that I required in order to mitigate any effect on Tera:

No provision in this Confirmation Order, the Fourth Amended Plan, or the

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