Xiaoyan Lu v. Sagewood SFF III LLC
| Decision Date | 26 October 2021 |
| Docket Number | Index 651832/2020 |
| Citation | 2021 NY Slip Op 32285 (U) |
| Court | New York Supreme Court |
| Parties | XIAOYAN LU, YIMIN WU, XIAOZHEN ZHAN, COMPASS REAL ESTATE INVESTMENT LLC, Z&W MANAGEMENT LLC Plaintiffs, v. SAGEWOOD SFF III LLC, SAGEWOOD MANAGEMENT LLC, SAGEWOOD KT II LLC, KT SAGEWOOD LLC, JINGYING WU, Defendants. Motion Seq. No. 001 |
MOTION DATE 01/12/2021
DECISION + ORDER ON MOTION
The following e-filed documents, listed by NYSCEF document number (Motion 001) 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20 21, 22, 23 were read on this motion to DISMISS
In this action, a group of investors invoke a variety of contract and tort theories to pursue the recovery of allegedly misapplied or misappropriated funds. Defendants move to dismiss the second through eleventh causes of action upon documentary evidence, for lack of standing and failure to state a claim (CPLR 3211[a][1], [3] and [7]).
According to the complaint (NYSCEF 12), each of the plaintiffs invested $200, 000 in defendant Sagewood KTII, LLC (Fund II) and were repeatedly assured that their funds were rolled over into Sagewood SFF III LLC (Fund III). They were later advised that the funds had never been transferred, and that Fund II had lost all of its (and their) money.
Specifically between June 14 and June 20, 2017, the plaintiffs executed subscription agreements for Fund II and wired in their contributions by November 2017. All plaintiffs invested in Fund II directly except for plaintiff Yimin Wu (Yimin), who did so through plaintiff Z&W Management LLC of which she and her husband are its only members (id. ¶¶ 15-16).
Defendant KT Sagewood LLC (KT) is the managing member of Fund II. Defendant Jingying Wu (Wu) is a member of Fund II, and together with non-party Kenneth Tse (Tse) executed the operating agreements on behalf of both KT and Fund II. Wu is also a member of Fund III, of which defendant Sagewood Management LLC (Sagewood) is the managing member. Additionally, Wu is an agent of KT and Sagewood (id, ¶¶7, 9-10, 17-18, 27-28).
In the spring or early summer of 2018, plaintiffs approached Wu with their concerns about the lack of information they were receiving about their investments in Fund II. Wu responded by presenting them with a pitch book about Fund III which detailed an investment opportunity focused around acquiring, renovating, and selling real estate. She informed plaintiffs that they could join Fund III and their capital contributions could be satisfied by rolling over the $200, 000 they had already invested in Fund II. She also met with three of the plaintiffs on August 4, 2018 and described the benefits of doing so (id., ¶¶ 20-23).
On August 6, 2018, Wu sent plaintiffs, via the WeChat messaging service, documents prepared by Fund III and defendant Sagewood, including the Fund III Operating Agreement. The agreement provided, inter alia, for dissolution of Fund III no later than August 1, 2020, subject to a one-year extension in the sole discretion of the Managing Member. Plaintiffs made no changes to the operating agreement and promptly executed and returned the documents between August 6 and 9, 2018. Shortly thereafter, plaintiffs all received a "Net Capital Demand Notice" from Sagewood on behalf of Fund III asking for a capital contribution of $50, 000. However, on September 13, 2018, Wu informed them through WeChat that they would not have to worry about funding Fund III because they were "all 100% rollover" (id, ¶¶ 25-26, 29, 32, 34-35).
Wu also advised plaintiffs that they would continue to receive similar demands as they were sent out by email uniformly to all investors. Consequently, plaintiffs received a second demand for $50, 000 from Fund III on October 25, 2018, as well as an email from a Senior Sales Specialist from an entity called Sagewood Equity LLC, which attached the notice but stated that it was for informational purposes only as "the draw will be rolled over from Fund II." Plaintiffs received a demand for $100, 000 on March 6, 2019, with a similar disclaimer, and the letter also stated that their unpaid capital contribution was $0 (id., ¶¶ 35-38).
Plaintiffs additionally received quarterly reports for Fund III starting in the third quarter of 2018, in emails addressed to them as "investors" in Fund III. The reports provided information regarding the properties purchased with Fund III capital and the status of the renovation and sale process. The first quarter 2019 report listed the capital received as $10 million, and the balance minus expenses as approximately $7 million (id., ¶¶ 39-42).
On August 20, 2019, the plaintiffs received an invitation to a Fund III "investor portal" which promised access to communications about their investments and fund documents. Through that portal, on September 30, 2019 they received statements of assets and liabilities and statements of operations. Aline item of $1, 850, 000 identified as "Equity rollover receivable" was listed as part of Fund Ill's assets (id., ¶¶ 43-44).
In September 2019, plaintiffs received through the portal a notice of "Distribution of Unused Capital and Preferred Returns." Each plaintiff was to receive from Fund III a net distribution consisting of $23, 454.79 - $20, 000 of which was categorized as a partial return of their capital contribution while the remaining $3, 454.79 was categorized as a distribution, both from Fund III. Plaintiffs thereafter received physical bank checks for the distributions (id., ¶¶ 45-46).
Plaintiffs also received a Capital Account Statement for Fund III as of September 30, 2019. A footnote next to the line item "Contributions" stated that "[y]our original commitments to the Fund [Fund III] include $200, 000 of committed capital due as equity rollover from Sagewood KTII, LLC ("Fund II")." Additionally, plaintiffs were sent K-1 statements for 2018 reflecting their capital contributions of $100, 000 each to Fund III (id., ¶¶ 47-48).
On a conference call on November 30, 2019, however, Wu claimed for the first time that the plaintiffs had no interest in Fund III. She stated that they were investors in Fund II only and that Fund II had lost all of its of funds. In this connection, the complaint alleges that Fund II is suing Tse for breach of contract and conversion for failing to perform various real estate-related services (id., ¶¶ 49-50).
In a December 6, 2019 email, Wu further advised plaintiffs that that the distributions made to them from Fund III had been made in error. However, she then changed her position and claimed that plaintiffs were in fact investors in Fund III, but were each required to fund their subscriptions with $200, 000. On December 19, 2019, plaintiffs received a formal demand for the payment their capital contribution, with the notice identifying Wu as "partner" of Sagewood. Wu asserted that plaintiffs were in violation of the Fund III operating agreement and subscription agreements due to their failure to pay (id, ¶¶ 51-53).
Thereafter, plaintiffs retained counsel and served a books and records demand upon both Fund II and Fund III, seeking detailed financial information including records reflecting the receipt and expenditure of plaintiffs' capital contributions. Fund II provided partial records which did not contain information about the contributions, and Fund III refused to respond at all (id., ¶¶ 55-58).
Plaintiffs then filed a petition seeking enforcement of their demands in an action captioned Xiaoyan Lu et al v Sagewood SSF III LLC et al, NY County Index No. 152990/2020, (the Books and Records action). The Fund III defendants opposed the petition in part upon the grounds that plaintiffs were not Fund III members, and that Wu acted outside of her authority when she purported to roll over plaintiffs' Fund II capital contributions into Fund III. Although the petition was granted, Fund III objected to nearly all of the demands, including one which sought its communications with its accountants regarding the preparation of the K-l forms issued to plaintiffs (id., ¶¶ 59-62).
The documents that were provided contained numerous discrepancies regarding Fund Ill's membership and assets. For example, plaintiffs are listed, together with their capital contributions and ownership percentages, among the 33 members in Schedule A of the Fund III operating agreement, but their names do not appear in the list of 25 individuals identified as members in a document entitled "Member Information." Additionally, in September 2019, 24 individuals were issued checks for Fund III distributions and partial return of capital, and six of them, including plaintiffs, were on Schedule Abut not the membership list (id, ¶¶ 63-65, 67).
One of the individuals on the schedule received a wire transfer equal to his or her entire $300, 000 capital contribution on same day that distributions were issued. In December of 2019, another member, Seapulse LLC, was issued a check for $1 million for "Redemption," a sum which represented half of its capital contribution. A Fund II member also redeemed shares, receiving the $196, 002.90 balance of a $200, 000 capital contribution (id., ¶¶ 68-70).
Fund Ill's financial information also did not comport with the quarterly reports plaintiffs received. According to Fund Ill's bank records, tax returns and financial statements it did not have the $7 million balance or ever receive close to the $10 million in capital contributions, reflected by the March 2019 quarterly report. The 2019 K-Is issued to plaintiff by Fund III stated that plaintiffs had a beginning capital account of $100, 015 and withdrew or were distributed $100, 000, when no such transactions occurred. Furthermore, all plaintiffs received conflicting 2018 and 201...
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