Wang v. Jianming

          OPINION AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS' THIRD MOTION TO AMEND COMPLAINT AND TO ADD CLASS ACTION CLAIMS AND GRANTING SILVER DEFENDANTS' MOTIONS TO DISMISS (DOCS. 67, 86, & 87)

          CHRISTINA REISS JUDGE.

         On August 11, 2017, Plaintiffs Wei Wang, Guangyi Xiong, and Xiaofeng Feng filed a Complaint in this court alleging legal malpractice; breach of contract; breach of the implied covenant of good faith and fair dealing; unjust enrichment; violations of Sections 10(b) and 10b-5 of the Securities Exchange Act of 1934; unfair and deceptive practices in violation of the Vermont Consumer Protection Act, 9 V.S.A. §§ 2451-82J; and breach of fiduciary duty against Jianming Shen^[1] and ShenLaw LLC (collectively, the "Shen Defendants"). Plaintiffs' claims arise out of development projects in Jay Peak, Burke, and the greater Newport area of Vermont comprised of eight phases in various stages of completion (the "Jay Peak Projects").

         Pending before the court is Plaintiffs' third motion to amend the Complaint and to add class action claims (Doc. 67). Also pending before the court are a motion to dismiss Plaintiffs' claims for lack of personal jurisdiction pursuant to Rule 12(b)(2) (Doc. 86), a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), and a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) (Doc. 87) filed by Defendants Darren Silver and Darren Silver & Associates LLP (the "Silver Defendants").

         At issue is whether Plaintiffs should be permitted to amend their Complaint a third time; whether Plaintiffs' proposed class action claims are futile; whether Plaintiffs' motion to amend should be denied on the grounds of undue delay; whether Plaintiffs have standing to assert their proposed class action claims; whether the court has subject matter jurisdiction in light of the absence of diversity of citizenship between proposed new plaintiff Stephen Webster and the Silver Defendants; and whether the court may properly exercise personal jurisdiction over the Silver Defendants.

         I. Procedural Background.

         On June 22, 2018, approximately ten months after filing their initial Complaint, Plaintiffs moved to amend their Complaint to add class action claims. In their First Amended Complaint, Plaintiffs, individually and on behalf of similarly situated class members, alleged four causes of action against a proposed class of defendants: breach of fiduciary duty; unfair and deceptive practices in violation of the Vermont Consumer Protection Act, 9 V.S.A. §§ 2451-82J; legal malpractice; and breach of the implied covenant of good faith and fair dealing. The Shen Defendants opposed the motion to amend.

         On August 13, 2018, prior to the court's ruling on their first motion to amend, Plaintiffs filed a second motion to amend their Complaint to add Stephen Webster as a plaintiff and to add the Silver Defendants as defendants. Plaintiffs served their proposed Second Amended Complaint without withdrawing their proposed First Amended Complaint.

         At a hearing on November 5, 2018, the court granted Plaintiffs' oral motion to withdraw their first motion to amend the Complaint and granted in part and denied in part Plaintiffs' second motion to amend the Complaint. The court ruled that the class action allegations as pled were futile because the proposed class of plaintiffs lacked standing to sue the proposed class of defendants. At Plaintiffs' request, the court granted Plaintiffs thirty days to file a Third Amended Complaint (hereinafter, "TAC") to correct certain factual errors in their Second Amended Complaint. The court did not foreclose the possibility of revised class action claims. Thereafter, Plaintiffs embarked upon what they characterize as a "vast overhaul of Part II" (Doc. 67 at 2) of their Complaint. They seek to add claims for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962 (Count I); conspiracy to violate 18 U.S.C. § 1962(c) (Count II); civil conspiracy to violate 13 V.S.A. § 1108 (Count III); and unjust enrichment (Count IV). They propose asserting these claims on behalf of a class of plaintiffs comprised of "individuals who retained the Defendant Attorneys to perform all necessary legal services for their investment at the Jay [Peak] Projects under and pursuant to the United States Citizenship and Immigration Services Employment-Based, Fifth Preference ('EB-5') immigrant-investor program" (the "Proposed Class Plaintiffs") against a proposed class of defendants comprised of individuals or business entities "hired by a Plaintiff to represent them in their investment with the Jay Peak Projects" (the "Proposed Class Defendants"). (Doc. 67-1 at 31, ¶¶ 16, 21.)

         The TAC further seeks to add Siyi Chen as a plaintiff and to add defendants Darren Silver; Darren Silver & Associates LLP;^[2] Dai & Associates LLP; Nguyen Huuan; Ting Geng; the Law Offices of Geng & Zhang, PLLC; Leslie I. Snyder, BSC; Ruben Flores; and Cheng Yun & Associates, PLLC. The TAC seeks to remove defendants Schnader, Harrison, Segal & Lewis LLP; the Flores Group; and Yun Cheng.

         The Shen Defendants filed an initial opposition on February 1, 2019 and a supplemental opposition on March 13, 2019. Plaintiffs filed a reply on March 15, 2019 and a supplemental reply on March 27, 2019, at which time the court took the pending motion under advisement. The Silver Defendants filed motions to dismiss on March 7, 2019 which Plaintiffs opposed on May 31, 2019. The Silver Defendants replied on June 21, 2019, at which time the court took those motions under advisement. In light of the overlap among the pending motions, the court addresses them in a single opinion.

         Plaintiffs are represented by Russell D. Barr, Esq. and Chandler W. Matson, Esq. The Shen Defendants are represented by Andrew H. Montroll, Esq. The Silver Defendants are represented by Christopher E.H. Sanetti, Esq.

         II. The TAC's Factual Allegations.

         A. Allegations Against the Shen Defendants Individually.

         Plaintiffs are individuals who sought to invest and reside in the United States pursuant to the United States Citizenship and Immigration Services ("USCIS") employment-based fifth preference ("EB-5") visa program. This program authorizes foreign investors who have invested capital in a commercial enterprise in the United States to file an 1-526 Petition requesting conditional permanent residency status for a two-year period. An 1-526 Petition requires a petitioner to acquire and supply evidence that the chosen EB-5 investment project will create ten full-time positions for qualifying employees. If the foreign investor satisfies certain criteria, he or she may apply to have the conditions removed from his or her visa in order to permanently live and work in the United States.

         Jianming Shen is an attorney who is the managing partner and president of ShenLaw LLC which has its principal place of business in New York. ShenLaw LLC handles transactions for immigrant investors through the EB-5 program. Attorney Shen allegedly "holds himself out to be an experienced EB-5 attorney with a nationwide presence." Id. at 8, ¶ 24.

         Plaintiffs contend that Attorney Shen directed them to invest in the Jay Peak Projects and, on multiple occasions, authored, procured, and disseminated advertisements to foreign investors in which he endorsed the Jay Peak Projects as being one of the best EB-5 enterprises in the United States with a 100% 1-526 Petition approval rate. More specifically, Attorney Shen allegedly directed approximately seventy clients, including Plaintiffs, to invest in Phase VII of the Jay Peak Projects, which included the Jay Peak Biomedical Research Park L.P.

         Plaintiff Feng retained Attorney Shen in December 2013, although Attorney Shen maintains that Plaintiff Feng did not pay his retainer or bills for legal fees. Plaintiff Wang retained Attorney Shen in May 2014 and paid approximately $18, 000 in legal fees and filing costs to the Shen Defendants. Plaintiff Xiong retained Attorney Shen in March 2016 and paid approximately $14, 500 in legal fees and filing costs to the Shen Defendants.

         After retaining Attorney Shen, Plaintiffs received the investment offering documents for Phase VII. The offerings required each Plaintiff to make a capital contribution of $500, 000 and pay a separate administrative or management fee of $50, 000 which was used to pay fees and expenses incurred by the promoters, including the payment of commissions and finder's fees. Each Plaintiff complied with these requirements and transferred $550, 000 to the Phase VII promoters.

         Attorney Shen allegedly "explicitly assured" Plaintiffs that he would assist with the necessary due diligence and ensure the "immigration suitability" of the Jay Peak Projects; however, he allegedly did not conduct any due diligence regarding Plaintiffs' investments. Id. at 13, ¶ 56. Plaintiffs assert that "[t]he most basic and standard legal due diligence would have revealed that [Plaintiffs] were throwing their money into a complete sham." Id. at 14, ¶ 60. Attorney Shen did not request financial information regarding how EB-5 investor funds were spent, and the Jay Peak Projects did not disclose that information. In 2012, public allegations of wrongdoing by the Jay Peak Projects promoters emerged. By May 2014, a group of twenty investors had complained about the misappropriation of investor funds.

         Phase VII's parent company, AncBio, was ultimately sold at auction in May 2014 to satisfy creditors. Phase VII did not obtain approval from the U.S. Food and Drug Administration for the research center's products-a prerequisite for the operation of Phase VII and the use of Plaintiffs' investment funds. Plaintiffs allege that Attorney Shen failed to inform them of wrongdoing at the Jay Peak Projects because he was receiving direct and indirect compensation in exchange for referring foreign investors to the Jay Peak Projects.

         As a result of the Shen Defendants' acts and omissions, Plaintiffs allege that they have "lost their initial investment, their initial path to immigration in the United States, their administrative fees, and the fees paid to [Attorney] Shen." Id. at 17-18, ¶ 82. Through separate litigation, the federally appointed receiver of the Jay Peak Projects secured a settlement from which each Plaintiff was offered $500, 000. Plaintiffs Wang and Feng each accepted the $500, 000, while Plaintiff Xiong did not.

         B. Proposed Class Allegations and Claims.

         Proposed Class Plaintiffs are over one hundred individuals who invested in the Jay Peak Projects and retained Proposed Class Defendants to perform legal services in support of their EB-5 visa applications. Proposed Class Defendants are approximately seventy-one attorneys or law firms who allegedly marketed and promoted the Jay Peak Projects to potential investors, including Proposed Class Plaintiffs.

         Proposed Class Defendants collected legal fees from Proposed Class Plaintiffs of approximately $13, 000 to $18, 000 per class member. Proposed Class Plaintiffs and Proposed Class Defendants reviewed investment offering documents for the Jay Peak Projects which described how the investors' money was to be used and how the profits would be allocated to the investors.

         Proposed Class Plaintiffs were required to invest a capital contribution of $500, 000 and pay a separate administrative fee of $50, 000 which was "supposed to be used to pay legitimate fees and expenses incurred by the Jay Peak Projects and the promoters of the Projects." Id. at 38, ¶ 54. However, these funds were allegedly commingled by the Jay Peak Projects and some of the funds were allegedly used to pay individual kickback payments of $5, 000 to $30, 000 to Proposed Class Defendants for each individual who invested in the Jay Peak Projects. The alleged kickback payments were memorialized in agreements (the "Kickback Agreements") between the Jay Peak Projects and each Proposed Class Defendant. Proposed Class Plaintiffs do not allege any agreements between and among the Proposed Class Defendants regarding the Kickback Agreements. Proposed Class Plaintiffs were not aware of the Kickback Agreements at the time they retained Proposed Class Defendants to provide legal services. "In general," Proposed Class Defendants "agreed that they would be paid money by Jay Peak after, and only after, one of their client's money was released from escrow to the Jay Peak Projects." Id. at 38, ¶ 52. Proposed Class Plaintiffs' funds were held in an escrow account to be released only after their initial 1-526 Petition was approved, however, "upon information and belief, this escrow arrangement was not always followed[.]" Id. at 38, ¶53.

         The Kickback Agreements allegedly formed the basis of a "Kickback Association or Enterprise" which was "an ongoing organization that functioned as a continuing unit over the course of many years, and at least from 2007 to April of 2016" and allowed Proposed Class Defendants to profit from funds paid to them by the Kickback Association or Enterprise. Id. at 39, ¶ 59. Proposed Class Defendants "appear[] to have received" kickbacks totaling more than $4.6 million.^[3] Id. at 41, ¶ 76. The TAC alleges that each time a Proposed Class Defendant received money from the Jay Peak Projects, this created a deficit in funding that needed to be rectified by further investment by a subsequent immigrant investor.

         In 2012, each Proposed Class Defendant allegedly received a letter from Douglas Hulme, an immigration advisor to the Jay Peak Projects, explaining that the Jay Peak Projects had orchestrated a Ponzi-scheme. Proposed Class Defendants allegedly failed to disclose this information to their clients and "assisted the Jay Peak Projects in hiding the allegations and reporting of the Jay Peak Ponzi-scheme[.]" Id. at 43, ¶ 85.

         III. Conclusions of Law and Analysis.

         A. Whether to Allow Plaintiffs' Amendments to the Factual Allegations in Part I of the TAC.

         The Shen Defendants do not squarely oppose Plaintiffs' request to amend their factual allegations as set forth in Part I of the TAC. With regard to those revisions, Plaintiffs were granted leave to amend by the court. At least insofar as their new factual allegations are concerned, there is no challenge to the proposed amendments on the grounds of bad faith, undue delay, or futility. Plaintiffs' motion to amend to include these revised factual allegations in Part I of the TAC is therefore GRANTED. See Fed. R. Civ. P. 15(a)(2) ("The court should freely give leave [to amend] when justice so requires.").

         B. Whether to Permit Plaintiffs' Third Motion to Amend Part II of their Complaint.

         Pursuant to Fed.R.Civ.P. 15(a)(1), "[a] party may amend its pleading once as a matter of course within ... 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whichever is earlier." If more than twenty-one days have elapsed, "a party may amend its pleading only with the opposing party's written consent or the court's leave[, ]" ...