Taupita Investments, Ltd. v. Leung
1:14-cv-09739
S.D.N.Y.Aug 17, 2017Background
- Plaintiffs (Taupita, Segue, Urbacon, Mackey) invested promissory-note funds (totaling about $3.75M from EFG clients; $2.3M alleged to be at issue) in a China real-estate project run by entities controlled by defendant Benny Leung; First Toronto is an entity tied to Leung.
- Plaintiffs allege Leung solicited investments with false representations about project financing, title, and needed capital, and that investor funds were diverted (including to repay earlier "Bridge Loan Investors").
- Promissory notes and Note Purchase Agreements (NPAs) were executed; NPAs included a limited-recourse / covenant-not-to-sue clause and a "no third-party beneficiaries" clause; some notes contained jury-waiver and New York jurisdiction provisions.
- Payments were delayed or missed; plaintiffs allege project approvals and certifications were misrepresented; a later Chinese-law-firm investigation contradicted Leung's explanations (per SAC).
- Defendants counterclaimed seeking recovery of their litigation fees, asserting lack of standing by Taupita and breach of the covenant-not-to-sue; defendants also impleaded EFG, alleging a placement agreement breach and that EFG induced plaintiff breaches.
- Court disposition on motions (Aug. 17, 2017): plaintiffs' motion to dismiss counterclaims granted; EFG's motion to dismiss third-party claims granted; defendants' motion to strike plaintiffs' jury demand denied without prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether defendants may recover attorneys' fees from plaintiffs via counterclaims | Fees not payable absent statute/agreement; counterclaims lack basis | Defendants seek fees because Taupita lacks standing and allegedly breached covenant-not-to-sue | Dismissed: American Rule bars fees; no statute/agreement authorizes fees; counterclaims not frivolous enough to trigger exception |
| Whether a covenant-not-to-sue permits recovery of litigation costs for its breach | Plaintiffs: covenant cannot bar fraud claims and does not evidence intent to award fees | Defendants: plaintiffs sued in bad faith and breached covenant, entitling defendants to fees | Dismissed: under Artvale, fees recoverable only for suits in obvious breach/bad faith; defendants pleaded only conclusory bad-faith allegations; covenant cannot shield fraudsters (fraud exception) |
| Whether Leung/First Toronto can pursue third-party claims against EFG (placement-agreement / contract theory) | EFG served as placement agent and breached placement agreement and incorporated NPA terms; Leung/First Toronto are third-party beneficiaries | EFG: no enforceable placement agreement entitling defendants; NPAs disavow third-party beneficiaries | Dismissed: defendants fail to plead they are intended third-party beneficiaries; they cannot enforce NPA provisions that expressly negate third-party rights |
| Whether defendants can state tort claim (inducing breach / tortious interference) against EFG | EFG induced plaintiffs to breach the covenant-not-to-sue, causing damages including defense costs | EFG: no enforceable covenant as to defendants; plaintiffs' fraud claims are permitted; no actual breach that defendants can enforce | Dismissed: deficient pleading — defendants not parties or intended beneficiaries, and covenant cannot be enforced to bar fraud claims, so no actionable procurement of breach |
| Whether plaintiffs waived jury trial via promissory-note jury-waiver provisions | Plaintiffs invoked jury demand | Defendants: jury waiver in notes applies and should be enforced | Denied without prejudice: court declines to decide now; better resolved after discovery and any summary-judgment rulings to clarify which claims/parties proceed to trial |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for pleadings)
- Ashcroft v. Iqbal, 556 U.S. 662 (legal conclusions vs. factual allegations at pleading stage)
- Fox v. Vice, 563 U.S. 826 (American Rule and limits on fee-shifting tied to bad-faith litigation)
- Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186 (discussion of American Rule in New York context)
- Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002 (fees for breach of covenant-not-to-sue only for obvious breach or bad faith)
- Turkish v. Kasenetz, 27 F.3d 23 (contractual limitations cannot shield parties from liability for their own fraud)