The Fang Holdings Case: New York Supreme Court Extends Long-Arm Jurisdiction Over Foreign Real Estate Portal
10.7.2024
The New York Supreme Court decision in Oasis Investments II Master Fund Ltd. v. Mo (the Fang Holdings Case)[1] sets a precedent for New York courts to establish personal jurisdiction over foreign companies that exploit New York markets to defraud investors. This ruling opens new avenues for litigation, empowering the state to hold alleged wrongdoers accountable.
Previously, foreign defendants who appeared to have minimal contacts with the state could argue that the courts lacked jurisdiction due to their foreign status and absence of a physical presence in New York. This defense will now be less effective, as the ruling suggests that even if a company is neither incorporated in New York nor has its principal place of business there, transactions involving schemes that manipulate the New York market – such as spinning off a company’s valuable assets into a new subsidiary to benefit company officers at the investors’ expense – can establish a substantial connection between New York and the claims of fiduciary duty breaches. This connection is sufficient to establish personal jurisdiction.
In this case, the court expanded the “minimum contacts” rule, allowing the N.Y. Supreme Court to deny the defendant’s motion to dismiss. The defendants, officers of Fang Holdings Limited, a foreign company incorporated in the Cayman Islands with its principal place of business in China, were found to have subjected themselves to New York’s jurisdiction. The ruling was based on allegations that the defendants’ actions, manipulating New York markets, are connected to the claim that they breached their fiduciary duties, which led to the looting of Fang Holdings. These activities provided the necessary basis for establishing jurisdiction under CPLR 302(a)(1).[2]
When a New York court exercises personal jurisdiction over a non-domiciliary defendant, two conditions must be satisfied: (i) the court must have long-arm jurisdiction over the defendant pursuant to CPLR 302 and (ii) the exercise of such jurisdiction must comply with due process requirements.[3] Failure to establish either condition will prevent the action from proceeding. Additionally, long-arm jurisdiction permits adjudication only of issues that arise from or relate to the controversy that established jurisdiction.[4] Thus, the lawsuit must stem from the defendant’s contacts with the forum.[5]
Under CPLR 302(a)(1), a New York court may exercise specific jurisdiction over a non-domiciliary who, either personally or through an agent, (i) “transacts any business within the state” or (ii) “contracts anywhere to supply goods or services in the state.”[6] A single transaction can satisfy this requirement, provided the defendant’s activities were purposeful and there is a substantial relationship between the transaction and the claim asserted.[7] Whether the activity conducted within the state is sufficient to constitute the “transaction of business” under this section depends on the facts of each case. This determination cannot be made by applying a mechanical formula but must instead consider what is fair and reasonable under the circumstances.
Fang Holdings Derivative Action Background
The plaintiffs initiated this lawsuit on May 29, 2023, alleging various breaches of fiduciary duties by Vincent Tianquan Mo and Richard Jiangogn Dai (collectively, the defendants). The defendants moved to dismiss the case on several grounds, arguing that the plaintiffs failed to establish personal jurisdiction, that the forum was non-convenient under CPLR 327 and that the action was time-barred under CPLR 202.[8] This article will focus solely on the issue of personal jurisdiction.
The plaintiffs contended that their breach of fiduciary duty claims arose from the defendants’ use and manipulation of the New York financial market in a multi-step transaction designed to loot Fang Holdings and enrich themselves. The transactions allegedly undertaken by defendants included: (i) Fang’s spin-off of its valuable wholly owned subsidiary, China Index Holdings Limited), as a separate publicly traded entity in New York; (ii) Fang’s purchase of China Index Holdings’ shares both on the New York market and from affiliates of defendants; (iii) Fang’s delisting from the New York Stock Exchange, which further depressed the value of China Index Holdings shares on the New York market, enabling the defendants to buy back the shares at a reduced price; and (iv) Fang’s participation in a take-private transaction, during which defendants forced Fang to pay approximately $130 million to acquire a 35.8% minority interest in China Index Holdings – a company that Fang had fully owned just a few years prior – all for the personal gain of defendants.[9]
The defendants argued that their motion to dismiss was warranted because CPLR 302(a)(1) does not apply when there is no articulable nexus between the causes of action in the complaint and the defendants’ activities in New York.[10] They contended that the transactions involving Fang Holdings did not serve as the nexus for the causes of action asserted in the plaintiffs’ complaint.
Renren Inc. and Its Impact on Fangs Holding
In determining whether there was an articulable nexus or substantial relationship between Fang Holdings’ transactions and the alleged breaches of fiduciary duty, the court looked to the precedent set in Renren Inc. for guidance.[11] In Renren Inc., the defendants similarly sought dismissal based on a lack of personal jurisdiction.[12] However, the court held that the defendants’ alleged involvement in a multi-step transaction designed to strip Renren Inc. of its most valuable assets by manipulating the New York markets constituted transacting business in New York under CPLR 302(a)(1). The court further concluded that this exercise of jurisdiction was consistent with due process, thereby making jurisdiction in New York proper.[13]
Renren Inc. was also a foreign company, headquartered in China, and was often referred to as the Chinese equivalent of Facebook.[14] The company experienced significant growth, especially after Facebook was banned in China. Seizing this opportunity, the defendants took Renren Inc. public on the New York markets, assuring investors that it would not become an investment company. However, as Renren’s profits soared, the defendants reversed course, transforming the company into an investment company and devising a plan to capture its profits for their own benefit.[15]
At this point, the defendants in Renren Inc. initiated a multi-step transaction scheme. First, they announced a plan to spin off Renren Inc.’s investments by selling the assets to a wholly owned subsidiary, Oak Pacific Investment, for a nominal consideration of just 5% of the investments’ book value. Next, they executed a private placement of Oak Pacific Investment’s shares, presenting investors with a Hobson’s choice: either accept a cash dividend based on a grossly understated valuation or receive shares of the company, but only if they met the stringent criteria of having a net worth of at least $1 million and $5 million in investments.[16]
During the motion to dismiss, the court determined that the defendants’ use of the Oak Pacific Investment spin-off in New York amounted to market manipulation that served the officers’ interests rather than just a routine spin-off. The court found that these actions created a substantial connection between the defendants’ transactions and the breach of fiduciary duty claims. Therefore, jurisdiction under CPLR 302(a)(1) was deemed proper.[17]
Connection Between Both Cases
The similarities between the Fang Holdings and Renren Inc. cases are remarkable. In both instances, the complaints allege that the defendants breached their fiduciary duties and sought to establish personal jurisdiction based on the defendants’ transactions in New York – transactions that allegedly involved market manipulation through a spin-off scheme to defraud investors. The similarities set an easy path for the ruling of the courts, as the actions by both defendants involved a clear articulable nexus or substantial relationship between the transactions and the claims asserted, thereby justifying jurisdiction under CPLR 302(a)(1).
Primary Actors and the Assertion of Personal Jurisdiction Over Mo and Dai
Defendants further argued that while the plaintiff might have jurisdiction over Fang Holdings, it does not extend to them personally.[18] They argued that, as citizens of the People’s Republic of China with insufficient contacts with New York, they are not subject to New York’s personal jurisdiction.[19]
Under CPLR 302(a)(1), personal jurisdiction can be asserted over company officers if they are deemed “primary actors” in the relevant transactions.[20] To be a primary actor, a corporation needs to engage in purposeful activities in New York related to the transaction, with the defendant’s knowledge and consent. Personal jurisdiction over the defendant can then be established.[21] This applies if the defendant benefited from the transaction and exercised some degree of control over the corporation.[22]
The plaintiff’s complaint provided enough information to establish the defendants as primary actors in Fang Holdings. They engaged in significant activities, including signing misleading securities filings on behalf of Fang Holdings and executing agreements related to the China Index Holdings’ take-private transaction (Dai served as chairman of Fang Holdings during the China Index Holdings transaction). Given their involvement, control over the company and the benefits they derived, the court found grounds to reject their argument and assert personal jurisdiction over them individually, as well as over Fang Holdings as an entity.
Conclusion
Now that a precedent has been set, it remains to be seen how courts will apply it in future cases. What kind of impact will it have and how should attorneys prepare to plead or defend their cases? Only time will tell.
Piero Sauñe Casas, a third-year law student from Lima, Peru, graduated cum laude from Manhattanville College in 2021 with a bachelor’s in political science. At St. John’s University, he is actively engaged in several organizations, including his role as editor-in-chief of the New York Real Property Law Journal. He is also a member of the Real Property Law Society, the Latin American Law Students Association, and a Fellow of the Mattone Family Institute for Real Estate Law. This past summer, Piero authored this article during his internship with the in-house counsel at Alma Realty Corp.
Endnotes
[1] 82 Misc. 3d 1242(A) (Sup. Ct., N.Y. Co. 2024).
[2] Id.
[3] N.Y. Civil Practice Law and Rules 302 (CPLR); Williams v. Beemiller, Inc., 33 N.Y.3d 523, 528 (2019).
[4] Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011).
[5] Bristol-Myers Squibb Co. v. Superior Ct. of California, 582 U.S. 255, 262 (2017).
[6] CPLR 302(a)(1).
[7] Kreutter v. McFadden Oil Corp., 71 N.Y.2d 460, 467 (1988).
[8] Oasis Invs. II Master Fund Ltd. v. Mo, 82 Misc. 3d 1242(A) (Sup. Ct., N.Y. Co. 2024).
[9] Id.
[10] Id.
[11] Id.
[12] Renren, Inc. v. XXX, 67 Misc. 3d 1219(A) (Sup. Ct., N.Y. Co. 2020).
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Oasis Invs. II Master Fund Ltd. v. Mo, 82 Misc. 3d 1242(A) (Sup. Ct., N.Y. Co. 2024).
[19] Id.
[20] Coast to Coast Energy, Inc. v. Gasarch, 149 A.D.3d 485, 487 (1st Dep’t 2017).
[21] Id.
[22] Retail Software Servs., Inc. v. Lashlee, 854 F.2d 18 (2d Cir. 1988).
