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Yu v. GSM Nation, LLC

Court of Chancery of Delaware

July 7, 2017

Warren David Yu
v.
GSM Nation, LLC et al.,

          Date Submitted: May 18, 2017

          Larry R. Wood, Jr., Esquire Adam V. Orlacchio, Esquire Blank Rome LLP

          John P. DiTomo, Esquire Alexandra M. Cumings, Esquire Morris, Nichols, Arsht & Tunnell LLP.

          Michael Busenkell, Esquire Margaret F. England, Esquire Gellert Scali Busenkell & Brown, LLC.

          Blake Rohrbacher, Esquire Susan M. Hannigan, Esquire Richards, Layton & Finger, P.A.

         Dear Counsel:

         This letter opinion resolves Defendants' motion to dismiss. Defendants move to dismiss for lack of subject matter jurisdiction because, in their view, the complaint merely seeks to collect a debt, and damages provide an adequate remedy at law. They also move to dismiss for failure to state a claim, and Defendant Ahmed Khattak moves to dismiss for lack of personal jurisdiction. Because, when viewed holistically, the complaint does not assert any equitable claims and an adequate remedy exists at law, the motion to dismiss for lack of subject matter jurisdiction is granted.

         I. BACKGROUND

         The facts outlined in this letter opinion derive from Plaintiff's Verified Amended Complaint (the "Complaint").

         A. Facts

         Defendant GSM Nation, LLC ("GSM") is a Delaware limited liability company in the mobile phone retail and wholesale business. Defendant Ahmed Khattak is the chief executive officer, co-founder, and manager of GSM and owns 85% of the GSM units. Junaid Shams is the other co-founder of GSM. Shams was acquainted with Plaintiff David Warren Yu through medical studies at the George Washington University before Yu loaned money to GSM in the series of transactions that gave rise to this case.

         Defendant U.S. Mobile Inc. was a Delaware corporation that was merged with and into Defendant U.S. Mobile LLC, a Delaware limited liability company, on July 1, 2015. Khattak also allegedly controls U.S. Mobile LLC.

         Khattak and Shams founded GSM in 2010, and since then, the company has allegedly experienced "tremendous growth."[1] In 2011, GSM was featured in Forbes magazine and listed among Businessweek's 25 most promising companies.

         In mid-2012, GSM sought to expand further by developing a mobile virtual network operator ("MVNO"), which would allow GSM to provide cellular service plans to its customers. But GSM was cash strapped at the time. Shams, at Khattak's request, approached Yu for the purpose of soliciting loans to GSM, and Khattak allegedly represented to Yu that GSM needed capital to launch an MVNO. In October 2012, GSM provided Yu with a prospectus that included the plan to form an MVNO as a division of GSM.

         From February 2013 through September 2014, Yu loaned $3, 500, 000 to GSM under a series of 16 separate loan agreements (the "Loan Agreements") bearing 12% simple interest, payable monthly. Yu was entitled to call the loans at any time with 60 days' notice.

         GSM paid Yu the required monthly interest payments and employed personnel to develop MVNO capabilities. The Complaint also alleges that Khattak paid himself "a draw" of $10, 000 to $15, 000 per month from GSM while Yu was making loans to the company. Additionally, Khattak used $5, 000 from GSM each month to cover his personal living expenses. And the Complaint asserts that Khattak "tried to buy a luxury car using a cashier's check from GSM, "[2] but it does not allege that Khattak was successful in buying the car or when he made the attempt.

         In April 2013, GSM released an MVNO business plan, which stated in part that the MVNO GSM was developing would be a part of GSM. But Yu alleges that instead of completing the MVNO development process within GSM, Khattak applied to the Federal Communications Commission (the "FCC") on behalf of U.S. Mobile LLC for permissions related to becoming an MVNO. U.S. Mobile LLC sought the right from the FCC to provide global resale services between the United States and points abroad. Yu alleges that, as a result, U.S. Mobile LLC, not GSM, became an MVNO. Yu also asserts on information and belief that Khattak caused GSM to purchase cellular phones and transfer them to U.S. Mobile LLC for no consideration, but the Complaint does not allege when this transfer occurred.

         GSM paid Yu the required interest payments under the Loan Agreements until January 2016 when GSM's interest check was returned for insufficient funds. GSM's February 2016 interest check also was returned for insufficient funds. On February 17, 2016, Yu made a demand for full payment of the debt pursuant to the Loan Agreements. But GSM allegedly responded that "given the current state of the business, GSM is not able to repay or service the loan."[3] GSM provided Yu with a GSM income statement dated December 4, 2015, which showed a net loss of $812, 257, and a GSM balance sheet dated January 31, 2016, which showed total assets of $112, 730.27 and total liabilities of $4, 403, 083.35.

         B. This Litigation

         On May 3, 2016, Yu filed the original complaint in this action, and on July 26, 2016, he filed the Complaint at issue in this motion. Count I of the Complaint alleges a breach of contract claim against GSM for failure to repay the loans. Count II is a claim for fraudulent inducement against GSM and Khattak in connection with the Loan Agreements because GSM and Khattak allegedly represented that an MVNO would be developed within GSM. Count III alleges equitable fraud against GSM and Khattak for the same conduct. Count IV is a fraudulent transfer claim against GSM, Khattak, U.S. Mobile LLC, and U.S. Mobile Inc. Count V alleges unjust enrichment against GSM, Khattak, U.S. Mobile LLC, and U.S. Mobile Inc., and count VI seeks to pierce the corporate veils of GSM, U.S. Mobile LLC, and U.S. Mobile Inc. under an alter ego theory of liability against Khattak. Further, Yu's prayer for relief requests "equitable rescission" of the loan agreements, "reformation, " a "constructive trust" voiding the transfers from GSM to U.S. Mobile LLC, and an "equitable accounting."

         On August 9, 2016, Defendants GSM, U.S. Mobile Inc., and U.S. Mobile LLC moved to dismiss the Complaint for lack of subject matter jurisdiction. Defendant Khattak moved to dismiss for lack of personal jurisdiction, and all Defendants moved to dismiss for failure to state a claim. Yu asserts that his claims for equitable fraud and unjust enrichment are equitable claims. And he argues that his claims for fraudulent transfer and fraudulent inducement seek equitable remedies such that the Court of Chancery has subject matter jurisdiction. Yu contends that the Court has jurisdiction over his breach of contract claim ...


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