For want of an address, a lawsuit was lost

By Pat Murphy

A tale of woe out of Superior Court in Massachusetts underscores that plaintiffs’ lawyers can’t be too careful in making sure that all the i’s are dotted and t’s crossed before a lawsuit is filed.

On Sept. 30, Judge Debra A. Squires-Lee granted a motion to dismiss the derivative action filed against defendant Cambridge Institute of Business Research, Inc. in Zhou v. Lin.

Plaintiff May X. Zhou‘s claims against CIBR may have been chock full of merit or completely groundless. But no one will ever know because her attorneys used the corporate defendant’s old address when they sent the demand letter required to proceed with a derivative action under Chapter 156D, §7.42.

“After hearing the evidence and having made credibility determinations, I find that a demand was not made on CIBR,” Squires-Lee wrote. “The derivative claims are, therefore, barred by the plain language of the statute.”

There are multiple lessons to be taken from the ruling, CIBR’s attorney, Kevin T. Peters, of Fox Rothschild in Boston, said.

“Judge Squires-Lee confirmed that proof that a derivative demand was received is not part of the plaintiff’s prima facie case,” Peters said. “It’s jurisdictional and so should be resolved as early as possible by evidentiary hearing.”

So, what happened?

The case involved two corporations formed by the plaintiff and defendants Xinwei Lin and Jianxin Gao more than a decade ago — CIBR and Knowledgelink Group. The plaintiff filed her derivative action against CIBR, Knowledgelink, Lin and Gao in June 2023, alleging that Lin and Gao had unlawfully diverted company funds.

The suit sought accounting, the payment of compensatory damages, and the removal of Lin and Gao as directors and officers of the companies.

The court consolidated Zhou v. Lin with two related cases and scheduled trial for this month. Meanwhile, CIBR moved to dismiss the plaintiff’s claim on the grounds that the shareholder failed to make a proper demand in accordance with G.L.c. 156D, §7.42.

The statute provides: “No shareholder may commence a derivative proceeding until: (1) a written demand has been made upon the corporation to take suitable action; and (2) 90 days have elapsed from the date the demand was made, or, if the decision whether to reject such demand has been duly submitted to a vote of the shareholders … within 60 days from the date when demand was made, 120 days have elapsed from the date the demand was made, unless in either case the shareholder has earlier been notified that the demand has been rejected by the corporation or irreparable injury to the corporation would result by waiting for the expiration of such 90-day or 120-day period.”

Squires-Lee conducted an evidentiary hearing on the written demand question on Sept. 24, which included the testimony of the plaintiff’s attorneys, Kurt S. Kusiak and Ryan Cunningham, of Fitch Law Partners in Boston.

According to the judge’s findings of fact, a secretary at the firm mailed a derivative action demand letter on behalf of the plaintiff to CIBR on Nov. 22, 2022. The letter, which was prepared by Cunningham, had the wrong address.

It turns out Cunningham had earlier obtained CIBR’s Waltham address from the Massachusetts secretary of state’s corporate database. But CIBR had moved between the time Cunningham checked the site and the secretary sent the demand letter.

“Atty. Cunningham did not re-check the Secretary of State’s database to ensure CIBR’s address was correct before the letter was sent,” the judge found.

Meanwhile, CIBR had made all the necessary arrangements with the U.S. Postal Service to ensure that mail delivered to its old address would be forwarded. Still, Squires-Lee found CIBR’s evidence that the demand letter was never received to be credible.

Compounding the problem, the plaintiff’s attorneys never sent a courtesy copy of the demand to Peters, even though they were aware from his appearance as counsel in related matters that he represented CIBR.

The plaintiff contended that her lawyers’ omissions were of no consequence, arguing that under the “mailbox rule,” it could be presumed that the demand letter was received.

Peters points to a gaping hole in that argument.

“A forwarding address does not satisfy the mailbox rule. For the presumption of delivery to apply, the letter must be sent to the right address,” Peters said.

Likewise, Squires-Lee found the plaintiff’s reliance on the mailbox rule to be fatally flawed.

“First, every case cited premises the presumption on a properly addressed letter and Zhou did not send a properly addressed letter. The CIBR address was incorrect,” she wrote. “Second, the presumption is just that, a presumption that turns receipt into a question of fact. I have heard the evidence on this issue. I credit Lin and Gao that the Demand was not received.”

To avoid dismissal, the plaintiff cited case law suggesting a derivative complaint may be recast as asserting “direct” claims in the event there is a failure to make a proper demand.

But Squires-Lee found that that case authority drew a line to such recasting of complaints where the recovery sought by the plaintiff properly belonged to the company.

“Here as well, a careful review of Zhou’s complaint establishes that the recovery sought belongs entirely to CIBR,” Squires-Lee wrote. “The counts against CIBR are for diversion of corporate assets and opportunities; for breach of fiduciary duty through the diversion and conversion, and exposure of CIBR to potential tax liability; and for declaratory relief. … Thus, Zhou, if she was injured at all, was injured because the alleged diversion and conversion took money out of CIBR, affecting her distributions. Because the claims concern harms to CIBR and not Zhou personally, the case is properly considered to be derivative.”

Kusiak did not respond to a request for comment.

This report was originally published in Massachusetts Lawyers Weekly.