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For close business owners and their attorneys embarking upon a major litigated business dispute, it is not unreasonable to want to know with certainty which state or nation's laws they can expect the court to apply over the course of the case to the plaintiff's claims.
No such luck for the parties in Huang v Zhou (2025 NY Slip Op 51696[U] [Sup Ct, Westchester County Oct. 7, 2025]).
In Huang, Westchester County Commercial Division Justice Linda S. Jamieson held under the internal affairs doctrine that issues of fact precluded a determination, at the pre-answer stage under CPLR 3211, whether the laws of New York, or the laws of the Cayman Islands, governed nearly a dozen causes of action arising out of a founding shareholder's claims of alleged dilution of his equity interest in a cryptocurrency business.
The Internal Affairs Doctrine, Eccles, and Ezrasons
The internal affairs doctrine has been a subject of interest lately to New York's highest court, which in the past 18 months authored not one, but two important opinions on the subject. Peter Sluka wrote about both of them here and here. I wrote about the intermediate appellate decision in one of them here.
Last year, in Eccles v Shamrock Capital Advisors, LLC (42 NY3d 321 [2024]), the Court of Appeals reversed the Appellate Division's reversal of a Decision and Order of New York County Commercial Division Justice Andrea Masley. The Court announced:
[W]e clarify that the substantive law of a company's place of incorporation presumptively applies to causes of action arising from its internal affairs. Moreover, because of the important interests that the internal affairs doctrine represents, we decline to create any broad exceptions to that presumption. Rather, in order to overcome this presumption and establish the applicability of New York law, a party must demonstrate both that (1) the interest of the place of incorporation is minimal—i.e., that the company has virtually no contact with the place of incorporation other than the fact of its incorporation, and (2) New York has a dominant interest in applying its own substantive law.
Under this standard, Eccles ruled that Scottish law governed claims challenging the consideration for the merger of Scottish-incorporated online betting company FanDuel Ltd., including claims for breach of fiduciary duty by shareholders against corporate directors, and that, under Scottish law, they were sufficient to survive a motion to dismiss.
This year, in Ezrasons, Inc. v Rudd (___ NY ___, 2025 NY Slip Op 03008 [May 20, 2025]), the Court of Appeals affirmed the Appellate Division's affirmance of a Decision and Order of New York County Commercial Division Justice Robert R. Reed.
In Ezrasons, the Court ruled under the internal affairs doctrine that English law governed the issue of standing to sue derivatively on behalf of an English entity, displacing New York's shareholder derivative statute, Section 626 of the Business Corporation Law (the "BCL"), which is made applicable to foreign corporations under BCL § 1319. Under English law, the Court affirmed dismissal of the plaintiff's shareholder derivative claims for lack of standing, even though standing might otherwise have existed under New York law pursuant to BCL § 626 and case law applying the statute.
What Procedural Stage for the Choice-of-Law Decision?
Eccles and Ezrasons both resolved difficult conflicts-of-laws questions at the pre-answer stage as a matter of law.
Might there be some cases where a court lacks sufficient information to make a choice-of-law decision on a pre-answer factual record, or possibly, even on a more complete factual record, preclude summary judgment, requiring a trial? Let's take a look.
The Facts of Huang
BB Shares Capital Management Limited ("BBShares" or the "Company") was incorporated as a Cayman Islands company. According to the Second Amended Complaint, it was "conceived as a crypto asset management firm, poised and timed to take advantage of the momentum crypto and digital assets were gaining among investors."
One of the founders, Defendant JingJing Zhou ("Zhou"), allegedly "resided and conducted BBShares business out of White Plains, New York," and the entity allegedly "had a principal office in Westchester County, New York."
The essence of the lawsuit was that Jhou and co-founder / Defendant Hongtao Qiao ("Qiao") allegedly diluted from 24% to 2.5% the equity interest in BBShares of another of the founders, Plaintiff Guang Huang ("Huang"), took control of the business, "froze out" Huang, and committed a litany of business torts in the process.
The Claims
Huang pled his action "derivatively on behalf of BBShares Capital to seek restitution on behalf of the Company and put an end to the self-dealing and corporate waste that has plagued the Company and harmed minority members at Zhou's and Qiao's hands, and individually to assert and restore his rights as the co-founder and minority member of the Company." Eleven causes of action emerged:
- Breach of Fiduciary Duty under Cayman Islands law
- Dishonest Assistance under Cayman Islands law
- Aiding and Abetting Breach of Fiduciary Duty under Cayman Islands law
- Breach of Fiduciary Duty under Cayman Islands law
- Conspiracy under Cayman Islands law
- Breach of Fiduciary Duty under New York law
- Fraud under New York law
- Accounting under New York law
- Unjust Enrichment under New York law
- Conversion under New York law
- Tortious Interference with Prospective Business Relations under New York law
The Dismissal Motion
Relying upon the internal affairs doctrine, Zhou and Qiao moved to dismiss every claim against them on six principal grounds:
- The highest court of the Cayman Islands, the Privy Council, recently ruled that a plaintiff may bring a claim of stock dilution against the entity itself, but not against the entity's directors
- It is "black letter law" that fiduciary duty claims are matters of corporate internal affairs governed by the law of the Cayman Islands, not New York
- Under Cayman Islands law, corporate directors do not owe fiduciary duties to shareholders unless there is a "special duty," which they argued Huang could not show
- The fraud claim was "duplicative" of the claims for breach of fiduciary duty
- The civil conspiracy claim was a pure tort claim governed by the law of New York, not Cayman Islands, and New York law prohibits claims for civil conspiracy
- Cayman Islands law prohibits derivative claims except under narrow exceptions like a "fraud on the minority," whey Zhou and Qiao argued was inapplicable
Huang opposed dismissal. Those curious can read all three interesting briefs here, here, and here.
The Decision
The resulting decision by Justice Jamieson gave both sides plenty of reasons to be unhappy.
First, finding it to be a matter of tort, not a matter of internal affairs, the Court applied New York law to the fraud claim, holding it "duplicative" of the claims breach of fiduciary duty, dismissing the claim.
Second, finding it to be a matter of internal affairs, the Court applied Cayman Islands law to the accounting claim, ruling that Huang mispled it as a claim under New York law, dismissing the claim.
Third, finding it to be a matter of tort, not a matter of internal affairs, the Court applied New York law to the conspiracy claim, ruling that New York law prohibits a claim for civil conspiracy, dismissing the claim.
Fourth, on the remaining claims, including those sounding in breach of fiduciary duty, the Court declined to rule based on the factual record before it. The Court wrote:
With respect to the remaining causes of action . . ., a review of the parties' arguments shows that these claims turn on factual questions that cannot be decided on a motion to dismiss. For example, the parties dispute whether [Huang] had a special relationship with [Zhou and Qiao] such that they owed him fiduciary duties. The parties also dispute whether New York law or Cayman law applies to some of the tort claims, with [Zhou and Qiao] asserting that they are internal affairs (arising only under Cayman law, not New York) and [Huang] challenging that by arguing that the internal affairs doctrine does not apply to claims against third parties whose duty to [Huang] does not arise out of any relationship to the nominal corporate defendant in a derivative action. The parties also dispute whether any of the exceptions to the general rule that Cayman law does not allow for derivative actions against individual directors exists here. The Court finds that [Zhou and Qiao] have not demonstrated at this juncture that the remaining claims should be dismissed. That is not to say that these claims will be successful ultimately — that is a determination for a later date.
(quotations omitted)
Problems When Conflicts of Laws Raise Issues of Fact
Naturally one might perceive conflicts of laws to be a pure issue of law, not an issue of fact. In most cases, that is true. But it turns out that Huang is not the first court to conclude that choice-of-law analysis may raise an issue of fact:
- Munzer v St. Paul Fire and Mar. Ins. Co., 145 AD2d 193 [3d Dept 1989] [holding on summary judgment in an insurance coverage dispute that "there is insufficient evidence in the record to make a choice of law determination. Generally speaking, in conflict of laws situations, a court must determine which law governs a particular transaction and then determine what the foreign law is. With respect to determining which law applies, the record is deficient for purposes of making such a determination"] [citation omitted]
- Beasock v Dioguardi Enters., Inc., 100 AD2d 50 [4th Dept 1984] [holding on summary judgment in a products liability dispute that the nonmovant "demonstrated that, because she has not yet deposed Kelsey-Hayes, Inc., she lacks knowledge of that defendant's principal place of business and of the place of design of the tire rim. Without these facts no determination can be made concerning the proper choice of law. The motion . . ., therefore, should be denied, with leave to renew after the completion of discovery proceedings"]
- J. Manes Co., Inc. v Greenwood Mills, Inc., 75 AD2d 557 [1st Dept 1980], affd 53 NY2d 759 [1981] [holding on summary judgment in a sale-of-goods dispute under the Uniform Commercial Code that "Special Term held, basically, that triable issues of fact exist, and we agree. The record indicates that there are questions concerning choice of law . . . which are disputed and which involve underlying triable issues of fact whose resolution is necessary before they may be determined"]
So choice of law can, in rare cases, raise issues of fact.
But an issue of fact on choice of law poses major practical problems for litigators. Imagine having to prepare for and put on a trial without knowing for sure the correct law governing the claims. What if the law of one state or nation directly conflicts with that of the forum? How do you pick which version of your case to try? If a jury trial, how do you draft proposed jury instructions or a verdict sheet on the elements of the causes of action when you can't say for sure what those elements will be until the jury decides which law applies. Trial work is hard enough without that kind of paradox.
One thing is for sure. Choice-of-law analysis in interstate and international business divorce litigation raises some of the most difficult legal issues New York commercial courts encounter. As Huang held, it may sometimes require full-blown discovery, possibly even a trial. Good news for lawyers who practice in this space, where uncertainly begets novel issues and challenging legal work. Bad news for business owners, where uncertainty begets risk and large legal bills.
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