Chinese EB-5 Investors Wrongfully Terminated Management Company
We’ve blogged before about legal translation services for the United States’ EB-5 Visa Program and how the EB-5 Program incentivizes individuals from foreign countries to invest in the United States in exchange for green card status for qualified investors. In the case discussed below, A& J Capital v. Law Office of Krug, et al, a complicated commercial real estate dispute arose when a group of Chinese investors invested in a real estate venture in Los Angeles, CA and terminated the U.S. based management company without cause.
Background on EB-5 Visa Program
The EB-5 Immigrant Investor Visa Program allows immigrant investors the opportunity to become lawful permanent residents (or “green card” holders) in exchange for investing at least $500,000 (or $900,000 after November 21, 2019) to finance a business within the United States that will employ at least 10 workers. According to the Department of Homeland Security, the program was “created by Congress in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors.” Investors must meet certain other requirements of the program in order to maintain eligibility.
Background on Plaintiff and Defendant Companies
In this case, the defendant company was formed with the purpose of raising investment capital from Chinese investors pursuant to the United States’ EB-5 Visa program. The Defendant company was comprised of two hundred Chinese nationals who contributed $100 million to a construction loan in order to finance and develop residential and commercial space in downtown, Los Angeles. The defendants issued the loan to non-party Greenland LA Metropolis Development, LLC (“Greenland”), of which the defendants were members.
The Plaintiff is a financial services and advisory firm that was hired to serve as the Class B Manager of the Company in exchange for a management fee. At some point, Greenland became unsatisfied with the Plaintiff management company and allegedly conspired with its members to derive reasons why the Plaintiff should be fired as manager. Eventually, the Plaintiff was released as Greenland’s Manager in March of 2018, which stemmed the basis for Plaintiff’s lawsuit.
Background on Non-Party Henry Global Consulting Group
Henry Global Consulting Group is a Chinese company that was involved in obtaining investments in the Defendant company. It routinely solicits foreign investments for projects under the EB-5 Visa program. Henry Global strategized with the Plaintiff on the investment project. Specifically, it marketed the subject investment opportunity to Chinese citizens. In August of 2014, the defendant entered into a Distributor Services Agreement with Henry Global whereby Henry Global became a “distributor.” According to the agreement, Henry Global would recruit EB-5 investors from China. In exchange for its services, Henry Global was to be paid a fee of $41,000.
Dispute Ensues Between Plaintiff and Chinese Investors
According to the parties’ agreement, the Plaintiff would only be able to be removed for “cause.” After the project was substantially completed, the funds from the sale of individual condominium units was released to an account in Greenland’s name for the benefit of the defendant company. However, Greenland and the defendant company entered into a “pledge” agreement whereby they agreed that Greenland would not be able to use any of the money in Greenland’s account without the Plaintiff’s prior approval. Later, Greenland became frustrated with the fact that it could not use the funds tied up in escrow to pay down the loan or invest in other real estate opportunities. In addition, Greenland was also required to pay interest to the defendant company during this time.
Accordingly, Greenland’s CEO approached the plaintiff’s founder/president with an offer to repay the loan before it matured so that the fixed capital could be repurposed to fund another project. The parties negotiated a pre-payment amount of $1 million dollars and advised the members of the proposal explaining that prepayment was necessary to “cure a potential immigration violation” and “salvage the immigration status of most if not all of the Class B Members.”
Greenland then became concerned that plaintiff would not recommit the redeployed investment funds on fair terms once the loan was repaid. Accordingly, Greenland then contacted members of the defendant company and advised them that the plaintiff was “pushing” for repayment of the loan and that Greenland opposed the proposal.
Plaintiff is Removed as Class B Manager
Plaintiff and Henry Global met with the Chinese members. After that meeting, a vote was held regarding a new proposal that would allow Greenland to cash out $55 million of its equity and free up funds for Greenland to use on other projects. The ballot with which the members voted did not identify any basis for the proposed removal, only the members’ right to remove the manager under certain provisions of the operating agreement. On March 14, 2018, the Plaintiff was notified that it had been removed as the Class B Manager by the members and replaced by Defendant Krug.
When the Plaintiff was fired for reasons that did not include any allegedly wrongful behavior, Plaintiff filed suit alleging a breach of the agreement. The Plaintiff claimed that this maneuver violated the parties’ agreement. Specifically, Plaintiff argued that the agreement stated that the Plaintiff could only be removed “by majority vote of the Class B Members for gross negligence, intentional misconduct, fraud, or deceit.”
The Defendants argued that the Plaintiff acted in a manner which justified its removal for cause. Specifically, the Defendants argued that the plaintiff improperly requested the prepayment fee as part of the prepayment of the loan and also claimed that the plaintiff made improper payments to Henry Global by making the payments from the interest income. The Defendants also argued that the Plaintiff wrongfully prevented the members from learning about the payments made to Henry Global by concealing information and by distributing financial statements written in English and not in Simplified Chinese.
Dispute Proceeds to Bench Trial
After the close of discovery, the court held a two-day bench trial in which it admitted 400 trial exhibits and heard testimony from six witnesses. At the close of evidence, the court held that the evidence did not support the Plaintiff’s removal for cause. The court also held that the payments to Henry Global were not improper. The court noted that Henry Global’s services included organizing conferences with potential investors, translating loan documents, and traveling with investors outside of China to open escrow accounts and facilitate currency transfers.
The court noted that Henry Global also assisted members with citizenship applications such as Visa applications and helped them prepare for interviews with immigration officials. Contrary to the Defendants’ arguments, the court held that there was nothing in the agreement which prohibited the payment of fees to Henry Global from the administration fees and interest income on the loan. Specifically, the court held that while Henry Global’s fee could not be paid from the members’ financial contributions, the fees could be paid from the interest on the loan from the members’ investment.
Based on the foregoing, the court entered a declaratory judgment in favor of the plaintiff.
Legal Translation from Simplified Chinese, Traditional Chinese
Parties and individuals associated with commercial real estate investment projects pursuant to the EB-5 Visa program should be mindful of the risks and pitfalls associated with complicated real estate agreements and transactions. In order to minimize these inherent risks, individuals involved in these transactions should be mindful of language barriers, documents written in foreign languages, and cultural differences and should endeavor to involve certified, experienced legal translators and interpreters at all phases of negotiation and contract execution.
Professional translators at All Language Alliance, Inc. with headquarters in Denver, Colorado, USA, can assist you with legal document translation from and into Simplified Chinese, Traditional Chinese, Korean, Swedish, Portuguese, Norwegian, Spanish, Russian, Arabic, Farsi, Turkish, and other languages.
The case is A&J Capital, Inc. v. Law Office of Krug, et al., Court No. 2018-0240-JRS, decided in the Court of Chancery of the State of Delaware on January 29, 2019.
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