By Ron Rohde
Who is getting sued? The most likely starting point for any lawsuit is to ask. In the EB-5 world, the parties who raised the EB-5 funds are the most likely targets named in a suit. Second would be regional centers that may have advertised or promoted certain projects. They may have liability to the investor for those representations if the appropriate disclosures were not made.
Other liable parties could be developers that received funds for ultimate job-creating entity purposes. General contractors received no-bid contracts. Expect, at a minimum, a subpoena into records and possible inclusion or interpleader by existing defendants. Attorneys who drafted documents or received payments without disclosing the potential conflicts of interest are also commonly named in these actions. Immigration agents who may have a U.S. presence are targets for being named in the suit. Clearly if the agents are taking funds, there is cause to accrue additional liability for lack of transparency.
Bank or escrow agents who physically processed investment funds all have varying levels of interaction. The factors to consider would be based on the types of accounts, escrow accounts or providing documents of perceived escrow account features. Depending on the size of the bank and insurance, they may be quick to settle privately. Escrow agents who may be within the bank or third parties that work closely with banking institutions. They receive sometimes significant funds as a fee but may not have performed to the agreement.
Finally, any related business owners, vendors or anyone who benefited from the EB-5 funds may be liable for recourse to the investor if they can prove that the services weren’t rendered or prices were inflated.
WHY ARE SUITS BEING FILED?
A lawsuit is a powerful, expensive tool to force action. If there is a significant delay in the project, a lawsuit may be effective at motivating the developer to finish on time and create the requisite number of jobs. Therefore, clients can be asked if the project is behind schedule, what is causing the delay, and if those delays were disclosed in the investment documents. They can also ask about third party or market conditions.
Delays in the project may not always mean a delay in job creation. If the project is in progress or funds were substantially spent, then a strategy to raise this issue can be effective. However, if the delay produces changes which lead to a delay in full job creation, the cause of such a delay may need to be proven in court. A common argument is that the operator has no liability for operating at a loss in order to meet job creation.
Has the investor been denied various immigration benefits? If the investor has not received his or her green card, there are various causes of action for the denial of an I-829. Does the investor have a duty to exhaust all I-829 appeals before filing a cause of action for denial of a green card? This process could include filing suit in federal district court, appealing that decision.
Regarding a return of investment, if the project is completed and the jobs created, when is the money due back to the investor? If a large project still has investors waiting for I-829 approval, there cannot be a return of capital which would jeopardize that investor’s application. We look at issues of partial refinance and redeployment of capital due to another investor’s delay.
Beyond just a return of principal, some investors will sue to capture their share of the gain or profit allocation. If the agreement allowed for a percentage equity of gain, then they might sue how to enforce the excess profit allocation beyond return of principal. These are common contract issues, but important to analyze through the lens of EB-5.
Alleged fraud or misuse/mismanagement of funds is another reason to sue. These allegations are quite serious and carry potential criminal penalties and individual liability. Careful accounting and forensic work are often needed to unwind the decisions and process behind the expenditures.
HOW ARE THEY GETTING SUED?
State law actions will likely encompass breach of contract, fraud and similar allegations. Common venues are found in California, New York, Delaware and Texas. An attorney can be based anywhere to review the case strategy, prepare documents and utilize local counsel for filings only. Plaintiffs will form a shop to find a venue friendly to plaintiffs and easy for travel to any trial/hearings.
Examine violations of fiduciary duty. Are there are license holders involved? Fiduciary duty by statute? These create additional elements to analyze if a fiduciary claim is made. Securities actions can be processed at the state and federal level. An attorney general can bring actions as well as the U.S. Securities and Exchange Commission or U.S. Department of Justice.
EB-5 presents unique claims via immigration intent and purpose. Every successful defense will rely on introducing these elements because it was an integral motivation for the developer/regional center and the investor/immigrant. Each case has various strengths and weaknesses, but it is important to hire a law firm with experience in EB-5.