Although China lacks the rule of law, this does not prevent Chinese businesses from taking advantage of the American legal system. Last week, a California bankruptcy court judge accepted a settlement agreement between China's state-owned Aviation Industry Corp., or AV IC, and two American entities and their co-claimants. The Americans agreed to walk away with less than a third of the more than $85 million they were promised under an arbitrator's verdict after years of litigation and considerable duress.
In 2008, AV IC International USA, one of many AV IC subsidiaries, partnered with Texas entrepreneur Patrick Genevein, his business Tang Energy Group, and a few other American investors. They agreed to collaborate on wind energy under the Soaring Wind joint venture. However, the relationship deteriorated. Tang claimed to have discovered that AV IC USA's related companies were competing with Soaring Wind.
Tang's lawyers claimed that AV IC, AV IC USA, and several other AV IC companies were all "one entity" and that the "feigned corporate differences are a fictional homage to western business practices." The AV IC businesses "received Tang's work product, specialized knowledge, relationships, and skills within the industry and then utilized that knowledge for their own gain and to usurp corporate prospects to the injury of Soaring Wind, Tang, and its other members," they claimed. Tang claimed that AV IC and its subsidiaries competed with Soaring Wind, infringing on their agreement's exclusivity clause. In 2015, an arbitration panel awarded a total of $70 million to multiple AV IC enterprises.
I approached AV IC USA's lawyers about Tang's assertions in January, but they didn't answer my comprehensive queries. "We disagree across the board," Cedric Chao, lead counsel for AV IC and one of its subsidiaries, told me. He noted that "Tang rigged the arbitrator selection process" and produced "what the case law terms a stacked deck arbitration, 'for the aim of getting the most advantageous outcome possible," adding that "AVIC USA is the sole entity that signed" the Soaring Wind deal.
Because they were concerned that the AV IC businesses would not pay, the American investors requested a federal court in Texas to validate the arbitration panel's ruling. Judge Ed Kinkeade eventually put a hold on the award against the other AV IC businesses who were still parties to the lawsuit, but he affirmed the monetary award against AV IC USA. The lower court's decision was upheld by the Fifth Circuit Court of Appeals, and the Supreme Court declined to consider the issue in 2020.
AV IC USA, on the other hand, made no payment, and their debt to Tang and Soaring Wind has ballooned to more than $85 million due to interest. According to court filings, it also began selling off its U.S. assets, generating $21.50 million. In court records, it claimed to have given $20.2 million from "proceeds of prior investments" to a road-building project in Zambia, which is out of reach of American authorities.
Judge Kinkeade stated in August 2020 that "AV IC USA has been shifting assets to circumvent this Court's decision" and ordered the company to hand over its remaining assets to a US marshal. AV IC USA subsequently filed for Chapter 11 bankruptcy in California, and its attorneys informed Judge Kinkeade that the bankruptcy statute barred "any act to collect, assess, or reclaim a claim against the debtor that occurred before the beginning of this action."
AV IC USA will pay only $24 million of the more than $ 85 million it owes under the settlement agreement. After AV IC USA attempted to move to a Chapter 7 liquidation bankruptcy, Tang and Soaring Wind agreed to these provisions. Mr Genevein might have asked Judge Kinkeade to lift the stay and hold the other AV IC corporations as alter egos of AV IC USA accountable for the entire damages. However, this is unlikely to succeed, and it would allow AV IC USA time to sell its remaining assets.
"Each AV IC Party hereby expressly denies it is an alter ego of AV IC USA or another AV IC Party, vicariously responsible for any act or omission of another AV IC Party, or that its conduct may be ascribed to another AV IC Party," according to the settlement agreement. The $24 million AV IC USA will pay Soaring Wind and Tang comes from its parent, AV IC International Holding Corporation, which is part of the wider AV IC family, according to the settlement agreement.
The parties agree not to "use, divulge, reference, discuss, or distribute to third parties any of the expert reports prepared or generated in any of the Covered Cases," according to the agreement. However, expert studies are part of the public record as part of the Texas litigation's protracted docket, and those court documents contain expert reports that map out the corporate linkages and intersections between various AVIC corporations.
Mr Jenevein deserves credit for pursuing AV IC and its subsidiaries in court for years and for making the contents of this settlement public. Global Technology Inc., a Michigan consulting firm, alleged in 2012 that AV IC and certain of its subsidiaries had broken an agreement, unfairly benefited themselves, and committed "misrepresentation and/or silent fraud." According to court filings, AV IC and Global Technology Inc. "agreed to address this dispute" in 2016. However, the details were not made public, and Global Technology Inc 's owner declined to comment.
In contrast, the settlement announced on Thursday, as well as court records from Texas, contain a wealth of information. Any American considering doing business with AV IC, its subsidiaries, or other Chinese state-owned firms should be aware of this extensive legal history.
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