A federal judge in a high-stakes lawsuit stemming from the controversial EB-5 program has temporarily handed the case over to the South Dakota Supreme Court.
The justices of the Supreme Court have agreed to consider three questions posed by U.S. District Judge Charles Kornmann. The questions pertain to a point of South Dakota corporate law for which Kornmann found no legal precedents.
“As the issues raised here are unsettled,” Kornmann wrote in a Dec. 7 order, “this Court therefore determines that the questions should be certified for state court determination.”
In the lawsuit, 65 Chinese investors are seeking repayment of $32.5 million they collectively lent to the ownership group of the Deadwood Mountain Grand casino-hotel.
The case is being litigated in federal court at Aberdeen. Judge Kornmann has already stated that the Chinese investors are entitled to a judgment of $32.5 million, plus interest. The Chinese investor partnership, called SDIF Limited Partnership 2, is the plaintiff in the lawsuit.
The only remaining issue to be settled in the lawsuit is whether the judgment will be imposed solely against the Deadwood Mountain Grand’s corporate owner, Tentexkota LLC, or also against eight individual members of the LLC who signed personal loan guarantees.
The eight guarantors are W. Kenneth “Big Kenny” Alphin (who is one-half of the country music duo Big & Rich), Timothy J. Conrad, Michael R. Gustafson, George D. Mitchell, Dale Morris, Marc W. Oswald, Ronald W. Wheeler and Dwight P. Wiles.
The loans came about because of a federal government program known as “EB-5,” which is shorthand for the employment-based fifth preference visa. Foreigners who invest at least $500,000 in a U.S. project that supports at least 10 jobs can earn the EB-5 visa and eventually a permanent residency green card for themselves and their families.
Among the 65 Chinese investors in SDIF Limited Partnership 2, one withdrew a residency application, but the other 64 were awarded permanent residency.
The partnership awarded two loans totaling $32.5 million to Tentexkota in 2010 and 2011. The money helped Tentexkota redevelop a former gold-mining slime plant into the Deadwood Mountain Grand. The facility’s event center has since become one of the most prolific concert venues in the Black Hills.
Court documents say Tentexkota was supposed to pay back the entire $32.5 million principal in 2015 but did not. The company defaulted again in 2016 after receiving an extension.
Balance nearly $44 million
The partnership of Chinese investors filed their lawsuit seeking repayment of the loan in 2016. Their legal representation includes attorney Haven Stuck, of the Rapid City office of the Lynn, Jackson, Shultz & Lebrun law firm.
In September, Stuck filed a memorandum stating that the balance owed to the Chinese investor partnership would grow to $43.71 million by Oct. 8, due to the accrual of interest. The memorandum said interest would continue to accrue at $10,685 per day after Oct. 8.
The Chinese investor group is asserting that the eight personal loan guarantees signed by members of Tentexkota should be enforced. Meanwhile, Tentexkota and its members, who are represented by lawyers from multiple law firms, assert that the personal loan guarantees should be thrown out.
Judge Kornmann has already discarded two assertions by the Tentexkota members regarding the personal guarantees, and he reiterated his reasoning in his Dec. 7 written order.
One of the two assertions was that the guarantees violated an EB-5 program requirement that investments be put “at risk.” Kornmann called the arguments in support of that assertion “myriad and meritless.”
The other assertion was that the LLC members were duped into signing the personal guarantees by Joop Bollen, the Dutch immigrant who facilitated many EB-5 projects in South Dakota, first as a state employee and later as a state contractor running his own company, SDRC Inc.
“No one is alleged to have forced defendant guarantors to sign the personal guarantees and defendant’s conclusory statement that they relied on Bollen’s representations to their detriment is unpersuasive,” Kornmann wrote.
The last stand for the Tentexkota members who signed the personal guarantees is their remaining assertion: That the personal guarantees violate South Dakota Codified Law 47-34A-303, part of which says, “the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.”
The lack of a legal precedent concerning that assertion led Kornmann to certify questions to the South Dakota Supreme Court. The court notified attorneys in the lawsuit Thursday that it will consider the questions. Each side will now be allowed to file briefs during the next couple of months.
The four Supreme Court justices who will consider the questions (a fifth position on the court is vacant, following the recent death of Justice Steven Zinter) were all appointed to either the Supreme Court or earlier circuit-court positions by Republican governors — Bill Janklow, Mike Rounds and Dennis Daugaard — who had roles in starting, continuing and ending South Dakota’s participation in the EB-5 program.
After the Supreme Court answers the questions, Kornmann could use them as a basis for a final decision in the lawsuit.
Judge critical of EB-5 activities
Kornmann’s handling of the lawsuit thus far has included some memorable critiques of South Dakota’s participation in the EB-5 program, and he served up a few more critiques in his Dec. 7 order.
Kornmann wrote, “It is no secret to this Court or any citizen in South Dakota with access to a newspaper that SDRC Inc. and Joop Bollen have been investigated for questionable banking practices and tax evasion. Indeed, Bollen was prosecuted in state court and received probation as a result of such investigations.”
Kornmann was referencing Bollen’s 2017 guilty plea to the felony crime of unauthorized disposal of personal property subject to a security interest, for which Bollen was sentenced to two years of probation and a $2,000 fine. The case stemmed from Bollen's illegal use of funds that his company shared with state government.
The resolution of Bollen’s criminal case capped a period of intense public scrutiny of EB-5 in South Dakota, which began with the 2013 death of a former state official, Richard Benda, who had worked with Bollen on EB-5 projects. At the time of Benda’s death, which was ruled a suicide, he had been facing a potential indictment for his alleged theft of $550,000 in state grant money that was intended for a meatpacking plant supported by EB-5 investments in Aberdeen.
Kornmann also wrote on Dec. 7, “I do not condone what happened between Mr. Bollen and others, including state government officials.” After several more similarly critical statements, Kornmann wrote, “But neither Mr. Bollen nor his corporation nor South Dakota officials are on trial here for such activities.”
Bollen was brought into the Deadwood Mountain Grand lawsuit as a third-party defendant, but Kornmann dismissed him. Bollen is still involved indirectly, because one of his companies, SD Investment Fund LLC2, a subsidiary of Bollen’s SDRC Inc., is the general partner of SDIF Limited Partnership 2. Kornmann wrote in his Dec. 7 order that Bollen’s corporate entities received at least $2.93 million in fees that the Chinese investors paid, in addition to their $500,000 individual investments in the partnership.
If a judgment is entered on behalf of the Chinese investors at the end of the lawsuit, further litigation could be necessary to collect any money. Anything collected would be divvied up among the Chinese investors, with some money potentially going to legal fees and also possibly to Bollen’s corporate entities for further contractual fees.
The loan for the Deadwood Mountain Grand was secured not only by the personal guarantees but also by a first mortgage, which means the Chinese investor partnership could ultimately try to foreclose on the casino-hotel if the loan is never fully repaid.
The lawsuit over the Deadwood Mountain Grand loan is one of at least two EB-5-related lawsuits still pending in South Dakota. The other lawsuit is in state court, where 35 Chinese investors are trying to recoup $18.55 million they lost in a failed EB-5 project in Aberdeen.