Since high net worth individuals often operate and own assets through LLCs and other business entities, including foreign corporate entities, a plaintiff must satisfy the requirements of a veil-piercing claim in order to attach assets owned by such entities. Failing to do so could frustrate a plaintiff’s ability to satisfy a judgment, as illustrated by Commercial Division Justice Barry Ostrager’s recent decision in Pacific Alliance Asia Opportunity Fund L.P. v. Kwok Ho Wan.[i]
The defendant in Pacific Alliance is Kwok Ho Wan, more commonly known as Guo Wengui.[ii] Wengui is an exiled Chinese billionaire who made his fortune in real estate, and a social media star known for being a thorn in the side of China’s Communist Party and its leader, Xi Jinping. Wengui fled China in 2014 after learning that he was going to be arrested for several alleged crimes, including bribery, rape, and kidnapping. He has since taken up residence in the Sherry-Netherland Hotel in New York’s Upper East Side, which is owned by Genever Holdings, LLC (“Genever”). Wengui is the sole shareholder of Genever, which bought the hotel in March 2015 and put it up for sale in September 2015. It has not yet been sold.[iii]
Plaintiff Pacific Alliance Asia Opportunity Fund L.P. (“PAX”) is an investment fund. In 2008, PAX agreed to provide Spirit Charter Investment Limited (“Spirit”), a Wengui entity, with a $30 million loan, which Wengui personally guaranteed. In September 2009, Spirit executed a deed under which Shiny Times Holdings Limited (“Shiny Times”), another Wengui business entity, assumed Spirit’s loan debt to PAX. Wengui again executed a personal guarantee of the loan debt.
In April 2013, PAX and Wengui entered into a Deed of Settlement that specified a number of conditions precedent. If any of the conditions were not satisfied by July 2013, the Deed of Settlement would be terminated in its entirety. PAX alleges that several conditions were not met by that date, and that Shiny Times and Wengui never repaid the loan, of which $88 million is outstanding.
PAX brought suit in the Commercial Division against Wengui individually, seeking repayment of the $88 million. PAX did not name any of Wengui’s business entities as co-defendants. PAX moved under CPLR §§ 6201 and 6212 for an order attaching the hotel, Genever, and any proceeds from the sale of the hotel.[iv]
Justice Ostrager denied the motion without prejudice.
To obtain an order of attachment, the plaintiff must establish (1) a cause of action; (2) probability of success on the merits; (3) one ground for attachment in CPLR § 6201;[v] and (4) the amount demanded from the defendant exceeds all of the counterclaims known to the plaintiff.
PAX argued that it could satisfy CPLR § 6201(3) because it could show that Wengui “with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiffs favor, has assigned, disposed of, encumbered or secreted property or removed it from the state, or is about to do any of these acts.” Justice Ostrager disagreed, explaining that PAX failed to meet its “high burden” of proving fraudulent intent to frustrate enforcement of a potential judgment because Genever purchased the hotel in March 2015 and put it up for sale in September 2015 — years before PAX filed the lawsuit against Wengui. Further, a sale of the hotel was not imminent. These facts did not “necessarily portend an intent to frustrate enforcement of a judgment in this action.”[vi]
Further, and importantly, Genever was not named as a defendant, and PAX had not “sufficiently shown why Genever should be subject to an attachment by virtue of [Wengui’s] alleged conduct.”[vii] Although Wengui was Genever’s sole shareholder, Justice Ostrager noted that “[e]vidence of domination alone does not suffice without an additional showing that it led to inequity, fraud or malfeasance.”[viii]
The Court nevertheless allowed the case to proceed to discovery, which “may shed light on Genever and/or [Wengui’s] purported fraudulent intent in purchasing and attempting to sell the Residence to avoid enforcement of a judgment in this action.”[ix] The Court noted that PAX could later bring a veil-piercing claim or could amend its complaint to add other parties and to seek a preliminary injunction enjoining the sale of the hotel.[x]
Pacific Alliance thus illustrates an important lesson about suits against high net worth individuals: If a high net worth individual’s assets are in fact owned by LLCs and other business entities under their control, a plaintiff is often served well by naming these LLCs and business entities as defendants and ensuring that the requirements of veil-piercing claims against them are satisfied. Failure to do so could frustrate such a plaintiff’s ability to attach assets and satisfy a judgment.