Chinese investors vs U.S. Immigration Fund - NY & Nicholas Mastroianni III
701 TSQ 1000 FUNDING GP, LLC, 701 TSQ 1000 FUNDING, LLC,
Filing Date:July 09, 2018
Case:Investors vs US Immigration Fund - NY
Jurisdiction:New York State Court
Civil / Criminal:Civil
In a petition filed in Manhattan Supreme Court, investors (petitioners) pushed to stop the U.S. Immigration Fund (USIF), 701 TSQ 1000 Funding GP, LLC, and their principal, Nicholas Mastroianni (respondents), from moving their funds into Maefield’s TSX Broadway, a 47-story hotel project across the street. The EB-5 investors allege that during a recent vote on a redeployment plan, USIF “coerced” them into choosing the option that most benefited itself. The investors allege that Mastroianni’s company used “scare tactics,” such as telling them that the company would notify United States Citizen and Immigration Services that they were no longer eligible for green cards if they did not consent to redeploy their money into TSX Broadway. The investors further claim that by paying off the 701 Seventh Avenue loan a year before it was due, USIF “manufactured” the need to redeploy into TSX Broadway in the first place. They describe TSX Broadway as a “faltering” project that has had “a lack of adequate financing from major institutions and banks for the last two years” and which is “riskier” than 701 Seventh. They also claim Mastroianni will receive a “disproportionate” return on the proposal: He’s set to receive a 9 percent interest annually (up from 5.4), while the investors would earn 3 percent, according to court documents. “The investors deserve a fair reinvestment plan put forward in good faith by unconflicted fiduciaries acting in the investors’ interests, rather than their own self-interest,” said the filing attorney, Matthew Sava of Reid & Wise. He filed the injunction so that the dispute can be handled in a private arbitration process. The Complaint alleges the following : Petitioners are a group of 124 EB-5 investors who invested $500,000 each in 701 TSQ 1000 Funding LLC, as part of the US Government's EB-5 investor immigration program. Petitioners seek this injunction to prevent the Respondents, U.S. Immigration Fund – NY LLC (“USIF”), 701 TSQ 1000 Funding GP, LLC (“Manager”), and their controlling principal, Nicholas Mastroianni (“Mastroianni”), from implementing a proposal (“Proposal”) to reinvest the Investors’ EB-5 capital into a different USIF project controlled by Mastroianni, a high risk real estate development project located at 1568 Broadway, New York (“702 Times Square Project”). As fiduciaries, respondents owe a duty of undivided loyalty to the company and to its members. Their job is to protect the interests of the Company and the members, without elevating their own self-interest above those they are obligated to protect. In disregard of these fiduciary duties, the self-dealing Proposal will enrich Respondents at the Investors’ expense, place investor capital at undue risk, and destroy the immigration eligibility of the Investors who opposed the transaction. Moreover, Respondents used a one-sided, coercive and unfair solicitation process to force the investors to vote for the Proposal. The Investors were explicitly and repeatedly threatened that if they do not vote in favor of the unfair Proposal, Respondents will take affirmative steps to ensure that those Investors will not get green cards by (i) placing their capital in a bank account for an indefinite period of time in violation of EB-5 requirements, and (ii) notifying the government that since the capital will be indefinitely sitting in a bank account, the Investors are no longer green-card eligible. The vote for the Proposal was thoroughly corrupted by this coercive process and is therefore invalid under applicable Delaware law. Moreover, as self-dealing fiduciaries who stand on both sides of the Proposal, Respondents have the burden to show that the transaction is “entirely fair” in all respects. On July 5, 2018, Respondents claimed that they received the required number of votes in favor of the Proposal and that they intend to proceed immediately with this self-dealing transaction and to reinvest investor capital in the 702 Times Square Project. For those investors who refused to vote in favor of the Proposal, Respondents have stated that they will leave their EB-5 capital in a bank account for an indefinite period in violation of the EB-5 program’s “at-risk” requirement and -- in an astonishingly spiteful act by these fiduciaries -- to notify the USCIS that these investors are disqualified from obtaining a green card as a result. Petitioners will forthwith commence an Arbitration to invalidate the purported investor vote in favor of the Proposal and to permanently enjoin the implementation of the Proposal (the “Arbitration”) per the dispute resolution provision in the Operating Agreement of the Company. In the Arbitration to be commenced, Petitioner will assert claims against Respondents for, inter alia, (i) breach of fiduciary duty and (ii) breach of the Operating Agreement, based on the coercive and unfair Proposal and the unrelentingly vindictive manner in which Respondents have conducted their self-interested campaign to push it forward. If Respondents are permitted to proceed with the Proposal, the Investors stand to be irreparably harmed by having more than $100 million of EB-5 capital locked away in a risky investment for four to six years, if not longer, pursuant to the Proposal. For those investors who refused to vote in favor of the Proposal, they stand to be irreparably harmed by Respondents’ vindictive threat to destroy their green-card eligibility, even though these investors have already fulfilled their obligation to create 10 jobs, seek to have their capital reinvested in compliance with EB-5 requirements by properly functioning fiduciaries, and have every interest in obtaining a green card. To ensure that an Award in the Arbitration in Petitioners’ favor will be effectual, Petitioners hereby seek an Injunction in Aid of Arbitration pursuant to CPLR 7502(c) and 6301(c), to enjoin Respondents from implementing the Proposal. Petitioners are all citizens of China who have invested in the Company pursuant to the U.S. Government’s EB-5 investor immigration program. Petitioners are members of the Company. Respondent 701 TSQ 1000 Funding, LLC (“Company”), a Delaware limited liability company, is the entity in which Petitioners invested. Respondent 701 TSQ 1000 Funding GP, LLC (“Manager”), a Delaware limited liability company, is the Manager of the Company. Respondent U.S. Immigration Fund-NY LLC (“USIF”), a New York limited liability company, is the Regional Center that sponsored the development of a mixed-used hotel and retail project located at 701 Seventh Avenue, New York, New York (“701 Times Square Project”) as well as the 702 Times Square Project. Respondent Nicholas Mastroianni is the individual who dominates and controls the activities of USIF, the Manager and the Company. The Manager has fiduciary duties to act in the best interests of the Company and its Members. These duties were explicitly spelled out by the Manager’s counsel in a letter recently disclosed to the investors: “Section 18-1104 of the DE LLC Act imposes fiduciary duties of care and loyalty on the Manager as the default standard with respect to the governance of the Company. The Operating Agreement does not eliminate or diminish this standard in any manner. Under the default standard, a manager of a limited liability company owes to the company and its members duties of care and loyalty. In simplest terms, the duty of care requires that the manager act on an informed basis after careful deliberation and that it exercise the care that an ordinary prudent person would exercise under similar circumstances. The duty of care places an affirmative burden upon the manager to assume an active role in the decision process. All significant information reasonably available should be considered and the manager should avoid decisions that appear hasty or ill-considered, or in disregard of significant information. The duty of loyalty prohibits unfaithfulness and self-dealing, and requires that the manager serve the company and its members to the exclusion of all other interests. The manager is required to act in good faith, in a manner reasonably believed to be in the best interests of the company. To do so, the manager must be both disinterested (i.e. not on both sides of the transaction or deriving financial benefit from it in the sense of self-dealing) and independent.” Respondents have flatly ignored their own counsel’s advice to honor their fiduciary duties of care and loyalty to the investors, including the Petitioners, in all dealings. Having manufactured the need to redeploy Investor EB-5 capital by accepting early prepayment of the Loan, Respondents put into motion a consent solicitation process attempting to seek a majority vote of the members of the Company to approve their self-interested Proposal, rife with conflicts of interest and self-dealing. The Proposal was first announced through a consent solicitation dated June 5, 2018. According to the Consent Solicitation Statement (attached as Exhibit D), the Proposal was designed to address the need to redeploy investor capital. The Proposal asks the members of the Company to approve an amendment to the Operating Agreement that would permit the Company to operate as a commercial real estate debt fund with discretionary authority to invest EB-5 capital in one or more commercial real estate investments. However, the Consent Solicitation Statement then explains that the Manager intends to reinvest all of the loan repayment proceeds into a particular reinvestment project, in the form of a $200 million preferred equity investment in the 702 Times Square Project. The Consent Solicitation Statement contains risk disclosures that highlight a litany of benefits that Respondents will obtain from approval of the Proposal as well as the conflicts of interest between their role on behalf of the Company and the other economic interests they will have in the 702 Times Square Project. The Coercive Consent Solicitation Process Under Delaware law, an investor vote will be invalidated “by a showing that the structure or circumstances of the vote were impermissibly coercive.” Courts will find wrongful coercion where investors are induced to vote “in favor of the proposed transaction for some reason other than the economic merits of that transaction.” The coercion inquiry focuses on “whether the shareholders have been permitted to exercise their franchise free of undue external pressure created by the fiduciary that distracts them from the merits of the decision under consideration.” Id. The vote must be structured in such a way that allows shareholders a “free choice between maintaining their current status [or] taking advantage of the new status offered by” the proposed deal. Under these governing legal standards, the consent solicitation process employed by Respondents here was plainly coercive. First, USIF manufactured the need to redeploy assets for its own gain. Under the loan agreements with the Developer, the prepayment of the Loan should not have occurred until April 2019. Nevertheless, USIF made the decision to accept early prepayment of the Loan and thereby created an artificial need to redeploy investor EB-5 capital to satisfy the “at-risk” requirement. USIF seeks to exploit this manufactured crisis to coerce the investors into a proposal that will result in the enrichment of USIF and the destruction of valuable investor rights. Second, USIF has engaged in scare tactics and false threats. In its campaign to lobby for votes, Respondents have stooped to base intimidation and clearly punitive measures to create an inequitable “take it or leave it” situation. In a PowerPoint used to persuade investors to vote for the Proposal, USIF pressured the investors to vote for the proposal out of a concern that otherwise they will notify USCIS that the investors’ EB-5 capital is no longer “at risk” and that they therefore will not receive a green card: “AS A REMINDER THE VOTING FORM WILL BE THE PRIMARY EVIDENCE WHEN FILING YOUR I-829 PETITION NEEDED TO SHOW THAT YOU HAVE SUSTAINED YOUR INVESTMENT AT RISK. USCIS WILL BE MADE AWARE OF YOUR CHOICE AND IF YOU DO NOT REDEPLOY OR FAIL TO RESPOND, THEN USCIS WILL KNOW YOUR CAPITAL IS NO LONGER AT RISK.” The PowerPoint similarly warns investors that if they vote against the Proposal, “Your capital will not be redeployed,” and that “Investors that check box 3 or do not return a vote will have their capital held by the NCE [the Company] in a depository until such time all of the members I-829 petitions have been approved (per the terms of the original operating agreement).” Similar statements were repeated throughout the solicitation materials and in emails and WeChat messages, in which the Investors were advised that if they did not approve the Proposal, their funds would be left in bank deposits and their capital would not be deemed “at risk” for EB-5 purposes. For example, in an email dated June 28, 2018 from USIF to the Investors, USIF warned the Investors that: “[W]e are writing to remind you that your voting form must be submitted in a week by July 5, 2018. THIS DEADLINE IS FINAL and necessary to timely redeploy the funds and close the proposed deal. Failure to respond will be deemed a “no” vote for purposes of redeploying your funds. Final votes (or non-votes) and supporting document will be submitted to USCIS after July 5 such that USCIS will be aware that your capital is no longer at-risk should you chose not to redeploy yours funds or fail to timely respond.” In another email dated July 3, 2018, USIF made the same threat to the Investors: “Following the conclusion of the July 5 voting, we will promptly confirm your voting selection with you. For those who did not vote we will confirm that you chose not to sustain your investment at risk and USCIS will be notified of the same in accordance with our reporting obligations.” On July 5, 2018, the date of the voting deadline, USIF reiterated the same threat to the Investors. Petitioners should not be unfairly and coercively subject to this “take it or leave it” ultimatum to remain green-card eligible. Contrary to these statements, the Petitioners’ reason for not voting was not that they do not wish to sustain their EB-5 capital at risk. As investors who seek to remain eligible for a green card, the investors must maintain their EB-5 capital in compliance with the USCIS “at risk” requirement. The Proposal and the entire consent solicitation process, however, is a product of the Respondents’ coercive efforts to force the investors into accepting an unfair proposal that benefits themselves rather than an exercise of their contractual and fiduciary duties to the investors to redeploy EB-5 capital in a way that serves the best interest of the investors. The Manager has a contractual and fiduciary duty to propose alternative redeployment options that satisfy USCIS requirements. Section 8.4 of the Operating Agreement requires the Manager to “operate the Company in a manner that is designed to comply with the legal and policy requirements” of the EB-5 Program and to “avoid reserve accounts designed to evade at risk investment” – which is precisely what Respondents threaten to do with the capital of those investors who opposed the Proposal. The Manager is required – even for investors opposing the Proposal – to take all required steps to ensure that the EB-5 capital is redeployed in conformity with the EB-5 requirements. In light of the foregoing, the Manager does not have the contractual or fiduciary right to simply leave the capital in a bank account, and its threat to do so with respect to those investors voting against the Proposal – and to notify USCIS that it has done so – is coercive and renders the solicitation process fatally flawed. Third, Alternative 2 exacerbates the coercive nature of the consent solicitation. The coercive nature of the consent solicitation is compounded by “alternative 2,” which purports to allow the investors to request immediate withdrawal of their capital, but only if they vote in favor of the Proposal to redeploy capital to the 702 Times Square Project. Alternative 2 improperly tangles the investors' right to withdraw their EB-5 capital with a vote in favor of the amendment proposal -- even though these investors will have no continuing interest in the company and no further concern regarding the safety and liquidity of the redeployed capital. There is no legitimate reason to condition the investors’ right to withdraw from the 701 Times Square Project on a vote in favor of redeployment to the 702 Times Square Project and doing so unfairly seeks to pit the withdrawing investors against those investors who oppose the 702 Times Square Project. Under the existing Operating Agreement, investors have a clear right to withdraw their capital once the Developer repays the loan. Section 11.8(a)(ii) provides: “The Cash Flow that arises from any repayment of principal under the Loan shall be allocated to the Members.” (Ex. B, §11.8(a)(ii)) Section 11.8(c) provides: “The portion of the Cash Flow allocated to the Members under Section 11.8(a)(ii) will be distributed to the Members in return of their Capital Contributions. These distributions will be allocated amount [sic] the Members in proportion to the amount of their Capital Contributions.” (Ex. B, §11.8(c)). There is no legitimate reason why a vote in favor of the Proposal is required as a condition to being permitted to withdraw. It is a purely coercive vote-grabbing ploy by Respondents. To make matters worse, USIF promised to reward those investors who voted in favor of alternative 2 and to punish investors who voted against the proposal. Thus, USIF announced that even if the vote did not pass, investors who selected alternative 2 would be permitted to withdraw in an expedited process, whereas investors who voted against the Proposal would remain indefinitely locked in. USIF explicitly wrote in its Supplement to the Proposal: “Even if the Amendment Proposal is not approved, the Manager plans to exercise its discretion under the existing Operating Agreement to permit any Member who elects Alternative 2 . . . to withdraw from the Company no later than 30 days following the repayment of the EB-5 Loan in full . . . .” In recent emails, USIF stated that the only way to ensure the withdrawal of the investor’s capital was to vote for alternative 2: “The simplest way to expedite a return of your capital should you wish to end the EB-5 process is to vote for [Alternative] 2 by July 5[.]” “[F]or those of you who vote for [Alternative] 2 ahead of the July 5 deadline, we anticipate a fast and easy withdrawal process for the 100% return of your capital contribution as we have now been repaid in full by the Developer. Refusing to vote will significantly slow down this process.” There is no legitimate reason that the process of returning capital contributions to those investors who seek to withdraw from the Company should be “slow[ed] down” for investors who did not vote for the Proposal. It is a transparently coercive device to garner more votes in favor of the 702 Times Square Project. Fourth, investors who were misled by the Proposal and submitted a consent form were not permitted before the deadline to revoke their consent. On information and belief, there are at least five investors who notified USIF prior to the July 5 voting deadline that their prior votes were based on a misunderstanding of the Proposal and that they revoked their votes. Despite these clear notices -- and despite USIF’s own campaign to get investors to switch “no” votes to votes in favor of the Proposal – USIF refused to recognize the investors’ revocation of their votes and has improperly counted these as votes in favor of the Proposal. Moreover, despite announcing that they had sufficient votes for the Proposal to pass, Respondents have refused despite request to provide the vote numbers or any other information to enable Petitioners to assess the voting process. Fifth, Respondents have further sought to derail opposition to the Proposal by attempting to interfere with the attorney-client relationship between Petitioners and their counsel. Respondents have disseminated false information to tarnish Petitioners’ counsel’s reputation and to impugn their competence by falsely asserting that counsel unsuccessfully litigated a case in which counsel in fact had no involvement. For these reasons, the consent solicitation process was coercive, a breach of Respondents’ fiduciary duties, and subject to invalidation.
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