LP 6 Claimants, LLC v. S.D. Dep't of Tourism & State Dev.

• Decision Date: 24 June 2020
• Docket Number: #29129
• Parties: LP6 CLAIMANTS, LLC, Plaintiff and Appellant, v. SOUTH DAKOTA DEPARTMENT OF TOURISM AND STATE DEVELOPMENT, South Dakota Governor's Office of Economic Development, South Dakota Department of Tourism, and the State of South Dakota, Defendants and Appellees, and SDRC, Inc., SD Investment Fund, LLC 6, and Joop Bollen, Defendants, and SDRC, Inc., SD Investment Fund, LLC 6, and Joop Bollen, Third-Party Plaintiffs, v. Henry Global Consulting Group a/k/a Henry Global a/k/a Henry Global Group a/k/a Henry Global Consulting USA, incorporated under the laws of the People's Republic of China, Third-Party Defendant.
• Court: South Dakota Supreme Court

945 N.W.2d 911

LP6 CLAIMANTS, LLC, Plaintiff and Appellant,

v.SOUTH DAKOTA DEPARTMENT OF TOURISM AND STATE DEVELOPMENT, South Dakota Governor's Office of Economic Development, South Dakota Department of Tourism, and the State of South Dakota, Defendants and Appellees,andSDRC, Inc., SD Investment Fund, LLC 6, and Joop Bollen, Defendants,

and

SDRC, Inc., SD Investment Fund, LLC 6, and Joop Bollen, Third-Party Plaintiffs,

v.Henry Global Consulting Group a/k/a Henry Global a/k/a Henry Global Group a/k/a Henry Global Consulting USA, incorporated under the laws of the People's Republic of China, Third-Party Defendant.

#29129

Supreme Court of South Dakota.

CONSIDERED ON BRIEFS APRIL 21, 2020

OPINION FILED June 24, 2020

STEVEN D. SANDVEN, Beresford, South Dakota, EZIO SCALDAFERRI, BRUCE ROBINS of Feder Kaszovitz, LLP, New York, New York, Attorneys for plaintiff and appellant.

PAUL E. BACHAND, AARON P. SCHEIBE, Special Assistant Attorneys General, Pierre, South Dakota, ROBERT L. MORRIS, Special Assistant Attorney General, Belle Fourche, South Dakota, Attorneys for defendants and appellees.

GILBERTSON, Chief Justice

[¶1.] A group of investors in the EB5 immigrant investment program sued various agencies that implemented the program in South Dakota, claiming fraud in procuring their investments, which were lost when the project went bankrupt. The circuit court granted a motion to dismiss by the state agencies involved based on sovereign immunity. The investors appeal the circuit court's decision, and we affirm.

Facts and Procedural History

[¶2.] This case arises from implementation of the federal EB5 immigrant investment program in South Dakota. The EB5 Program offers preferred immigrant status to foreign nationals who invest in commercial projects with the purpose of creating a specified number of jobs through each project. Under 8 U.S.C. § 1153(b)(5), the required investment per individual is at least $1,000,000, but for projects in economically disadvantaged or rural areas (regional centers), the threshold investment is reduced to a $500,000 minimum.

[¶3.] The South Dakota Department of Tourism and State Development (DTSD) entered into a consulting contract with SDRC, Inc.¹ in 2009 to administer and promote EB5 Program projects in South Dakota. The contract was made "for the purpose of having SDRC administer the Regional Center and the EB5 Program and to market the EB5 Program for the benefit of South Dakota[.]" SDRC had administrative duties to work with United States Customs and Immigration (USCIS) and the "non-exclusive right and privilege to market projects for development within the Regional Center's territory[.]" Promotion of projects required DTSD's written consent first, and three funds were established to ensure indemnification to DTSD when necessary. At the end of the term of the agreement, all remaining funds were to return to DTSD.

[¶4.] The contract covered future projects as well as nine existing projects, including an initial equity investment in the Northern Beef Packers processing plant in Aberdeen. SDRC solicited further investments in the Northern Beef Packers project by sending a Confidential Offering Memorandum to the thirty-five Chinese nationals that form the LP6 Claimants.² The Offering Memorandum detailed the requirements for a qualifying investment through the SDIF Limited Partnership 6 (Partnership).³ To comply with the regional center designation, each Limited Partnership Unit required a $530,000 investment (a $500,000 investment and $30,000 for issue expenses). The Offering Memorandum stated that the investments would be used to construct the packing plant facility and purchase machinery and equipment capable of processing 7,500 head of cattle each week and 396,000 head annually. The project was meant to create 563 jobs by 2010. The Offering Memorandum stated that there was "no assurance that investors will obtain final immigration status," and that the project was "suitable only for investors ... who can afford the loss of their entire investment." It also said there was no assurance "that the jobs required to be created and maintained ... will be achieved." Day-to-day management of the investments would be conducted by the Partnership, including supervising SDRC's performance of its obligations under its consulting agreement.

[¶5.] Each Claimant invested $530,000 (over $18 million collectively) through the Partnership. Their collective investment was lost when the Northern Beef Packers plant went bankrupt in 2013. The South Dakota Governor's Office of Economic Development (GOED)⁴ terminated the contract with SDRC the same year, and the United States Department of Homeland Security sent the GOED a Notice of Intent to Terminate the Regional Center in September 2015 for failure to submit required information to the USCIS and failure to demonstrate the promotion of economic growth.

[¶6.] Claimants filed an amended complaint⁵ in December 2015 against DTSD, GOED, South Dakota Department of Tourism, the State of South Dakota, SDRC, SD Investment Fund LLC 6, and Joop Bollen. The amended complaint alleged fraud, breach of fiduciary duty, aiding and abetting breach, and included a request to pierce the corporate veil.

[¶7.] The state agencies (collectively the State) filed a motion to dismiss under SDCL 15-6-12(b)(5), on three grounds, arguing: (1) sovereign immunity bars suit against the State; (2) Claimants’ tort claims are barred by failure to give mandatory statutory notice under SDCL 3-21-2 ; and (3) the claims are barred by SDCL 21-32-2 ’s one-year statute of limitations for tort claims against the State. SDRC, SD Investment Fund LLC 6, and Bollen filed an answer and crossclaim against the State for indemnity or contribution, in addition to a third-party claim against Henry Zou and the Henry Global Consulting Group, which lined up the potential Chinese investors, for defamation and indemnity or contribution. The State moved to dismiss the crossclaim because sovereign immunity would bar the derivative claim. Bollen also joined in the State's motion to dismiss against Claimants in so far as the claims related to any actions he took while a State employee.

[¶8.] Claimants’ opposition to the State's motion to dismiss argued that sovereign immunity was not a shield because the State was operating a commercial enterprise. Claimants further argued that SDCL chapter 21-32A acts as a waiver of sovereign immunity because the consulting agreement created participation in a risk-sharing pool through the requirement that SDRC obtain liability insurance that covered the State. The State responded that an express waiver was required for sovereign immunity to be waived, and that there was no commercial enterprise by the State.

[¶9.] After a hearing on the State's motion to dismiss, the circuit court held in its memorandum decision that Claimants’ suit against the State was barred by sovereign immunity.⁶ The court determined that there was no express waiver of immunity by the Legislature, and the commercial enterprise argument was unavailing. This Court denied Claimants’ petition for intermediate appeal.

[¶10.] Eventually all underlying claims against the other defendants, as well as the third-party claims, were dismissed by stipulation. The final stipulation, in August 2019, for dismissal of SDRC, SD Investment Fund LLC 6, and Bollen as defendants resolved with finality all underlying claims, and Claimants filed a notice of appeal on the issue of sovereign immunity in September 2019. Claimants raise the following claims:

1. Whether sovereign immunity applies to commercial activities conducted by the State.

2. Whether the Legislature expressly waived the State's sovereign immunity for claims arising from the EB5 projects.

Standard of Review

[¶11.] We review a circuit court's grant of a motion to dismiss de novo. N. Am. Truck & Trailer, Inc. v. M.C.I. Commc'n Servs., Inc. , 2008 S.D. 45, ¶ 6, 751 N.W.2d 710, 712. "A motion to dismiss under SDCL 15-6-12(b) tests the legal sufficiency of the pleading, not the facts which support it. For purposes of the pleading, the court must treat as true all facts properly pled in the complaint and resolve all doubts in favor of the pleader." Guthmiller v. Deloitte & Touche, LLP , 2005 S.D. 77, ¶ 4, 699 N.W.2d 493, 496.

[¶12.] "A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." N. Am. Truck & Trailer , 2008 S.D. 45, ¶ 6, 751 N.W.2d at 712 (quoting Thompson v. Summers , 1997 S.D. 103, ¶ 5, 567 N.W.2d 387, 390 ). "[W]hile the court must accept allegations of fact as true when considering a motion to dismiss, the court is free to ignore legal conclusions, unsupported conclusions, unwarranted inferences and sweeping legal conclusions cast in the form of factual allegations." Nygaard v. Sioux Valley Hosps. & Health Sys. , 2007 S.D. 34, ¶ 9, 731 N.W.2d 184, 190 (quoting Wiles v. Capitol Indem. Corp. , 280 F.3d 868, 870 (8th Cir. 2002) ).

Analysis and Decision

[¶13.] Under the South Dakota Constitution, "[t]he Legislature shall direct by law in what manner and in what courts suits may be brought against the state." S.D. Const. art. III, § 27. "Sovereign immunity is the right of public entities to be free from liability for tort claims unless waived by legislative enactment." Bickner v. Raymond Twp. , 2008 S.D. 27, ¶ 10, 747 N.W.2d 668, 671. Any waiver of the State's sovereign immunity must be expressly identified by the Legislature. See High-Grade Oil Co., Inc. v. Sommer , 295 N.W.2d 736, 739 (S.D. 1980).

[¶14.] Three cases set up the applicable framework for sovereign immunity analysis here. The first is High-Grade Oil , where a car accident led the plaintiff to sue the State Highway engineer responsible for designing or approving the design of state highways, claiming the curve the accident occurred on did not comply with the applicable safety...