China can be very dangerous for foreigners whose companies might owe money. A few weeks ago, a reader e-mailed one of my law firm’s international lawyers with an article regarding China’s recent jailing of California businessperson Brian Horowitz over a debt he (his company?) allegedly owed a Chinese company.
I have been assiduously following the case in the press for many reasons. First, this case could prove important to my law firm’s clients. Second, I am convinced my law firm has handled as many (or more) of these cases (around the world) as any other firm. Third, the “facts” in this case — at least as conveyed by the media — have remained sketchy and I am not prepared to believe them.
Let me explain.
According to yesterday’s Los Angeles Times article on the case, the story goes as follows:
An Orange County businessman who was prohibited from leaving China for nearly two weeks because of a contract dispute with a Chinese supplier has negotiated a settlement and returned to the United States.
Brian Horowitz, 46, of Mission Viejo, said Chinese government officials refused to let him leave the country until he paid the Chinese firm $250,000 to resolve a civil lawsuit the company had filed against him. He said he arrived home Jan. 18 after his wife wired the funds to China.
Horowitz said he was stopped at Shanghai Pudong International Airport on Jan. 6 and told that he couldn’t board an American Airlines flight to the United States until the case was resolved. Chinese law permits its immigration officials to deny exit to foreigners with pending lawsuits.
The supplier, Fuzhou Trading Co., was seeking payment for a shipment of blenders that Horowitz’s company, On the Edge Marketing Inc., sold briefly in the U.S., Horowitz said. The Chinese firm’s owner demanded $250,000 to settle the contract dispute before he would direct the judge to let him leave, Horowitz said.
The dispute involved Horowitz’s 2007 purchase of 3,000 gasoline-powered blenders, which were marketed to tailgaters and others who wanted to blend icy drinks without a power source. Horowitz said the blenders did not meet U.S. air quality standards, as the contract required. As a result, the California Air Resources Board fined Horowitz’s company $240,000 in 2009 and ordered him to pull the blenders from stores.
Horowitz said the Chinese company agreed to write off Horowitz’s balance of more than $300,000 because of the fine and recall. But the company alleged in a lawsuit filed in China that Horowitz had failed to make good on his debt. Officials with Fuzhou Trading could not be reached for comment.
Horowitz said he did not learn of the lawsuit until he was stopped at the airport. But experts in Chinese law said it would be highly unusual for the country to enforce a lawsuit without proof that it had been served on all parties.
Horowitz’s take on the case is as follows:
“I’m very relieved to be home,” Horowitz said. “I’m hoping my ordeal helps other businessmen who do business in China to be educated about how to protect yourself.”
Okay, but how? And what really happened here?
Our China lawyers represented a U.S. company that had sent one of its executives to China to announce that their China WFOE would be closing down and not paying its debts. The company’s Chinese suppliers then held one of the company’s executive hostage.
Had we been retained way earlier, our advice would have been so different there likely would never have been a hostage situation at all. This is because we would have told this company to get ALL of its personnel out of China before letting suppliers (or anyone else) know that you would be leaving China and payment would be slow, at best.
We did have a client quite recently in a similar situation, which we wrote about in our post, China, We Have A Problem. A Mostly True Story.
The key takeaway from that post (and from most China hostage situations on which our China lawyers have worked) is that the very first thing you need to do to avoid a hostage situation is to get everyone out of town and then out of China entirely.
Many years ago, we had a similar situation where our client was alleged to owe money to a Vietnamese company. The Vietnamese company had shipped defective product to our client and our client refused to pay for it. At least one person from our client absolutely had to go to Vietnam and we were all concerned about what might happen to him there. Our law firm’s advice was that he not go under any circumstances, but he insisted he had too. That being the case, we decided the best approach would be for our client to sue the Vietnamese company in a U.S. federal court, alleging the Vietnamese company owed our client money for the defective product. Our thinking was this might help insulate the client from problems in Vietnam. If the Vietnamese company tried to have our client imprisoned for his company’s alleged debt, we would at least be able to point out that there was an ongoing dispute between the two companies and that the Vietnamese company was seeking to act against our client in Vietnam in retaliation for our client having sued it. Our client went to Vietnam without incident and a few months later we were able to settle all claims with the Vietnamese company. We heard through the grapevine that the Vietnamese company had actually been intimidated into inaction by our lawsuit.
The following are some of what our China lawyers recommend to our clients for reducing their chances of being held hostage in China:
1. If you are in a debt dispute with a Chinese company, think about not going to China at all, but especially avoid the city in which that company is located.
2. If you think there is a Chinese company that might claim you owe it money, think about not going to China at all, but especially avoid the city in which that company is located.
3. If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.
4. Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.
5. Do not expect any help from the police in China. They likely will be getting a cut of whatever you end up paying and they rarely if ever will intervene. Best thing to do is to form your own SWAT team to extricate your people out of China, but be very careful in doing this because if this fails, many people will go to jail. Your country’s embassy may or may not help you.
So where did Horowitz appear to have gone so wrong? First, he says he reached an agreement with the Chinese company: “Horowitz said the Chinese company agreed to write off Horowitz’s balance of more than $300,000 because of the fine and recall.” If Horowitz did reach such an agreement, he should have memorialized it in writing — in a signed and sealed Chinese language agreement — and he should have had a copy of that agreement readily accessible each time he got on a plane to China. Oral (and to a large extent, e-mail) agreements in China are not worth the paper they are not printed on.
Second, I do not understand how Horowitz (or his company) could have been sued in China and had a judgment entered without ever receiving notice of the lawsuit. I am NOT saying this is what happened to Mr. Horowitz, because I do not know what happened to Mr.
Horowitz, but I have to wonder if maybe the lawsuit and the judgment were against one of his companies with which he no longer had any concerns and it just never occurred to him that the company debt might be taken so “personally.”
I say this because we have been involved in at least two cases where this was the case. U.S. company owed money to Chinese company. U.S. company ceased to do business and so its key figures assume the issue is resolved in that the company has no assets to pay any debt. They then get on a plane to a foreign country (one was a China case, the other was a Russia case) and they both get seized and “held hostage” until my law firm negotiates out their release. Both of these clients wanted us to argue that they personally did not owe the debt; rather, their companies did. Our response was to tell them “that would be an excellent argument if we had the luxury of filing court briefs and waiting months for a judge’s decision, but our goal here is to get these people released as quickly as possible.”
Our China lawyers deal with this issue in its nascent stages all the time when we work with our clients to shut down their Chinese entities.
We always instruct our clients never to reveal that they will be shutting down their China operations while anyone from the home office is in China. We also tell them that if they or their company wish to ever return to China, they should pay off all their debts and usually the best way to do that is to announce from outside China the plan to gradually shut down the China office and then, using that as leverage, negotiate down all of the debts. We always stress that once a reduced debt is agreed upon, there should be a written agreement reflecting that and there should be proof of payment under that agreement as well.
All of this is necessary if you want to formally close your China entity, which is, in turn, necessary, if you want to be able to return to China someday.
What are you seeing out there?