China is dangerous for foreigners whose companies might owe money to a person or company in China. 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 allegedly owed to a Chinese company. According to yesterday’s Los Angeles Times 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 he couldn’t board his 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, 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. 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.
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?
The key takeaway from this hostage situation 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 to the ongoing dispute between the two companies and assert that the Vietnamese company was seeking to act against our client in Vietnam in retaliation for our client having sued it in the United States. 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 about where you stay and where you go. Be careful with whom you meet.
4. Consider preemptively suing the alleged creditor somewhere so that you can 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. If you settle a dispute with a Chinese company, make sure you get a China-specific settlement agreement signed by the Chinese party. Based on the Los Angeles Times story above, it would seem that had Horowitz done this, he probably would never have been arrested.
6. 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 China-specific settlement 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.”
My law firm has 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 assumed the debt issues were resolved in that the companies had no assets to pay any debt. They then got 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 negotiated out their release. Both of these clients wanted us to argue that they personally did not owe the debt; 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 you 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 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 on all debts. We always stress that once a reduced debt amount is agreed upon, there needs to be a written agreement reflecting that and there should be proof of payment under that agreement as well.
What are you seeing out there?