October 02, 2023
On September 28, 2023, Weil won a complete dismissal of a $53.5 million “mass action” lawsuit for New York City Regional Center, LLC, when the U.S. District Court for the Southern District of New York granted NYCRC’s motion to dismiss 107 EB-5 investors’ fraud and breach of fiduciary duty claims with prejudice.
The EB-5 investors had subscribed to one of two LLC-funds formed and managed by NYCRC to obtain green cards under the EB-5 program. NYCRC, a USCIS-approved regional center, ensured that the investors all achieved permanent U.S. residency by deploying the EB-5 capital to help finance the redevelopment of the George Washington Bridge Bus Station. The plaintiffs filed their lawsuit in 2022 after the Station’s developer filed for bankruptcy and, despite NYCRC’s best efforts to protect the investors, the EB-5 capital was wiped out along with all other prepetition claims. The plaintiffs alleged that they were misled about the nature of the collateral, among other things, and that NYCRC breached its fiduciary duties by not calling a series of alleged defaults preceding the developer’s bankruptcy filing.
The Court agreed with NYCRC that the investors’ fraud claims were barred by the statute of limitations. NYCRC showed that the offering memoranda incorporated into plaintiffs’ signed subscription agreements “conflicted with” the alleged misstatements. For this reason, the court held that the plaintiffs were all on inquiry notice when they invested back in 2011 and 2014, more than six years before bringing suit, because an “investor of ordinary intelligence” would have realized the inconsistencies. The court also rejected the plaintiffs’ efforts to disregard the agreements and offering memoranda on the grounds that some investors allegedly could not understand English or had only received signature pages, recognizing that the plaintiffs had an obligation under New York law to read the documents before signing them.
The court also agreed that the breach of fiduciary duty claims failed under the business judgment rule. While plaintiffs alleged NYCRC should have called a default sooner to preserve their capital, NYCRC showed that doing so would have jeopardized the investors’ ability to qualify for permanent residency under EB-5 regulations. The court recognized that any decision not to call the alleged defaults “would have come with both costs and benefits,” and plaintiffs’ attempt to question NYCRC’s management decisions is “precisely th[e] kind of Monday-morning quarterbacking” that the business judgment rule prevents. The court further emphasized that the plaintiffs could not allege that NYCRC was self-interested merely because it allegedly wanted to continue receiving interest income and maintain its reputation. “Virtually every fiduciary is compensated for their services” and “presumably has an interest in impressing not only her principal but all potential future principals with her business acuity and sound judgment. That does not make every fiduciary self-interested.”
The Weil team was led by Weil Litigation Department Co-Chair David Lender, and included Complex Commercial Litigation and Appeals and Strategic Counseling Co-Head Greg Silbert, partner Jessica Falk, and associates A.J. Green and Jack Wollmuth.