China lacks the rule of law, but that doesn’t stop Chinese companies from taking advantage of the U.S. legal system. A California bankruptcy court judge last week approved a settlement agreement between the state-owned Aviation Industry Corp. of China, or AVIC, its subsidiaries and two American entities and their co-claimants. After years of litigation and under some duress, the Americans agreed to walk away with less than a third of the more than $85 million they were owed under an arbitrator’s judgment.
The story begins in 2008, when AVIC International USA, one of many AVIC subsidiaries, teamed up with Texas entrepreneur
Patrick Jenevein,
his company Tang Energy Group, and a handful of other American investors. Under a joint venture known as Soaring Wind, they agreed to work together on wind energy. But the relationship soured. Tang said it learned that AVIC USA’s sister subsidiaries were competing against Soaring Wind.
Tang’s lawyers claimed that AVIC, AVIC USA and several other AVIC subsidiaries were really “one entity,” and “the feigned corporate distinctions are a fictitious nod to western ways of doing business.” They alleged that the AVIC entities “accepted Tang’s work product, specialized knowledge, relationships and expertise within the industry and then used that knowledge for their own benefit and to usurp corporate opportunities to the detriment of Soaring Wind, Tang and its other members.” Tang asserted that AVIC and its subordinate entities had competed with Soaring Wind and violated the exclusivity clause of their agreement. An arbitration panel handed down an award of some $70 million against several AVIC entities in 2015.
In January I asked lawyers for AVIC USA about Tang’s claims, but they didn’t respond to detailed questions.
Cedric Chao,
lead counsel for AVIC the parent and another of its subsidiaries, told me that “we disagree across the board” with these allegations. “AVIC USA is the only entity that signed” the Soaring Wind agreement, he wrote, adding that “Tang manipulated the arbitrator selection process” and created “what the case law calls a ‘stacked deck arbitration,’ for the purpose of seeking the most favorable outcome possible.”
The American investors asked a Texas federal court to confirm the arbitration panel’s decision because they feared the AVIC entities might not pay. Judge
Ed Kinkeade
eventually stayed confirmation of the award against the other AVIC entities that remained parties to the suit, but he upheld the arbitration panel’s monetary award against AVIC USA. The Fifth Circuit Court of Appeals affirmed the lower court’s ruling, and the Supreme Court declined to hear the case in 2020.
Yet AVIC USA paid nothing, and its debt to Tang and Soaring Wind has grown to more than $85 million as interest accrued. It also began selling off its U.S. assets, netting some $21.5 million, according to court disclosures. It said in legal filings that it contributed some $20.2 million—the “proceeds of its past investments”—for a road construction project in Zambia, beyond the easy reach of American authorities.
In August 2020, Judge Kinkeade wrote that “AVIC USA has been transferring assets to avoid this Court’s judgment” and ordered it to surrender its remaining assets to a U.S. marshal. AVIC USA then filed for Chapter 11 bankruptcy in California, and its lawyers told Judge Kinkeade that “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of this case” was stayed under the bankruptcy code.
Under the settlement agreement, AVIC USA will pay only $24 million of the more than $85 million it owed. Tang and Soaring Wind agreed to these terms after AVIC USA had sought to convert to a Chapter 7 liquidation bankruptcy. Mr. Jenevein could have petitioned Judge Kinkeade to lift the stay and to hold the other AVIC entities liable for the full damages as alter egos of AVIC USA. But that wouldn’t necessarily succeed, and it would give AVIC USA time to unload its remaining assets.
The settlement agreement states that “each AVIC Party hereby specifically denies it is an alter ego of AVIC USA or another AVIC Party, vicariously liable for any act or omission of another AVIC Party, or that its conduct can be imputed to another AVIC Party.” Yet according to the settlement agreement, the $24 million AVIC USA will pay Soaring Wind and Tang comes from its parent, AVIC International Holding Corporation, which is part of the broader AVIC family.
The settlement includes a commitment that the parties won’t “use, disclose, reference, mention, or provide to third parties any of the expert reports produced or generated in any of the Covered Cases.” But expert reports are in the public record as part of the long docket for the Texas litigation, and those court records include expert reports that map out the corporate relationships and intersections among various AVIC entities.
Credit Mr. Jenevein for fighting AVIC and its subsidiaries for years in court and for getting the terms of this settlement in the public record. In 2012 a Michigan consulting company, Global Technology Inc., claimed AVIC and some of its subsidiaries had breached an agreement, unjustly enriched themselves, and engaged in “misrepresentation and/or silent fraud.” In 2016, AVIC and Global Technology Inc. “agreed to resolve this matter,” according to court documents. But the terms weren’t public, and the owner of Global Technology Inc. declined to comment.
In contrast, Thursday’s settlement, along with the court records from Texas, provide ample detail. That rich legal record should serve as a warning to any American considering business with AVIC, its subsidiaries or other Chinese state-owned enterprises.
Ms. Melchior is a Journal editorial page writer.
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