Ma v. Golden State Renaissance Ventures, LLC

Background

Five Chinese citizens—Hui Ma, Ailing Zhao, Rui Zhang, Xi Liu, and Yixuan Wang—invested through defendants to seek permanent residence under the federal EB-5 Immigrant Investor Program. Each plaintiff invested $500,000 and paid $40,000 in fees, according to the complaint. The plaintiffs alleged that defendants used the funds for unauthorized purposes and transferred remaining company assets to directors. Their 14 claims included fraudulent inducement, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, constructive fraud, fraudulent concealment, conversion, violations of California and Minnesota law, and failures to disclose required information.

The defendants included Golden State Renaissance Ventures, LLC, doing business as Golden Gate Global; GSRV Management, LLC; Steven Kay; GSRV-VTI Management, LLC; GSRV-VTI II, LLC; GSRV-VTI, LP; Eric Chelini; and Vertebral Technologies, Inc. The defendants moved to compel arbitration under the Federal Arbitration Act. The plaintiffs opposed the motions, arguing that they had not assented to the agreements containing arbitration provisions and that some defendants had not signed those agreements.

Contract Documents and Assent

Three plaintiffs—the LP Plaintiffs, Ma, Zhao, and Wang—invested through GSRV-VTI, LP. They signed subscription agreements that did not expressly contain arbitration provisions. Those agreements stated that the investments were made under the terms of a separate limited partnership agreement and appointed Eric Chelini as their representative and attorney-in-fact to execute that agreement on their behalf. The limited partnership agreement contained an arbitration provision. The court held that the LP Plaintiffs had authorized Chelini to execute the agreement and were bound by it, even though they did not personally sign it.

Two plaintiffs—the LLC Plaintiffs, Liu and Zhang—invested through GSRV-VTI II, LLC. Their subscription agreements also lacked express arbitration provisions, but the operating agreement contained one. The court found direct evidence that both LLC Plaintiffs signed the operating agreement, including executed copies containing their signatures. It also relied on subscription-agreement language stating that they needed to execute the operating agreement to complete their investments.

The court rejected the LLC Plaintiffs’ argument that a forum-selection clause in the subscription agreement required court litigation instead of arbitration. The court read the clause as selecting San Francisco courts for litigation when litigation occurred, not as eliminating the separate arbitration provision.

Unconscionability

The plaintiffs argued that the arbitration provisions were procedurally unconscionable because, among other things, the LLC arbitration provision appeared late in a 30-page document, was not highlighted, some documents were provided only in English, the partnership agreement was executed after the subscription agreements, and the authority given to Chelini was irrevocable. The court explained that under California law a contract must be both procedurally and substantively unconscionable to be invalid on that ground. Because the plaintiffs argued only procedural unconscionability in their original briefing, the court rejected that defense.

The court also declined to consider a substantive-unconscionability argument added in an errata, but stated that the argument would fail even if considered. It found that the arbitration provisions applied equally to the parties and that the plaintiffs had not shown that arbitration costs were unusually burdensome in this case.

Delegation of Arbitrability

The plaintiffs argued that their claims did not fall within the arbitration provisions. The court held that the agreements clearly and unmistakably delegated questions about whether the claims were arbitrable to the arbitrator. The LLC operating agreement referred to the rules of the American Arbitration Association, and the LP partnership agreement referred to Judicial Arbitration and Mediation Service rules. The court found the plaintiffs sufficiently sophisticated for the rule recognizing delegation through incorporated arbitration rules, considering the size and complexity of the investment and the investor-visa process. The arbitrator, rather than the court, therefore must decide the gateway question of whether the claims are covered by the arbitration agreements.

Claims Against Nonsignatories

The plaintiffs argued that the GGG Defendants and Vertebral Technologies, Inc. were not signatories and that Chelini had not signed in his personal capacity. The court applied equitable estoppel, a doctrine that can prevent a party from relying on a contract while avoiding a related arbitration obligation. It held that the plaintiffs’ claims were “intimately founded in and intertwined with” the investment agreements because all of the claims depended on the contractual investment relationship. The court therefore held that the nonsignatory defendants could invoke the arbitration provisions. Because it compelled arbitration on that basis, it did not decide the parties’ alternative alter-ego argument.

Disposition

The court granted the motions to compel arbitration. It ordered all claims against all defendants to arbitration and stayed the matter while arbitration proceeds. The parties must provide status updates every six months. If the arbitrator determines that any claims are not arbitrable, the parties must notify the court within 14 days and request a status conference. After the arbitration’s final disposition, the parties must notify the court and request that the stay be lifted or that the case be dismissed.