May it please the Court….
On July 18, Sixth Circuit Judge John L. Brown dismissed the State of South Dakota, the Governor’s Office of Economic Development, and the Department of Tourism from the “LP6 Claimants” lawsuit, leaving former EB-5 visa investment czar Joop Bollen as the sole defendant fighting 35 Chinese investors who feel they were tricked into investing in the doomed Northern Beef Packers slaughterhouse in Aberdeen. Judge Brown ruled that sovereign immunity shields the state from the Chinese investors’ claims.
The Chinese investors are asking the state Supreme Court to restore the state as a defendant. Their appeal cites Dakota Free Press as an authority, leading the state’s lawyer Paul Bachand to respond in an August 10 brief that the Court “should send a clear message that no online blog can impugn the wisdom of the Circuit Court’s decision which rests on clear legal authority.”
I’ve read the Sixth Circuit decision, and I think I can impugn its wisdom.
The state properly contends that, under Article 3, Section 27 of the South Dakota Constitution, only the Legislature can waive the state’s immunity from lawsuits. The plaintiffs say the waiver enacted in SDCL 21-32A-1 applies here, because the state and Bollen had an agreement requiring Bollen to set aside some of the proceeds from the EB-5 investments to cover potential lawsuits against the program and the state (those were the indemnification funds that resulted in other litigation between the state and Bollen). Citing the 1980 case of High-Grade Oil Co., Inc. v. Somner, Judge Brown says that the state lacked explicit “constitutional or statutory authority to waive the governmental immunity by purchasing liability coverage.” Id. The Court goes on to hold that it is “only the legislature, expressing the will of the sovereign people, that is authorized to make this decision. No state official or board can usurp that authority.”
But High-Grade Oil was decided in 1980. The Legislature created SDCL 21-32A-1 in 1986 and amended it in 1987. Post-High-Grade Oil, the Legislature exercised its constitutional authority to waive by statute the sovereign immunity of state projects that participate in risk-sharing pools or purchase liability insurance. GOED and Tourism (or the Department of Tourism and State Development, as they were when Mike Rounds set them to wheeling and dealing EB-5 visas) usurped no authority; SDCL 21-32A-1 gave it to them.
Sovereign immunity is also waived when the state engages in commercial activity, but Judge Brown rejects the plaintiffs’ claim that the state’s EB-5 program was a commercial activity. Interestingly, Judge Brown knocks down the plaintiffs’ legal analogy of the EB-5 program to a rural water district and the state cement plant by pointing out that rural water districts and the state cement plant were specifically authorized by state law and the state constitution. However, the failure of those analogies does not change the fact that the EB-5 project itself was commercial activity, soliciting millions of dollars in investments in the beef plant, dairies, power facilities, and the Deadwood Mountain Grand Casino. Judge Brown’s ruling also raises the question of whether the state had the authority to engage in this commercial activity without specific authorization from the Legislature.
I suspect the Chinese investors will pay their legal team good money to come up with even better legal arguments to put the state back in its legal crosshairs. But even this humble blog can see holes in the Sixth Circuit’s ruling that the investors can exploit to bring the state back to court and hold it accountable for its EB-5 visa investment activities.