Lewis Brisbois accused of failing to recognize ‘draconian lending terms,’ conspiring to cover up mistakes
March 26, 2024, 1:08 pm CDT
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A lawsuit accuses Lewis Brisbois Bisgaard & Smith of conspiring to deflect blame for its failure to protect 185 Chinese investors who lost $92.5 million that they invested in a hotel and condominium project through an investment group called CMB Export. (Image from Shutterstock)
A lawsuit accuses Lewis Brisbois Bisgaard & Smith of conspiring to deflect blame for its failure to protect 185 Chinese investors who lost $92.5 million that they invested in a hotel and condominium project through an investment group called CMB Export.
Law360 has the story on the allegations, contained in a March 14 suit filed in the U.S. District Court for the Eastern District of California.
CMB Export was a junior mezzanine lender contributing $450 million total to the $2.5 billion project, according to the suit. The plaintiffs’ investments of $500,000 each allowed them to qualify for the federal EB-5 visa program.
The investors were supposed to receive repayment of loaned funds plus a portion of any profit earned by CMB. They have so far received nothing, and their investment capital has been wiped out, according to the suit.
CMB was represented by Lewis Brisbois. According to the suit, CMB was “a valuable client” whose business in the EB-5 industry generated “massive legal fees” for the law firm for at least a decade.
The plaintiffs allege that Lewis Brisbois committed malpractice and aided CMB’s breach of fiduciary duty to investors. The firm then engaged in a RICO conspiracy with CMB to hide the mistakes by filing meritless suits against senior lenders, the suit claims.
Lewis Brisbois and CMB “seek to disguise their naivete by shifting the focus to unfortunate conduct by senior lenders in the project and away from their failed business judgment, complete ineptitude, and failure to exercise a modicum of diligence,” the suit says.
As a junior mezzanine lender, CMB had lower repayment priority than a senior mezzanine lender and a senior lender for the project.
“From the beginning of the project,” the suit says, “CMB should have but failed to negotiate a first right of refusal and/or unilateral right to buy up or purchase a partial stake in the senior loan and/or senior mezzanine loan to protect its interest in the project.”
The developer sought more funding, producing a new lender and amended loan agreements with an unreasonable maturity date that failed to reasonably protect CMB’s junior mezzanine loan interest, the suit says.
If CMB and Lewis Brisbois had been “paying attention,” the suit says, they would have realized the severity of “the draconian lending terms” in an amended loan agreement, the petition says.
“At the very least, CMB should have ensured an extension of the project’s loan maturity date to minimize the possibility of a foreclosure,” according to the suit.
Nor did CMB notify the petitioners of a one-time right to purchase the senior loan, the suit says.
After CMB received notice of foreclosure in August 2022, Lewis Brisbois filed meritless suits in California and New York, the investors allege. The “sham lawsuits” alleged that Lewis Brisbois and CMB were “tricked” into signing a fourth amendment to the creditor agreement, even though a term sheet sent to Lewis Brisbois attorneys disclosed many of the terms, the investors say in their suit.
So far, CMB has paid Lewis Brisbois more than $3.8 million in legal fees.
“To this day,” the suit says, “CMB continues to conceal the meritless nature of the litigation against lender and recently had the audacity to request additional money from petitioners” to fund the litigation.
A Lewis Brisbois spokesperson told Law360 that the firm is in the process of responding to the allegations. But the firm did not comment further, saying it “does not generally comment on claims against clients or the firm.”
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