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A Costly Lesson in Chinese Business Practices

A Costly Lesson in Chinese Business Practices

Patrick Jenevein

was enthusiastic about doing business in China until he got burned. His company, Dallas-based Tang Energy Group, helped electrify China’s impoverished western provinces in the 1990s. His company “actively supported China’s bid for Most Favored Nation trading status with the U.S.” and for membership in the World Trade Organization, his lawyers have noted, adding: “Scholars at the Council [on] Foreign Relations teased Jenevein about consistently seeing the best side of China. They were right.”

In legal filings, Mr. Jenevein claims his partners at a Chinese state-owned enterprise violated their contracts, poached his business, and tried to skirt the legal consequences when they got caught. “Investing in companies that the Communist Party controls or can control,” he says in an interview, “is a really bad idea.” Mr. Jenevein’s saga illustrates how the Communist Party and its state-owned enterprises use complicated networks of corporate entities to evade accountability for lawless behavior in the West and to move assets beyond the reach of the U.S. legal system.

“Texans are pulled to frontiers, for good or bad,” Mr. Jenevein, 63, says. “In the mid-’90s, China had a lot of frontier appeal. There was a lot that Chinese people needed to make their livelihoods better, and we had a chance to contribute to that.”

Mr. Jenevein worked with the state-owned China National Petroleum Corp. on natural gas and electricity generation in Xinjiang and Gansu provinces. He also helped develop Chinese wind energy. HT Blade—his joint venture with the state-owned enterprise known as the Aviation Industry Corp. of China, or AVIC—became the world’s second-largest maker of wind-turbine blades.

Patrick Jenevein and executives at Chinese state-owned enterprises.



Photo:

Courtesy of Patrick Jenevein

In 2008 Tang teamed up with private investors and AVIC International USA, a California-based subsidiary of the Chinese state company under a joint venture, Soaring Wind Energy, to do business in wind energy.

Mr. Jenevein knew he was taking a risk doing business with a country that lacks the rule of law. “To express long-term commitments in the shadow of a totalitarian regime, which trumps all other contracts, is difficult,” he told Dallas-based D Magazine in a 2007 interview.

He added that guanxi—a Chinese word that translates roughly as “connections”—“becomes useful to express those commitments” in lieu of a binding contract. Executives often forge such bonds on nights out drinking baijiu, a sorghum liquor of up to 120 proof whose flavor reminds some Westerners of diesel fuel. Mr. Jenevein told the magazine he wanted to “make sure we’re valuable to the people of China, so they want to have guanxi with us.”

It wasn’t enough. “Contracts matter,” Tang told an arbitration panel in 2015, “and neither gushing national pride nor unfettered greed excuse a party from its contractual obligations. In this case, a story that started with honor and optimism ended when one party refused to do what it promised, and bragged about doing exactly that which it promised not to do. The only apparent motive on the part of AVIC was to cut out its non-AVIC partners and diminish their profitability at every turn.”

In its legal filings, Tang offers an example. The American investors and AVIC USA were thinking about developing U.S. wind projects. Mr. Jenevein identified a supply-chain problem: Wind-turbine blades are a nightmare to import from China. They’re lightweight but nearly half a football field long, expensive to move by ship, and easy to damage in transit. Producing them in the U.S. was an attractive alternative. To that end, Mr. Jenevein pursued a deal with Cirrus Aircraft, a Duluth, Minn., company that makes private planes.

‘In the mid-’90s, China had a lot of frontier appeal. There was a lot that Chinese people needed to make their livelihoods better, and we had a chance to contribute to that.’—Patrick Jenevein

But Mr. Jenevein says AVIC cut Soaring Wind out. Email correspondence submitted as part of litigation shows Mr. Jenevein coordinating meetings with his Chinese partners and Cirrus executives and telling the latter: “AVIC is eager to discuss possibilities with you.”

They did. “After benefiting from Tang’s knowledge, relationships, resources and efforts,” Mr. Jenevein’s lawyers told an arbitration panel, “AVIC quietly established” a new entity, China Aviation Industry General Aircraft Co., or CAIGA. It “quietly transferred” Bian Tao—“one of the AVIC agents who flew to Duluth with Jenevein”—to the new entity, according to Tang’s legal filings. Tang’s lawyers said that AVIC created the entity “to funnel $210 million to Cirrus, for that acquisition,” and “never mentioned its plan to violate the exclusivity provisions” of its Soaring Wind agreement “until the transaction with Cirrus had closed and the American manufacturer of technically advanced aircraft had become a complementary asset” of AVIC.

That wasn’t an isolated occurrence, Tang claims. Its lawyers wrote in legal filings that AVIC “set up a new company,” Ascendant Renewable Energy Corp., “to compete directly with Soaring Wind” on a Texas wind energy project. AVIC even hired a “Soaring Wind member and officer,”

Paul Thompson,

as president of Ascendant “to compete with Soaring Wind and to utilize Soaring Wind’s expertise, knowledge, relationships and expertise,” Tang complained to the arbitration panel. Mr. Thompson didn’t respond to a LinkedIn message requesting an interview.

On March 22, 2014, Mr. Jenevein discussed the situation with

Xuming Zhang,

president of AVIC USA. The men met at a Marriott in Fullerton, Calif. The American recorded the conversation, which took a personal turn. Mr. Zhang mentioned the suicide of another AVIC executive, who he said had become “actually sick” from the stress of trying to succeed abroad. “The problem is too much pressure,” Mr. Zhang told Mr. Jenevein. “People like me must be very heart, very strong” to cope with the possibility of failure.

As for the Texas wind farm, Mr. Zhang said he felt “frustrated” and “very angry” when he learned AVIC had set up Ascendant. He described a conversation with his superiors: “I say, ‘OK. Why?’ Because when I set up this joint venture, Soaring Wind, we have some, you know, not compete terms, noncompetition, internal competition terms. I said, ‘You set up this company. This means we are internal-competing with our partner.’ ”

Mr. Jenevein and an AVIC executive at a Buddhist monastery in Gansu province.



Photo:

Courtesy of Patrick Jenevein

Mr. Zhang put the betrayal down to a change in management: The new executives “don’t care [about] the commitment, you know, the former CEO, the former chairman, you know, commit to the market, to the partner. They don’t care. The new leader don’t care. . . . Because they are state-owned. They don’t care.”

Mr. Jenevein’s attempts to resolve the dispute failed, and Tang and the other Soaring Wind investors filed a demand for arbitration in June 2014. “AVIC and its affiliates are one entity,” Tang asserted. “The feigned corporate distinctions are a fictitious nod to western ways of doing business, but they are disingenuous gestures intended primarily to placate American businesses, investors, auditors, legislators, regulators, courts and—to be sure—arbitrators.”

The filing alleged that AVIC and its subordinate entities had capitalized on Tang’s specialized knowledge and expertise in wind-energy development and had breached the exclusivity clause of their agreement by having its affiliate entities invest in competing projects. It quoted an email in which an AVIC International Renewable Energy Corp. executive admitted that AVIC International Holding Corp. had invested $50 million in American wind-power projects elsewhere in the U.S. It “intended to keep investing with no apparent regard for the Soaring Wind exclusivity provision,” Tang told the arbitration panel.

Lawyers for AVIC, AVIC USA and the other AVIC entities didn’t provide responses to my detailed questions about Tang’s claims about their business conduct and Mr. Zhang’s recorded comments. “There is not enough room to address the lack of merit and inaccuracies in Tang’s allegations, except to say that we disagree across the board,”

Cedric Chao,

lead counsel for the parent company AVIC and CAIGA, wrote in an email.

During the arbitration proceedings, AVIC and CAIGA said they never signed on to the Soaring Winds agreement, which defined “the purpose and nature of the business” as ”to provide worldwide marketing of wind energy equipment, services and materials related to wind energy including, but not limited to, marketing wind turbine generator blades” and other activities “necessary, incidental, proper, advisable or convenient” to that end. AVIC and CAIGA further claimed that the Cirrus acquisition didn’t breach the agreement because the Minnesota company manufactured “airplanes and parts” and CAIGA “did not engage in marketing of wind energy, equipment, services and materials.”

‘In this case,’ Tang Energy Group told an arbitration panel, ‘a story that started with honor and optimism ended when one party refused to do what it promised, and bragged about doing exactly that which it promised not to do.’

Ascendant sued in Texas federal court, noting that it wasn’t formed until “more than two and a half years after the Soaring Wind Agreement purportedly became effective.” It argued that it wasn’t a signatory to the agreement and therefore wasn’t subject to the arbitration panel’s authority. Judge

Ed Kinkeade

ruled in August 2015 that “Ascendant’s party status to the arbitration can only be determined by a court, and not an arbitrator, and no determination by the arbitration panel as to jurisdiction over or party-status of Ascendant is controlling on a court.”

Meanwhile, the arbitration panel returned a mixed decision in December 2015. It found “no evidence in the record that Cirrus Aircraft manufactured wind-turbine blades” after an AVIC subsidiary bought it. And while the claimants “demonstrated a benefit” that accrued to AVIC from its access to their “contacts and general knowledge, those facts alone are insufficient to show the information was a trade secret.”

But the arbitrators slammed the business conduct of AVIC and its subsidiaries. “AVIC HQ exercises such complete dominion and control” over AVIC subsidiaries, the panel found, “that they all operate as a single economic entity” and were thus jointly liable for violating the exclusivity agreement. The panel awarded Tang and Soaring Wind some $70 million.

Mr. Jenevein’s fight didn’t end with the arbitration panel’s decision. He had used his recording of the conversation with Mr. Zhang as evidence in arbitration. Mr. Zhang and his company sued Mr. Jenevein, alleging a privacy violation and unlawful eavesdropping or recording of confidential communications. A state trial court in Los Angeles ruled in favor of Mr. Jenevein’s motion for summary adjudication in all but one cause of action against him in 2019 and dismissed the remaining cause of action the next year. Mr. Zhang and AVIC USA have filed an appeal.

The American investors worried that the AVIC entities wouldn’t pay up, so they asked Judge Kinkeade to confirm the arbitration panel’s decision. In court filings, AVIC USA complained that the process of selecting arbitrators and the makeup of the panel were unfair, that the panel had improperly “exercised jurisdiction over and made liability determinations against” the AVIC entities that hadn’t signed the Soaring Wind agreement, and that the arbitrators had “considered issues that were not presented to them for resolution” and improperly imposed damages and other monetary awards.

“AVIC USA is the only entity that signed the [Soaring Wind] contract,” Mr. Chao wrote in an email to me. He said 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. . . . This ‘stacked deck’ arbitration was illegitimate, was contrary to the rule of law, and was a stain on the institution of arbitration.” Lawyers for the other AVIC entities didn’t respond to my questions but echoed these complaints in court filings.

AVIC International Trade & Economic Development, one of the AVIC entities included in the arbitration, challenged the Northern Texas federal court’s jurisdiction, and the American claimants agreed to dismiss them as a respondent.

Tang, Soaring Wind and the other American claimants asked Judge Kinkeade only for confirmation of the arbitration panel’s findings of wrongdoing and its monetary awards against AVIC USA, which had significant U.S. assets. In August 2018, Judge Kinkeade stayed confirmation of the award against the other AVIC entities but confirmed the arbitration panel’s decision against AVIC USA. The U.S. Court of Appeals for the Fifth Circuit affirmed his decision, and in October 2020 the Supreme Court declined to hear an appeal.

As this legal battle dragged on, AVIC USA paid nothing on the approximately $70 million award, Judge Kinkeade noted in August 2020. The award has grown millions larger as interest accumulated. Meanwhile, AVIC USA began selling off assets and moving money beyond the easy reach of the U.S. legal system, court filings show.

Beginning the same month the district court confirmed the arbitration panel’s award, AVIC USA sold off several of its U.S. assets and netted some $21.5 million, according to court disclosures by Mr. Zhang. In August 2019, AVIC USA entered into a joint-venture agreement “for a road construction project in the African nation of Zambia,” the filing said. AVIC USA “was required to contribute no less than $21 million and no more than $25 million,” “has made a contribution in the amount of $20.2 million,” and “used proceeds of its past investments for the contribution to this road construction project,” Mr. Zhang wrote.

Mr. Jenevein’s lawyers complained to Judge Kinkeade that “while acknowledging that its revenues for the last two years were more than $50 million, AVIC USA was left at that point with almost no valuable assets.”

Soaring Wind and Tang asked Judge Kinkeade to order AVIC USA to hand its remaining assets to the U.S. marshal. Judge Kinkeade agreed on Aug. 10, 2020: “The Court finds that AVIC USA has been transferring assets to avoid this Court’s judgment.” Tang and Soaring Wind complained the next month that AVIC USA still failed to turn over assets and asked for the company to show cause why it should not be sanctioned or held in contempt.

‘I can go back,’ Mr. Jenevein says. ‘It would just be a one-way trip.’

Lawyers for AVIC USA and AVIC didn’t respond to my questions about the sale of assets, movement of money to Zambia, and allegations that it sought to avoid legal judgments.

In October 2020, AVIC USA filed for Chapter 11 bankruptcy and told Judge Kinkeade that “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case” was stayed under the bankruptcy codes. The bankruptcy proceedings also put on hold the possibility of sanctions or a contempt holding.

Tang, Soaring Wind and the other American claimants in the joint venture asked Judge Kinkeade to lift his earlier stay and allow them to go after the parent company and its related entities. “As noted in the [arbitration] award, the ‘evidence overwhelmingly shows that AVIC,’ the parent, ‘used its subsidiaries and its control over its subsidiaries to commit a fraud and work an injustice,’ ” they argued.

But in October 2021 Judge Kinkeade declined to lift the stay, at least for now. In November a California judge said she would allow AVIC USA to convert to a Chapter 7 (liquidation) bankruptcy case if the company fails to settle with its creditors, including Tang and Soaring Wind.

That put Mr. Jenevein in a difficult position. Perhaps he could recover some of the money AVIC USA owes if he offered a discount on the damages awarded by the arbitration panel. He could gamble that a federal court will someday consider the claims against the parent and other AVIC entities and hold them liable for breach of contract. But by then, would AVIC USA have assets within the reach of the U.S. legal system?

Tang’s lead counsel,

Lewis T. LeClair,

told me in a Jan. 5 email that “Tang and Soaring Wind are pleased to report that after lengthy and complex negotiations with representatives of AVIC USA and the other AVIC Parties, the terms of a full global resolution of the disputes among the parties has been reached and is expected to be executed in the next few days.” He added that “all parties intend to put these disputes behind them and welcome the amicable resolution as a just and acceptable outcome.” The terms of the prospective settlement haven’t been disclosed.

Meanwhile, after fighting back against a state-owned enterprise, Mr. Jenevein feels he couldn’t safely do business in China even if he wanted to. “I can go back,” he says. “It would just be a one-way trip.”

Ms. Melchior is a Journal editorial page writer.

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