Lp6 v. S.D. Dept of Tourism

#29129-a-DG
2020 S.D. 38

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

****
LP6 CLAIMANTS, LLC, Plaintiff and Appellant,

v.

SOUTH DAKOTA DEPARTMENT
OF TOURISM AND STATE
DEVELOPMENT, SOUTH DAKOTA
GOVERNOR’S OFFICE OF ECONOMIC
DEVELOPMENT, SOUTH DAKOTA
DEPARTMENT OF TOURISM, and THE STATE
OF SOUTH DAKOTA, Defendants and Appellees,

and

SDRC, INC., SD INVESTMENT FUND,
LLC 6, and JOOP BOLLEN, Defendants,

and

SDRC, INC., SD INVESTMENT FUND,
LLC 6, and JOOP BOLLEN, Third-Party Plaintiffs,

v.

HENRY GLOBAL CONSULTING GROUP
a/k/a HENRY GLOBAL a/k/a HENRY
GLOBAL GROUP a/k/a HENRY GLOBAL
CONSULTING USA, incorporated under the
laws of the People’s Republic of China, Third-Party Defendant.

****

CONSIDERED ON BRIEFS
APRIL 21, 2020
OPINION FILED 06/24/20
APPEAL FROM THE CIRCUIT COURT OF
THE SIXTH JUDICIAL CIRCUIT
HUGHES COUNTY, SOUTH DAKOTA

****

THE HONORABLE CHRISTINA L. KLINGER
Judge

****

STEVEN D. SANDVEN
Beresford, South Dakota

EZIO SCALDAFERRI
BRUCE ROBINS of
Feder Kaszovitz, LLP
New York, New York Attorneys for plaintiff and
appellant.

PAUL E. BACHAND
AARON P. SCHEIBE
Special Assistant Attorneys General
Pierre, South Dakota

ROBERT L. MORRIS
Special Assistant Attorney General
Belle Fourche, South Dakota Attorneys for defendants and
appellees.
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GILBERTSON, Chief Justice

[¶1.] A group of investors in the EB5 immigrant investment program sued

various agencies that implemented the program in South Dakota, claiming fraud in

procuring their investments, which were lost when the project went bankrupt. The

circuit court granted a motion to dismiss by the state agencies involved based on

sovereign immunity. The investors appeal the circuit court’s decision, and we

affirm.

Facts and Procedural History

[¶2.] This case arises from implementation of the federal EB5 immigrant

investment program in South Dakota. The EB5 Program offers preferred

immigrant status to foreign nationals who invest in commercial projects with the

purpose of creating a specified number of jobs through each project. Under 8 U.S.C.

§ 1153(b)(5), the required investment per individual is at least $1,000,000, but for

projects in economically disadvantaged or rural areas (regional centers), the

threshold investment is reduced to a $500,000 minimum.

[¶3.] The South Dakota Department of Tourism and State Development

(DTSD) entered into a consulting contract with SDRC, Inc. 1 in 2009 to administer

and promote EB5 Program projects in South Dakota. The contract was made “for

the purpose of having SDRC administer the Regional Center and the EB5 Program

and to market the EB5 Program for the benefit of South Dakota[.]” SDRC had

administrative duties to work with United States Customs and Immigration

(USCIS) and the “non-exclusive right and privilege to market projects for

1. SDRC is wholly owned by Joop Bollen, a former State employee.
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development within the Regional Center’s territory[.]” Promotion of projects

required DTSD’s written consent first, and three funds were established to ensure

indemnification to DTSD when necessary. At the end of the term of the agreement,

all remaining funds were to return to DTSD.

[¶4.] The contract covered future projects as well as nine existing projects,

including an initial equity investment in the Northern Beef Packers processing

plant in Aberdeen. SDRC solicited further investments in the Northern Beef

Packers project by sending a Confidential Offering Memorandum to the thirty-five

Chinese nationals that form the LP6 Claimants. 2 The Offering Memorandum

detailed the requirements for a qualifying investment through the SDIF Limited

Partnership 6 (Partnership). 3 To comply with the regional center designation, each

Limited Partnership Unit required a $530,000 investment (a $500,000 investment

and $30,000 for issue expenses). The Offering Memorandum stated that the

investments would be used to construct the packing plant facility and purchase

machinery and equipment capable of processing 7,500 head of cattle each week and

396,000 head annually. The project was meant to create 563 jobs by 2010. The

Offering Memorandum stated that there was “no assurance that investors will

obtain final immigration status,” and that the project was “suitable only for

investors . . . who can afford the loss of their entire investment.” It also said there

2. Two offering memos were sent, one in November 2009 and one in January
2010, but they appear to contain the same provisions. One had a detailed
plan attached for the Northern Beef Packers project.

3. South Dakota Investment Fund LLC 6, an affiliate of SDRC, is the sole
general partner of the SDIF Limited Partnership 6.
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was no assurance “that the jobs required to be created and maintained . . . will be

achieved.” Day-to-day management of the investments would be conducted by the

Partnership, including supervising SDRC’s performance of its obligations under its

consulting agreement.

[¶5.] Each Claimant invested $530,000 (over $18 million collectively)

through the Partnership. Their collective investment was lost when the Northern

Beef Packers plant went bankrupt in 2013. The South Dakota Governor’s Office of

Economic Development (GOED) 4 terminated the contract with SDRC the same

year, and the United States Department of Homeland Security sent the GOED a

Notice of Intent to Terminate the Regional Center in September 2015 for failure to

submit required information to the USCIS and failure to demonstrate the

promotion of economic growth.

[¶6.] Claimants filed an amended complaint 5 in December 2015 against

DTSD, GOED, South Dakota Department of Tourism, the State of South Dakota,

SDRC, SD Investment Fund LLC 6, and Joop Bollen. The amended complaint

alleged fraud, breach of fiduciary duty, aiding and abetting breach, and included a

request to pierce the corporate veil.

[¶7.] The state agencies (collectively the State) filed a motion to dismiss

under SDCL 15-6-12(b)(5), on three grounds, arguing: (1) sovereign immunity bars

4. In 2011, DTSD was abolished and the GOED and the South Dakota
Department of Tourism took its place.

5. The initial complaint excluded the GOED, Department of Tourism, and the
State of South Dakota.

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suit against the State; (2) Claimants’ tort claims are barred by failure to give

mandatory statutory notice under SDCL 3-21-2; and (3) the claims are barred by

SDCL 21-32-2’s one-year statute of limitations for tort claims against the State.

SDRC, SD Investment Fund LLC 6, and Bollen filed an answer and crossclaim

against the State for indemnity or contribution, in addition to a third-party claim

against Henry Zou and the Henry Global Consulting Group, which lined up the

potential Chinese investors, for defamation and indemnity or contribution. The

State moved to dismiss the crossclaim because sovereign immunity would bar the

derivative claim. Bollen also joined in the State’s motion to dismiss against

Claimants in so far as the claims related to any actions he took while a State

employee.

[¶8.] Claimants’ opposition to the State’s motion to dismiss argued that

sovereign immunity was not a shield because the State was operating a commercial

enterprise. Claimants further argued that SDCL chapter 21-32A acts as a waiver of

sovereign immunity because the consulting agreement created participation in a

risk-sharing pool through the requirement that SDRC obtain liability insurance

that covered the State. The State responded that an express waiver was required

for sovereign immunity to be waived, and that there was no commercial enterprise

by the State.

[¶9.] After a hearing on the State’s motion to dismiss, the circuit court held

in its memorandum decision that Claimants’ suit against the State was barred by

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sovereign immunity. 6 The court determined that there was no express waiver of

immunity by the Legislature, and the commercial enterprise argument was

unavailing. This Court denied Claimants’ petition for intermediate appeal.

[¶10.] Eventually all underlying claims against the other defendants, as well

as the third-party claims, were dismissed by stipulation. The final stipulation, in

August 2019, for dismissal of SDRC, SD Investment Fund LLC 6, and Bollen as

defendants resolved with finality all underlying claims, and Claimants filed a notice

of appeal on the issue of sovereign immunity in September 2019. Claimants raise

the following claims:

1. Whether sovereign immunity applies to commercial
activities conducted by the State.

2. Whether the Legislature expressly waived the State’s
sovereign immunity for claims arising from the EB5
projects.

Standard of Review

[¶11.] We review a circuit court’s grant of a motion to dismiss de novo. N.

Am. Truck & Trailer, Inc. v. M.C.I. Commc’n Servs., Inc., 2008 S.D. 45, ¶ 6, 751

N.W.2d 710, 712. “A motion to dismiss under SDCL 15-6-12(b) tests the legal

sufficiency of the pleading, not the facts which support it. For purposes of the

pleading, the court must treat as true all facts properly pled in the complaint and

resolve all doubts in favor of the pleader.” Guthmiller v. Deloitte & Touche, LLP,

2005 S.D. 77, ¶ 4, 699 N.W.2d 493, 496.

6. At the hearing, the State conceded that the statute of limitations and notice
claims were secondary to the sovereign immunity claim, so the circuit court
only considered sovereign immunity.
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[¶12.] “A complaint should not be dismissed for failure to state a claim unless

it appears beyond doubt that the plaintiff can prove no set of facts in support of his

claim which would entitle him to relief.” N. Am. Truck & Trailer, 2008 S.D. 45, ¶ 6,

751 N.W.2d at 712 (quoting Thompson v. Summers, 1997 S.D. 103, ¶ 5, 567 N.W.2d

387, 390). “[W]hile the court must accept allegations of fact as true when

considering a motion to dismiss, the court is free to ignore legal conclusions,

unsupported conclusions, unwarranted inferences and sweeping legal conclusions

cast in the form of factual allegations.” Nygaard v. Sioux Valley Hosps. & Health

Sys., 2007 S.D. 34, ¶ 9, 731 N.W.2d 184, 190 (quoting Wiles v. Capitol Indem. Corp.,

280 F.3d 868, 870 (8th Cir. 2002)).

Analysis and Decision

[¶13.] Under the South Dakota Constitution, “[t]he Legislature shall direct

by law in what manner and in what courts suits may be brought against the state.”

S.D. Const. art. III, § 27. “Sovereign immunity is the right of public entities to be

free from liability for tort claims unless waived by legislative enactment.” Bickner

v. Raymond Twp., 2008 S.D. 27, ¶ 10, 747 N.W.2d 668, 671. Any waiver of the

State’s sovereign immunity must be expressly identified by the Legislature. See

High-Grade Oil Co., Inc. v. Sommer, 295 N.W.2d 736, 739 (S.D. 1980).

[¶14.] Three cases set up the applicable framework for sovereign immunity

analysis here. The first is High-Grade Oil, where a car accident led the plaintiff to

sue the State Highway engineer responsible for designing or approving the design of

state highways, claiming the curve the accident occurred on did not comply with the

applicable safety standards. 295 N.W.2d at 737. The engineer moved to dismiss in

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part on the basis of sovereign immunity as a State employee, which was treated as

a motion for summary judgment by the trial court and granted. Id.

[¶15.] On appeal, this Court determined that the action was against the

State, so sovereign immunity would apply, and affirmed the trial court because the

Legislature had not waived sovereign immunity for the type of action brought by

the plaintiff. Id. at 738-39. In reaching its decision, this Court reaffirmed

precedent that “if there is to be a departure from the rule of governmental

immunity it should result from legislative action.” Id. at 738 (quoting Conway v.

Humbert, 82 S.D. 317, 325, 145 N.W.2d 524, 529 (1966)).

[¶16.] Two cases involving the South Dakota Cement Plant followed High-

Grade Oil. Arcon Construction Company, Inc. v. South Dakota Cement Plant

involved a breach of contract action for the sale of cement to the plaintiff, and the

cement plant asserted sovereign immunity. 349 N.W.2d 407 (S.D. 1984). This

Court decided that “[t]he cement plant is clearly an arm of the state” based on the

declaration in the South Dakota Constitution that the plant’s activities were a

function of state government used for a public purpose. Id. at 410. See also S.D.

Const. art. XIII, § 10. The determination was further bolstered by SDCL 5-17-2.1,

which “provided: ‘The state cement commission and the state cement plant under

its control shall comprise a principal department of state government.’” Id. (quoting

SDCL 5-17-2.1). However, the Court determined that by enacting the Uniform

Commercial Code (U.C.C.), which covered the cement plant’s sales contracts, the

Legislature “expressly waived sovereign immunity for the cement plant whenever

the cement plant enters into contracts for the sale of goods.” Id.

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[¶17.] L.R. Foy Construction Company, Inc. v. South Dakota State Cement

Plant Commission expanded Arcon’s holding by applying the waiver of immunity to

commercial torts arising from the cement plant’s operations. 399 N.W.2d 340, 347

(S.D. 1987). In that case, the cement plant breached its contract with the plaintiff

by overselling its production capacity for the year, and in addition to the contract

claim, the plaintiffs alleged multiple tort claims, including fraud and deceit,

negligent misrepresentation, and tortious interference with contract, related to the

plant’s commercial operations. The cement plant asserted sovereign immunity as a

defense against the tort claims. Id. at 344. The Court identified that Arcon “never

reached the question of tort immunity for Cement Plant.” Id. at 346. However, we

reasoned that “[i]nasmuch as we have already waived sovereign immunity for

claims sounding in contract, we find that holding Cement Plant responsible for its

commercial torts is a logical extension of Arcon in conjunction with the intent and

meaning of the U.C.C.” Id. at 347. This is because “when authorization for Cement

Plant operations appeared in our constitution, it created an agency of state

government with independent proprietary powers or functions, and sufficiently

independent from the State to be sued.” Id. at 346.

[¶18.] The Court observed the statement from High-Grade Oil that “as to the

state there is no distinction between governmental and proprietary functions.” Id.

at 348 (quoting High-Grade Oil, 295 N.W.2d at 738). However, the Court

distinguished High-Grade Oil because that case involved claims against the State

related to personal injury and not claims involving “obligations and remedies within

the intent and meaning of the U.C.C.” Id. at 348. The Court also relied on Kunkel

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v. United Sec. Ins. Co. of New Jersey, 84 S.D. 116, 168 N.W.2d 723 (1969), “which

recognized that independent obligations may accrue as a matter of law even though

the parties operate in a contractual setting.” L.R. Foy, 399 N.W.2d at 349. Finally,

the Court held that the cement plant “should be held fully accountable for both its

contract and commercial tort claims” based on Arcon, the constitutional provisions

related to the cement plant, and the way the cement plant operates, along with the

express U.C.C. waiver. Id.

[¶19.] Claimants assert that this situation is similar to L.R. Foy, Arcon, and

Aune v. B-Y Water District, 464 N.W.2d 1 (S.D. 1990) (denying state sovereign

immunity to a water district), because waiver here is based on similar legislative

schemes and a distinction between governmental and commercial activity. But

Arcon involved the U.C.C., see 349 N.W.2d at 410, and L.R. Foy’s holding was

“expressly limited to the operations of [the] Cement Plant, and [did] not affect the

general rule set forth in High-Grade [Oil].” L.R. Foy, 399 N.W.2d at 349. Finally,

Aune did not concern the State’s sovereign immunity, but rather a business

enterprise with a commercial purpose. 464 N.W.2d at 4.

[¶20.] Nevertheless, Claimants maintain that High-Grade Oil does not apply,

because that case did not involve a commercial enterprise and L.R. Foy

distinguished High-Grade Oil. In Claimants’ view, High-Grade Oil, Arcon, L.R.

Foy, and Aune are all good law, but can only be reconciled through a commercial

enterprise and governmental activity distinction. Further, according to Claimants

even in the absence of an express waiver by the Legislature, this Court has followed

a general nation-wide rule that sovereign immunity does not apply to claims arising

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from the State’s operation of a commercial enterprise. Claimants rely primarily on

L.R. Foy and Aune for that assertion, but also cite federal cases to support the idea

that soliciting investments in securities is a commercial activity. 7

[¶21.] Claimants argue that while there were express waivers in L.R. Foy

and Arcon, the cases were actually decided based on the activities being a state

commercial enterprise. It is clear in those cases, though, that the Legislature’s

express waiver is what made the cases consistent with High-Grade Oil.

[¶22.] Although in L.R. Foy this Court noted the distinction between

commercial and government functions, Arcon and L.R. Foy concerned the U.C.C.

and the Cement Plant and are thus not controlling here. Rather, the rule in High-

Grade Oil controls and an express waiver by the Legislature is required to waive

sovereign immunity. See High-Grade Oil, 295 N.W.2d at 738. See also State v. Bd.

of Comm’rs of Beadle Cty., 53 S.D. 609, 222 N.W. 583, 593 (1928) (“[T]here cannot

be successfully maintained, as a matter of law, in this state, under the

circumstances here involved, a distinction between what has been frequently

denominated as a ‘sovereign’ and ‘nonsovereign’ capacity of the state[.]”). That an

express waiver is required was reaffirmed in L.R. Foy. 399 N.W.2d 340 at 348.

United States Supreme Court cases also lend support to the rule. See Kelo v. City of

7. See EIG Energy Fund XIV, L.P. v. Petroleo Brasileiro, S.A., 894 F.3d 339
(D.C. Cir. 2018); Atlantica Holdings v. Sovereign Wealth Fund Samruk-
Kazyna JSC, 813 F.3d 98 (2d Cir. 2016); Wolf v. Banco Nacional de Mexico,
S.A., 739 F.2d 1458 (9th Cir. 1984); Wasserstein Perella Emerging Mkts. Fin.,
LP v. Province of Formosa, No. 97 Civ. 793(BSJ), 2000 WL 573231 (S.D. N.Y.
May 11, 2000); Tucker v. Whitaker Travel, Ltd., 620 F. Supp. 578 (E.D. Pa.
1985).

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New London, Conn., 545 U.S. 469, 484, 125 S. Ct. 2655, 2665, 162 L. Ed. 2d 439

(2005) (“Promoting economic development is a traditional and long-accepted

function of government.”); Berman v. Parker, 348 U.S. 26, 33-34, 75 S. Ct. 98, 103,

99 L. Ed. 27 (1954) (considering a development project governmental despite a

private entity being partially involved in the implementation). The State’s

sovereign immunity applies to all of its functions unless waived, including

commercial activities. We return then to the basic High-Grade Oil rule to

determine whether the Legislature waived sovereign immunity for claims arising

from the EB5 Program. 8

[¶23.] From our review there is no express waiver here, and no statutory or

constitutional provision has been identified that would provide such a waiver.

Claimants, however, argue that SDCL 21-32A-1 created a waiver based on the

consulting agreement requiring SDRC to purchase liability insurance covering the

State. High-Grade Oil also dealt with the argument that purchasing liability

insurance constitutes a waiver of immunity, and determined that the agencies

purchasing coverage did not have the authority to waive the State’s immunity by

doing so. 295 N.W.2d at 739. Only the Legislature can waive the State’s sovereign

immunity. And under SDCL 21-32A-1 the Legislature specifically exempted the

State from its waiver provisions for public entities purchasing liability insurance.

See SDCL 21-32A-1 (providing that a public entity “other than the state” waives

8. The High-Grade Oil standard for waiver of sovereign immunity has been
consistently followed by this Court in subsequent cases. See, e.g., Truman v.
Griese, 2009 S.D. 8, 762 N.W.2d 75; Hanson v. S.D. Dep’t of Transp., 1998
S.D. 109, 584 N.W.2d 881.
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sovereign immunity to the extent that entity purchases liability insurance or

participates in a risk sharing pool).

[¶24.] Claimants also argue, for the first time on appeal, that the Uniform

Securities Act, SDCL 47-31B-101, et seq., provides an express waiver. The claim

cannot survive because it was not asserted below. See A-G-E Corp. v. State, 2006

S.D. 66, ¶ 19, 719 N.W.2d 780, 786. When an issue is raised for the first time on

appeal this Court need not consider it. Cain v. Fortis Ins. Co., 2005 S.D. 39, ¶ 22,

694 N.W.2d 709, 714. Additionally, although Claimants assert that this argument

responds to the State’s reply brief below, which it had no opportunity to respond to

in writing, the Act was not brought up at the motions hearing either.

[¶25.] Claimants maintain that this Court should nevertheless address the

issue because we can do so in certain circumstances. When this Court has

considered issues not raised below, we were “faced with a compelling case.” In re

J.D.M.C., 2007 S.D. 97, ¶ 27, 739 N.W.2d 796, 805. There is no compelling reason

to analyze the issue on appeal even if the activities do fall under the Act, because

Claimants would at most identify an implied waiver of immunity. Implied waiver

does not satisfy our standard under High-Grade Oil. 9

9. No claim is advanced herein that as to express waiver Arcon and L.R. Foy
were improperly decided. As such, we do not address that issue today. We
note that those cases were decided in 1984 and 1987 and have not been
followed for their holdings that adoption of the U.C.C. is an express waiver.
Thus, we leave for another day the issue of whether when the Legislature
passes a comprehensive uniform code, it complies with the constitutional
standard that a waiver must be expressly stated by the Legislature and
cannot be implied by this Court.
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[¶26.] It is also telling that when the EB5 Program was created, no express

waiver of sovereign immunity was included in that legislation. Without an express

waiver, Claimants cannot maintain their action against the State.

Conclusion

[¶27.] Claimants have made no showing that an express waiver of sovereign

immunity applies to the State’s activities with the EB5 Program. Their suit cannot

be maintained, and the circuit court properly granted the State’s motion to dismiss.

The circuit court’s decision is affirmed.

[¶28.] KERN, JENSEN, and SALTER, Justices, and WILBUR, Retired

Justice, concur.

[¶29.] WILBUR, Retired Justice, sitting for DEVANEY, Justice, disqualified.

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