#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,
SDRC, INC., SD INVESTMENT FUND, LLC 6, and JOOP BOLLEN, Third-Party Plaintiffs,
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. #29129
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. -1- #29129
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. -2- #29129
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. -5- #29129
[¶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. -11- #29129
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. -12- #29129
[¶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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