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How Not To Get Kidnapped In China, Part 3. Resolve Your Debt Problems Before You Go.

Posted in Legal News

Yet another story of an American businessperson being held in China for his company’s unpaid debt. Hate to say we told you so, but we told you so. And more than once (note this is Part 3!)

This latest debt-hostage story was brought to my attention by Jeremiah Jenne of rectified.name (a terrific new China blog, but one that really ought to allow comments) and Jottings from the Granite Studio fame (a terrific old China blog that does allow comments).  Jeremiah asked me about it via Facebook by sending the following:

Sure to be more to this story than just ‘bad China.’ Rep sounds clueless at best, downright dumb at worst. US company boss also seems quite shady, firing the poor schmuck but still unable to remove him as ‘legal representative.’

Need help making sense of this. Sending bat signal to Dan Harris.

Not sure there really is all that much unusual to the story as it reads like a typical debt-hostage story, with the following standard elements:

  • For whatever reason, American company owes China company money (or even just China company claims American company owes it money).
  • For whatever reason, company doesn’t pay China company.
  • For whatever reason, important American guy (I’ve heard of this happening at least a dozen times and my firm has been actively involved in these at least twice and every single time it’s been a guy) goes to China to try to resolve the debt either by trying to convince China company to accept less than the full amount owed.
  • For obvious reasons, important American guy gets his passport taken and is blocked from leaving China until the matter is resolved.
  • For whatever reason, important American guy thinks that whining to the U.S. Embassy and the press is going to help him.

Anyway, here is this latest story, courtesy of the Washington Post, and titled, “Missouri businessman in limbo in China in dispute over debt, unsure when he’ll get back to US“:

The Chinese government forced Steve Fleischli of Labadie, Mo., to surrender his passport in a dispute over his company’s unpaid debt to Chinese firms. Complicating matters is that he has lost his job since going to China on business in January.

Many of the details of the case, including exactly why Fleischli was fired from his job, are unclear. But his story offers insight into the perils of a western businessman doing business in China, especially when commercial disputes are involved.

The State Department declined comment on his case, but its website says there is little it can do to intervene on behalf of Americans in situations like Fleischli’s, which can take years to resolve.

Let’s break down this intro a bit.  First off, it says the “Chinese government” forced this American to surrender his passport. What is meant by “Chinese government”?  Local police or President Hu Jintao?  I’m betting it’s local.

Second, it says that “Many of the details of the case….are unclear.”  Yup.  No surprise. Reading between the lines, this probably (note I said probably because I do not know and I am just guessing here) means that the company does owe the debt, the American hostage is responsible for the debt under Chinese law, and the company that fired the American was less than happy with him.

More of the story:

“I think he’s more frightened about the comment that sometimes these things go on for years, rather than about his personal safety,” Fleischli’s attorney, Mitch Margo, said.

Fleischli, 37, began his career at Washington, Mo.-based NorthPole Ltd. 11 years ago and rose to CEO. The company is a leading maker of outdoor gear including tents, foldable camping chairs. Warburg Pincus, a global equity firm, is NorthPole’s majority owner.

Times got tough for NorthPole in recent years as prices for materials increased and retail orders slowed. The company owed money to suppliers in China. Margo said Fleischli even loaned NorthPole $200,000 of his own money last year. The company declined to discuss details of the loan, but it was an issue in Fleischli’s firing.

Let’s look at the above.  The American guy is “more frightened about the comment that sometimes these things go on for years, rather than about his personal safety.” That makes sense.  In my law firm’s experience, these things only end by an agreement by the Chinese company to accept a certain payment and then that payment being made. Maybe these things can end some other way, but I am not aware of that ever having occurred. The Chinese company typically wants its money, not to physically harm anyone.  I do hope Mitch Margo is working with other lawyers experienced in negotiating with Chinese companies.  “The company owed money to suppliers in China.” Presumably, the American company owes money to the Chinese company that saw to the taking of Mr. Fleischli’s passport. Why does a company fire someone for loaning the company money? This does not make much sense and there has to be more to it than this.

Fleischli, who has a 3-year-old daughter and wife back home in Missouri, decided to fly to China to address concerns of suppliers in person. He left in January in anticipation of a meeting with suppliers at a factory in Xiamen, China, in March. The meeting was a disaster as angry suppliers rioted. After more than a day, police were able to help Fleischli get out of the factory.

In How Not To Get Kidnapped In China, we set out three rules to follow if you or your company are alleged to owe money to a Chinese company:

So what are the lessons from all this?

  1. If you are in a debt dispute with a Chinese company, think about not going to China at all.
  2. If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.
  3. Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

We really should have added a fourth rule, which rule we discussed in “Shanghai Thugs Forcibly Remove Shanghai Residents. Why This Matters For YOUR Business”:

Though China is relatively safe, one should absolutely not write off the possibility of violence in one’s business dealings in China. My law firm has been called in at least a half dozen times where violence was either threatened or occurred. We tell our clients that if they owe money to a Chinese company or are involved in any sort of dispute with anyone in China (partner, employee, etc.), they should avoid meeting to discuss the dispute/problem anywhere other than in a neutral, very public place in the day time. A high end hotel lobby in Shanghai or Beijing is a good choice.

In other words, if you really think it necessary for you to go to China to try to resolve your company’s debt issues, at least seek to have the meeting in a hotel lobby in Beijing or in Shanghai, rather than in Xiamen in the conference room of the company to whom the debt is allegedly owed.

The article goes on to say that Fleischli is being held because he was/is NorthPole’s “legal representative in China” and that a court in Xiamen actually ordered Fleischli to be held.  I am pretty certain that in every case like this on which my law firm has worked, there was no court order.  Instead, the company and the police had merely acted together to block any exit by our client.

In “Bo Xilai’s Lessons For Your China Business,” we wrote of how arguing that the hostage does not personally owe the debt is usually not the fastest/best way to resolve these sorts of situations:

I say this because we have been involved in at least two cases where this was the case. U.S. company owes money to Chinese company. U.S. company ceases to do business and so its key figures assume the issue is resolved in that the company has no assets to pay any debt.  They then get on a plane to a foreign country (one was a China case, the other was a Russia case) and they both get seized and “held hostage” until we negotiate out their release. They wanted us to argue that they personally did not owe the debt; their companies did. Our response was to tell them “that would be an excellent argument if we had the luxury of filing court briefs and waiting months for a judge’s decision, but our goal here is to get you released as quickly as possible.”

We deal with this issue in its nascent stages all the time when we work with our clients to shut down their Chinese entities (which for some reason has been happening like crazy of late). We always instruct our clients never to reveal that they will be shutting down their China operations while anyone from the home office is in China. We also tell them that if they or their company ever wish to return to China, they should pay off all their debts and usually the best way to do that is to announce from outside of China the plan to gradually shut down the China office and then, using that as leverage, negotiate down all of the debts. We always stress that once a reduced debt is agreed upon, there should be a written agreement on that and there should be proof of payment on that agreement as well.

All of this is necessary if you want to formally close your China entity, which is, in turn, necessary, if you want to be able to return.

Fleischli appears to be in an even worse situation in that a court has already found him personally liable for the debt as NorthPole’s legal representative in China.  Fleischli pleads ignorance: “I had no clue,” Fleischli told the Post-Dispatch. “I’m an American guy over here in China. I can’t read Chinese. I had no idea what a legal rep even was.” To which we can only say that ignorance of the law is no excuse in China just as in the United States.

Now here’s where the story gets weird.

Then in May, Warburg Pincus fired Fleischli for “gross misconduct.” The company declined to comment further on the firing, but Margo said it meant Fleischli also lost access to the company’s lawyers in China.

It’s not clear to Margo or Fleischli why the firing didn’t absolve Fleischli of his duties as NorthPole’s legal representative. Fleischli has sued NorthPole and Warburg Pincus seeking severance and damages and asking to be removed from that role. Margo believes that would help him get out of China.

But Warburg Pincus says it can’t remove Fleischli from that role.

“Warburg Pincus has had no involvement with any travel restrictions Mr. Fleischli may have in China. The firm does not control Mr. Fleischli’s status as legal representative of NorthPole in China, and does not control any travel restrictions that local authorities in China have placed on him,” the company said in a statement.

Fleischli was fired in May. Why didn’t anyone pay the company debt before that?  Presumably it is because the company lacked the funds to do so. Why didn’t Warburg Pincus pay the debt then? Presumably because even though it has power to fire the company CEO it is not on the hook for company debt. I guess that can make sense.  But what about removing Fleischli from his role as NorthPole’s legal representative?  I do not see why NorthPole and Fleischli cannot agree to make that happen, unless, of course, Chinese law forbids changing legal representatives in a situation where the company has debt.  But I also do not see how Fleischli’s removal as legal representative will help him at all with his present situation.  I truly hope Fleischli has good legal counsel in Xiamen where he is being held.

The story concludes by pointing out how the U.S. State Department’s website makes clear that when it comes to commercial disputes, the Chinese “may prohibit you from leaving China until the matter is resolved under Chinese law. There are cases of U.S. citizens being prevented from leaving China for months and even years while their civil cases are pending.” And how the U.S. Embassy and consulates general “have no law enforcement authority in China and cannot recommend a specific course of action, give legal advice, or lobby the Chinese government regarding a private citizen’s commercial dispute.”  All true.

For more on hostage situations in China, check out the following:

And just to scare you a little bit more, I have a friend who works for a high end China risk consultancy and he tells me that they started seeing a massive increase in these cases this year.

What are you seeing out there?

  • Jeremiah

    Good points all.  Just a quick legal question, if the situation were reversed, and a rep from Chinese company X came to the US (or Canada, or South Korea, or England, etc.). where Company X owes money to local company Y. What legal recourse, if any, would company Y (in Canada, ROK, England, US, etc.) have for seizing the passport of the rep and holding it indefinitely until payment by Company X was received?

    Having no legal training, I’m curious to know if this practice is ‘normal’ in international business or if it happens in some countries more than others?

    • bystander

      99% of this stuff is worked out by bankruptcy procedures in the US.  I.e., we have an orderly way of shutting down a failed business that does not involve kidnapping.

      Here Dan will have to correct me if I’m wrong, but my impression is that if there are criminal charges pending against someone then it’s probably possible to ask for a court order to prevent the person from fleeing the country, but in civil cases I have never heard of such a thing — a person having their passport confiscated over a civil case.

    • Jaycasey

      If I’m not mistaken, any such action in the US would have to be court-ordered.  A company in the US can’t call their local police and have a foreigner’s passport taken away.

    • http://www.chinalawblog.com/ Dan Harris

      I have never heard of it happening in any advanced economy.  Not saying it has never happened, but I have never heard of it. I am not certain, but I think it is impossible to take someone’s passport over a debt in the US.  I think — but am not certain — that it may be possible to take someone’s passport if they owe child support, but I could well be wrong on that.  I think — and am a bit more certain of this — that it is possible to take someone’s passport if there is a fear that they will leave the country with one of their children, against the law and the wishes of the other parent.  But I am also 99.9% certain that there has to be some sort of court order to seize/freeze someone’s passport.  Would love to hear from US lawyers who know this area better than I do!

  • China Bystander

    It is not just Americans who are getting taken as debt-hostages. We wrote last month about Indian traders being abducted in Yiwu, something that seems to have happened multiple times. 
    http://chinabystander.wordpress.com/2012/05/23/another-indian-trader-feared-abducted-in-yiwu/

  • http://twitter.com/ttmh Tobias

    NorthPole reportedly owes 20m RMB http://www.whatsonxiamen.com/news24243.html

  • Jaycasey

    This situation is so much more common than even you know about.  The only people that know are in the US (and other countries’) embassy and consulates but because of privacy laws they cannot discuss the cases openly.  Often, the companies don’t want to talk about it either out of fear of retaliation on their business interests from Chinese authorities.  One disabled American I knew in Shanghai was held for over a year because his employer had suddenly gone out of business and owed money to a Chinese company.  His passport was taken away when he tried to leave Pudong.  The Consulate helped make sure he had medicine and communications but that’s all they could do.  After a year of getting nowhere (he had nowhere near enough money to pay off the Chinese company) he went to Fujian and managed to pay someone to sneak him out of China.  I still don’t know how that was arranged.

    In the Xiamen case the bloodsucking private equity firm that drained off Northpole’s profits needs to settle up and has a moral obligation to help their former employee.  But I don’t have much hope Warburg will act on a moral obligation.

    Your advice is right but even better advice is stay away from China.  Put your business somewhere else.

  • Blue Apple

    you may like or dislike the regulation that a person can be barred from leaving the country in case of an economic dispute, but it is a valid law, not a kidnapping, it applies to Chinese and foreign citizens alike!

    One additional question:
    Is there a kind of private insolvency law in China?
    If a Legal Representative is made personal liable for the debt of his company, in most cases he/she will not be able to pay such an amount (there was a discussion on this board before: there should be very few cases in which the Legal Representative is  personal liable).
    Can a Chinese court decide that a Legal Representative is insolvent and close the case?

  • Frankie Leung

    There are situations that even lawyers representing clients got detained and threatened.  A wealth manager of a foreign finance company was detained because her client allegedly stole money from a company and the Chinese authority suspected the wealth manager assisted her client.  There are thousands of cases, and I have encountered a few.  China does not make a distinction between the corporate entity and the individual who either owns company as a stockholder or employed as a CEO.  In all fairness to China, many third world countries do the same.  I have a friend who is in oil and gas company, he has been detained in countries such as Nigeria or Mexico because of business dispute.  In China, the state-owned countries see themselves as part of the government.  Every form of business dispute is looked at a fraudulent case and the foreigner has to be threatened to resolve it.  Since the courts are ineffective agent for dispute resolution, China thinks  detention works.

  • http://www.facebook.com/people/Shi-Huangdi/100003740372610 Shi Huangdi

    What happen to me if I have unpaid debts in Hong Kong. Can this situation affect me in China mainland?