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?

The other day, in a post entitled, “China Hostage Situation. Now IS A Good Time To Pay Your Debts,” I wrote about some U.S. executives who were being held hostage in China over nonpayment of a business debt. Their US based company had gone bankrupt and when they went over to China to explain all this to their Chinese suppliers, they were taken hostage. I have since learned that they were eventually released, though I do not know whether a payment precipitated that release or not.

Forbes Magazine just came out with an article, entitled, “How To Avoid Getting Kidnapped In China,” the thesis of which is that if you are going to do business with another company in China, you should find an “uncle” first who will be able to mediate any disputes that might arise between the two of you:

Before entering a partnership with a Chinese company, you should find an “uncle”–a person both parties trust who will be able to mediate differences. This assures each side that issues will be resolved fairly. I have seen too many American businessmen drag out an inch-thick contract with some clause that they think lets them out of a deal. To their Chinese counterparts, it is clear the Americans are cheating. Use relationships rather than legalese whenever possible to solve problems.

The article  even posits that this US company whose executives were held hostage could have avoided their fate had they had such an uncle: “The case written up by China Law Blog should have been handled that way. Had the foreign company turned to an uncle to smooth relations before declaring it would not pay, the dispute would never have gotten to hostage-taking.”

Well maybe. But I still think the safer tact would have been to get all of your people out of China and then negotiate a payment plan from afar.

The article then talks about the need to “build guanxi:”

Many Americans have heard of guanxi, but it’s often translated wrongly to mean relationships with powerful people. Guanxi means something very different from the American concept of connections. It means being in a social circle where you can let your guard down a little, because there is deep trust, perhaps from generations of coexistence, living in the same neighborhoods or even with interwoven family relations. In the case I was involved in, the CEO didn’t want to hurt his relationship with the uncle, and once he knew I, too, was in the uncle’s circle, he wanted to create a friendship with me.

Many consultants like to tout that they have good guanxi and can arrange meetings with powerful officials to grease the wheels of commerce. They may be able to get the meetings, but those powerful people don’t usually really trust them–especially if the consultants are former officials of foreign governments, as they often are. Building long-term trust is very difficult, especially for those who once sat across negotiating tables representing other countries. Acceptance into a guanxi circle can take years.

Long-term perspective is very important in China. A defaulting borrower should avoid saying he won’t pay and instead pay a little right away and explain that he is hurting but will make good in the future. You cannot rely on bankruptcy to absolve debts.

Bottom Line: We definitely agree on the need to build long term relationships in China and having an “uncle” is certainly not a bad idea. The real key is to build up your relationships before you need them. And if you owe money to someone in China, the wise thing to do is to not go to China until your debt issue is resolved.

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