In more detail

On 3 March 2023, a federal judge in New York pierced the veil of a company that held a Manhattan apartment. In La Dolce Vita Fine Dining Company v. Zhang Lan, Judge Kaplan awarded the proceeds from a foreclosure sale of the apartment to Ms. Zhang's creditors. 

Ms. Zhang founded the well-known South Beauty restaurant chain in China. In 2013, she sold more than 80% of the group to La Dolce Vita. Shortly after closing, the La Dolce Vita parties (referred to collectively as La Dolce Vita for ease of reference) alleged that Ms. Zhang fraudulently misrepresented South Beauty's financial condition and claimed that she violated various warranties in the acquisition agreement. 

La Dolce Vita brought arbitration proceedings before the China International Economic and Trade Commission (CIETAC). The CINETIC arbitration panel awarded La Dolce Vita more than USD 142 million. The Second China International Commercial Court confirmed the award, and La Dolce Vita took action in Singapore, Hong Kong and New York to enforce the award.

La Dolce Vita filed in the US District Court for the Southern District of New York to (i) confirm the arbitral awards under the Convention on Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), (ii) obtain a judgment against Ms. Zhang based on the court's quasi in rem jurisdiction, and (iii) appoint a receiver to effectuate the sale of the Manhattan apartment and distribute the net proceeds to La Dolce Vita. 

Ms. Zhang did not hold title to the apartment. The apartment was owned by a New York limited liability company ( LLC) called Metro Joy International LLC ("Metro Joy"). The petitioners claimed that Ms. Zhang effectively controlled Metro Joy even though Metro Joy was apparently held in an offshore trust that Ms. Zhang established. 

The court found that Ms. Zhang's control over the structure allowed for the attachment of the property regardless of the legal structures based on her "effective ownership" of the property. The court highlighted the flow of funds from Ms. Zhang to purchase the property and communications between the real estate broker and insurance broker that referred to Ms. Zhang as the owner of the property. Judge Kaplan noted that Ms. Zhang did not provide evidence to rebut the evidence presented by La Dolce Vita that demonstrated her interest in the apartment. 

It is a common practice for clients to acquire US real estate through one or more entities for legal and tax reasons. It is important to observe the formalities of companies and trusts involved in structures. The court in the Zhang Lan case noted the third-party communications (such as those with the brokers) as supporting the finding of quasi in rem jurisdiction. 

Private clients and their advisers should ensure that communications are consistent with the legal structures used and properly refer to owners as such. Advisers should also consider whether to instruct third parties involved in a transaction to properly and accurately refer to parties. 

The Zhang Lan case is a reminder of the importance of proper execution and governance from planning and implementation all the way through transactions.