$60 Million Fight Over Chinese Business Collapse

Don DeBenedictis

LOS ANGELES (CN) — A group of Chinese educational companies claim in a federal lawsuit that they are on the hook for a $60 million judgment from a state court case to which they have no connection.

Cirrus Education and three related companies on Monday asked a federal judge to declare they are not the alter egos of another group of Asian educational companies, which actually lost the Superior Court trial that produced the multimillion-dollar judgment.

“Neither CEI [Cirrus Education Inc.], nor any of the other plaintiffs in this case, were ever named as defendants in the Superior Court action” or given notice of the proceedings, Cirrus says in the complaint.

“Remarkably, though, the Superior Court amended its judgment to hold the plaintiffs in this case — none of whom appeared in the Superior Court action — jointly and severally liable for the $60 million-plus judgment as purported ‘successor entities’ to EXPL,” referring to English Xchange Pte. Ltd., the Singapore-based defendant in that case.

Most of the winning plaintiffs in the Superior Court trial are defendants in the new federal case, including Los Angeles private equity investor Christopher M. Adams and his family’s real estate investment company, Morgan Adams Inc. The other defendants are Adams’ father, David V. Adams, and DVA Inc.

Co-plaintiffs are Cirrus subsidiaries Cirrus Beijing, Cirrus Ltd. and IQ-Hub Pte. Ltd.

Cirrus also accuses Adams of sending false information about the Cirrus Beijing subsidiary to an over-the-counter Chinese stock exchange, to derail the subsidiary’s effort to be listed on the exchange.

Cirrus claims his letter to “smear and defame” it worked. “It caused the investment bank handling Cirrus Beijing’s proposed listing to cease its efforts to pursue the listing,” which undermined its plan to raise capital, the complaint states.

Adams’ attorneys, Laurence Osborn and Robert Baker, with Baker, Keener & Nahra, could not be reached for comment late Tuesday.

Cirrus attorney Michael Tu with Orrick, Herrington & Sutcliffe, declined to comment.

The tangled dispute springs from deals in 2000 between Adams and two investors in China, Hong Mu and David Topolewski, to develop English language training programs and software for Chinese students. Adams and his family’s companies loaned the enterprise about $568,000, according to an unpublished appellate opinion about the Superior Court lawsuit.

Topolewski and Mu formed EXPL in 2001, allegedly without informing Adams. Later, they told him he owned 19.7 percent of it, the opinion and the federal lawsuit say.

The attorney for Mu and Topolewski, Jeffrey Zuber, with Zuber Lawler & Del Duca, could not be reached for comment late Tuesday.

For various reasons, including the economic downturn, EXPL failed and went into receivership. Cirrus says it then acquired some of EXPL’s intellectual property rights in exchange for assuming some of its secured debt.

Trying to recoup his losses from EXPL’s collapse, Adams sued Topolewski and Mu in December 2007. But when their attorney withdrew a month before trial, Adams’ counsel was unable to contact the two Chinese investors. The trial took place without them or their defense.

At the end, the judge valued EXPL at more than $300 million and awarded Adams more than $62 million for his 19.7 percent share.

After Mu and Topolewski appealed, the appellate court ordered a new trial.

“The plaintiffs in this case, however, again played no part in the Superior Court action,” Cirrus says, referring to itself. “Throughout the entire case and trial, plaintiffs in the Superior Court action made no attempt to name any of the plaintiffs in this case as defendants in the Superior Court action. No amendment was attempted and no notice was given.”

Cirrus claims in its lawsuit that Adams’ attorney Baker promised the judge during a February 2016 evidential hearing that he planned to file a brief showing why Cirrus was an alter ego of EXPL. But Cirrus says he never did.

It claims that the comments to the judge show that Adams “intended from the beginning to seek a judgment against the plaintiffs [Cirrus], yet intentionally did not inform plaintiffs of the claims so that plaintiffs would not oppose them.”

A third judge heard the retrial this summer and awarded Adams more than $60 million for his share of EXPL.

Perhaps unaware of the alter ego issue, that judge found that Cirrus and its subsidiaries “were ‘related entities’ and ‘successor entities’ to some of the Superior Court defendants and that they should be jointly and severally liable for the judgment,” the federal lawsuit states.

Cirrus, joined by Mu and Topolewski, have appealed the judgment to the state Court of Appeal.

In the new lawsuit, Cirrus asks the federal court to declare that it is not the alter ego of EXPL. Although it acquired some of EXPL’s intellectual property, only about 7 percent of Cirrus’s owners — three shareholders — had owned shares in EXPL.

Cirrus also seeks punitive damages from Adams for defamation, interference with prospective economic advantage and unfair competition, based on his letter to the Chinese stock exchange.

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