EB-5 Foreclosure: Investor Rights When a Senior Lender Moves In

A senior lender is moving to foreclose on your EB-5 project, and the investors’ money sits behind that lender or has no security at all. California law offers several tools, including the equitable lien, and the cases below show both how they work and where investors have lost.

This post is part of Rosenberger + Kawabata’s series on EB-5 investor lawsuits.

Where does EB-5 money stand when a project fails?

Priority decides the order in which lenders are paid from the property. Under Civ. Code § 2897, “Other things being equal, different liens upon the same property have priority according to the time of their creation, except in cases of bottomry and respondentia.” An unsecured lender has a promise to repay but no lien on the property at all.

Two cases show the security behind EB-5 loans falling short. In a 2022 New York Appellate Division decision (211 A.D.3d 1475), an EB-5 partnership with ten foreign investors had lent $4,000,000 to a developer to build a hotel in Syracuse. The appellate court said the documents may establish “that plaintiff’s loan was unsecured.” The city transferred the land to a company that, according to the partnership, shares the borrower’s owners, and the complaint alleges that the loan money followed it, leaving the borrower with no assets.

In a published 2024 Court of Appeals of Virginia decision (Record No. 0523-23-4, Oct. 8, 2024), investors in a Mississippi electric-car venture were promised more security than they had. They received a brochure saying 100 acres of land, plant and equipment would secure the loan “to the EB-5 investors, who ha[d] a first-ranking mortgage on the collateral.” The offering memorandum disclosed a deed of trust on 80 acres that might not fully secure the loan. The project’s principal, who denied making any of the allegedly false statements, testified the brochure statement was untrue. The investors still lost. The court held their fraud claims ran from when they signed the offering memorandum in 2012 and 2013, so their 2019 suit came too late, and the Supreme Court of Virginia refused the appeal.

In an SEC enforcement case in the Northern District of Illinois (No. 17-cv-4686) over EB-5 senior-living projects, the federal court in Chicago noted in 2017 that the one completed project had 12 of its 60 units occupied and was “the subject of a foreclosure suit in Kane County,” where a receiver had been appointed.

What is an equitable lien, and when does a court grant one?

In California, “An equitable lien is a right to subject property not in the possession of the lienor to the payment of a debt as a charge against that property” (53 Cal.App.4th 445, 453 (1997)).

The same court explained that the lien can arise two ways. One is a contract that shows an intent to make particular property security for a debt. The other is “general considerations of right and justice as applied to the relations of the parties and the circumstances of their dealings,” which the court linked to doctrines such as estoppel and unjust enrichment. It added that “A promise to pay a debt out of a particular fund, without more, will not create an equitable lien on that fund.”

A 1964 California Supreme Court decision, 61 Cal.2d 311, overruled on other grounds by a 1978 decision of the same court, 21 Cal.3d 943, adds the priority point, quoting a leading treatise. A written agreement that makes particular property security for a debt creates an equitable lien that is enforceable against later “purchasers or encumbrancers with notice.”

Recording matters too. Under Civ. Code § 1214, an unrecorded conveyance of real property is void against a later purchaser or mortgagee who takes in good faith, pays value, and records first.

California’s securities law separately makes it unlawful to offer or sell a security in the state by means of a communication that “omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading” (Corp. Code § 25401).

What other tools do investors have?

Constructive trust

California makes a person who gains property by fraud or another wrongful act “an involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it” (Civ. Code § 2224). Courts require a specific piece of property, the plaintiff’s right to it, and a wrongful taking or holding (35 Cal.App.4th 980, 990 (1995)).

A Texas case shows a related result for an EB-5 investor. In a 2023 memorandum opinion (No. 14-22-00197-CV), the Houston Court of Appeals described an investor who paid $1 million for a business that was supposed to qualify her for an EB-5 visa. The sponsor admitted he used her money to buy an office condominium, which he titled in another of his companies. A jury found fraud. Separately, on the investor’s claim that as the 90% shareholder she controlled the company’s assets, the trial court placed those assets, including two vehicles and the condominium, in a constructive trust for her. The appeals court affirmed the fraud liability against the sponsor and his businesses, reversed the judgment against his wife, suggested a reduction in the damages, and let the constructive trust stand because the defendants had not challenged the ruling it rested on. The court said the trust “was not awarded as a remedy for fraud.”

Fraudulent-transfer and veil-piercing claims

In the Syracuse hotel case, the EB-5 partnership sued the borrower, the company that held the land, the individual owners, and the law firm that held the loan money in escrow. In 2022 the Appellate Division let the fraudulent-conveyance claims proceed against the owners and held the partnership had adequately alleged that “corporate funds were purposefully diverted to make [the borrower] judgment-proof.” It also kept the partnership’s claim that the law firm breached the escrow agreement by releasing funds to the land-holding company. The trial court had already dismissed the fraud claim against all defendants and the fraudulent-conveyance claims against the law firm. As of that December 2022 ruling, the case was at the pleading stage, and the court had made no findings of wrongdoing.

Contract promises about the property

In a 2023 North Carolina Business Court decision (2023 NCBC 47), investors in a Wilmington, North Carolina hotel and marina project pointed to a subscription agreement that limited the partnership’s ability to sell the property “for EB-5 visa approval until removal of the [investor’s] conditional permanent residence status.” The court let a breach-of-contract claim against the general partner proceed over the alleged transfer of project property. As of that July 2023 ruling, the case was at the pleading stage, and the court had made no findings of wrongdoing. The investors lost other claims: the court dismissed their fraud and securities claims with prejudice, and it dismissed their direct fiduciary-duty claim because the alleged harm fell on the partnership as a whole.

Can investors stop a sale by recording a lis pendens?

A lis pendens is a recorded notice of a pending lawsuit that affects title to real property. California courts limit when one may be recorded. In a 2005 Court of Appeal decision (132 Cal.App.4th 904), the plaintiff sought an equitable lien on a house to recover trust money spent remodeling it. The court held that a claim seeking an interest in property only to secure a claim for money damages does not support a lis pendens. A later published decision (Cal. Ct. App., 1st Dist., No. A163711, 2022) held that a claim to recover the same property allegedly taken from the plaintiffs can support a lis pendens and sent the case back for further proceedings. It distinguished claims for a lien on “different property, merely as a means to secure collection of a debt.”

In an unpublished 2024 summary disposition (which, under Hawaii Rule of Appellate Procedure 35(c)(2), is “not precedent”), the Hawaii Intermediate Court of Appeals affirmed orders expunging EB-5 investors’ lis pendens because “none of the plaintiffs claimed title to, or sought to possess, any real property.”

Why does speed matter once a default notice arrives?

California’s nonjudicial foreclosure statute sets the clock. Before a power of sale may be used, “Not less than three months shall elapse from the filing of the notice of default” (Civ. Code § 2924(a)(2)). Investors who see a default notice, missed interest payments, or a request to consent to new debt should get their documents to counsel right away. In the Virginia case, the court also noted that after interest payments stopped in 2016, two of the investors did not investigate further, and the suit was not filed until 2019.

Frequently asked questions

Can an equitable lien put EB-5 investors ahead of the bank?

The 1964 California Supreme Court decision says a written agreement making property security for a debt creates an equitable lien enforceable against later encumbrancers “with notice.” None of the cases in this post gave EB-5 investors priority over a senior lender.

Can a lis pendens protect the investors’ position?

It depends on the claim. In the 2005 California decision, the court held that a claim seeking an interest in property only to secure money does not support one. In the 2022 decision, the court held that a claim to recover the same property allegedly taken can support one.

The developer moved the property to a related company. Does that matter?

In the Syracuse hotel case, the appellate court let fraudulent-conveyance claims proceed at the pleading stage after the loan money allegedly went to a related company. In the Texas case, the investor, as majority shareholder, obtained a constructive trust over her company’s assets, including the condominium.

What to do now

1. Gather the offering documents: the private placement memorandum, subscription agreement, and partnership agreement, plus any translations you received.
2. Collect the loan documents, any notice of default or sale, and every update from the fund about other lenders or new debt.
3. Save the marketing materials and every message from your migration agent, including anything describing collateral or “first” position.
4. Write down what you were told about security for the loan, by whom, and when.
5. Keep your annual statements and fund-administrator reports.
6. Talk to your immigration counsel about I-526 or I-829 effects, and consult a securities lawyer promptly.

Rosenberger + Kawabata does not give immigration advice. Before taking legal action, talk with your immigration attorney about how a lawsuit or a recovery could affect a pending I-526 or I-829 petition.

A related post covers misappropriation of EB-5 funds.

Rosenberger + Kawabata represents investors in securities fraud and investment loss cases, including claims by EB-5 investors against regional centers, developers and the professionals around them. Consultations are confidential.

Call Rosenberger + Kawabata at (310) 894-6921.

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