Hotel Lawyer on technology challenges to your proprietary and sensitive corporate information. The continuing advances of technology continue to present a double edged sword. On the one edge are tremendous cost savings, efficiencies and power to manage information. On the other edge are daunting issues of information security and privacy.

In the article below, two of our Global Hospitality Group® lawyers talk about a recent court decision from the respected second circuit in New York that has important implications for every employer in the hospitality industry. It serves as a reminder that good employee handbooks and company policies are important to protecting your valuable business information and electronic data.

Here is what it is all about.

New case from the second circuit in NY

Multinational companies, like hotel companies, often face challenges in enforcing claims against their employees and agents located in foreign jurisdictions. In December 2012, a federal appeals court decision -- MacDermid, Inc. v. Deiter, No. 11-5388-cv (2nd Cir. Dec. 26, 2012) -- made enforcement a bit easier when a company goes after employees who commit cyber theft beyond U.S. borders.

In this case, a Connecticut-based chemical company employed an account representative in Canada, and when the employee learned that she was to be terminated, downloaded to her personal email account data files that the company alleged were confidential and proprietary. The company sued the employee "alleging unauthorized access and misuse of a computer system and misappropriation of trade secrets." The terminated employee moved to dismiss the complaint for lack of personal jurisdiction. The trial court agreed with the Canadian employee because she had not used a computer in Connecticut. The Court of Appeals, however, held that jurisdiction over the defendant employee in Connecticut, where she had never physically visited, was established when she intentionally accessed the Connecticut servers.

Defining a path to protect sensitive information

Hotel brands and managers have employees in a wide variety of jurisdictions, often worldwide, and the vast array of foreign laws, regulations and policies can make it difficult to establish clear and comprehensive security plans, and even more difficult to enforce them. This decision creates a clearer path for multinational companies to protect their key business information.

The company in MacDermid won because (1) it had a written policy that both identified the location of its servers that stored the company's proprietary and confidential electronic data, and (2) the company made it a condition of employment that employees acknowledge in writing that they were not authorized to transfer that information to their personal email accounts.

Two important factors

The Court observed that "[m]ost Internet users, perhaps, have no idea of the location of the servers through which they send their emails. Here, however, [the company] has alleged that [the employee] knew that the email servers she used and the confidential files she misappropriated were both located in Connecticut."

The Court also said that "employees of [the company] and its subsidiaries are, as a condition of employment, made aware of the housing of the companies' email system and their confidential and proprietary information in Waterbury" and that the employee "agreed in writing to safeguard and to properly use [the company's] confidential information and that she was not authorized to transfer such information to a personal email account."

MacDermid offers a clear lesson for companies. Employee handbooks must contain a policy dealing with proprietary and sensitive information, with clear restrictions on use and prohibiting improper downloading of information from company servers. Also, companies with offshore employees should explicitly disclose the existence and the location of the servers that store confidential information, so that an employee who improperly downloads confidential information can be sued in the company's home jurisdiction.

Getting the "home field" advantage

This gives the company, rather than the employee, the "home field" advantage. Most companies do not explicitly identify where their data is located. And, where companies use cloud computing services, they may not even know. But whenever possible, companies should include this information in their employee policies. Employers will usually be better off suing and enforcing their rights in their home state, rather than a foreign jurisdiction.

Developing a comprehensive information privacy and security program

The JMBM Global Hospitality Group® and the JMBM Data Security Group work with clients to establish and enforce data security policies, and assists clients when there are breaches. We have helped a variety of clients, including hospitality companies, in developing compliance programs, addressing data breach issues, and negotiating contracts with vendors and providers. Contact Bob Braun (RBraun@jmbm.com, 310.785.52331) or Mike Gold (MGold@jmbm.com, 310.201.3529) for assistance. Bob Braun is a member of the International Association of Privacy Professionals and was the first and only "Super Lawyer" in Southern California in 2012 with a specialty in information technology.

If this article was of interest, you may also wish to read other articles on "Data Technology, Privacy & Security," which include the following articles:

Cyber Security Alert: How to protect your proprietary information from employees

Hotel Lawyer Privacy Alert: Do your hotel mobile apps comply with new interpretations of online privacy rules?

Hotel Liability for Guest Information -- What you need to know and how to avoid liability.

Losing the expectation of privacy bit by bit, byte by byte.

Dodd-Frank Act presents Hotels with decisions on credit and debit card charges.

Robert Braun is a senior member of the Global Hospitality Group® at JMBM. Mr. Braun advises hospitality clients with respect to hotel management agreements, franchise agreements and operating issues. He also advises on transactional matters, including entity formation, financing, and joint ventures, and works with companies on their data technology, privacy and security matters. These include software licensing, cloud computing, e-commerce, data processing and outsourcing agreements for the hospitality industry. He is a member of the International Association of Privacy Professionals. Contact him at 310.785.5331 or rbraun@jmbm.com.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who's your hotel lawyer?

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,300 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or +1 (310) 201-3526.

Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider.

ADA defense lawyer: Striking the right balance

The ADA defense and compliance team at JMBM has long advocated compliance with the Americans with Disabilities Act, commonly known as the ADA. ADA compliance is good business and it is the law. (See articles at www.HotelLawyer.com under HotelLawBlog/ADA Defense & Compliance.)

But we have all seen some terrible abuses of this law in the hands of certain plaintiffs and attorneys who literally file dozens of cases. I have a service that follows the filing of ADA complaints, and recently, one lawyer filed 18 cases in one day against various small businesses for purported ADA violations.

It seems as if both courts and legislatures are getting fed up with abusive practices by some greedy or overzealous advocates. We recently reported on action by the California legislature in "Finally! Relief from abusive ADA litigation in California?")

Today, we want to recognize a recent federal court decision that reflected outrage at abusive plaintiffs and their lawyers which detract from the spirit and noble purpose of the ADA. We think this kind of insight and approach will help to strike a better balance that we believe was the intent of the ADA.

Today, my partner Marty Orlick provides us with a trenchant summary of the case, including some insightful quotes from the court's opinion.

Federal Court slams abusive ADA lawsuits

On April 16, 2012, an article appeared on the front page of the New York Times about the proliferation of lawsuits brought under the Americans with Disabilities Act (or ADA) against small businesses and portending a wave of cases to come. Indeed, lawyers from Florida and other states have joined forces with local attorneys to file scores of ADA lawsuits against small businesses, many of which are owned by minority entrepreneurs.

On March 28, 2013, a Federal Judge in the Eastern District of New York excoriated plaintiff Mike Costello's attorneys for filing scores of frivolous ADA lawsuits against mom-and-pop businesses over technical or non-existent deviations from the ADA Standards only to line their own pockets. Costello v. Flatman, LLC, 11-CV-287.

Dozens of "boilerplate" ADA lawsuits

In 2011, the plaintiff, Mike Costello, filed a complaint against a Subway franchisee and his landlord under the ADA and state and city New York Human Rights laws. The same day, the plaintiff and his lawyers filed seven other identical ADA lawsuits against small businesses located within a two-block radius of the Subway store. Costello later amended his complaint to bring in another defendant who ignored the lawsuit, resulting in a default being taken. After the Court issued a $14.31 default judgment, plaintiff's counsel filed a motion for fees and litigation costs in the amount of $15,172 supposedly incurred in prosecuting the action. [Note: This is not a typographical error. The damages were fourteen dollars and thirty one cents. The attorneys' fees sought were more than fifteen thousand dollars.]

The Judge noted that in a boilerplate complaint, Costello alleged that he is disabled, required a wheelchair for mobility, and that he visited a Subway restaurant where he encountered various ADA barriers which prevented him from enjoying the goods and services offered at Subway. The plaintiff was represented by two law firms, one from New York the other from Florida. The Court found that together, these attorneys filed dozens of boilerplate ADA lawsuits alleging very similar barriers only to force the defendants to pay money to settle the cases.

Goal of the ADA . . .

The Court noted that the goal of the ADA is to remedy discrimination against individuals with disabilities in employment and full and equal access to the goods and services offered by public accommodations like banks, retail stores, restaurants, hotels, museums, golf courses, and amusement parks. Title III of the ADA requires the removal of structural and programmatic barriers in existing public accommodations "where such removal is readily achievable, and in newly altered or constructed buildings." The ADA defines "readily achievable" barrier removal as "easily accomplishable and able to be carried out without much difficulty or expense."

The ADA contains both a private right of action for individuals and advocacy groups, and a public right of action by the Attorney General. The only remedies for a private individual under the ADA are injunctive relief (barrier removal) and the recovery of attorney's fees and litigation costs. The Department of Justice (DOJ) can also impose fines of $55,000 for the first occurrence and $110, 000 for each subsequent ADA violation.

New York (like California) awards attorneys' fees and damages to plaintiffs

New York, like California and several other states, also permits private plaintiffs to recover damages for ADA violations. (California, for example, permits private plaintiffs to alternatively recover (1) three times actual damages or $4,000 or (2) $1,000 per offense each time the plaintiff visited the business, or knowing of the existence of barriers, was deterred from returning). Costello sued under the ADA, but coupled the federal claim with damage claims available under the New York State Human Rights Laws and The New York City Human Rights Laws.

Appalled at an abusive pattern of litigation

The Court, appalled to find a similar litigation pattern in dozens of lawsuits filed by these attorneys in New York and Florida noted that:

Some plaintiffs and their attorneys have found a way to circumvent the will of Congress by seeking money damages while retaining federal jurisdiction.

In a highly unusual effort, the Judge visited each of the eight small businesses sued by plaintiff and observed that some of the alleged violations were frivolous. In the Subway complaint, plaintiff alleged that the public bathroom was non-compliant. The Judge observed that there was no public bathroom at all.

The Court in an impassioned opinion reduced the attorney's billing rates for filing boilerplate pleadings, found their time entries were excessive (even fictitious) and denied their motion for attorneys' fees and litigation costs.

Plaintiff focused on financial gain rather than the noble intent of the ADA

Considering the spirit and noble intent of the ADA, the Judge commented:

The ADA is a testament to the country's effort to protect some of its most vulnerable citizens. It is one of the most significant federal statutes that was born out of this nation's Civil Rights movement and was enacted to ensure that disabled individuals have equal and safe access to the same benefits and accommodations as every other American. However, a troubling reality is that cases like the one presently before the court have the effect of being less about ensuring access for those with disabilities and more about lining counsel's pockets.

The Court cited a prominent California ADA lawsuit Molski v. Mandarin Touch Rest., 347 F. Supp.2d 860 (C.D.Cal. 2004):

The scheme is simple: an unscrupulous law firm sends a disabled individual to as many businesses as possible, in order to have him aggressively seek out any and all violations of the ADA. Then, rather than simply informing the business of the violations and attempting to remedy the matter through conciliation and voluntary compliance, a lawsuit is filed, requesting damage awards that would put many of the targeted establishments out of business. Faced with the specter of costly litigation and a potentially fatal judgment against them, most businesses quickly settle the matter.

Lawsuits had no effect on ADA accessibility

In Costello v Flatham, the Court analyzed the ADA lawsuits filed by the two lawyers and determined that they had no impact on improving accessibility. Upon visiting each of the businesses named in the other lawsuits, the Court expressed its shock to see most, if not all, of the alleged barriers were still there. The Court did not highlight the existing barriers to invite more ligation against these businesses, but to bring attention to the "troubling litigation tactics" used by these two lawyers.

This is indicative of the mendacious conduct that is central to counsel's litigation scheme.

Plaintiff's attorneys fees denied

In denying plaintiff's fee motion, the Court went out of its way to chastise the plaintiff's attorneys and their inexcusable litigation scheme of preying on small businesses.

Those who take on the honorable cause of representing disabled individuals must recognize that they not only represent their fellow lawyers of the bar, but also the legal giants who paved the way for passage of crucial civil rights legislation like the ADA.

The Court concluded with the thoughts of one such Civil Rights legal giant Charles Hamilton Houston, who famously said "a lawyer is either a social engineer or he's a parasite on society."

The conduct of counsel is indicative of a parasite disguised as a social engineer. It must stop.

The Court intends to report its findings to state bar authorities and to Chief Judges across the country about the attorneys' mendacious litigation tactics if these lawyers continue to litigate in this fashion.

Other ADA defense and compliance resources

You can access the full library of ADA materials on Hotel Law Blog by going to the home page, selecting the tab at the top that says "HOTEL LAW TOPICS", and then clicking on "ADA Defense & Compliance" in the drop down menu . . . or by clicking here.

A blast against frivolous, serial ADA lawsuits in striking the right balance

Finally! Relief from abusive ADA litigation in California?

Pool lift deadline of January 31, 2013 looms, but may be a diversion from enterprise-wide ADA compliance

ADA experts discuss hottest issues facing the hotel industry today

Charles Schwab settles claim over website accessibility

New ADA compliance standards for golf courses. What do they mean to you?

Updating Service Animal Policies of Your Hotel or Other "Place of Lodging"

How a recent ADA case affects all hotels but particularly conference centers and meeting hotels

ADA Defense Lawyer Alert: Hilton's ADA settlement with the Department of Justice: Precedent-setting agreement delivers more than removing architectural barriers

ADA Defense Lawyer Alert: New regulations now in effect

ADA defense lawyer: Implications of the latest ADA enforcement "sweeps" against hotels in Portland and San Francisco.

Department of Justice (DOJ) ADA enforcement "sweeps" hit the West Coast. What you need to know now.

When disabled hotel guests' needs go beyond the norm for typical guests, what do hotel owners and managers have to do?

ADA Compliance is no longer an option. There is a "new sheriff" in town, and problem prevention costs a fraction of defense and compliance under a microscope.

ADA Sweeps by U.S. Department of Justice? How to get ready before it's too late.

Defending ADA lawsuits. How your hotel website can make you a target for ADA lawsuits

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who's your hotel lawyer?

Martin Orlick is a partner in JMBM's Real Estate Department, the Chair of the Firm's ADA Compliance and Defense Group, and a senior member of JMBM's Global Hospitality Group®. Marty has significant experience in representing hospitality industry clients in enterprise wide ADA compliance and defense. He has represented more than 500 businesses in ADA issues, many of them hotels and restaurants, as well as hotel mixed-use properties. In addition to defending lawsuits and governmental investigations, Marty's team of ADA specialists focuses on enterprise-wide ADA compliance including facilities, website and operational compliance. He recently performed an ADA survey of a portfolio of Manhattan hotels. Marty is a member of the American College of Real Estate Lawyers (ACREL) and a frequent speaker on the ADA and other topics. For more information, please contact Marty Orlick at 415.984.9667 or morlick@jmbm.com.

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,300 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or +1 (310) 201-3526.

Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider.

Hotel Lawyer with a major legal development on terminating hotel management agreements -- Marriott v Eden Roc.

Under a New York Appellate Division court decision issued March 26, 2013, virtually all hotel management agreements are now terminable at will by owners. And this result will prevail even against the Marriott-style management agreements that seek to avoid an "agency" characterization of the owner-operator relationship.

The decision was rendered in the case of Marriott International v. Eden Roc reversing the November 7, 2012 decision of Judge Melvin L. Schweitzer, who had granted Marriott's motion for a preliminary injunction, halting the owner's ouster of Marriott for poor performance.

In reversing the lower court decision, the Appellate Division succinctly stated that hotel management agreements giving full control to operators are personal services contacts and cannot be enforced by injunction. The court said:

Termination may or may not be "free"

Please note that this decision has not addressed the question of damages that an owner may owe the operator for termination of a hotel management agreement under such circumstances. We should assume that unless there is adequate legal justification for the owner's termination, that the owner will be liable to the operator for damages. In a long-term, no-cut contract, these damages could be substantial unless the operator has materially breached the contract. In the latter case, the owner might be entitled to terminate the contract without cost -- in fact, the owner might be entitled to recover damages from the operator.

Why Marriott v Eden Roc is particularly important for hotel owners

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Marriott International lost an appeal in its lawsuit against the owners of the Eden Roc Renaissance Hotel in Miami Beach, Florida. The owners of the 57-year-old Eden Roc sued Bethesda, Maryland-based Marriott in April, saying the company mismanaged the property after they invested more than $300 million in the hotel, including a $240 million renovation. Marriott sued the owners in the same court six months later, accusing them of attempting a hostile takeover. New York State Supreme Court Justice Melvin L. Schweitzer granted Marriott a preliminary injunction in November 2012. In a decision released March 26, 2013, an appeals panel in Manhattan reversed Schweitzer's order and vacated the preliminary injunction. This is a significant legal decision for the hotel industry.

For some unexplained reason trial courts are notorious for rendering the wrong legal answer on termination of hotel management agreements. The lower court had to be reversed in the Eden Roc case. The same has been true in many other well-known cases such as Woolley v Embassy Suites (cited by the decision), Marriott v Pacific Landmark, and others.

About the same time we successfully terminated the Fairmont management agreement for the Turnberry Resort last year [see How to terminate a hotel management agreement: A Tale of Two Hotels -- Marriott's Edition Waikiki and Fairmont's Turnberry Isle Resort], the owner of the Honolulu Edition lost a similar suit in the New York Supreme Court and filed bankruptcy to avoid reinstating Marriott as manager of the hotel.

If the lower court in the Edition case had followed the law as determined by the federal court in our Fairmont v Turnberry case or the law as clarified by Marriott v Eden Roc, there would have been no need for the Waikiki Edition hotel to file bankruptcy.

What it all means -- all long-term hotel management agreements are terminable

Under one of two theories, hotel owners can now terminate their long-term hotel management agreements if they feel there is no satisfactory way to work with their operators. They may be liable for substantial damages for breach of contract unless the termination is justified, but they can take back their properties.

We believe the best way to resolve differences with an operator is through a dialog and a process of give and take to resolve the differences. But we have seen a number of cases, where patient owners have tried everything they know how to do and are still frustrated by non-responsive operators.

Thus, when all else has failed, owners may be able to terminate the hotel management agreement and take back the operation of their hotels. This will usually be in the face of a contract that contains many paragraphs in all capital letters, stating that the contract is not terminable and that the owner waives all of its rights to terminate.

Notwithstanding this contractual boiler plate, virtually every hotel management agreement either (a) creates an agency relationship between the owner and the operator, or (b) establishes a personal services contract for the operator's services.

Despite any provision to the contrary in such contracts, in most jurisdictions, there is such a strong public policy developed over more than a century that the non-termination provisions will be struck down. Except in unusual circumstances, an owner always has the power to terminate an agency or a personal services contract. If the termination is wrongful, the owner will be liable for damages. But the law simply will not enforce the agency or personal services contract against the owner.

For a full copy of the Marriott v Eden Roc decision.

For a full copy of the court's opinion discussed above, click here and scroll down until you see "Marriott International v. Eden Roc" and click on that link.

Do you need help with a hotel management agreement?

The hotel lawyers of JMBM's Global Hospitality Group® have negotiated, re-negotiated, litigated, arbitrated and advised on more than 1,000 hotel management and franchise agreements. We have current state-of-the-art experience in dealing with every major branded hotel operator, most of the independent managers, and all the significant franchisors.

Our business and legal experience from all these deals provides the largest virtual database of hotel management and franchise agreement terms in the world. JMBM can help you confidently establish reasonable "market" terms for your deal. With our HMA PRO™ process, we can help you recruit the right brand and get a management agreement you can live with.

It is always best to start out with the right brand and operator for your hotel ... and an agreement with fair terms you can live with. But when you don't have that advantage and the situation becomes unbearable, what can you do as an owner to renegotiate or terminate a long-term, "no-cut" management agreement?

We have developed some very effective tools for dealing with long-term hotel management agreement problems. Clients really value our more than 20 years of business and legal experience to help them evaluate the situation, identify alternatives, develop successful strategies and execute them.

The right outcome can unlock millions of dollars of value.

Articles about terminating hotel management agreements

Marriott loses appeal in Eden Roc case: Why all long-term hotel management agreements are now terminable.

How to terminate a hotel management agreement: A Tale of Two Hotels -- Marriott's Edition Waikiki and Fairmont's Turnberry Isle Resort

Terminating hotel operators: M Edition lawsuit against Marriott has a new twist -- Marriott is replaced overnight

More on M Waikiki Edition lawsuit against Marriott - What Marriott's General Counsel says

M Waikiki's Edition lawsuit against Marriott and Ian Schrager - an owner's HMA dispute with Marriott

Terminating hotel operators: Turnberry Resort drops Fairmont flag

Hotel management agreement terminations -- Is there a better way?

Terminating hotel management agreements when things don't work? Not easy, but not impossible either.

Hotel bankruptcy trump card. Terminating hotel management agreements without liability -- the alchemy of lead to gold for troubled hotels and hotel loans?

Ritz-Carlton Bali hotel management agreement termination further court order

Ritz-Carlton breached contractual and fiduciary duties under hotel management agreement giving rise to free termination, $10.3 million in damages plus attorneys fees. When will hotel operators "get it"?

How to terminate a hotel management agreement when an operator really deserves it!

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who's your hotel lawyer?

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,300 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or +1 (310) 201-3526.

Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider.

Hotel Lawyers on EB-5 issues.

Last month, the EB-5 investment community was shocked by the SEC enforcement action against the Intercontinental Regional Center Trust of Chicago, alleging that the sale of $145 million of EB-5 investments intended to be used to fund a huge convention center and hotel complex near Chicago O'Hare Airport, was a complete fraud.

This is an event that that has the potential to threaten the integrity of the EB-5 investment market, which over the past two years has gained acceptance among main stream hotel developers as an important source of alternative financing.

My partners, Catherine Holmes and Victor Shum, together with Angelique Brunner, a well-known EB-5 regional center operator, have offered their views on how the EB-5 investment market can be protected through prudent efforts on the part of regional center owners and developers.

EB-5 stakeholders must act to protect the integrity of the EB-5 investment market in the wake of the SEC fraud complaint against the International Regional Center Trust of Chicago, LLC. The EB-5 immigrant investor program provides an important source of capital for investment in job-creating businesses in the United States, but in order to protect the market for these investments, the EB-5 community must demonstrate its commitment to the protection of EB-5 investors from fraudulent operators. The recent action by the Securities and Exchange Commission against the Intercontinental Regional Center Trust of Chicago, LLC, and its operator, Anshoo Sethi, have caused investors to question how many other EB-5 investments are being offered by unscrupulous operators making fraudulent statements in their offering documents and presentations. The best EB-5 regional centers already have established practices that are based on the same standards as are used in U.S. securities offerings and are designed to prevent fraud by project developers using EB-5 financing. Those regional centers who have not already adopted these practices should make this a priority in order to assure EB-5 investors that the EB-5 investment market is based on the same principles of good faith and fair dealing as are the foundation of the U.S. securities markets. We would recommend that every regional center review its due diligence practices with counsel to verify their compliance with best practices.

U.S. securities markets have benefited from laws and regulations requiring issuers and underwriters to use reasonable due diligence to verify the accuracy of statements made in their offering documents, and similar practices should be used by all regional centers for every EB-5 project they promote. Individual investors in the U.S. securities markets rely on issuers and underwriters of U.S. securities offerings to make accurate statements of fact and reasonable projections of future business. U.S. securities laws put the legal burden on issuers and underwriters to demonstrate that the statements made in securities offering documents are true and not misleading, and if they cannot meet that burden, issuers and underwriters may be held liable for damages caused by any material misrepresentations. These standards of accountability provide investors with assurance that issuers and underwriters will use their best efforts to verify statements of fact and determine the reasonableness of projections used by an issuer in a securities offering. In order to promote the integrity of the EB-5 investment market, we believe that all regional centers should adopt similar practices as are used in U.S. securities markets with respect to the preparation and use of offering documents. Regional centers should advise potential EB-5 investors of the practices they use to protect investors, so that investors can evaluate the strength of the EB-5 projects they invest in using information that has been verified by the regional centers.

Regional centers are the "gatekeepers" to the EB-5 investment market, and they should be responsible for maintaining the integrity of the market. Regional centers have received the approval of the USCIS to sponsor EB-5 investment offerings, and over 95% of all EB-5 investment offerings are made through regional centers. There are typically no U.S. securities brokers involved in EB-5 offerings, because most EB-5 investments are sold to persons residing outside the U.S. under Securities and Exchange Commission Regulation S through foreign marketing or emigration agents. It is generally not feasible for foreign investors or agents to do their own due diligence investigations on EB-5 investment offerings for a number of reasons, including language differences, geographic distance, and differences in customs and methods of doing business between the United States and countries where EB-5 investors reside. Regional centers, on the other hand, are in a position to assess the truth of statements made by an issuer of EB-5 investments and the reasonable basis for the issuer's business plan. In the case that the regional center is the issuer and author of such documents, then the regional center bears the burden to offer proof to the market of its statements and projections. Regional centers generally participate in the preparation of offering documents for EB-5 investments, and review business plans of issuers. In addition, no EB-5 investment offering that includes indirect jobs as part of the job creation model can go forward without sponsorship of a regional center. Therefore, regional centers are the appropriate parties to be responsible for assuring that the projects they sponsor are being sold using truthful offering documents and reasonable business plans. Best practice is for the regional center to oversee or author the business plan and offering documents. In the case of overseeing the production of such documents the regional center would be responsible for checking the facts of all statements made in these documents.

Regional centers are not guarantors of EB-5 investments, but they should follow appropriate standards in sponsoring EB-5 investment offerings. Regional centers are not, and should not, be guarantors of every EB-5 offering they sponsor, because every EB-5 investment must be at risk in order to qualify investors for issuance of EB-5 visas, and because every commercial business by its nature has some risks that are appropriately undertaken by the investors in the business. However, every regional center should have a reasonable basis for determining that the material facts stated in the offering documents for every EB-5 offering they sponsor are true and not misleading, and that if EB-5 investors contribute their capital to a project, that project has a reasonable chance of being completed in accordance with its business plan described in the offering documents.

Regional centers should adopt due diligence practices similar to those used by issuers and underwriters in U.S. securities offerings. The underwriting standards applied by regional centers for project selection should not be dissimilar to those applied by banks or other funding sources. While every funding source assesses risk differently there are general principles of risk analysis that are applied based on the risk of investment. For example, a private equity investor will typically be willing to accept higher risks than a bank, as consideration for the higher rate of return expected by the private equity investor. EB-5 regional centers may price their funds independent of their place in the capital stack (independent of risk) but the standards of underwriting and evaluation should be similar to the institutional capital they are replacing. If the regional center is replacing bank debt, the due diligence standards used by the regional center should be similar to those used by a bank. If the regional center is replacing private equity, the due diligence standards should be similar to those used by a private equity provider. This is not to say that the cost of the capital should be the same as the capital being replaced, but that the level of due diligence applied by regional centers should be no less than any other financial investor in a project.

Due diligence means verifying factual statements in offering documents and determining that there are no other facts that should be stated so that the offering documents are not misleading. Verifying factual statements in an offering circular does not mean relying on questionnaires or conversations with project owners, it means asking for and obtaining documented evidence of factual statements, and having experts review projections used to determine project costs and future operating revenues and expenses in light of conditions in the specific industry in which the business will be conducted. The methods for verifying factual statements in an offering circular are generally as follows: (a) to verify that a project developer has experience in the relevant business, ask for details of the background and experience of each of the key managers of the developer, including the names of their employers, dates of their employment, and details of the projects they have been involved with in the same industry as the project; (b) to verify that an issuer has one or more contracts that are material to the business, such as a hotel franchise agreement for a hotel project, ask for executed copies of all material contracts, and talk to the hotel franchisor to verify that the contract is in effect; (c) to verify that an issuer has received or will receive necessary government approvals for project plans, require the issuer to provide copies of the approved plans with evidence of approval from the appropriate governmental authorities; (d) to verify the value of contributed land, ask for copies of recent appraisals, or request your own appraisal from a third party of your selection, and require updated appraisals if they are more than 12 months old or the market conditions have otherwise changed after the original appraisal was done; (e) to verify statements made about market conditions in a specific industry, ask for copies of the data that supports those statements; (f) to verify a project budget and timeline for construction of a project, hire a construction consultant familiar with type of construction being undertaken to review and provide comments on the project budget and timeline; and (g) to verify projections of future revenues and expenses, hire an expert consultant in the industry to review and provide comments on the projections. This is the same process as an underwriter of a U.S. securities offering, or a bank or commercial lender would undertake to conduct its own due diligence on a securities issuer or a borrower of a commercial loan, and which is typically paid for by the developer. Verification will often require engaging an impartial third party expert.

Regional centers should document their due diligence process, the evidence they received to support factual statements and the analysis they used to determine the support for the issuer's project costs and projections of future revenues and expenses. In order to be effective, due diligence reviews must be documented in writing. There are various methods of documenting due diligence that could be used. One of those is to create an annotated copy of the private placement memorandum or other offering document, with footnotes that indicate the documents that verify every factual statement. Another method is to create a fact sheet that lists all material facts stated in the offering circular in one column, alongside another column that states the evidence that verified the statement. When an investor or marketing agent asks what due diligence was done to verify the facts stated and business plan presented, the regional center can provide a copy of the due diligence document to show the work it has done to support its due diligence. Proof of facts should be readily available in the regional center's due diligence files. While most centers will not allow such confidential information to travel or be emailed, the best centers will allow any investor or consultant to visit their offices and review the full due diligence files on any investment.

Regional centers should require the project developer to certify that the offering documents contain no misstatements before the offering documents are distributed. As part of any due diligence process related to an EB-5 offering, a regional center should require one or more senior officers of the project developer to certify that the EB-5 offering documents contain no material misstatements or omissions. The regional center might ask for other third parties critical to a project to verify certain portions of an offering circular for which those third parties will be responsible. In this way, the regional center can document that it has involved the project developer and other important third parties in the due diligence process, and used reasonable efforts to assure that they have disclosed all material facts in the offering documents.

Regional centers affiliated with EB-5 investment issuers should consider a third party due diligence report. Since the purpose of due diligence is to demonstrate an independent review of the factual statements in an offering document and an independent analysis of the issuer's business plan, a regional center that is affiliated with the issuer will not be able to provide an independent review without bringing in a third party. We believe that it is important for the integrity of the EB-5 market that regional centers do bring in third parties to verify the statements made in offering documents the regional centers prepare on their own behalf. The regional center could speed the process by preparing its own due diligence document that provides the supporting documentation and providing those documents to the third party reviewer. The third party reviewer can then certify that it reviewed the materials and documents provided by the regional center and verified the accuracy of the statements made in the offering documents, using the same standards as regional centers which sponsor offerings for third party developers.

A regional center that acts as an administrator of EB-5 regulatory compliance but does not sponsor a specific offering should require the project sponsor to perform the same due diligence that the regional center would otherwise perform. From time to time, a regional center may agree to act as administrator for an offering in which the regional center is not itself involved as either project sponsor or in marketing the EB-5 offering. In that case, the regional center should require that the project sponsor conduct the same due diligence that the regional center would otherwise perform for a project that it sponsored on its own behalf, and provide a copy of a third party due diligence report that is obtained by the project sponsor.

Regional centers' due diligence obligations extend through the completion of the offering. It may take several months to receive subscriptions for an EB-5 offering, during which time it is possible that facts may change. For example, a construction project using EB-5 may be started before all of the EB-5 financing is raised, and changes may occur in the construction budget. In addition, there may be changes in financing status of a project, or other changes that may be deemed material that should be disclosed to investors. Regional centers should regularly communicate with project developers to ask about material changes in the project that may require further disclosure in the offering documents.

Regional centers which implement appropriate due diligence practices will realize multiple benefits. Regional centers which conduct a thorough due diligence review will identify early in the process the weaknesses of a project. Some of those weaknesses may be corrected with early intervention, before a more serious problem develops that could jeopardize the successful completion of the project. Regional centers which perform and document their due diligence will be considered more reliable by non-U.S. investors and marketing agents, which could translate in greater market acceptance for their offerings than other regional centers which do not demonstrate adequate due diligence practices. A regional center which prepares strong documentation of its due diligence investigation will also have evidence available in the event something does go wrong with a project that was not related to misrepresentations in the offering documents, which the regional center can use to defend itself in the event of any claims brought by investors or other third parties related to the project. Most importantly, adoption of due diligence standards by regional centers will strengthen the integrity of the entire EB-5 market, which is necessary to assure that this market remains an important financing source for U.S. job-creating businesses.

We believe that all regional centers can and should follow the due diligence best practices outlined above, for the protection of all participants in the EB-5 market.

Catherine Holmes is a transaction and finance partner with JMBM's Global Hospitality Group® and Chinese Investment Group™ and specializes in resort and hotel purchase and sale transactions, resort and urban mixed-use financing and development, hotel management and franchise agreements, and hospitality asset workouts. With her background in securities transactions, she also assists hotel developers with public and private offerings of securities. For more information, please contact Catherine Holmes at +1 310.201.3553 or cholmes@jmbm.com

Victor Shum is a corporate and securities partner in JMBM's Global Hospitality Group® and Chinese Investment Group™. He has advised clients on EB-5 matters since 1999 and assists hotel developers on EB-5 financing as well as public and private securities, mergers and acquisitions, cross-border issues, and other strategic business transactions, including real estate transactions and intellectual property and technology licensing matters. For more information, please contact Victor Shum at +1 415.984.9611 or vshum@jmbm.com

Angelique Brunner is President of EB5 Capital and an owner of the DC Regional Center. She has sourced and structured EB-5 projects since 2006 and proudly has a 100% approval rate on both the I-526 petition and I-829 petition. She focuses on hotel developments throughout the country and is a member of Marriott's Owner Diversity Program. She also serves on the Best Practices and Legislative committees for IIUSA, which is the national EB-5 trade association. Ms. Brunner has over 15 years of experience in finance and has placed over $3 billion dollars of debt and equity into public and private projects. For more information, please contact Angelique Brunner at +1 202.652.2437 or abrunner@eb5capital.com

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel owners, developers, investors and lenders. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,300 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

JMBM's Global Hospitality Group® announces publication of the How to Buy a Hotel Handbook.

The Global Hospitality Group® of Jeffer Mangels Butler & Mitchell LLP (JMBM) today announced the release of the How to Buy a Hotel Handbook, third in the "We Wrote the Book™" series of handbooks published by the Group's hotel lawyers.

Jim Butler is the Chairman of JMBM's Global Hospitality Group®. The How to Buy a Hotel Handbook is based on the experience Jim's team has gained from more than $60 billion of hotel transactions involving more than 1,300 hotels all over the world. The Handbook provides a detailed overview of the hotel acquisition process, a thorough due diligence checklist, and informative articles that address some of the most important questions that arise when buying or selling a hotel.

Bjorn Hanson Ph.D. wrote the Foreword to the How to Buy a Hotel Handbook.

In the Foreword, Dr. Hanson writes:

There have been numerous books and articles about developing and purchasing hotels, but this handbook is unique because it presents an extraordinary amount of technical, legal and transaction structuring information based on the expertise and experience of professionals with specific arbitration, litigation, structuring, negotiating, transaction and risk management perspective."

Dr. Hanson is divisional dean of the Preston Robert Tisch Center of Hospitality, Tourism and Sports Management at New York University.

Contributing authors

Synthesizing decades of industry experience, the contributing authors from JMBM include

Jim Butler
Robert Braun
Eudeen Chang
Marta Fernandez
Catherine Holmes
Guy Maisnik
Jeffrey Steiner
David Sudeck

And our sincerest thanks to Bruce Baltin, Senior Vice President of PKF Consulting for his significant contribution to the detailed overview of the hotel acquisition process, comprising the first article in the book.

Register and download your free copy NOW!

Register and download your free copy of the How to Buy a Hotel Handbook at the Resource Center on HotelLawyer.com.

JMBM's "We Wrote the Book™" series

As experts in virtually everything where hotels and the law intersect, JMBM's Global Hospitality Group® has published the "We Wrote the Book™" series, which includes:

• Lenders Handbook for Troubled Hotels
• The HMA Handbook -- Hotel Management Agreements
  for Owners, Developers, Investors and Lenders
• How to Buy a Hotel Handbook

Find these and other free publications on the Resource Center at HotelLawyer.com.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel owners, developers, investors and lenders. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

US Attorney's Office announces criminal convictions arising from Host's claims against Molinaro Koger

On February 19, 2013, the US attorney's office announced that Jonathan Propp, 48, of McLean, Va., pleaded guilty today to conspiring with others to steal more than $20 million from Host Hotels and Resorts L.P. (Host), one of the nation's largest hotel owners, by executing a series of illegal sales of hotels."

According to court records, Propp was the chief operating officer of Molinaro-Koger, an international hotel real estate brokerage firm headquartered in Tysons Corner, VA From 2009 through 2012, Propp conspired with others to illegally sell hotels owned by Host to straw buyers, who would then immediately sell the properties to a buyer at a higher price, with the conspirators pocketing the difference. Propp admitted that he posed as a straw buyer, forged signatures, and obtained a driver's license for one of the straw buyers who had died before the fraudulent sale could be completed.

Todd Lawyer, 53, of Fairfax, VA, also pleaded guilty today for his role as a straw buyer in the conspiracy. The conspirators earned more than $20 million by illegally flipping the hotels.

In addition, Propp admitted that he participated in a scheme to steal and launder an additional $15 million from deposits provided by prospective buyers of hotels, which they purported to hold in escrow but instead used to pay for personal and business expenses. Propp used the money to pay Molinaro-Koger's expenses and employee salaries, despite knowing the escrowed funds were obtained fraudulently.

These criminal convictions obtained by guilty plea have been widely reported in the press, including Kris Hudson's article in the Wall Street Journal. See "Former Brokerage Executive Pleads Guilty in Flipping Case.

This case and its underlying facts are pretty amazing. I first wrote about this matter in August 2011 after reviewing the high-profile civil lawsuit that Host Hotels & Resorts filed against Robert T. Koger, personally) and his firm. See "Hotel Lawyer on the fiduciary, contractual and agency duties of hotel brokers - Host Hotels & Resorts LP v. Molinaro Koger litigation".

The guilty pleas suggest that the nearly unbelievable allegations in the civil complaint are pretty close to the truth. Use of straw men, forged signatures of a dead man, notarized by Koger's secretary . . . directing sales to straw men to deprive the client of maximum sales price and convert it to the broker and straw men . . . This real story is stranger than fiction.
Click here to take another look at the Host complaint.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.