GettyImages_140827099.jpgWe have had a number of recent cases involving foreign companies who entered into large-scale sale agreements with American-based corporations.  These companies are run by sophisticated, experienced executives. In most instances, the agreements were for millions of dollars’ worth of merchandise. 

Both sides hired attorneys who scrutinized the proposed contracts.  They carefully considered payment and delivery plans, including letters of credit.  They haggled over details, negotiated changes and agreed upon final terms. Soon after, they signed and executed the contracts. 

Yet, despite all these efforts, the Americans swindled the foreign companies. 

Those letters of credit that were supposed to provide so much protection and peace of mind? Well, they were useless. 

It turns out the Americans conned the banks as well.  The foreigners had to sue for payment or the return of goods, sometimes both in their home country and in the United States.  Despite prevailing in court, their wins were cold comfort.  As litigators know all too well, having a judgment and collecting on a judgment are two very different things.  The U.S. courts agreed that they had been deceived, but these foreign companies were unable to collect the money or merchandise that was rightfully theirs.  In more than one instance, the Americans declared bankruptcy and the foreign company found itself in the unenviable position of trying to recover from a bankrupt debtor.

This is where we were brought in.  The foreign company’s American lawyers retained us to assist in those collection efforts. In some cases we were asked to uncover any hidden assets. In the cases where the Americans had declared bankruptcy, we were asked to help determine if the foreign companies could build a case of fraudulent conveyance against the debtor.

What we discovered stunned us. 

A cursory review of the public record on these American business partners pulled up a number of red flags. Not just little warning signs or judgment calls, but big, flaming, impossible to deny red flags. 

It was a greatest hits of warning signs:

  • Bankruptcies;
  • Houses in foreclosure;
  • State and federal tax liens;
  • Numerous dummy corporations;
  • Litigation. Lots and lots of litigation.

This litigation was the most damning.  These businesses had repeatedly been sued for defaulting on contracts. 

And our clients knew nothing about these lawsuits, or anything else that was easily accessible in the public record, before they brokered their deals.  It is unclear to us exactly what due diligence practices they’d initially had in place, if any.  Maybe these foreign companies did a thorough public records search in their own country while failing to take into consideration any charges that might be pending in the company’s home country.  Maybe they were satisfied by the personal assurances of their peers that these foreign businesses were safe and reliable.  Maybe they figured the letters of credit provided enough protection.  

Whatever they had done, it had not been enough. 

A cursory investigation of the American records alone would have justified refusing to enter into any agreements whatsoever. These American companies clearly couldn’t be trusted to sell a stick of gum, never mind millions of dollars’ worth of merchandise. 

We’ve seen it before.  Businesses take the time and money to hire sharp lawyers to craft tightly-worded contracts.  They hire tough litigators and investigators to help sue swindlers and try to collect on judgments.  But the most important step of all—due diligence before the transaction—is woefully inadequate.  And this simply can’t be fixed after the fact. 

Do it right the first time or suffer the consequences. 

When brokering a business deal, be it with a domestic or a foreign company, thorough due diligence is a must: 

  • Public Records: Look at the public records of the countries in which the company is based as well as where it does most of its business; 
  • Other Companies: See what other companies the executives are affiliated with;
  • Litigation: Investigate who they have sued or been sued by;
  • More Litigation: Obtain copies of the litigation documents to get all the necessary details. 

Clients may balk at the time and money this requires, but this is about more than peace of mind. This is good business sense:  It is far easier to prevent a bad business deal than it is to get a con artist to pay you what is rightfully yours.