Findings of Fact and Conclusions of Law — United States ex rel. GNGH2 Inc. v. XLD Century LLC (Dkt. 115, C.D. Cal.)

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Findings of Fact and Conclusions of Law in United States of America ex rel. GNGH2 Inc. v. XLD Century LLC et al., Case No. 2:22-cv-05514-SB-PVC, in the U.S. District Court for the Central District of California, dated July 31, 2024 and signed by District Judge Stanley Blumenfeld, Jr. The court states that each defendant received a $2 million PPP loan and that the relator alleged they were ineligible because both were ultimately owned by Sichuan Xinglida, a Chinese entity. After finding falsity, materiality and causation on summary judgment, the court conducted a bench trial on scienter on July 11, 2024. It finds that the relator has not established scienter under 31 U.S.C. § 3729(b)(1) and dismisses the claim on the merits with prejudice.

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Case 2:22-cv-05514-SB-PVC     Document 115      Filed 07/31/24   Page 1 of 7 Page ID
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                      UNITED STATES DISTRICT COURT
                     CENTRAL DISTRICT OF CALIFORNIA




 UNITED STATES OF AMERICA EX
 REL GNGH2 INC.,                              Case No. 2:22-cv-05514-SB-PVC
        Plaintiff,

  v.
                                              FINDINGS OF FACT AND
 XLD CENTURY LLC et al.,                      CONCLUSIONS OF LAW

        Defendants.



        Defendants XLD Century LLC and XLD Group LLC each applied for and
received a $2 million Paycheck Protection Program (PPP) loan. Relator GNGH2
Inc. filed this False Claims Act (FCA) lawsuit, alleging that Defendants were
ineligible to receive these loans because they were both ultimately owned by
Sichuan Xinglida, a Chinese entity. The Court granted in part Relator’s motion for
summary judgment, finding that Relator had proved falsity, materiality, and
causation, but found a triable issue of material fact as to scienter. Dkt. No. 84. On
July 11, 2024, the Court held a bench trial to determine whether Relator could
establish the element of scienter. After evaluating the evidence at trial and
considering the parties’ written submissions, the Court issues the findings of fact
and conclusions of law set forth below.

                                 BACKGROUND

1.     Defendants XLD Group LLC and XLD Century LLC are limited liability
       companies that own the Torrance Marriott and the LAX Marriott hotels,
       respectively. Dkt. No. 102 at 3–4 ¶¶ 5–6, 27–28.

2.     Defendants are a family owned and operated business founded in 2013. Jun
       Zhang, Defendants’ beneficial owner, and his daughter, Jiaqi Zhang,
       established the corporate structure for Defendants in 2013. Since 2013, Jiaqi
       Zhang and her brother, Joey Zhang, have served as vice presidents and

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      senior managers of both XLD Group and XLD Century and are responsible
      for running the daily operations of both Marriott businesses owned by these
      two companies. Id. at 4 ¶¶ 23–24.

3.    Jun Zhang owns approximately 99.5 percent of Sichuan Xinglida, a Chinese
      company based in the People’s Republic of China that predominantly owns
      both Defendants through a chain of subsidiaries. Id. at 4 ¶¶ 18–19.

4.    The relevant corporate structure is as follows: (a) Sichuan Xinglida wholly
      owns XLD U.S. Top LLC; (b) XLD U.S. Top LLC wholly owns XLD N.A.
      Real Estate Inc. and XLD Investment; (c) XLD N.A. Real Estate Inc. owns
      95 percent of XLD Group (which owns the Torrance Marriott Hotel); and
      (d) XLD Investment owns approximately 89 percent of XLD Century
      (which owns the LAX Marriott Hotel). Id. at 5 ¶¶ 29–31.


                                 Loan Application

5.    Enacted as part of the Coronavirus Aid, Relief, and Economic Security Act
      (CARES Act), the PPP provided financial assistance to small businesses
      during the COVID-19 pandemic and associated economic downturn.
      CARES ACT, PL 116-136, 134 Stat 281, March 27, 2020.

6.    In January 2021, Defendants each applied for a $2 million disaster relief
      loan under the PPP. Dkt. No. 102 at 2–3 ¶¶ 1–2.

7.    Jiaqi Zhang completed each application. Id. at 4 ¶¶ 21–22.

8.    Prior to filling out the applications, Jiaqi Zhang spoke with her in-house
      certified public accountant (CPA), Jack Chen, about Defendants’ eligibility
      to obtain the PPP loan. Chen informed Jiaqi Zhang that Defendants were
      eligible under the program to apply for the loan.

9.    Chen assisted Jiaqi Zhang in filling out the applications, primarily providing
      financial information relating to payroll, employees, and revenue.

10.   In their respective applications, each Defendant certified that:

      The Applicant is not a business concern or entity (a) for which an
      entity created in or organized under the laws of the People’s
      Republic of China or the Special Administrative Region of Hong
      Kong, or that has significant operations in the People’s Republic of


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      China or the Special Administrative Region of Hong Kong, owns
      or holds, directly or indirectly, not less than 20 percent of the
      economic interest of the business concern or entity, including as
      equity shares or a capital or profit interest in a limited liability
      company or partnership; or (b) that retains, as a member of the
      board of directors of the business concern, a person who is a
      resident of the People’s Republic of China (hereinafter, the PRC
      Certification).

Dkt. No. 102 at 3–4 ¶¶ 9–11, 14.

11.   When Jiaqi Zhang submitted the applications on behalf of Defendants, she
      was aware that Defendants were ultimately owned by Sichuan Xinglida. Id.
      at 4 ¶¶ 25–26.

12.   Chen was also aware that Defendants were ultimately owned by Sichuan
      Xinglida.

                                   Umpqua Bank

13.   Umpqua Bank was the lending bank who administered the PPP loans to
      Defendants. Id. at 5.

14.   As the lending bank, Umpqua Bank did not fill in any information on a PPP
      application that was to be completed by the applicant. Id.

15.   On or about April 5, 2021, Umpqua Bank sent Jiaqi Zhang an email about
      XLD Group that asked, among other questions: “[If] the ownership
      structure involves multiple layers of corporations, partnerships and/or trust
      please provide a detailed lineage of the ownership until it arrives at the
      Beneficial Owners (Individual(s)/ Person(s)[)].” Tr. Ex. 5.

16.   Jiaqi Zhang replied that XLD Group N.A. Real Estate Development Inc. was
      the owner and that Jun Zhang owns 100% of XLD Group N.A. Real Estate
      Development Inc. Id.

17.   Jiaqi Zhang did not list all levels of ownership between Defendants and Jun
      Zhang, including the ultimate entity owner, Sichuan Xinglida. Id.




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                                  Loan Approval

18.   Defendants’ loan applications were granted, and the government made
      payments totaling more than $4 million. Dkt. No. 102 at 2–3 ¶¶ 1–2.

19.   Both Defendants’ loans were eventually forgiven. Id. at 3–4 ¶¶ 13, 17.

                                   This Lawsuit

20.   Relator filed this action in August 2022, alleging a violation of the FCA.
      Dkt. No. 1. The government declined to intervene, and the case was
      unsealed in July 2023. Dkt. No. 14.

21.   All parties moved for summary judgment. Dkt. No. 65.

22.   The Court granted in part Relator’s motion for summary judgment, finding
      that Defendants’ PRC Certification was false because each Defendant is
      ultimately owned by Sichuan Xinglida. Dkt. No. 84. The Court also found
      that the PRC Certification was material and caused the government to
      disburse funds because Defendants would have been ineligible to receive the
      loans if they had not made the certification. Id. at 9–11.

23.   The Court determined that a genuine dispute of material fact existed as to
      scienter. Id. Thus, the parties proceeded to a bench trial on this sole
      remaining issue. 1

                              LEGAL STANDARD

                                 False Claims Act

24.   A claim under the FCA requires “(1) a false statement or fraudulent course
      of conduct, (2) made with scienter, (3) that was material, causing (4) the
      government to pay out money or forfeit moneys due.” United States v.
      United Healthcare Ins. Co., 848 F.3d 1161, 1173 (9th Cir. 2016).


1
 The Court denied Defendant’s motion for summary judgment, which had relied
on the public-disclosure bar, because the government opposed dismissal on that
ground. See 31 U.S.C. § 3730(e)(4) (requiring a court to “dismiss an action or
claim under this section, unless opposed by the Government, if substantially the
same allegations or transactions as alleged in the action or claim were publicly
disclosed . . . from the news media) (emphasis added).


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25.   Relator must prove the elements in an FCA case by a preponderance of the
      evidence. U.S. ex rel. Biddle v. Bd. of Trs. of Leland Stanford, Jr. Univ., 161
      F.3d 533, 540 (9th Cir. 1998).

26.   All elements other than scienter have been established as a matter of law.

                                       Scienter

27.   To be liable under the FCA, a person must “knowingly” submit false
      information. 31 U.S.C. § 3729(a)(1)(A), (B).

28.   The FCA defines “knowingly” to mean that the applicant “(i) has actual
      knowledge of the information; (ii) acts in deliberate ignorance of the truth or
      falsity of the information; or (iii) acts in reckless disregard of the truth or
      falsity of the information.” 31 U.S.C. § 3729(b)(1). Proof of the specific
      intent to defraud is not required. 31 U.S.C. § 3729(b)(1)(B).

29.   A defendant acting in reckless disregard or deliberate ignorance of the falsity
      of her statements acts with the requisite scienter. United States v. Mackby,
      261 F.3d 821, 828 (9th Cir. 2001). On the other hand, “[i]nnocent mistakes,
      mere negligent misrepresentations and differences in interpretations will not
      suffice to create liability.” United States v. Corinthian Colleges, 655 F.3d
      984, 996 (9th Cir. 2011) (cleaned up).

30.   A party relying on a good faith interpretation of the relevant language is not
      liable under the FCA because her good faith “forecloses the possibility that
      the scienter requirement is met.” U.S. ex rel. Oliver v. Parsons Co., 195
      F.3d 457, 464 (9th Cir. 1999).

                                   DISCUSSION

                                     Credibility

31.   During the bench trial conducted on July 11, 2024, Relator acknowledged
      that “ultimately this trial is about the credibility of the Defendants’ witness,
      the only witness, Ms. Zhang.”

32.   The Court carefully evaluated Jiaqi Zhang’s testimony and observed her
      demeanor, which helped to inform the Court’s overall assessment of her
      credibility. While her testimony raised some questions about its reliability,
      Relator has not convinced the Court—particularly on the very limited record
      developed—that the questions were weighty enough to discredit the core


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      substance of her testimony. Accordingly, the Court finds Jiaqi Zhang’s
      testimony to be generally credible—a finding that is dispositive on the
      question of scienter.

                                      Scienter

33.   Prior to applying for the PPP loan, Jiaqi Zhang consulted her CPA, Chen,
      about the eligibility requirements for the PPP loan. Jiaqi Zhang reasonably
      believed that Chen was knowledgeable about those requirements (or at least
      Relator has not shown otherwise). Chen advised her that Defendants were
      eligible for the loan. At the time of rendering this advice, Chen was familiar
      with each Defendant’s corporate structure—including that each was
      indirectly owned by Sichuan Xinglida.

34.   Jiaqi Zhang also testified that she believed that if Defendants were ineligible
      for the loan, Umpqua Bank would inform them. Umpqua Bank was aware
      of Defendants’ corporate structure when they applied for the PPP loans. Tr.
      Ex. 12.

35.   While filling out the PPP applications, Jiaqi Zhang understood the PRC
      Certification to address whether the applicant owned a Chinese entity, not
      whether the applicant was owned by a Chinese entity. This reading is
      incorrect.

36.   Although the Court concluded on summary judgment that Jiaqi Zhang
      misread the PRC Certification, it also noted that the language was poorly
      written. Dkt. No. 84 at 6. Relator produced no evidence at trial that this
      poorly written certification (or the statute that it quotes verbatim (15 U.S.C.
      § 636(a)(37)(A)(iv)(III)(cc)), was widely understood at the time Defendants
      submitted the applications to render companies like them ineligible to
      receive PPP loans. More significantly, Relator has not convinced the Court
      that Jiaqi Zhang’s reading of the certification was not made in good faith.

37.   In short, the Court finds, upon applying the legal standard for scienter set
      forth above, that Relator has failed to show by a preponderance of the
      evidence that Jiaqi Zhang made a knowing misrepresentation in the PRC
      Certifications. More specifically, the Court finds that Relator has failed to
      show that Jiaqi Zhang’s misrepresentation was based on anything other than
      a genuine misunderstanding of the certification’s confusingly drafted
      language. Thus, Relator has not established the requisite element of
      scienter, as defined in 31 U.S.C. § 3729(b)(1).


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                                  DISPOSITION

38.   In light of the above-stated findings of fact and conclusions of law, the Court
      finds that Relator has failed to carry its burden and is not entitled to recover
      on its FCA claim.

39.   Relator’s claim against Defendants is therefore dismissed on the merits with
      prejudice.

40.   The parties shall meet and confer and no later than August 7, 2024 shall file
      a proposed final judgment that is agreed as to form.



Date: July 31, 2024                           ___________________________
                                                    Stanley Blumenfeld, Jr.
                                                  United States District Judge




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