Complaint and Jury Demand — United States ex rel. Blockquote, Inc. v. Lotte Hotel Holdings USA (Dkt. 1)

Summary

A Complaint and Jury Demand filed April 10, 2024 as Document 1 in United States of America ex rel. Blockquote, Inc. v. Lotte Hotel Holdings USA Co., Ltd. and Lotte Duty Free Guam LLC, Case 2:24-cv-00476, in the U.S. District Court for the Western District of Washington at Seattle. Relator Blockquote, Inc. brings the action under the False Claims Act, 31 U.S.C. §§ 3729 et seq., alleging that Paycheck Protection Program funds loaned to the defendants were forgiven as a result of false applications. It alleges a First Draw loan of $860,500 approved by Bank of Guam on April 27, 2020 and a Second Draw loan of $860,500 approved on April 1, 2021, and that when affiliated entities are included, Lotte Duty Free Guam exceeded the size standards. The complaint closes with a demand for trial by jury.

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Case 2:24-cv-00476-LK Document 1

FILED ENTERED
LODGED RECEIVED

APR 10 2024 KS

AT SEATTLE
CLERK U.S. DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON

DEPUTY

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

UNITED STATES OF AMERICA ex
rel. BLOCKQUOTE, INC.,

Plaintiff-Relator,

LOTTE HOTEL HOLDINGS USA CO.,
LTD., and LOTTE DUTY FREE GUAM
LLC,

Defendants.

COMPLAINT AND JURY
DEMAND

Filed Under Seal
pursuant to
31 U.S.C. § 3730(b)(2)

COMPLAINT AND JURY DEMAND

LAW OFFICES OF

MCcNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Document1 Filed 04/10/24 Page 2 of 14

NATURE OF THE ALLEGATIONS

1. Relator Blockquote, Inc. brings this action on behalf of itself and the United
States of America against Defendants Lotte Hotel Holdings USA Co., Ltd. and Lotte
Duty Free Guam LLC for violations of the federal False Claims Act, 31 U.S.C. §§
3729 et seq.
2. This action seeks to recover funds that were loaned to Defendants through the
federal Government’s Paycheck Protection Program (“PPP”) and forgiven as a result
of false applications.
3. Under the SBA’s affiliation rules, Lotte Duty Free Guam should have
considered the employees, revenues, and net worth of its affiliated entities when
evaluating its eligibility for the two loans. This includes three affiliated hotels owned
by its parent company, Lotte Hotel Holdings USA Co., Ltd., likely worth over a
billion dollars. Had it done so, Lotte Duty Free Guam would have exceeded the size
standards and been ineligible for PPP funding.

JURISDICTION AND VENUE

4. This Court has jurisdiction over this action pursuant to 31 U.S.C. § 3732(a)

and 28 U.S.C. §§ 1331, 1845.

5. Venue is proper in this district under 28 U.S.C. §§ 1391(b) and 31 U.S.C.

§ 3732(a), as one or more Defendant transacts business in this jurisdiction and

violations of the False Claims Act described herein occurred in this district.
PARTIES

6. Lotte Hotel Holdings USA Co., Ltd. (‘Lotte Hotels USA”) is registered as a

corporation in Delaware. It is part of the multinational conglomerate Lotte Group.

COMPLAINT AND JURY DEMAND -1 TAW/OFHEESOF
MCNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Documenti_- Filed 04/10/24 Page 3 of 14

7. At all relevant times, Lotte Hotels USA was the 100% owner of Lotte Duty

Free Guam LLC; Lotte Hotel Guam LLC; Lotte Hotel New York Palace LLC; and

Lotte Hotel Seattle LLC.

8. Lotte Duty Free Guam LLC operates a duty free store at Antonio B. Won Pat
International Airport, 355 Chalan Pasaheru B224-A, Tamuning, 96913, Guam.

9, Lotte Hotel Guam LLC operates a hotel at 185 Gun Beach Road, Tamuning,
96913, Guam.

10. Lotte Hotel New York Palace LLC operates a hotel at 455 Madison Ave., New
York, NY 10022.

11. Lotte Hotel Seattle LLC operates a hotel at 809 5th Ave., Seattle, WA 98104.
12. Blockquote, Inc. is a company based in California that produces public interest

research, news reporting, and investigations.

THE PAYCHECK PROTECTION PROGRAM

13. During the COVID-19 pandemic, Congress passed the Coronavirus Aid,
Relief, and Economic Security Act (‘CARES Act”). Section 1102 of the CARES Act
contains a program called the Paycheck Protection Program (“PPP”), a program
administered by the U.S. Small Business Administration (“SBA”) to provide
economic relief to small businesses nationwide adversely impacted by the
coronavirus pandemic.

14. Section 1102 of the CARES Act temporarily permitted SBA to guarantee 100%
of the PPP loans. Section 1106 of the CARES Act provided for forgiveness of up to
the full principal amount of qualifying loans guaranteed under the PPP.

15. The CARES Act gives lenders delegated authority to process loan applications
for PPP funding. SBA allowed lenders to rely on certifications of the borrowers in

order to determine eligibility of the borrower and use of loan proceeds, and to rely on

COMPLAINT AND JURY DEMAND - 2 LAW OFFICES OF
MCNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Documenti Filed 04/10/24 Page 4of14

specified documents provided by the borrower to determine qualifying loan amount,
and eligibility for loan forgiveness.
16. Under the First Draw program, lenders were compensated by the federal
government via processing fees based on the balance of the financing outstanding at
the time of final disbursement, in the following amounts:

e Five (5) percent for loans of not more than $350,000;

e Three (3) percent for loans of more than $350,000 and less than $2,000,000;

and

e One (1) percent for loans of at least $2,000,000.
17. Borrowers had to submit documentation necessary to establish eligibility such
as payroll processor records, payroll tax filings, form 1099s, income and expenses
documentation.
18. In general, the maximum amount borrowers could borrow was calculated by
aggregating payroll costs from the previous year, with annual employee salaries
capped at $100,000. The borrower then calculated the average monthly payroll cost
and multiplied that amount by a factor of 2.5.
19. The Economic Aid Act (P.L. 116-260, in the Consolidated Appropriations Act
of 2021), authorized and funded a Second Draw PPP Loan program.
20. For Second Draw PPP Loans, lenders were compensated by the federal
government via processing fees based on the balance of the financing outstanding at
the time of final disbursement, in the amount of five (5) percent for loans of more
than $50,000 and not more than $350,000, and in the amount of three (8) percent for

loans above $350,000.

COMPLAINT AND JURY DEMAND - 3 LAW OFFICES OF
MCNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Document1 Filed 04/10/24 Page 5of14

21. Each borrower certified on the First and Second Draw loan applications that
they were eligible to receive the loans under the program guidelines and that their
applications and supporting documentation were accurate.

22. Borrowers were later able to seek forgiveness of the loans if the funds were
used for eligible payroll costs, payments on business mortgage interest payments,

rent, or utilities during either the 8- or 24-week period after disbursement.

FACTUAL ALLEGATIONS

23. Lotte Duty Free Guam LLC was approved for a First Draw PPP loan of
$860,500 by Bank of Guam on April 27, 2020. It reported 154 jobs. The loan, plus
interest, was forgiven, for a total of $864,318.

24. Lotte Duty Free Guam LLC was approved for a Second Draw PPP loan of
$860,500 by Bank of Guam on April 1, 2021. It reported 136 employees. This loan,
plus interest, was also forgiven, for a total of $865,639.

25. Lotte Duty Free Guam was not eligible for either loan because, when including
affiliated entities, it exceeded the requisite size standards.

26. Version 1 of the First Draw PPP Borrower Application Form, effective April
2, 2020, required the applicant to certify in good faith that, inter alia:

a. The Applicant is eligible to receive a loan under the rules in effect at the
time this application is submitted that have been issued by the Small
Business Administration (SBA) implementing the Paycheck Protection
Program under Division A, Title I of the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act) (the Paycheck Protection Program
Rule).

b. The Applicant (1) is an independent contractor, eligible self-employed
individual, or sole proprietor or (2) employs no more than the greater of
500 or employees [sic] or, if applicable, the size standard in number of
employees established by the SBA in 18 C.F.R. 121.201 for the Applicant’s
industry.

COMPLAINT AND JURY DEMAND - 4 LAW OFFICES OF
McNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Document1 Filed 04/10/24 Page 6 of 14

ce. I further certify that the information provided in this application and the
information provided in all supporting documents and forms is true and
accurate in all material respects. I understand that knowingly making a
false statement to obtain a guaranteed loan from SBA is punishable under
the law, including under 18 USC 1001 and 3571 by imprisonment of not
more than five years and/or a fine of up to $250,000; under 15 USC 645
by imprisonment of not more than two years and/or a fine of not more than
$5,000; and, if submitted to a federally insured institution, under 18 USC
1014 by imprisonment of not more than thirty years and/or a fine of not
more than $1,000,000.

27. Version 1 of the Second Draw PPP Borrower Application Form, effective
January 8, 2021, required the applicant to certify in good faith that, inter alia:

a. The Applicant is eligible to receive a loan under the rules in effect at
the time this application is submitted that have been issued by the
Small Business Administration (SBA) and the Department of the
Treasury (Treasury) implementing Second Draw Paycheck
Protection Program Loans under Division A, Title I of the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
and the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and
Venues Act (the Paycheck Protection Program Rules).

b. The Applicant, together with its affiliates Gf applicable)... employs
no more than 300 employees...

c. I further certify that the information provided in this application and
the information provided in all supporting documents and forms is
true and accurate in all material respects. I understand that
knowingly making a false statement to obtain a guaranteed loan
from SBA is punishable under the law, including under 18 USC 1001
and 3571 by imprisonment of not more than five years and/or a fine
of up to $250,000; under 15 USC 645 by imprisonment of not more
than two years and/or a fine of not more than $5,000; and, if
submitted to a federally insured institution, under 18 USC 1014 by
imprisonment of not more than thirty years and/or a fine of not more
than $1,000,000.

28. Later versions of the applications had similar certifications.
29. Lotte Duty Free Guam must have made these certifications in order to receive

PPP funds.

COMPLAINT AND JURY DEMAND -5 PAM ORHICES OF
McCNAUL EsBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Documenti Filed 04/10/24 Page 7 of 14

30. These certifications were false when made because they failed to properly
consider affiliated entities.

A. THE AFFILIATION RULES

31. Inaddition to small business concerns, a business was eligible for a First Draw
PPP Loan if the business had 500 or fewer employees or the business met the SBA
employee-based or revenue-based size standard for the industry in which it operates
Gf applicable) or under the alternative size standard.

32. Under the Second Draw program, businesses were eligible only if they had
300 or fewer employees.

33. When multiple entities are operated under common ownership, the SBA
generally applies “affiliation rules,” codified at 13 C.F.R. § 121.301(f), that require
the various entities to consolidate their employee and revenue count when
evaluating their loan eligibility. Their purpose is to capture exactly the situation we
appear to have with Lotte Group—a large and successful corporation operating
multiple subsidiaries.

34. The “affiliation based on ownership” test states that:

For determining affiliation based on equity ownership, a concern is an
affiliate of an individual, concern, or entity that owns or has the power
to control more than 50 percent of the concern's voting equity. If no
individual, concern, or entity is found to control, SBA will deem the
Board of Directors or President or Chief Executive Officer (CEO) (or
other officers, managing members, or partners who control the
management of the concern) to be in control of the concern.

35. Lotte Duty Free Guam LLC, Lotte Hotel Guam LLC, Lotte Hotel New York
Palace LLC, and Lotte Hotel Seattle LLC were all wholly owned by Lotte Hotel

Holdings USA Co., Ltd., and, thus, they were affiliated.

COMPLAINT AND JURY DEMAND - 6 TAMJOEFICESOR
McCNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Document1 Filed 04/10/24 Page 8 of 14

B. AFFILIATION RULE WAIVER REQUIREMENTS

36. Accordingly, to avoid affiliation with the hotels, Lotte Duty Free Guam would
have to meet one of three affiliation rule waiver requirements. At least two of the
three waivers to the affiliation rules do not apply: it was not assigned a NAICS code
beginning with 72, nor has it been assigned a franchise identifier code.

37. The third waiver applies where a business “receives financial assistance from
acompany licensed under section 301 of the Small Business Investment Act of 1958,”
1.e., a “small business investment company.” “Financial assistance” includes any
type of financing listed in 13 C.F.R. § 107.50, including loans and equity. It seems
unlikely that the subsidiary of a multinational conglomerate would have applied for
SBIC funding, and Relator has found no evidence that it did.

38. The NAICS code beginning with the digits 72 did apply to the three Lotte
Hotels (Guam, Seattle, and New York Palace), which is why Lotte Hotel Guam was
eligible for a PPP loan notwithstanding this affiliation. However, the affiliation
waiver is a one-way street. For example, as explained by SBA PPP FAQ 24:

Example 3. Company X wholly owns Company Y and Company Z (as a
result, Companies X, Y, and Z are all affiliates of one another). Company
Y owns a restaurant with 400 employees. Company Z is a construction
company with 400 employees.

e Company Y is eligible for a First Draw PPP Loan because it has
500 or fewer employees. The affiliation rules do not apply to
Company Y, because it has 500 or fewer employees and is in the
food services business (with a NAICS code beginning with 72).

e The waiver of the affiliation rules does not apply to Company Z,
because Company Z is in the construction industry. Under SBA’s
affiliation rules, 13 CFR 121.301(f)(1) and (8), Company Y and
Company Z are affiliates of one another because they are under
the common control of Company X, which wholly owns both
companies. This means that the size of Company Z is determined
by adding its employees to those of Companies X and Y.
Therefore, Company Z is deemed to have more than 500

COMPLAINT AND JURY DEMAND -7 PAW OFFICES OF
MCNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700

Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Document1 Filed 04/10/24 Page 9 of 14

employees, together with its affiliates. However, Company Z may
be eligible to receive a First Draw PPP Loan as a small business
concern if it, together with Companies X and Y, meets SBA’s other
applicable size standards, as explained in FAQ #2.

39. Similarly, the size of Lotte Duty Free Guam (Company Z) is determined by
adding its employees to those of Lotte Hotel Holdings USA (Company X) and its
subsidiaries (Company Y).

C. APPLICATION OF THE AFFILIATION RULES

40. Looking to the Second Draw Loan first, Lotte Duty Free Guam reported 136
employees on its loan application. Separately, Lotte Hotel Guam reported 174
employees on its own application. This puts the affiliated companies at over 300
employees prior to even including the other two hotels. Since this is the only
eligibility test for the Second Draw, Lotte Duty Free Guam was not eligible.

41. Lotte Duty Free Guam applied for its Second Draw PPP loan using NAICS
code 453220, Gift, Novelty, and Souvenir Stores.

42. Assuming this is the correct code for Lotte Duty Free, with regards to the First
Draw program, this code did not have an employee limit, and so the standard 500-
employee limit applied to the First Draw Loan. Its revenue standard was $8 million.
43. Under the alternative size standard, an entity (including affiliates) could
qualify if the maximum tangible net worth is not more than $15 million; and average
net income after Federal income taxes (excluding any carry-over losses) of the
business for the two full fiscal years before the date of the application is not more
than $5 million.

44. On the First Draw applications, Lotte Duty Free Guam reported 154 jobs and

Lotte Hotel Guam reported 244 jobs, a total of 398 jobs.

COMPLAINT AND JURY DEMAND - 8 PAMSORHICESOE
MCNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Document1 Filed 04/10/24 Page 10 of 14

45. Upon information and belief, Lotte Hotel New York Palace—a five-star hotel
with over 900 rooms and suites and amenities—and Lotte Hotel Seattle had more
than 102 employees.

46. Also upon information and belief, the revenues, net worth, and net profits for
these three hotels and Lotte Duty Free Guam exceeded the $8 million revenue limit
and the limits of the alternative size standard.

47. Zippia, for example, estimated that in 2023, New York Palace Hotel had 1,500
employees and $130M in revenue.

48. Moreover, Lotte Group purchased the New York Palace Hotel in 2015 for
about $805 million, plus $140 million in renovations.

CONCLUSION

49. Lotte Duty Free Guam was the subsidiary of a holding company that included
three luxury hotels. Moreover, it was part of a multinational conglomerate with total
assets of KRW 19,921.9 billion, or about $150 billion.

50. Lotte Group and its affiliates should never have received PPP money.
Although it qualified under an exception for its Guam hotel, the same exception did
not apply to Lotte Duty Free Guam. Defendants should be required to repay the loan,
plus interest, processing fees, and penalties.

COUNTI
VIOLATIONS OF 31 U.S.C. § 3729
FALSE CLAIMS ACT

51. Relator hereby incorporates and realleges herein all other paragraphs as if
fully set forth herein.
52. Asset forth above, Defendants knowingly presented or caused to be presented

false or fraudulent claims for payment or approval, in violation of 31 U.S.C. §

3729(a)(1)(A).

COMPLAINT AND JURY DEMAND -9 oa
MCNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Documenti_ Filed 04/10/24 Page 11 of 14

538. As set forth above, Defendants knowingly made, used, or caused to be made
or used, false records or statements material to false or fraudulent claims, in
violation of 31 U.S.C. § 3729(a)(1)(B).
54. As set forth above, Defendants knowingly conspired to commit a violation of
the False Claims Act, in violation of 31 U.S.C. § 3729(a)(1)(C).
55. Due to Defendants’ conduct, the United States Government has suffered
substantial monetary damages and is entitled to recover treble damages and a civil
penalty for each false claim. 31 U.S.C. § 3729.
56. Relator is entitled to reasonable attorneys’ fees, costs, and expenses. 31 U.S.C.
§ 3730(d)(1).
PRAYER FOR RELIEF
WHEREFORE, Relator prays for judgment against Defendants:
On behalf of the United States:
a) awarding the United States treble damages sustained by it for each of the
false claims or improperly retained payments;
b) awarding the United States a maximum civil penalty for each of the false
claims, records, or statements;
c) awarding Relator the maximum share of the proceeds of this action and
any alternate remedy or the settlement of any such claim;
d) awarding Relator litigation costs, expenses, and reasonable attorneys’
fees; and
e) granting such other relief as the Court may deem just and proper.
DEMAND FOR JURY TRIAL
Relator hereby respectfully demands trial by jury on all issues and counts

triable as of right before a jury.

COMPLAINT AND JURY DEMAND - 10 LAW OFFICES OF
MCNAUL EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

Case 2:24-cv-00476-LK Documenti_ Filed 04/10/24 Page 12 of 14

DATED this 10‘ day of April, 2024.

McNAUL EBEL NAWROT & HELGREN
PLLC

Malaika M. Eaton, WSBA No. 32837
600 University Street, Suite 2700
Seattle, Washington 98101
206-467-1816

meaton@mcnaul.com

Jason Marcus

(Pro Hac Vice Application to be Submitted)
Georgia Bar No. 949698

Bracker & Marcus LLC

3355 Lenox Rd., Suite 660

Atlanta, Georgia 30326

Tel: (770) 988-5035

Fax: (678) 648-5544
Jason@FCACounsel.com

Attorneys for Relator Blockquote, Inc.

COMPLAINT AND JURY DEMAND - 11 ihren
McNAut EBeL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816
10

24.

Case 2:24-cv-00476-LK Document1 Filed 04/10/24 Page 13 of 14

FILED ENTERED
LODGED RECEIVED

APR 10 2024 KS

AT SEATTLE
CLERK U.S. DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
PUTY

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

UNITED STATES OF AMERICA ex
rel. BLOCKQUOTE, INC.,

Plaintiff-Relator,

Vv.

LOTTE HOTEL HOLDINGS USA CO.,
LTD., and LOTTE DUTY FREE GUAM
LLC,

Defendants.

NO. 2.267 ev- 476 ~Le.

COMPLAINT AND JURY
DEMAND

Filed Under Seal
pursuant to

31 U.S.C. § 3730(b)(2)

COMPLAINT AND JURY DEMAND

LAW OFFICES OF

McNaut EBEL NAWROT & HELGREN PLLC
600 University Street, Suite 2700
Seattle, Washington 98101-3143
(206) 467-1816

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