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In re SageCrest II LLC

United States District Court, D. Connecticut

March 30, 2018

IN RE SAGECREST II LLC and SAGECREST HOLDING LIMITED

          RULING ON APPEAL OF BANKRUPTCY COURT'S ORDER

          Victor A. Bolden United States District Judge.

         Appellant, Equal Overseas Consulting (“Equal”), LTD, appeals from an order of the United States Bankruptcy Court for the District of Connecticut (“Bankruptcy Court”) sustaining Appellees' objection to Equal's Proof of Claim. Notice of Appeal, ECF No. 1. The Bankruptcy Court concluded that the settlement agreement, on which the claim was based, was collusive and lacked consideration. Mem. of Decision on Debtor's Obj. to Claim of Equal Overseas Consulting, Ltd. (“Bankr. Op.”) at 16-17, ECF No. 1-1.

         The Bankruptcy Court therefore held that the agreement could not be enforced, and it sustained SageCrest's objection and held that “the monies claimed by Equal will be available for distribution in accordance” with the plan. Bankr. Op. at 18. Additionally, the Bankruptcy Court rejected a claim for a commission upon sale of property, holding that Equal was “attempting to circumvent one of the safeguards of court-approval of a debtor-in-possession's retention of professionals.” Bankr. Op. at 17-18.

         On appeal, Equal argues that the Bankruptcy Court wrongly applied U.S. law, instead of Canadian law, erroneously concluded that the agreement lacked consideration and was collusive, and erroneously denied payment of the commission. The Court disagrees, and AFFIRMS the Bankruptcy Court's Order.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         The claims here stem from a larger bankruptcy proceeding related to a series of hedge funds and subsidiaries.[1] This case, however, arises primarily out of a real estate deal involving a hotel and property located in Toronto, Canada.

         A. Factual Background

         SageCrest Dixon, Inc. (“Dixon”) was a Delaware corporation and wholly-owned subsidiary of SageCrest Canada Holdings, Inc., a wholly-owned subsidiary of SageCrest II, LLC (“SageCrest”). Bankr. Op. at 2. Dixon's sole asset was property located in Toronto, Canada, where the Constellation Hotel was located. Bomhof Dep. at 89, Joint Ex. 1, In Re Sagecrest, II, LLC, 08-50754 (Bankr. D. Conn. 2014).

         Dixon acquired the property in a Canadian bankruptcy proceeding. Bankr. Op. at 2. The property had been owned by two Canadian companies - 158930 Ontario, Inc., and its subsidiary, 2031939 Ontario Inc. - which had received approximately CDN $2 million[2] in financing from Jean-Daniel Cohen (“Mr. Cohen”), an investor, as well as an additional CDN $20 million in loans Cohen helped arrange. Transcript of Trial at 60, In Re Sagecrest, II, LLC, 08-50754 (D. Conn. Bankr. July 15, 2014). The two companies filed for bankruptcy under Canadian law in 2005, leaving Cohen the largest unsecured creditor. Additionally, after the start of proceedings, a SageCrest subsidiary acquired the first and second mortgages on the property and therefore become the largest secured creditor. Bankr. Op. at 3.

         A court-appointed monitor then oversaw a bidding process for the property in 2006. See generally Endorsement, Appellee's Resp. Br., Ex. J., ECF No. 17-10. Two former principals of the property, Al Soorty and Zoran Cocov (“Soorty and Cocov”), made the first bid, but the Superior Court of Justice, Province of Ontarior, Canada (“Ontario Court”) disapproved of the offer because it believed that Soorty and Cocov had not provided adequate assurances of financing. Endorsement ¶ 5, Appellee's Resp. Br., Ex. J.; Bankr. Op. at 3. Several other bids followed in September of 2006: Soorty and Cocov amended their offer, and Cohen submitted a bid on behalf of various entities he controlled and labeled “Equal Group.” Cohen agreed to make financing available to Soorty and Cocov, if the offer was approved, with the understanding that Cohen could pursue his own offer should the Ontario Court reject that proposal. Jewitt Aff. ¶¶ 3, 8-9, Appellee's Resp. Br., Ex. BB, ECF No. 17-28; Bankr. Op. at 4. Soorty and Cocov and Cohen informed the Ontario Court of the agreement and sought another opportunity to submit an amended offer; the Ontario Court agreed “with some reluctance” and opened up bidding for “any party to put in a further offer” on the property. Endorsement ¶¶ 13, 19, Appellee's Resp. Br., Ex. J.

         On October 16, an agent of SageCrest contacted Mr. Cohen to suggest that Cohen and the entities he controlled, labeled as the “Equal Group, ” join SageCrest in supporting a bid for the property. This conversation ultimately resulted in a “Settlement Agreement” between the two parties. See Settlement Agreement, Appellee's Resp. Br., Ex. O, ECF No. 17-15. The agreement noted that SageCrest had “proposed to fund a plan” that would allow it to “acquire all of the property and assets” related to the property. Id. § C. Cohen and Equal Group agreed that it would withdraw funding from Soorty and Cocov's bid, and that “it does not intend to participate in or support any alternative transaction to the Proposed Transaction, ” i.e., a “Competing Bid.” Id. ¶¶ 1-2. In return, it would be paid a “fixed retainer” in two installments: CDN $ 1.369 million when Dixon became the owner of the property, and an additional CDN $1.379 million one year later. Id. ¶¶ 3(a)-(b). Additionally, “in the event that Dixon disposes of its interest in the Property, the Equal Group shall receive a commission from such sale proceeds in the amount of CDN$850, 000.” Id. ¶ 3(c).

         The agreement contemplated that the parties would enter into a further consulting agreement that would govern the payment of these fees. Id. ¶ 3. The Settlement Agreement noted, however, that “[u]ntil such formal consulting agreement is executed, the terms hereof shall govern and the amounts set out above shall be payable regardless of the quantum of the services actually requested” by Dixon. Id.

         The agreement also included a choice of law provision that stated it “shall be governed by the laws of Ontario and the federal laws of Canada applicable therein.” Id. ¶ 8. Finally, there was a non-disclosure provision under which the parties “agree that the terms of this Agreement are confidential and shall not be disclosed to any third party” without written consent. Id. ¶ 7.

         The parties to the Settlement Agreement did not inform the Ontario Court of the agreement. Bankr. Op. at 7. Instead, Soorty and Cocov and Dixon submitted offers to the monitor one day after the Settlement Agreement was signed. Cohen informed the monitor at that time that he had withdrawn his support for the Soorty and Cocov offer, and declined to make his own offer. The monitor approved the Dixon bid, and SageCrest took ownership of the property, eventually demolishing the Constellation Hotel in order to build a new one. By 2008, however, Dixon and SageCrest were both bankrupt and they commenced bankruptcy actions in the District of Connecticut.[3]

         B. Procedural History

         Both SageCrest and Dixon filed for bankruptcy in the District of Connecticut in 2008, and their cases were jointly administered. See Bankr. Op. at 8. The property was sold at a court-approved auction, and Dixon's case was fully administered and a final decree approved. See Bankr. Op. at 9.

         On September 23, 2008, however, Equal filed a proof of claim, the subject of this appeal. Id. While the initial CDN $1.369 million payment had already been made, Equal claimed they should be paid the second installment of CDN $1.379 million, as well as the CDN $850, 000 for the consulting fee. Id. SageCrest objected to the claim, arguing that it was, in effect, a “bribe” by past management of SageCrest to “induce Cohen to withdraw his support” for the competing bid and therefore “had such an arrangement been made in a U.S. Bankruptcy Court, it would be a crime.” Id. at 9-10.

         The Bankruptcy Court then held a two-day trial, after which it sustained SageCrest's objections. It declined to decide conclusively whether Canadian or U.S. law applied, instead holding that “the same result follows from the application of either.” Bankr. Op. at 11. Under both Canadian and U.S. law, the court held, the Settlement Agreement lacked consideration and therefore was unenforceable. Id. at 16. Additionally, the agreement was collusive, “a side-deal between [SageCrest] and Cohen under which, for a pay-off, Cohen agreed to cease competing with [SageCrest] for the Property.” Id. at 15. The Court reasoned that this was antithetical to both Canadian and U.S. bankruptcy law and, applying the doctrine of in pari delicto, the agreement was unenforceable. Id. at 15. Finally, the court held that there was no basis under U.S. law to allow for the payment of the CDN $850, 000 commission. Id. at 17.

         Equal timely filed a notice of appeal of the Bankruptcy Court's decision on January 5, 2017. The parties filed their designations of the record ...


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