United States District Court, D. Connecticut
IN RE SAGECREST II LLC and SAGECREST HOLDING LIMITED
RULING ON APPEAL OF BANKRUPTCY COURT'S
A. Bolden United States District Judge.
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.
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.
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.
FACTUAL AND PROCEDURAL BACKGROUND
claims here stem from a larger bankruptcy proceeding related
to a series of hedge funds and subsidiaries. This case,
however, arises primarily out of a real estate deal involving
a hotel and property located in Toronto, Canada.
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.
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 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.
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.
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).
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.
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.
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
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.
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.
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.
timely filed a notice of appeal of the Bankruptcy Court's
decision on January 5, 2017. The parties filed their
designations of the record ...