In Re Sagecrest Ii LLC
| Decision Date | 14 January 2011 |
| Docket Number | No. 3:10cv978 (SRU),No. 3:10cv979 (SRU),3:10cv978 (SRU),3:10cv979 (SRU) |
| Court | U.S. District Court — District of Connecticut |
| Parties | IN RE SAGECREST II, LLC TOPWATER EXCLUSIVE FUND III, LLC, et al., Appellants, v. SAGECREST II, LLC, et al., Appellees. |
Topwater Exlusive Fund III, LLC and other purported creditors and investors in SageCrest II, LLC ("SC II"), a debtor hedge fund, appeal the May 18, 2010 order of the United States Bankruptcy Court for the District of Connecticut approving an agreement to remove SC II's current manager, settle that manager's administrative claim, and appoint a new interim manager in its place. For the reasons set forth herein, the bankruptcy court's order is affirmed.
This case concerns the bankruptcy of four related hedge funds: SC II, a Delaware hedge fund; SageCrest Finance, LLC ("Finance"), a Delaware subsidiary of SC II; SageCrest Holdings, Ltd. ("Holdings"), a Bermuda-based subsidiary of SC II that, according to the appellees, controls 77 percent of SC II's assets; and SageCrest Dixon, Inc. ("Dixon"), another Delaware subsidiary of SC II. The most significant of those hedge funds for the purposes of this appeal is SC II.
SC II is managed by Windmill Management, LLC ("Windmill"); Windmill's principals are the brothers Alan and Phillip Milton. Windmill manages SC II pursuant to an operating agreement dated December 18, 2002; as manager, Windmill acts as the hedge fund's executive and is "vested with the full, exclusive and complete right, power and discretion to operate, manage and control the affairs of the Company and to make all decisions affecting Company affairs... to carry on the business of the Company." Operating Agreement § 5.1. The other parties to this action are the Official Committee of Equity Investors ("Committee"), which represents SC II's equity interests; Topwater Exclusive Fund III, LLC ("Topwater"), a purported investor in and unsecured creditor to SC II; Freestone Low Volatility Partners, LP and Freestone Low Volatility Qualified Partners, LP (collectively, "Freestone"), purported investors in and unsecured creditors to SC II; Wood Creek Multi-Asset Fund, LP ("Wood Creek"), a purported investor in and unsecured creditor to SC II;1 and ACG Credit Company II, LLC, Art Capital Group, LLC, ACG Financy Company, LLC, Fine Art Finance Company, LLC, and Ian Peck (collectively, "ACG"), unsecured creditors to SC II. Topwater, Freestone, and Wood Creek are pursuing one appeal, while ACG is pursuing a separate appeal; the Committee, along with the four debtor Sagecrest hedge funds, are the appellees. In an order dated July 28, 2010, the two appeals were consolidated (3:10cv978 (SRU), doc. # 14; 3:10cv979 (SRU), doc. # 14) and the appellants filed a joint brief.
On August 17, 2008, SC II and Finance filed for voluntary Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Connecticut; Holdings and Dixon filed for bankruptcy on August 20, 2008 and September 11, 2008, respectively. Those bankruptcies were consolidated before Judge Alan H.W. Shiff. After its bankruptcy filing, SC II became a debtor-in-possession and Windmill continued managing the hedge fund pursuant to theterms of its operating agreement. On March 31, 2009, SC II, Finance, and Dixon filed a joint plan for reorganization; on May 15, 2009, Holdings filed its own plan for reorganization. On June 10, 2009, Judge Shiff granted an order, with the parties' consent, for SC II and the other hedge funds to enter mediation in order to propose a joint consensual plan for liquidating the funds' assets; because of the complexity, illiquidity, and interconnectedness of the funds' assets, Judge Shiff determined that a joint reorganization among all four hedge funds would prove more fruitful than two separate reorganization plans. The bankruptcy court appointed Melanie Cyganowski, former Chief Judge of the United States Bankruptcy Court for the Eastern District of New York, to mediate that settlement. In October 2009, while the mediation was ongoing, the Committee applied to the bankruptcy court to employ Ralph Harrison as a consultant. Harrison had been the managing director and general counsel of SSR Capital Partners, LP ("SSR"), an investor in SC II and a member of the Committee, but had resigned from his positions with SSR in order to consult the Committee. Over Topwater's objection, Judge Shiff approved the Committee's application.
On September 8, 2009, Windmill filed an administrative claim in bankruptcy court seeking payment from the debtor estate for managing the funds' assets during the pendency of SC II's bankruptcy. Windmill sought more than $1 million in its claim. Windmill's administrative claim was contested by several parties, including the appellants, and on December 1, 2009, Judge Shiff ordered the parties to take up the Windmill administrative claim in the mediation sessions before Cyganowski. The debtor, creditors, and Committee all wanted Windmill out: they blamed the Milton brothers for the funds' insolvency and accused them of operating the hedge funds as, essentially, a Ponzi scheme. The Milton brothers, by contrast, wished to be compensated for their administration of the funds during the bankruptcyproceedings and in securing waivers of liability from the other parties. On March 25, 2010, SC II, Finance, Holdings, Dixon, the Committee, Deutsche Bank, and Windmill entered into a settlement agreement for the Windmill administrative claim and moved for court approval. The settlement agreement included, inter alia, the following provisions: (1) Windmill would withdraw its administrative claim and any other claims against the SageCrest hedge funds in exchange for $1,325, 000, to be paid in five installments; (2) SC II and the funds agreed not to pursue any legal action against Windmill or the Miltons except for actions premised on their fraudulent or criminal activity; (3) Windmill would withdraw as manager of SC II and the other funds immediately; (4) Ralph Harrison would be appointed as interim manager.
The appellants objected to that settlement agreement on several grounds, including that Harrison could not be appointed interim manager because he was a not a disinterested person as defined in 11 U.S.C. § 327(a); Harrison was appointed interim manager via a process that contravened the rules set forth in the SC II operating agreement for appointing a new manager; the settlement was not fair and equitable, as required under Rule 9019 of the Federal Rules of Bankruptcy Procedure; the settlement plan was not supported by sufficient evidence; and the settlement plan was, in effect, a sub rosa liquidation plan, and not a mere settlement of the Windmill administrative claim. In an order dated May 18, 2010, Judge Shiff overruled the appellants' objections to the settlement plan. Specifically, Judge Shiff held: (1) Harrison was not a "professional person" within the ambit of 11 U.S.C. § 327(a) and therefore did not have to be "disinterested" in accordance with that subsection; (2) the process of appointing Harrison did not contravene the operating agreement; (3) the settlement was fair and equitable, based on a balancing of the factors set forth by the Court of Appeals in Motorola, Inc. v. Official Committee of Unsecured Creditors & JPMorgan Chase Bank, N.A. (In re Iredium Operating, LLC), 478 F.3d 452, 462 (2d Cir. 2007); (4) the settlement plan was not a sub rosa liquidation plan; and (5) there was sufficient evidence and disclosure to support the bankruptcy court's approval of the settlement agreement.
Following Judge Shiffs order, Windmill and the Milton Brothers withdrew as manager of SC II and Harrison began serving as interim manager. The appellants twice tried to stay Judge Shiffs order and prevent Windmill's withdrawal and the commencement of Harrison's service, first in the bankruptcy court and then in the district court. Both motions for a stay were denied. The appellants subsequently appealed Judge Shiffs approval of the settlement agreement.
Under 28 U.S.C. § 158(a)(1), federal district courts enjoy jurisdiction to hear appeals of final judgments, orders, and decrees of bankruptcy judges, including orders approving bankruptcy settlement agreements. Debenedictis v. Truesdell (In re Global Vision Products, Inc.), Nos. 07cv12628 (RDD), 09cv 374 (BSJ), 2009 WL 2170253, at *2 (S.D.N.Y. July 14, 2009). On appeal, a district court will review a bankruptcy court's conclusions of law de novo and its findings of fact for clear error. In re Flanagan, 415 B.R. 29, 38 (D. Conn. 2009).
The appellants' arguments for reversal of the bankruptcy court's approval of the Windmill settlement can be divided into two groups. First, the appellants charge that Harrison cannot serve as an interim manager under SC II's operating agreement and the Bankruptcy Code; and, second, that the Windmill settlement as a whole should not have been approved. I address the appellants' claims in that order.
The appellants present three sub-arguments for why Harrison cannot be appointed interim manager immediately following Windmill's withdrawal. First, they claim that the settlement agreement only permits Harrison to begin serving as SC II's manager on the settlement agreement's effective date, which is defined in the settlement agreement as "the first date on which... each SageCrest Entity Party and subsidiary thereof from which Windmill and/or the Miltons are resigning... have taken all corporate action necessary to effectuate such resignation and replace such resigning party, all in accordance with documents governing such entities and Applicable Law'" (emphasis added). Windmill Settlement Agreement § 6.3(g). The effective date has not yet been reached, according...
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