In re Sagecrest II LLC
| Decision Date | 23 December 2015 |
| Docket Number | Case No. 08-50754 (AHWS),Case No. 08-50844 (AHWS),Case No. 08-50755 (AHWS) |
| Court | U.S. Bankruptcy Court — District of Connecticut |
| Parties | In re: SAGECREST II LLC, SAGECREST FINANCE LLC, SAGECREST DIXON INC., Debtors. |
Jointly Administered
Appearances:
Laurence May, Esq.
Cole, Schotz, Meisel, Forman
900 Third Ave., 16th Fl.
New York, NY
For the Liquidating Trustee
of the SageCrest Liquidating Trust
Kevin Nash, Esq.
Goldberg, Weprin Finkel Goldstein
New York, NY
For Claimant, Equal Overseas
Consulting, Ltd.
MEMORANDUM OF DECISION ON DEBTOR'S OBJECTION TO CLAIM OF EQUAL OVERSEAS CONSULTING, LTD.Debtor SageCrest II, LLC ("SCII")4 objects to the claim of Equal Oversea Consulting, Ltd. ("Equal"). For the reasons that follow, the objection is sustained.
The Court assumes the parties' familiarity with the history of these cases.6 For convenience of the parties, the following limited background is provided to give context to this memorandum of decision.
SageCrest Dixon Inc. ("Dixon") was a Delaware corporation, which was a wholly owned subsidiary of SageCrest Canada Holdings Inc., which, in turn, was a wholly owned subsidiary of SCII. Dixon was established to hold title to real property in Toronto, Canada, upon which the Constellation Hotel ("Hotel") was located ("Property").7 (See Bomhof Dep., at 89, Trustee's Tr. Exh. CC.) The Property was Dixon's sole asset.
The manner in which Dixon came to own the Property prompted the instant controversy. As more specifically detailed, infra at 7, the Property was acquired through a Canadian bankruptcy proceeding, known as an arrangement.
In March 2004, SCII made a loan to Orenstein Investments, Inc, which was secured by shares in a Canadian company known as 1587930 Ontario Inc. ("158Ontario"8 ). 158 Ontario and its subsidiary, 2031939 Ontario Inc. ("203 Ontario"9) (collectively, the "Numbered Entities"), used that financing for the purchase of the Property. The Numbered Entities also borrowed approximately CDN $2 million from Jean-Daniel Cohen ("Cohen") to acquire the Property.10 In addition, Cohen arranged a CDN $20 million loan for the Numbered Entities, for which he was owed commissions. (See July 15, 2014 Trial Tr. at 60; SCII's Tr. Exh. A (Cohen Aff. 5, ¶20).)
On April 22, 2005, the Numbered Entities filed petitions for arrangement under Canada's Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA")11 in the Superior Court of Justice, Province of Ontario, Canada ("Ontario Court"). In accordance with the CCAA, a monitor was appointed to oversee the Numbered Entities' ongoing operations and assist with the filing and voting on a restructuring plan. (See July 16, 2014 Trial Tr. at 79-80 (Tayar Direct Exam) (ECF No. 2436).) After the CCAA filing date, SCII's subsidiary, SageCrest Regal, Inc., acquired the first and second mortgages on the Property. As a result, SCII was the Numbered Entities senior secured creditor. (See Equal's Tr. Exh. 5 at 6, ¶4(b) (Supp. to 12th Report of Monitor).) Cohen was the Numbered Entities largest unsecured creditor.
On July 13, 2006, two former principals of 158 Ontario and 203 Ontario, Al Soorty and Zoran Cocov (hereafter, "S&C"), submitted an initial offer to the monitor to purchase the Property. That offer was not approved by the Ontario Court because S&C could not provide adequate assurance of financing to fund their offer.
During September 2006, offers were made to the monitor for the Property by S&C (an amended offer); by Cohen, on behalf of various entities he controlled, including Mercury Hospitality Partners, LLC ("Mercury"),12 and by SCII. On September 25, 2006, the Ontario Court considered those offers. After the September 25th hearing, S&C's financial advisor had a conversation with Cohen in which the advisor asked Cohen to support S&C's amended offer by making his (Cohen's) financing available to S&C. (See SCII's Tr. Exh. I; see also SCII's Tr. Exh. BB at ¶¶7-11; SCII's Tr. Exh. DD at 39.) S&C and Cohen reached an understanding that if the Ontario Court rejected S&C's amended offer, Cohen would pursue his own offer. (See id.; see also SCII's Tr. Exh. DD at 41.)
The monitor and the Ontario Court did not learn about S&C's new, Cohen-related financing until September 26th or 27th, i.e., after the September 25th hearing. (See SCII's Tr. Exh. BB. at ¶¶9, 11.) On the basis of their enhanced financing capability to support their amended offer, S&C sought another court hearing on their offer to purchase the Property. The Ontario Court agreed and conducted a hearing on October 3, 2006 to determine whether evidence of S&C's alleged financial status should be considered. (See id. at ¶13.)
On October 6, 2006, the Ontario Court issued an endorsement that "with some reluctance" it would "re-open the opportunity to any party to put in a further offer" on the Property. (See SCII's Tr. Exh. J.) Its stated basis for doing so was that a Canadian bankruptcy proceeding "is different from an ordinary civil action and trial . . . [since it] anticipates dynamic and 'real time' process that should only be stifled when to do otherwise would operate as a significant prejudice to a creditor or group of creditors."Thus, the Ontario Court concluded that "the unsecured creditors should not be deprived of the possibility of Court consideration" of an improved offer by SCII or an offer from S&C or others. (See SCII's Tr. Exh. J.) A corresponding order entered on October 11, 2006 instructing, inter alia, that "[o]ffers are to be received by the monitor no later than Oct.18[, 20]06" and that "all parties bidding are to do so on a best foot forward basis." (See SCII's Tr. Exh. K.) A hearing on the monitor's recommendation as to the best offer was scheduled for October 19 or 20, 2006. (See id.) Thus, when the bidding period was re-opened, Cohen was a bidder in two distinct capacities: as a financial backer of S&C, and as a principal pursuing his own bid.
On October 16, 2006, an SCII agent13, Jeffrey Gwin of Creative Realty, LLC, telephoned Cohen to ask about his plans to bid on the Property. (See SCII's Tr. Exh. DD at 63-64.) Cohen told Gwin he was planning to re-submit his $42 million offer. (Id. at 65.) Gwin inquired whether Cohen was interested in "joining forces" and not competing with SCII. (Id. at 67-70.) Cohen agreed in principle. That is, he would withdraw his financial support of the S&C offer, but he had not yet decided to forego his right to make an independent, competing bid through his Mercury affiliate. That decision was made the next day, October 17, 2006, when Cohen received "the final terms of an agreement" with SCII, which were acceptable to him. (Id. at 72-73.)
Despite having no claims against SCII (see id. at 75-76),14 the agreementbetween SCII and Cohen was fashioned as a "settlement agreement", which was subject to a confidentiality provision ("Settlement Agreement"). Under its terms, Cohen would withdraw his financial support of the S&C offer, would not make his own offer, and would support SCII's offer. The Settlement Agreement also provided that the parties exchange mutual releases "with respect to any and all claims, liabilities and actions related to their investment in or involvement with the Property . . .". (SCII's Tr. Exh. O at 3, ¶5.) Further, SCII agreed that once it (through Dixon) became the registered title holder of the Property, it would retain Cohen as a redevelopment consultant, paying a fixed retainer in two installments: an initial payment of CDN $1.369 million and a subsequent payment of CDN $1.379 million. (See SCII's Tr. Exh. O at 2.) Cohen was to receive a third payment, a commission of CDN $ 850,000 ("Commission"), upon the further sale of the Property, which "shall be a claim solely against the owner of the Property (i.e., Dixon) . . ." (Id.) It is of paramount significance in this controversy to note that those amounts were "payable regardless of the quantum of the services actually requested by Dixon." (See id. at 3 (emphasis added).) The Settlement Agreement also contemplated that once Dixon became the owner of the Property, a subsequent consulting agreement, as well as other related documents, would be executed between SCII and Cohen. (See id.) Notwithstanding the fact that Cohen received a letter from his Canadian counsel which raised concerns about whether the Settlement Agreement could expose Cohen to "criminal and civil charges and/or claims for bid-rigging or conspiracy . . ." under Canadian law (SCII's Tr. Exh. Y.15), Cohen testified that, on October 17, 2006, he nonetheless agreed to the terms of the Settlement Agreement, and then decided not to pursue his own offer for the Property. (See SCII's Tr. Exh. DD at 72-73.)
On October 18, 2006, S&C re-submitted their amended offer and SCII submittedits offer to the monitor. (See SCII's Tr. Exh. Q at p.4.) Cohen informed the monitor that his financial backing of the S&C financing had been withdrawn. (See SCII's Tr. Exh. Q at p.5). Neither he nor any of his affiliates made an offer by the October 18th deadline. It is noteworthy that the monitor was not informed about SCII's agreement with Cohen. (See, e.g., SCII's Tr. Exh. CC at 85-86 (Bomhof Dep); see also July 16, 2014 Trial Tr. at 96-97.) After comparing the two offers, the monitor recommended SCII's offer. (See SCII's Tr. Exh. Q at 5.) At an October 20, 2006 hearing to consider the monitor's recommendations, once again neither SCII nor Cohen disclosed to the monitor or the Ontario Court the existence of the Settlement Agreement. (See July 16, 2014 Trial Tr. at 100-101; see also SCII's Trial Memo at 6 (ECF No. 2346).) The Ontario Court approved SCII's bid and ordered that title to the property vest in SCII's designee (i.e., Dixon). (See SCII's Tr. Exh. BB at 116 (Bomhof Dep.).)
On December 15, 2006,...
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