18-1208 In re: SageCrest II LLC, et al. 18‐1208‐bk In re: SageCrest II LLC, et al.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURTʹS LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION ʺSUMMARY ORDERʺ). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the sixth day of March, two thousand nineteen.

PRESENT: BARRINGTON D. PARKER, DENNY CHIN, RICHARD J. SULLIVAN, Circuit Judges. ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐x

IN RE: SAGECREST II LLC and SAGECREST HOLDING LIMITED, Debtor,

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EQUAL OVERSEAS CONSULTING, LTD, Creditor‐Appellant,

v. 18‐1208‐bk

JOHN D. HUBER, Trustee of the SageCrest Liquidating Trust, Debtor‐Appellee.

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FOR CREDITOR‐APPELLANT: KEVIN J. NASH (Joseph T. Donovan, on the brief), Goldberg Weprin Finkel Goldstein LLP, New York, New York.

FOR DEBTOR‐APPELLEE: LAURENCE MAY, Eiseman Levine Lehrhaupt & Kakoyiannis, P.C., New York, New York.

Appeal from the United States District Court for the District of

Connecticut (Bolden, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED.

Creditor‐appellant Equal Overseas Consulting, Ltd (ʺEqualʺ) appeals from

the district courtʹs judgment entered March 31, 2018, affirming the order of the United

States Bankruptcy Court for the District of Connecticut (Shiff, B.J.) entered December 23,

2015. In its order, issued after a two‐day trial, the bankruptcy court sustained the

objection of debtor SageCrest II LLC (ʺSageCrestʺ) to Equalʹs proof of claim, holding

that the consulting agreement upon which Equalʹs claim was based was unenforceable.

We assume the partiesʹ familiarity with the underlying facts, the procedural history of

the case, and the issues on appeal.

This case arises out of two agreements involving a hotel property located

in Canada. In October 2006, during bankruptcy proceedings in Canada, a Canadian

court received offers for the purchase of the property. Two bidders, SageCrest and

Jean‐Daniel Cohen (ʺCohenʺ), entered into an agreement (the ʺSettlement Agreementʺ),

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pursuant to which Cohen and his affiliate, Equal Group, agreed to withdraw their

financial support of a competing bid and to refrain from submitting their own bid or

supporting any alternative bid. In return, SageCrest agreed to pay Cohen a ʺfixed

retainerʺ of $1.369 million when SageCrest Dixon, Inc. (ʺDixonʺ), an affiliated entity,

took ownership of the property; a fixed retainer of $1.379 million one year later; and an

$850,000 consulting fee. Appx. at 554.1 On October 20, 2006, SageCrest resubmitted its

bid for the property, but neither SageCrest nor Cohen informed the Canadian court of

the Settlement Agreement. The Canadian court thereafter approved SageCrestʹs bid,

and SageCrest acquired the property.

In December 2006, as contemplated by the Settlement Agreement,

SageCrest and Cohen entered into a consulting agreement (the ʺConsulting

Agreementʺ) that named Equal Group as SageCrestʹs redevelopment consultant and

incorporated the Settlement Agreementʹs payment provisions. The Consulting

Agreement also contained a choice‐of‐law provision, stipulating that Canadian law

governed.

In 2008, SageCrest and Dixon separately filed for bankruptcy in the

District of Connecticut; their cases were jointly administered. On September 23, 2008,

Equal filed a proof of claim ‐‐ the subject of this appeal ‐‐ based on SageCrestʹs failure to

make the second retainer and consulting payments required by the Consulting

1 All currency figures are stated in Canadian dollars.

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Agreement. The bankruptcy court, choosing not to determine which law applied, held

that under both Canadian and American law the Consulting Agreement was

unenforceable because it was the product of collusion and was not supported by

consideration. On March 30, 2018, the district court affirmed, holding that American

law applied and the Consulting Agreement was the product of collusion and therefore

unenforceable. The district court did not reach the question of consideration. Judgment

was entered thereafter, and this appeal followed.

DISCUSSION

Three issues are presented: whether (1) American or Canadian law

applies; (2) the Consulting Agreement was the product of collusion; and (3) the

Consulting Agreement lacks consideration. ʺThe rulings of a district court acting as an

appellate court in a bankruptcy case are subject to plenary review.ʺ In re Stoltz,

, 87 (2d Cir. 2002). Accordingly, ʺwe review the bankruptcy court decision

independently, accepting its factual findings unless clearly erroneous but reviewing its

conclusions of law de novo.ʺ In re Baker,

(2d Cir. 2010) (internal

quotation marks omitted). ʺAdditionally, we may affirm on any ground that finds

support in the record.ʺ In re Lehman Bros. Holdings Inc.,

(2d Cir. 2014).

1. Choice of Law

Equalʹs principal argument on appeal is that Canadian law should apply

per the Consulting Agreementʹs choice‐of‐law provision, rather than American law, the

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law of the forum. The bankruptcy court did not resolve the choice‐of‐law issue based

on its conclusion that ʺthe same result follows with the application of either.ʺ S. Appx.

at 11. The district court, by contrast, concluded that American law applies. Whether

there is a conflict of law issue is a legal question. See In re Air Crash Off Long Island,

(2d Cir. 2000) (Sotomayor, J., dissenting) (including conflict of law issues

as a type of legal question). We agree with the bankruptcy court that no conflict exists

because, as discussed below, the Consulting Agreement is unenforceable under both

Canadian and American law.2

2. Collusion

The bankruptcy court held that the Consulting Agreement was not

enforceable under the doctrine of in pari delicto, which is recognized under both

American and Canadian law. See, e.g., Republic of Iraq v. ABB AG,

(2d

Cir. 2014); Cement LaFarge v. B.C. Lightweight Aggregate,

(S.C.C. 1983).

Under the in pari delicto doctrine, ʺa plaintiff who has participated in wrongdoing

equally with another person may not recover from that other person damages resulting

2 The district court concluded that enforcing the choice‐of‐law clause would violate public policy. See Roby v. Corp. of Lloydʹs,

, 1362‐63 (2d Cir. 1993) (holding a court should consider whether a ʺclause[] contravene[s] a strong public policy of the forum stateʺ in determining if it is unreasonable)). While we agree that enforcing the Settlement Agreement as a whole contravenes public policy because it was the product of collusion, we are doubtful that enforcing the choice‐of‐law clause ‐‐ i.e., applying Canadian law ‐‐ would contravene public policy. In light of our disposition of the question of collusion, we need not decide whether the district court was correct as to the enforceability of the choice‐of‐law clause.

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from the wrongdoing.ʺ Republic of Iraq,

; see also Hall v. Hebert,

(S.C.C. 1999) (holding that the in pari delicto doctrine prevents recovery from an

illegal contract).

Here, the bankruptcy court found that the Settlement Agreement was a

ʺcollusive thwarting of a rival bidʺ because it ʺwas a side‐deal between [SageCrest] and

Cohen under which, for a pay‐off, Cohen agreed to cease competing with [SageCrest]

for the Property.ʺ S. Appx. at 15. This factual finding is not erroneous, let alone clearly

erroneous. Pursuant to the Settlement Agreement and Consulting Agreement, Cohen

agreed to withdraw his support for all competing bids and to refrain from submitting a

bid himself in exchange for a guaranteed payment of more than $3.5 million.

Under American law, such an agreement is ʺantithetical to the Bankruptcy

Code,ʺ S. Appx. at 17, and clearly violates

(n) because a ʺpayment . . . to

induce [another] to drop out of the bidding . . . comes close to the classic collusive

bidding against which the statute is directed,ʺ In re New York Trap Rock Corp.,

, 753 (2d Cir. 1994); see United States v. Bonanno Organized Crime Family of La Cosa

Nostra,

(2d Cir. 1989) (ʺ[I]llegal agreements, as well as agreements

contrary to public policy, have long been held to be unenforceable and void.ʺ).

Relying exclusively on In re GSC, Inc.,

(Bankr. S.D.N.Y. 2011),

Equal argues that the Settlement Agreement was not collusive because it resulted in a

higher recovery, which is ʺantithetical to the notion of collusion.ʺ Appellantʹs Br. at 23.

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In In re GSC, the bankruptcy court considered ʺ[a]n agreement between two bidders

resulting in a single bid in exchange for consideration,ʺ and found that it did not

constitute collusion because the resulting single bid raised the sale price. In re GSC,

. In re GSC is inapposite, however, because SageCrest and Cohen did not

submit a joint bid. See

(noting that the parties ʺcombined their bids to raise the sale

priceʺ and citing cases with joint bids for support). Instead, as in Trap Rock, SageCrest

induced Cohen to withdraw from the bidding process, which is close to a case of

ʺclassic collusive bidding.ʺ In re New York Trap Rock Corp., 42 F.3d at 753. If SageCrest

and Cohen had not colluded but engaged in a good faith bidding process, the final price

might have been higher. The Settlement Agreement, therefore, is not enforceable under

American law.

In addition, such an agreement violates Canadian law, which makes it a

crime to be a party to bid‐rigging ‐‐ i.e., to participate in ʺan agreement . . . between or

among two or more persons whereby one or more persons agrees or undertakes not to

submit a bid in response to a call or request for bids.ʺ Competition Act, R.S.C. 1985, c C‐

34, s.47 (defining bid‐rigging). Indeed, Cohenʹs own counsel recognized that the

Settlement Agreement ʺmay expose [Cohen] to criminal and civil charges and/or claims

for bid‐rigging.ʺ Appx. at 549. Moreover, Canadian courts have made clear that ʺ[n]o

action can be brought for the purpose of enforcing an illegal contract whether directly

or indirectly, or of recovering a share of the proceeds of an illegal transaction, by any

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parties to it.ʺ Major v. Canadian Pac. Ry.,

(S.C.C. 1922) (internal

quotation marks omitted). Therefore, because the Settlement Agreement required

Cohen to refrain from submitting a competing bid or supporting any alternative bid, in

return for a substantial payment, a Canadian court also would have found the

Settlement Agreement unenforceable.

3. Consideration

Because we affirm the bankruptcy courtʹs decision on the grounds that the

Consulting Agreement was the product of collusion and unenforceable, we need not

reach the question of consideration. In re Lehman Bros. Holdings Inc.,

(ʺ[W]e may affirm on any ground that finds support in the record.ʺ).

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We have considered Equalʹs remaining arguments and conclude they are

without merit. Accordingly, we AFFIRM the judgment of the district court.

FOR THE COURT: Catherine OʹHagan Wolfe, Clerk

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