MEMORANDUM OF DECISION ON DEBTOR'S OBJECTION TO CLAIM OF EQUAL OVERSEAS CONSULTING, LTD.

ALAN H. W. SHIFF, Bankruptcy Judge.

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.

I. Background5

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.

Generally

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.

SCII's Initial Interest in the Property and the Canadian 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. ("158 Ontario"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.

Agreement Between SCII and Cohen

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 agreement between 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 submitted its 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.).)

Consulting and Other Agreements

On December 15, 2006, as contemplated in the Settlement Agreement, after the sale of the Property, SCII and Cohen entered into a consulting agreement (the "Consulting Agreement"). (See SCII's Tr. Exh. BB at 124-27 (Bomhof Dep.); see also SCII's Tr. Exh. R; SCII's Tr. Exh. AA (re: date of Consulting Agreement).) Cohen designated Equal as his nominee to be the consultant to SCII. (See SCII's Tr. Exh. R at 1.) The same relevant terms that were stated Settlement Agreement were repeated in the Consulting Agreement, specifically, the provision: "The fees shall be payable regardless of the quantum of services actually requested by [Dixon, the title holder] or performed by [Equal],"and "[SCII] agrees to guarantee [Dixon's] obligations under this [Consulting] Agreement to pay to [Equal] the Fees for services rendered." (Id. at 2, ¶4, ¶5 (emphasis added).) Notwithstanding that none of the signatories where Canadian citizens or companies, and the Consulting Agreement was not signed in Canada, it specifically stated that it was to "be governed by and interpreted, construed and enforced in accordance with the laws of the Province of Ontario and the law of Canada applicable therein". (Id. at ¶12; see also July 15, 2014 Trial Tr. at 34, 38-39.)

On December 15, 2006, in addition to the Consulting Agreement, two other agreements were executed: an escrow agreement regarding CDN $250,000 of the first fixed retainer fee due under the Consulting Agreement (see Equal's Tr. Exh. 23 (Escrow Agreement)), and a release agreement, which provided greater detail of the releases referred to in October 17, 2006 Settlement Agreement. (See Equal's Tr. Exh 24 (Release Agreement).) The Settlement, Consulting, Escrow, and Release Agreements were to "constitute the entire agreement between the parties pertaining to the subject matter" of the Escrow agreement. (See Equal's Tr. Exh. 23 at ¶18.)

It is undisputed the first fixed retainer payment was made. (See July 16, 2014 Trial Tr. at 10-11.) However, despite Cohen's demands made on December 21, 2007, and January 14, 2008, the second fixed retained payment was not made. (See SCII's Tr. Exh. AA (re: demand); see also July 16, 2014 Trial Tr. at 11, 92.) Nor was the Commission ever paid. On March 10, 2008, Equal commenced a collection action in the Ontario Court, and motion practice ensued. The collection action was stayed when the Ontario Court was advised that bankruptcy petitions for SCII and Dixon had been filed in this Court. (See July 16, 2014 Trial Tr. at 93.)

SCII's & Dixon's U.S. Bankruptcies

On August 17, 2008, SCII filed this chapter 11 case.16 On September 11, 2008, Dixon also commenced a chapter 11 case in this Court. SCII's and Dixon's cases have been jointly administered.17 At the time of its filing, Dixon was in the process of demolishing the Hotel in order to build a new one on the Property. As a result of Dixon's bankruptcy filing, all development of the Property stopped. The Property was eventually sold "as is, where is" on March 25, 2011, after a March 2, 1011 court-approved auction.18 By early 2012, the Dixon Case was fully administered,19 and its application for a final decree was approved. Thereafter, the case was closed.20, 21

Equal's Proof of Claim and SCII's Objection

On September 23, 2008, Equal filed a proof of claim ("POC") in SCII's case, based on SCII's guarantee of payments under the Consulting Agreement. (See Main Case, Claims Register, Claim No. 3-1, Exh. A.) Equal seeks CDN $1,379,000 for the second fixed retainer consulting fee and the CDN $850,000 Commission due after the sale of the Property. On November 29, 2011, SCII filed an objection to Equal's claim. (See ECF No. 1909.)

SCII supplemented its objection, arguing the unenforceable nature of the intertwined agreements upon which Equal's claim is based. (See SCII's Supplement at 2 (ECF No. 2344).) In essence, SCII argues that Cohen was "offered a bribe" by Creative's Gwin (who was appointed by Windmill to act on SCII's behalf22) to induce Cohen to withdraw his support of S&C's competing bid for the Property in the Canadian bankruptcy case. SCII argues that had such an arrangement been made in a U.S. bankruptcy case, it would be a crime, citing 18 U.S.C. § 152(6).23 (See SCII's Trial Memo. at 2 (ECF No. 2346).) SCII acknowledges that the first fixed retainer fee was paid, but as to the balance claimed in Equal's POC, "[t]his Court should not lend its imprimatur to the enforcement of agreements so plainly contrary to United States law." (Id.)

Equal countered that Cohen "had a significant interest to protect as a major creditor of the [Property]," and that the "settlement was pursued to garner additional support for" SCII's purchase of the Property. (Equal's Pre-Trial Memo at 2 (ECF No. 2349).) It further asserted that "the consulting agreement was effectively a funding device" which SCII requested. (Id. at 4.) It characterized the parties' agreement (initially documented in the Settlement Agreement, and subsequently augmented with the December 15, 2006 Consulting Agreement and other integrated agreements) as "the product of a duly negotiated settlement undertaken by experienced businessmen and represented by seasoned counsel," which "remains an enforceable obligation . . ." (Id.)

II. Discussion

Proof of Claim

"A claim . . ., proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest . . . objects." 11 U.S.C. § 502(a); see also Fed. R. Bankr. P. 3001(f) ("A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.").

In re Driscoll, 379 B.R. 415, 420 (Bankr. D. Conn. 2008) (block quoting In re Jorczak, 314 B.R. 474, 481 (Bankr. D. Conn) (further quoting In re Rally Partners, L.P., 306 B.R. 165, 168-69 (Bankr. E.D. Tex. 2003) (footnote omitted)) (emphasis added); see also In re Central Rubber Products, Inc., 31 B.R. 865, 867 (Bankr. D. Conn. 1983) (instructing that the "ultimate burden of persuasion . . . is upon the creditor").

Applicable Law

SCII argues that the laws of the United States must be applied, but even if Canadian law applies, the Agreement is not enforceable. Equal challenges that assertion, taking the position that the claim objection should be determined under Canadian law, pursuit to which its claim should be allowed. For the reasons that follow, the Court need not dwell on which law applies because the same result follows with the application of either.24

1. Under Canadian Law, the Consulting Agreement Would Not Be Enforceable25

There are two independent reasons why the Agreement is not enforceable under Canadian law. The cumulative effect of those reasons strengthens this conclusion.

(a) Lack of Consideration

Under Canadian law, "Adequacy of consideration is not the test of a valid contract but sufficiency of consideration is. There must be something which is being given in exchange for the act or promise that is alleged for there to be contractual obligation. . . ." Fridman, The Law of Contract in Canada, at 91 (6th ed. 2011). In this instance, the Court finds Cohen did not provide any consideration for the payments to be received under the Consulting Agreement.

Despite Equal having claims against the Property's prior owners, it failed to persuasively explain how those claims became claims against SCII, such that SCII would need to consider them. Indeed, Cohen's testimony on this matter is inconsistent. While Cohen previously testified at his deposition that he had no claims against SCII (see Joint Tr. Exh. 3 at 75-76 (Cohen Dep.)), he equivocally testified at trial that he may have a claim against SCII (see July 15, 2014 Trial Tr. at 88-89 (ECF No. 2435); July 16, 2014 Trial Tr. at 10). Despite it being his burden to do so, Cohen has failed to adequately explain the claim or claims he had against SCII, such that his waiving them would serve as his consideration in entering into the initial Settlement Agreement or the subsequent Consulting Agreement.

Rather, on the basis of the evidence adduced at trial, including the text of the Consulting Agreement, together with the other agreements, the Court concludes that the Agreements, collectively, were a mechanism to implement a side-deal whereby SCII would pay Cohen roughly the amount of his unsecured claims against the Numbered Entities to ensure his support of its bid for the Property. (See, e.g., Equal's Tr. Exh. I at 11, ¶3.) This appears to be tacitly acknowledged in Blakes Rule 44.1 Report at ¶15 (the assumed fact Equal provided to Blakes that Cohen would "explore the possibility of a `partnership' with SageCrest, based upon a settlement that would pay Sofon/Cohen a minimum of $4.0 million").)

Accordingly, there was nothing to settle; so, there was no bases for a settlement. It follows, therefore, that there was nothing to serve as consideration for the payments to be made to Equal. Thus, without consideration, the Consulting Agreement, upon which Equal bases its POC, is unenforceable.

(b) In Pari Delicto and/or Ex Turpi Causa Non Oritur Actio

Canada recognizes the common law principle of in pari delicto, which holds that when parties enter an agreement that offends public policy or is plainly illegal, i.e., where the parties are equally at fault, a court will not lend its stature and good offices to enforce the agreement. Instead, it will leave the equally culpable parties to their own devices. "They cannot come to the courts to enforce any unfulfilled promises, recover any money or property which has been transferred thereunder, or obtain damages." See Fridman, The Law of Contract in Canada at 408 (6th ed. 2011); see also Major v. Canadian Pacific Railway [1992], 64 S.C.R. 367 ("No action . . . can be brought for the purpose of enforcing an illegal contract either directly or indirectly, or for recovering a share of the proceeds of an illegal transaction, by any of the parties to it. Where the object of a contract is illegal the whole transaction is tainted with illegality and no right of action exists in respect of anything arising out of the transaction.").

Like the United States, Canada, recognizes that contracts which offend public policy are not enforceable. Where a matter is presented to a court, such as Equal's claim, which is based on such a contract, the imposition of the doctrine of ex turpi causa non oritur actio is appropriate. As one Canadian jurist wrote over a century ago:

Scott v. Brown, [1892] 2 Q.B. 724 (Lord Justice Lindley). Furthermore, in his concurrence in Hall v. Herbert, [1993] 2. S.C.R. 159, Canadian Justice Gonthur stated that the purpose of this maxim is "to defend the integrity of the legal system and the repute in which the courts ought to be held. . . ." See also generally Fridman, The Law of Contract in Canada at 406-410 (6th ed. 2011).

The evidence supports a finding that the Settlement Agreement, with the subsequent Consulting Agreement, was a side-deal between SCII and Cohen under which, for a pay-off, Cohen agreed to cease competing with SCII for the Property. This collusive thwarting of a rival bid is contradictory to what the Ontario Court sought to accomplish by ordering the bidding period re-opened. The stated reason Justice Campbell reluctantly agreed to re-open the bidding was to provide the opportunity for other, better bids to be presented for the benefit of the unsecured creditors. (See SCII's Tr. Exhs. J, K.) By SCII's entering into a side-deal with Cohen, the purpose of Justice Campbell's orders was subverted — indeed, eviscerated — because the potential of another, real and better offer for the Property, i.e., an offer from Cohen, was eliminated. It also meant Cohen, an unsecured creditor, would receive more than his pro rata share of funds available for unsecured creditors. (See, e.g., Equal's Tr. Exh. at 10.) The Court concludes that if the Ontario Court had been made aware of these facts, it also would have found them to be offensive to the integrity of the Canadian legal system and/or a manifest interference with the administration of justice. See Fridman, The Law of Contract in Canada at 361-363, 407 & n.42026 (6th ed. 2011). Presented with such an affront, it is likely that the Ontario Court would invoke either of two doctrines (if not both): in pari delicto and/or ex turpi causa non oritur actio.

2. Under U.S. Law, the Consulting Agreement is Not Enforceable

The Agreement is not enforceable under U.S. law.

(a) Lack of Consideration.

Like Canada, for a contract to be enforceable in the United States, there must be consideration. See Citizens Commc'ns Co. v. Trustmark Ins., 303 F.Supp.2d 197, 209 (D. Conn. 2004). The Court has already found Cohen did not meet his burden of establishing the requisite consideration to establish an enforceable contract under Canadian law. (See supra at 13-14.) That also supports a finding that the Consulting Agreement is unenforceable under U.S. law.

(b) In Pari Delicto

As with Canadian law, the laws of the United States recognize the doctrine of in pari dellicto. See Pinter v. Dahl, 486 U.S. 622, 634 (1988); see also Titan Real Estate Ventures, LLC v. MJCC (In re Flanagan), 415 B.R. 29, 34, 36 (D. Conn. 2009). The imposition of that doctrine "prohibits wrongdoers from evading responsibility for their own corrupt bargains by leaving the parties where it finds them . . ." Titan Real Estate, 415 B.R. at 36. Indeed, it has long been the law of the United States that "illegal promises will not be enforced in cases controlled by federal law." Kaiser Steel Corp. v. Mullins et al., 455 U.S. 72, 77 (1982). Further, when federal courts are acting as courts of equity, they should be even more reluctant to recognize agreements which are tainted with illegality. See, e.g., Morris-Griffen Corp. v. C&L Serv. Corp., 731 F.Supp.2d 488, 496 & 502 (E.D. Va. 2010).

Contrary to Equal's attempt to characterize it otherwise, this is not the instance where two parties agreed to act together to combine their bids to raise their offer, which courts have found to be non-collusive. Cf., In re GCC, Inc., 453 B.R. 132, 154 (Bankr. S.D.N.Y. 2001) (finding the existence of a joint bid does not itself amount to collusive bidding). Rather, here, one party agreed to not submit a bid in exchange for a payment, so that the other party could present its own bid, unchallenged. That is antithetical to the Bankruptcy Code, and this Court will not countenance such conduct. See, e.g., 11 U.S.C. § 363(n). Thus, for the same reasons that this Court concluded the Ontario Court would not enforce the Settlement and Consulting Agreements under the in pari delicto doctrine, see supra at 14-16, this Court finds the doctrine is applicable under U.S. law warranting the conclusion that the Consulting Agreement is unenforceable under U.S. law.

3. Under U.S. Bankruptcy Law, There Is No Basis for Awarding the Commission

As a threshold matter, Equal was never retained as a professional by SCII to assist it in selling the Property. See 11 U.S.C. § 327(a); see also Fed. R. Bankr. P. 2014(a). "[W]ithout an order of the court . . . not only may [the professional] not be retained, but he can recover nothing, no matter how beneficial, or how arduous, his services." In re Eureka Upholstering Co., Inc., 48 F.2d 95, 95 (2d Cir. 1931)(J. Hand). See also In re Crafts Retail Holding Corp., 378 B.R. 44, 48-49 (Bankr. E.D.N.Y. 2007) (collecting cases).

Through its claim, Equal is, in essence, attempting to circumvent one of the safeguards of court-approval of a debtor-in-possession's retention of professionals, i.e., control over administrative costs. See Crafts Retail, 378 B.R. at 49 (citing Eureka Upholstering, 48 F.2d 95). That is contrary to the

Id. (emphasis added). As noted, supra at 7, the Property was sold via a court-ordered auction under the auspices of this Court. It is undisputed that Equal did not provide any services in that auction. Even assuming, arguendo, Equal had been retained, its lack of providing any services would warrant the denial of the CDN $850,000 Commission sought.

* * *

It is noteworthy that SCII's management, Windmill, which authorized SCII to enter into the side-deal, was removed. See In re SageCrest II, LLC, 2011 WL 134893, at *2-3. Neither Windmill nor its principals, the Milton Brothers, will benefit from this ruling. Rather, the monies claimed by Equal will be available for distribution in accordance with SCII's Plan.

III. Conclusion

Accordingly, IT IS ORDERED that SCII's objection to Equal Oversea's claim is sustained.

This memorandum of decision constitutes the Court's findings of facts and conclusions of law in accordance with Federal Rules of Bankruptcy Procedure 7052.