• Fraud, breach of contract case clear to go to trial

• Baha Mar developer’s ‘issues of fact’ need hearing

• But Chinese contractor sees own claims reinstated

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

SARKIS Izmirlian’s $2.25bn fraud and breach of contract claim against Baha Mar’s Chinese contractor was yesterday cleared to proceed to full trial before a New York court this August.

The Cable Beach mega resort’s original developer saw the main elements of his case survive China Construction America’s (CCA) appeal with the New York State Supreme Court’s appellate division finding there are “issues of fact” that must be determined via a full hearing.

In particular, the New York appeals court said a trial is needed to determine whether CCA and its parent, China State Construction and Engineering Corporation (CSCEC), both of which are owned by the Beijing government, “diverted resources” to the now-British Colonial’s acquisition and sent 700 construction workers home despite fears - concealed from Mr Izmirlian - that they would miss Baha Mar’s completion target.

And the appeals court also agreed that Baha Mar’s original developer had supplied sufficient evidence that CCA’s “misrepresentations” resulted in him spending millions of extra dollars to ramp up operations to prepare for the planned opening, including taking guest bookings, even though he had “some sense” his Chinese partners were “not telling the truth” about the construction progress.

However, while the New York appeals court found for Mr Izmirlian and his BML Properties vehicle on the main issues, yesterday’s verdict was not a comprehensive victory for the Lyford Cay resident. For CCA succeeded in persuading the court to dismiss the claim for lost profits by Baha Mar’s original developer as a result of his ousting from the project’s ownership.

It also rejected Mr Izmirlian’s assertion that CCA did not engage in “good faith and fair dealing”, although its rationale was that this claim duplicates his “breach of contract” assertion. And the Chinese state-owned contractor also enjoyed success in having its counter-claim restored over two alleged breaches of the investors’ agreement between itself and Mr Izmirlian.

This breach was purportedly caused by Baha Mar’s original developer filing for Chapter 11 bankruptcy protection in the US without CCA’s permission. However, the New York appeals court dismissed CCA’s claim that Mr Izmirlian further breached their investors’ agreement by loaning money through his private vehicle, Granite Ventures, to finance Baha Mar’s expenses during the Chapter 11 bankruptcy protection period.

Still, Baha Mar’s original developer is likely to be the happier of the two parties as the core of his $2.25bn claim has survived CCA’s bid to throw it out. “The motion court properly denied summary judgment dismissing plaintiff’s [Mr Izmirlian] breach of contract claim,” the appeals court said of the initial ruling by Judge Andrew Borrok.

“Issues of fact exist as to whether the representatives of defendant CSCEC Bahamas (CCA) failed to act in the best interests of the company by diverting resources to other projects and authorising the removal of 700 workers from the project as it was nearing its deadline, despite concerns about meeting that deadline, which they did not communicate to the company.

“It does not matter that the focus of the investors’ agreement is not construction management, as the CSCEC Bahamas representatives were required to act ‘at all times’ in the company’s best interests.” The “resource diversion” involves CCA allegedly sending funds, workers and materials to its newly-acquired British Colonial resort, the precursor to the $200m development of The Pointe on adjacent land.

Judge Borrok, in his original verdict on May 25, 2023, said the evidence also showed Tiger Wu, CCA (Bahamas) executive vice-president, approved some 700 Chinese construction workers leaving the Baha Mar work site between December 2014 and February 2015 “despite knowing that those workers may have helped the project reach the substantial completion date on time”.

As a result, CCA had “disingenuously” informed then-prime minister, Perry Christie, that the Cable Beach mega resort would meet its March 27, 2015, completion date. Mr Wu allowed the workers to leave “with the express purpose of causing CCA to stop work” so the contractor would have leverage over Baha Mar to demand it be paid more money.

Meanwhile, in yesterday upholding the decision not to dismiss Mr Izmirlian’s fraud claims, the appeals court asserted: “Fact development has not created a basis to modify this legal determination. Issues of fact exist with respect to justifiable reliance.

“Evidence was presented that plaintiff, which had day-to-day responsibility for [Baha Mar], relied on defendants’ misrepresentations by taking reservations, preparing for opening and refraining from seeking additional financing or labour.

“Evidence was also presented that, although plaintiff had some sense that defendants [CSCEC/ CCA] were not telling the truth, it lacked the ability to definitively verify their claims – especially in view of defendants’ apparent concealment of information.”

But, while Judge Borrok had ruled Mr Izmirlian could seek to recover lost profits as a result of his ousting, the New York State Supreme Court took a different view. “The request for lost profits damages should also have been dismissed because the parties did not contemplate liability for lost profits at the time of contracting,” it said, finding for CCA on this issue.

“It is not enough that CSCEC Bahamas expected that the project would make money, as that is not the same thing as expecting to be held liable for lost profits... Section 11.10 of the investors agreement expressly waived consequential damages, notwithstanding ‘anything herein contained, and anything at law or in equity, to the contrary’.”

David Bones, the expert hired by Mr Izmirlian’s BML Properties, estimated that the latter had lost its entire $830m investment in Baha Mar. This included tangible and intangible assets, including land and leased facilities, improvements, personal property, contracts, approvals, hotel assets, intellectual property, intangible personal property, casino operations and licence, and cash.

CCA, by contrast, received a further $700m to complete Baha Mar’s construction. However, this discrepancy failed to impress the New York appeals court, even though it rejected CCA’s assertions that the claims by Mr Izmirlian should be dismissed. These were not released by the Supreme Court proceedings in The Bahamas that wound-up the original Baha Mar because he was not a party to that case.

The Chinese contractor fared better, though, on other elements of its counter-claim. “CSCEC Bahamas’ counterclaim for breach of section 4.7 of the investors agreement should not have been dismissed. There is evidence in the record of at least one unanswered request for books and records in a March 13, 2015 letter, which was reiterated in March 25 and May 6, 2015 letters.

“Although the company [Baha Mar] was not obliged to create new documents in response to this request, it should have had some existing documentation responsive thereto. Issues of fact exist also exist as to whether the company’s failure to provide this information caused CSCEC Bahamas damages, as it could have taken steps to mitigate if it had evidence of financial mismanagement.”

CSCEC and CCA held $150m worth of preference shares in Baha Mar prior to the Chapter 11 move. And while Judge Borrok had dismissed CCA’s claims that Mr Izmirlian breached their investors’ agreement by filing for Chapter 11 bankruptcy protection in the US without the contractor’s permission, the appeals court reversed this.

“CSCEC Bahamas’ counterclaim for breach of section 4.8(g) of the investors agreement also should not have been dismissed. It is undisputed that plaintiff breached this provision by filing for reorganisation without CSCEC Bahamas’ consent, and issues of fact exist as to whether CSCEC Bahamas was damaged as a result.”

The final word in the appeals court ruling, though, went to Mr Izmirlian. Judge Borrok, in his original decision, wrote: “Finally, the defendants argue that BML Properties breached Section 4.8 (1) of the investors agreement by causing Baha Mar to procure a loan outside of the regular course of business. However, the record facts establish that the loan was both necessary to continue the ordinary course of business and on terms favourable to Baha Mar.”

“Among other things, the interest was payable in kind, there was no pre-payment penalty, Baha Mar could avail itself of better financing without penalty if another lender emerged, and the term of the loan was sufficient to allow restructuring of business while in Chapter 11. The loan came just days after the Baha Mar Board discussed at a June 24, 2015, meeting that Baha Mar’s financial situation was worsening.”

The New York appeals court agreed, finding: “CSCEC Bahamas’ counterclaim for breach of section 4.8 (1) of the investors agreement was properly dismissed, as there is no evidence that the subject loan damaged CSCEC Bahamas in any way.