The legal battle over the financing behind the failed Par-la-Ville Hotel project is set to go to trial in New York next week.

Mexico Infrastructure Financing has accused the Corporation of Hamilton and the Bank of New York Mellon of improperly releasing $13.7 million from an escrow account intended to kick-start financing of the hotel.

The firm further alleged that the corporation was motivated to release the funds to receive a $900,000 “Corporation Expense Payment” payable upon the closing of a senior loan.

However, the Corporation of Hamilton argues that it did not have the power to enter into the escrow agreement, which meant the agreement was void and unenforceable.

The corporation further claimed that MIF waived its rights with respect to the escrow drawdown because it was aware the proposed transaction was a “fraud” but took no steps to stop it.

The legal action is one of several surrounding the July 2014 loan to Par-la Ville Hotel and Residences, which was intended to jump-start financing to build a hotel on the site of the Par-la-Ville parking lot.

A total of $12.5 million of the funds were put in the hands of Gibraltar-based investment firm Argyle; however, the funds were never invested on PLV’s behalf and the company quickly defaulted on the loan.

A judge at the High Court in London ruled in July 2017 that Robert McKellar, the director of Argyle, had engaged in “unjust enrichment” and had spent the money.

While some of the missing cash was recovered, it was reported that the recovery costs had almost “wiped out” any benefit.

The Corporation of Hamilton had guaranteed the loan and, when PLV defaulted, initially said it would honour the guarantee.

However, the corporation later argued in court that it was unenforceable because it was ultra vires, meaning the body did not have the power to make the guarantee.

The legal dispute went to the Privy Council in London, Bermuda’s final court of appeal, which found in the corporation’s favour.

However, MIF launched further legal actions, including one in New York against both the corporation and the Bank of New York Mellon over the release of the funds.

According to pre-trial documents, MIF argues that while the guarantee was found to be ultra vires by the Privy Council, the corporation did have the power to enter into the escrow agreement.

“The Privy Council’s ruling, like those of the lower courts, was limited to the guarantee and did not discuss the escrow agreement, which was a separate contract governed by New York law,” the MIF claim states.

It further argued that, in New York, an ultra vires defence does not apply if the claim would harm those who were “misled” into a detrimental change of position.

“Hamilton induced MIF to enter into the escrow agreement by making a series of representations and promises, and undertaking obligations specifically designed to protect and ensure the proper disbursement of MIF’s funds,” MIF claimed.

It added that the ultra vires argument was also weakened because the corporation benefited directly from the escrow agreement, citing that PLV agreed to pay the corporation $900,000 upon the closing of a senior loan.

“Indeed, Hamilton has asserted claims in the PLV liquidation to collect the $900,000 fee and admitted that it expected to be paid $900,000 from the improperly released escrow funds,” the MIF claim said.

The company said that the corporation breached the agreement when it sent the bank a document that said the funds could be released because a senior loan or an equivalent had been secured.

It alleged the Argyle Agreement was not permanent loan, a permanent-loan funding agreement or a senior escrow agreement, and the corporation did not have signed certification from PLV before sending the notice to the bank.

“In sum, Hamilton breached virtually every aspect of the escrow agreement’s requirements relating to the preconditions for authorising the release of the escrow funds and cannot reasonably contend otherwise,” the MIF claim added.

In legal documents filed in response to the claim, the Corporation of Hamilton maintained that, like the guarantee, the escrow agreement was ultra vires and MIF was “acutely aware” of the risk when it signed the agreement.

“Its own counsel repeatedly expressed these concerns,” the corporation filing said.

“MIF was so cognisant of the risk that it undertook significant efforts to find a title insurer willing to insure against the risk of incapacity after the original title insurer unequivocally refused to do so.

“MIF appreciated the risk of incapacity and made a calculated business decision to pursue the transaction.”

The corporation added that the agreement had not received legislative approval in Bermuda, which would also render the agreement void.

“PLV and MIF did obtain legislative approval for some of the transactional documents,” it argued in legal documents.

“But neither PLV nor MIF sought or obtained legislative approval of the escrow agreement, notwithstanding that the escrow agreement is plainly ‘related’ to the mortgage, therefore requiring such approval.”

The corporation further said MIF allowed the withdrawal despite knowing the conditions of the agreement had not been met, and amid concerns that the Argyle Agreement was a “fraud”.

It cited an e-mail sent to PLV before the release of the funds, which stated: “I thought it was clear when we last spoke that the [Argyle Agreement] was a fraud. In case you have any doubt, read this. Do not send these people any money and cancel the disbursement request.”

The e-mail included a link to a US Treasury Department alert about a scam known as “prime bank investment fraud”.

Despite the e-mail, the corporation claimed that MIF took no steps to halt the escrow release or alert the corporation of its concerns.

“Instead, MIF let the drawdown occur and now blames others for the result it foresaw,” the corporation added. “It cannot do so.”

While MIF argued it had no contractual right to stop the drawdown, the corporation said that MIF could not claim a breach for something it did not bargain for.

“Having given up the contractual right, and having agreed to be a party to the escrow agreement only as a depositor, MIF was not owed a contractual duty with respect to the reasonableness or sufficiency of Hamilton’s approval of the drawdown,” the corporation said.

However, the corporation maintained that the drawdown did not breach the agreement, as the Argyle Agreement would have met the requirements had Argyle’s principal not turned out to be a “con man”.

The trial is scheduled to begin in New York next week.

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