City of Hamilton on hook for $20 million after court defeat
A US court has ruled that the Corporation of Hamilton is on the hook for the improper release of $13.7 million intended to kick-start a hotel project, which ultimately failed.
Mexico Infrastructure Finance had accused the corporation and the Bank of New York Mellon of releasing the funds in breach of an escrow agreement.
The corporation argued that it did not have the legal power to enter into the agreement, which made it unenforceable but a judgment handed down in the Southern District of New York rejected that defence.
District Judge Denise Cote found that the corporation had “turned a blind eye” to potential risks and was liable for losses suffered by MIF.
Mark C. Zauderer, partner at Ganfer Shore Leeds and Zauderer, which represented MIF in the case, said: “We are grateful for the US federal court’s decision, which holds the Corporation of Hamilton responsible for the damages it caused our client, an amount well in excess of $20 million.”
Charles Gosling, the mayor, said the corporation was “disappointed” with the decision, which he argued was in conflict with past rulings.
“While we are in a far better financial position now than we were in 2015, the impact of this legal decision is potentially significant for the city,” Mr Gosling said.
“We and our counsel are reviewing yesterday’s decision and considering the next steps in the US litigation and our options regarding the decision.”
Mr Gosling added that additional legal actions related to the ongoing dispute were still under way in the Bermuda courts, both against the corporation and several law firms involved in the matter.
“We will utilise our tools to ensure that Hamilton is duly and pragmatically represented,” he said. “This case has shown us the importance of good governance and we have taken tremendous steps since 2015 to ensure that it prevails.”
The legal action related to a 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 money borrowed by PLV was transferred to Argyle, a Gibraltar-based investment firm. The funds were never invested on PLV’s behalf and the PLV 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 but argued in court that the guarantee was ultra vires, meaning the body did not have the power to make the guarantee and it was, therefore, unenforceable.
The Privy Council in London, Bermuda’s final court of appeal, found in the Corporation’s favour but MIF initiated further legal actions.
In the case heard last month in the Southern District of New York, MIF argued that the corporation had the power to enter into the escrow agreement.
The fund claimed 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.
However, the corporation maintained that, like the guarantee, the escrow agreement was ultra vires and MIF was “acutely aware” of the risk when it signed the agreement.
In a decision handed down yesterday, Judge Cote said that because the escrow agreement required that the corporation ensure the project moved forward as planned, it was “reasonably incidental” to the development agreement.
As a result, she found the agreement was not ultra vires.
Judge Cote added: “There is no basis to assume that the problems the Privy Council identified with the guarantee are applicable to the escrow agreement.”
The judge said that the corporation had breached “multiple provisions” of the escrow agreement when it allowed the funds to be taken out of the account.
“Hamilton’s role in the escrow agreement was to oversee PLV’s attempt to secure permanent funding and to sign off on various components of the permanent funding scheme,” Judge Cote wrote.
“Through this, Hamilton was meant to ensure that the project moved forward as planned and that the bridge loan funds were not squandered.
“Hamilton abdicated this role. It never received, let alone reviewed, duly executed agreements resembling a permanent loan funding agreement or a senior escrow agreement.
“Further, the documents that Hamilton did receive and review revealed that PLV’s intended financing carried uncontrolled risk.”
Judge Cote said that representatives of Hamilton were aware that the deal with Argyle did not guarantee a return of principal or a profit, despite the escrow agreement requiring at least $18 million to cover the bridge loan.
“In essence, Hamilton knew that PLV planned to send the bridge loan funds to a gambler who would try, but would not guarantee, to earn at least $18 million in return,” the she wrote.
“Turing a blind eye, Hamilton nonetheless authorised the final draw down, knowing that the requirements for the disbursement had not been satisfied.
“Within a couple of months, the funds were lost. The only external force relevant to that loss was Mr McKellar, the very person that Hamilton failed to vet. Thus, that the bridge loan funds were ultimately lost was entirely foreseeable for Hamilton.”
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