The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Baha Mar’s contractor yesterday obtained an “emergency stay” to protect “hundreds” of Bahamian jobs and block the potential “liquidation” of its two Nassau resorts from Sarkis Izmirlian enforcing his $1.642bn award.

The New York State Supreme Court’s appeal division granted the interim injunction, which for the moment prevents Baha Mar’s original developer from collecting on the fruits of his comprehensive legal win, after China Construction America (CCA) and its affiliates pleaded poverty and warned they would “suffer catastrophic and irreparable harm” absent such a stay.

The Chinese state-owned contractor moved rapidly to secure this relief because it was unable to obtain the near-$2bn bond required by New York State Supreme Court rules to gain an “automatic stay” of any judgment it issues. Branding the sum awarded against it as “breathtaking”, CCA alleged that the damages handed to Mr Izmirlian are “several times’ the combined value” of itself and its affiliates.

Their most valuable assets were described as "two hotels in Nassau, Bahamas" which, although not specifically named in CCA's November 1, 2024, legal filings are clearly downtown's British Colonial property as well as the Margaritaville Beach Resort that sits at the heart of the adjacent Pointe complex. However, as "illiquid" real estate assets, neither could be pledged as collateral to secure the required bond.

The Chinese contractor warned that, unless it obtained a stay, any bid by Mr Izmirlian to enforce the fraud and breach of contract damages awarded to him over his ousting from Baha Mar would drive it into insolvency and, subsequently, either bankruptcy in the US or "liquidation proceedings" in The Bahamas - the latter of which would inevitably hurt the two resorts.

A surety bond broker, used by CCA as an expert witness, besides asserting that there is "no ability" to use the resorts as collateral for the security demanded by the New York court also argued that financiers will shy away from Bahamas-based assets due to perceived challenges with enforcing agreements and potentially having to deal with this nation's court system.

Mark Goodman, an attorney with CCA's US attorneys, Debevoise & Plimpton, in a November 1, 2024, affidavit alleged: "Defendants are ongoing businesses facing a judgment that is several times their combined value even under the most optimistic assumptions. The judgment is far more than any defendant could possibly satisfy."

Describing CCA as a New Jersey-based construction company whose primary asset is the equity ownership stakes it holds in its subsidiaries, Mr Goodman sought to portray the contractor and its affiliates as having minimal worth.

He added that China State Construction and Engineering Corporation (Bahamas) was merely a Bahamian special purpose vehicle (SPV) "that has no meaningful assets" after it lost its $150m preference share investment when Baha Mar was liquidated, while its $248m counterclaim against Mr Izmirlian was last month dismissed by the New York court.

As for CCA's own Bahamian subsidiary, CCA Bahamas, he added that its "principal assets are its ownership interests in two subsidiaries, which together own and operate two hotels in Nassau, Bahamas, and no surety firm would accept its assets as a form of collateral on a supersedeas bond".

"Absent a stay of enforcement, some or all of the defendants may be forced to file for bankruptcy in the US or initiate liquidation proceedings in The Bahamas," Mr Goodman added. "In this case, bankruptcy or insolvency proceedings would harm not only defendants but non-parties as well.

"The two hotels CCA Bahamas owns employ hundreds of people. And CCA provides shared services, including communications, accounting, information technology and other general administration services, to non-party affiliates engaged in ongoing construction projects.

"Defendants have diligently sought to avoid this outcome. They approached several bonding companies, but none were willing to provide a bond in any amount. A discretionary stay of enforcement is the only means by which defendants can preserve their assets while pursuing their right to appeal."

Mr Izmirlian is opposing CCA's efforts to at the very least delay his collection of the damages awarded to him. And the New York State Supreme Court's appeal division yesterday said it will hold an "expedited" full hearing on the issue to determine whether the "stay" should endure until the contractor's full appeal is determined - a process that could take between one to two years.

Neil Pedersen, president of Pedersen & Sons Surety Bond Agency, which was hired by CCA and its affiliates to procure the security demanded by the New York court, alleged that in this case some $1.98bn would be required given the scale of Mr Izmirlian's legal success.

Noting that the court's rules also require that the bond cover appeal costs, Mr Pedersen alleged: "New York State statutory post-judgment interest will continue to accrue at 9 percent per year. The time to appeal varies. Additionally, in New York state, an appellate court can award a greater sum than the judgment. The bond itself cannot be issued in an unlimited sum.

"My office generally suggests using a bond in the amount of 120 percent of the judgment, which takes into account a little over two years' post-judgment interest. Here, considering the $845m judgment, pre-judgment interest and post-judgment interest, a bond of a $1.98bn could, in my opinion, be reasonably expected to be sufficient to obtain the automatic stay."

Besides the $845m awarded to Mr Izmirlian as compensation for his lost Baha Mar equity investment, the original developer also gained $68.56m from 9 percent interest covering the period May 1, 2014, to March 31, 2015. And a further $729.038m in interest, also at a 9 percent rate, was awarded for the period April 1, 2015, to the date of last month's judgment and continues to accrue.

Mr Pedersen described the $1.98bn bond needed by CCA as "exceptionally large", and would have to be underwritten by a consortium or syndicate of financiers with several "anchors" contributing $500m each. However, he alleged that obtaining it is "impossible under the circumstances in this case" as the funders would require liquid cash - via instruments such as letters of credit - as protection in the event of a payout.

"I have been provided valuation reports for certain hotels and assets owned by one of the defendants and located in The Bahamas," Mr Pedersen added, referring to the British Colonial and Margaritaville Beach Resort. "I was asked to provide information about the ability to use the assets as collateral to secure a bond. As far as I am aware, there is no ability to use the hotels as collateral.

"Surety is not asset-based lending. Real estate, along with other non-liquid forms of collateral, are not preferred types of collateral especially for a matter of this large. Few companies take real estate as collateral. Real estate is not easily liquidated.

"The foreclosure process for real estate can be a multi-year proceeding. Once an appeal is decided, a surety has a short window to satisfy a judgment while it could take years to foreclose on an asset and ultimately sell the real estate."

Pointing to further issues with using the two downtown Nassau resorts as security, Mr Pedersen added: "From the perspective of a surety bond provider, another issue with taking the indemnity of an entity whose assets are located in The Bahamas is that it is difficult to enforce an indemnity agreement in that jurisdiction.

"The possibility of dealing with a foreign court related to a possible future claim proceeding is not a favourable underwriting factor when underwriting an appeal bond. In addition, jurisdictions like The Bahamas can make it difficult for a surety to enforce its indemnity agreement....

"In my career, I have been involved in the issuance of thousands of bonds. I have never seen, nor heard of, an appeal bond of this size, for a company -or companies- in the financial position of the defendants. For the foregoing reasons, and after the efforts made, obtaining an appeal bond is not possible under these circumstances."

CCA's legal filings seemingly contradict assertions by Fred Mitchell, minister of foreign affairs and PLP chairman, that the Chinese contractor's dispute with Mr Izmirlian is a private legal battle with no other consequences given the potential negative fall-out for the British Colonial, Margaritaville Beach Resort and their hundreds of employees should a bankruptcy or liquidation ultimately result.

James McMahon, another member of CCA's legal team, warned bluntly in a November 1, 2024, legal filing: "Enforcement proceedings could jeopardise CCA's ability to pay its employees and fund its ongoing businesses, creating a substantial risk that CCA would be forced into bankruptcy proceedings."

And Xin Fu, China State Construction and Engineering Corporation (Bahamas) president, added: "If enforcement of the judgment is not stayed pending appeal, China State Construction and Engineering Corporation (Bahamas) will be rendered insolvent."

Observers will likely see a certain irony in CCA's predicament given that Judge Andrew Borrok ruled it used $54m, which it urged Mr Izmirlian to procure from Baha Mar's lender to settle debts owed to sub-contractors, to instead fund its British Colonial acquisition in late 2014. Now that same resort is allegedly threatened with liquidation if Mr Izmirlian moves to collect on a verdict stemming from those very same CCA actions.

However, it is unlikely that Beijing will want to endure the embarrassment of a Chinese state-owned company being forced into bankruptcy or liquidation - especially in the US. CCA's ultimate parent, China State Construction and Engineering Corporation, was said as recently as 2019 to have generated $205.8bn in annual revenues and reached 18th in the Fortune Global 500.

Therefore, it should have sufficient assets to cover the damages awarded to Mr Izmirlian should he prevail on appeal. The latest developments also bear an uncanny resemblance to the plot laid out last week by Dionisio D'Aguilar, one of Mr Izmirlian's key allies, who both suggested CCA could file for bankruptcy and would likely face a near-$2bn damages bill if their appeal fails.

Mr D'Aguilar, who sat on Baha Mar’s Board as a director prior to the original developer’s ousting and his own later appointment as minister of tourism and aviation, simply said yesterday of CCA: "They should settle."

He had argued last week: “Another alternative that they have is to simply declare bankruptcy, but I cannot imagine a Chinese subsidiary of China State Construction and Engineering Corporation (CSCEC) would take that route.

“It would be hugely embarrassing for the parent company that, when found wrong, this is the route they decide to take to protect themselves from the risk. I’m sure it’s an option. I don’t know of any Chinese company ever doing that. Declaring bankruptcy to protect yourself from the award, no Chinese state-owned company has ever done that.”

CCA, in its legal filings, asserted that the "stay" is required "to prevent gross injustice". It added: "The decision imposes $1/6bn in liabilities on companies worth nowhere close to that. The decision is egregiously wrong. But if it does into effect the defendants will be insolvent."

Mr Goodman, on the Chinese state-owned contractor's behalf, added: "The decision, which saddles defendants with a breathtaking $1.6bn in liability, rests on numerous errors of law and fact. The Decision also erroneously treats all three defendants as a single entity when only one (CSCEC Bahamas) signed the contract alleged to be breached and another (CCA) was not involved at all in the construction project at issue.

"Without a stay of enforcement, defendants may never be able to exercise their rights to appeal the decision and clear their names.... At the same time, the judgment’s size means that if plaintiff is allowed to commence enforcement proceedings, defendants will be forced into insolvency.

"Defendants plan to perfect their appeal within eight weeks of filing their notice, far earlier than the six-month time frame provided for in the [New York court rules], and the appeal may be resolved within several months. Plaintiff’s potential recovery would be protected in the meantime," Mr Goodman added. "Defendants intend to perfect by December 30, 2024, so this court may hear the appeals in the March term.

"A stay would allow defendants to continue to generate value while the appeal is pending, and post-judgment interest would continue to accrue. Defendants would not, and could not, dispose of or transfer their assets while this appeal is pending. And, as defendants already disclosed to plaintiff, the vast bulk of defendants’ value are in its ownership of two well-known hotels in The Bahamas."