The New York State Supreme Court judge who ruled this month that contractor China Construction America (CCA) owed damages worth $1.6bn to the developer of the Baha Mar resort in the Bahamas said in his ruling that the defendants, CCA, breached contracts and committed fraud to force the project out of the developer’s hands.
In his ruling, Justice Andrew Borrok said the plaintiff, developer BML Properties (BMLP), “more than met its burden in proving” its claims against CCA.
He said CCA “actively worked to push BMLP out of the Project”, and characterised this as a “massive misappropriation of funds”.
“The gravamen of BMLP’s complaint,” he wrote – “gravamen” meaning crux – “was that the Defendants hatched a scheme to defraud and breach its contracts with BMLP in order to delay the opening of the Project, extort extra payments from BMLP, and wrest control of the Project from BMLP.
“As alleged, the Defendants carried out this scheme by intentionally misleading BMLP as to the Defendants’ ability to meet their obligations and open the Project when and as planned, including by, among other things, diverting resources and manpower to competing projects, concealing those diversions, and even engaging in outright sabotage of the Project.”
‘Ripped out of my hands’
After one delayed opening at the end of 2014, CCA falsely assured BMLP that the resort would be sufficiently complete to open on 27 March 2015, the judge found.
When it didn’t, BMLP became insolvent.
The Bahamian government then forced the development into liquidation and the scheme’s financier, China Export-Import Bank (CEXIM), sold the resort to a Hong Kong company in 2016.
As a result, BMLP lost its $845m equity contribution to the development. Interest accruing from the first instance of contract breach, which the judge identified as occurring on 1 May 2014, brings the damages to $1.6bn.
“I first conceived of Baha Mar more than 20 years ago, only to see it ripped out of my hands at the brink of opening by CCA,” said BMLP chair and chief executive Sarkis Izmirlian in a statement following the decision.
Judge Borrok found that CCA breached the Best Interests Obligation of the Investors Agreement at least six times and committed fraud at least four times, which directly resulted in those damages.
What follows is a summary of the judge’s findings, after a description of the parties involved and the project’s background.
Parties and background
BMLP’s Sarkis Izmirlian began acquiring properties on Cable Beach near Nassau in 2005.
In 2007 he teamed up with joint venture partners Harrah’s Entertainment and Starwood Hotels & Resorts Worldwide to develop the Baha Mar resort.
Comprising four hotels, a casino, convention centre, and a Jack Nicklaus-designed golf course, it was billed one of the biggest single-phase resorts under development in the western hemisphere.
But Harrah’s pulled out of the scheme in 2008 amid the global financial crisis, and Izmirlian began negotiations over financing with CEXIM.
In 2010, CEXIM agreed to lend the scheme $2.45bn, and one of China’s biggest contractors, China State Construction Engineering Corporation (CSCEC), was to build the resort and assume a minority equity interest of $150m.
Izmirlian would make an equity contribution of $845m.
When ground broke in February 2011, the role of general contractor had been assumed by CSCEC’s US subsidiary, CCA, the defendants in BMLP’s suit.
At the time, the resort’s opening was set for the end of 2014.
Concerning the identity of the defendants, Judge Borrok noted that while a number of variously-named entities connected to CCA and CSCEC played a role in the Baha Mar project – including “CCA Bahamas” (CCAB) and “CSCEC Bahamas” (CSCECB) – they shared officers, directors and premises, and were not treated as separate profit centres.
Borrok said that in the interest of “piercing the corporate veil”, they should be seen as “a single economic entity”.
During the 11-day, non-jury trial, BMLP successfully argued that CCA breached the “Best Interests Obligation” contained in the Investors Agreement at least six times.
The Investors Agreement was signed as a binding contract between BMLP and the defendants at the start of the project.
The Best Interests Obligation obliged parties not to deliberately work against the interests of their partners in the contract, but CCA did.
Bought a hotel instead of paying subcontractors
At a November 2014 crunch meeting in Beijing, CCA asked BMLP to pay $54m, saying it was needed to pay subcontractors ahead of the new, fast-approaching opening date of 27 March 2015.
BMLP complied but, instead of using the money to pay subcontractors or otherwise accelerate the project, CCA used the $54m to conclude the purchase of a competing hotel, the nearby British Colonial Hilton.
CCA had agreed to pay that exact amount when it signed a contract of sale on 21 October, weeks before the November crunch meeting in Beijing.
The Judge called this manoeuvre “an absolute sham and shakedown”, counting it as an instance of fraud as well as of breach of contract.
Off to Panama
Court documents showed that during the critical period between the November 2014 crunch meeting in Beijing and the opening date of 27 March 2015, CCA executives were diverting their attention from Baha Mar to business opportunities in Panama.
During January and February 2015, they sent the head scheduler for the Baha Mar project to Panama.
On 19 February 2015 the scheduler reported to CCA leadership that he was “fully engage[d] in the Panama project now” and preparing for his next trip.
Mere days before the opening date in March, the scheduler reported that he hadn’t updated a critical Baha Mar schedule since January.
Home for the holidays
Also among the breaches of the Best Interests Obligation the judge identified was the decision to let hundreds of workers return to China for the Chinese New Year without arranging replacements for trades and supervisors.
CCA leadership approved of the departures of some 700 workers from the project between December 2014 and February 2015 while assuring BMLP that everything was on track.
In addition to these and other instances of breach of contract, Judge Borrok found three other instances of fraud in addition to the covert hotel purchase.
No plan to complete
At the crunch meeting in Beijing over 17-18 November, attended by BMLP, CCA, and CEXIM, CCA gave a firm commitment to the agreed completion date of 27 March 2015.
BMLP even made concessions over what constituted completion.
But the judge found that CCA made no plan to fulfil this promise.
Steven Collins, BMLP’s expert witness on the subject of construction management, testified that “there was never a realistic, fully-developed, manpower-loaded schedule for the resources to achieve the March date”.
CCA, said the judge, “thereby made an empty, fraudulent promise which misrepresented its present ability to perform”.
Golfing and cigars
Judge Borrok accepted evidence presented by Paul Pocalyko, an expert in forensic accounting and construction cost analysis, showing that CCA officers misappropriated project funds to buy personal items including scarves, golfing equipment and cigars.
He noted that while the amounts spent on personal items may be trivial compared to the project’s cost, the diversion of project funds was “just as fraudulent as the diversion of $54 million to buy the Hilton”, and was “indicative of a fraudulent course of dealing and a disrespect for the observation of corporate formalities”.
Judge Borrok held the fourth instance of fraud to be the fact that the CCA leadership knew they would not be able to complete the project on time but actively concealed that knowledge from BMLP, which had reasonably relied on CCA’s assurances.
What happened next
Ahead of 27 March 2015, BMLP spent millions of dollars hiring and training staff, marketing, and stocking the casino to receive paying guests, and entered a liquidity crisis when the opening didn’t happen.
The judge cited evidence showing that CCA refused to commit to a new opening date unless BMLP met new demands for payment, purportedly to pay subcontractors.
In June 2015, BMLP filed for bankruptcy in the US state of Delaware because one of its affiliates was headquartered there.
CCA and CEXIM, who each favoured liquidation, then filed motions in Delaware to dismiss BMLP’s bankruptcy cases.
On 16 July 2015, the Bahamian Attorney General presented a petition to the Bahamian Supreme Court seeking orders for the winding up BMLP’s business. At the same time, the Bahamian Attorney General issued an application for the appointment of provisional liquidators for BMLP.
The Delaware court dismissed BMLP’s bankruptcy filings on 15 September 2015.
On 19 October 2016, the government of the Bahamas announced that the Baha Mar had been acquired by Perfect Luck Holdings, a subsidiary of CEXIM.
On 14 December 2016, Chow Tai Fook Enterprises Limited (CTFE) said it had acquired Baha Mar from Perfect Luck.
BMLP filed its suit against CCA in the New York State Supreme Court in December 2017.
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