As previously reported in the Hedge Fund Law Report, in Fall 2008, the hedge funds SageCrest II, LLC (SC II), SageCrest Finance, LLC, SageCrest Dixon, Inc., and an offshore affiliate, SageCrest Holdings, Ltd. (collectively, SageCrest), filed for Chapter 11 bankruptcy protection. See “SageCrest Files for Chapter 11 Bankruptcy, a Rare Move by a Hedge Fund
,” Hedge Fund Law Report, Vol. 1, No. 21 (Sept. 22, 2008). In so doing, SageCrest informed its investors that the actions of Deutsche Bank, its primary lender, in demanding that SageCrest liquidate assets to accelerate repayment on its loans and in freezing a $400 million line of credit, as well as litigation with an investor, Wood Creek Capital Management, caused the bankruptcy filing. In March 2010, SageCrest, its fund manager Windmill Management, LLC (Windmill), and Windmill principals Alan and Philip Milton (the Milton Brothers), the largest secured creditor Deutsche Bank, and the Official Committee of Equity Investors moved for court approval of a Settlement Agreement pursuant to Federal Rule of Bankruptcy Procedure 9019(a), that required, among other things, the replacement of Windmill with an interim manager, Ralph Harrison, the Equity Committee’s financial consultant. Two creditors, Topwater and Art Capital, opposed the agreement, claiming that it was a sub rosa
plan, and that Harrison was not a “disinterested” party. On May 18, 2010, the United States Bankruptcy Court for the District of Connecticut approved the settlement after finding that it satisfied the “standard of reasonableness.” We detail the background of the action and the Bankruptcy Court’s legal analysis.