Despite Deep Flaws, Hedge Fund Owner’s Case Against Oakland Drags On
On November 21, Judge Joan A. Lloyd, a bankruptcy court judge in Kentucky, issued a decision allowing Insight Terminal Solutions (ITS), a shell company owned by hedge fund operator Jon Brooks, to proceed with its frivolous lawsuit against the City of Oakland. ITS claims losses of more than a billion dollars stemming from the City’s termination of Phil Tagami’s lease in 2018 which effectively terminated ITS’s sublease of the same West Oakland site.
The City is now seeking to have the case moved from the specialized Kentucky bankruptcy court to the United States District Court in Kentucky and then transferred to the United States District Court for the Northern District of California. As the City points out in its motion to have the case sent to Northern California, the case involves no questions of bankruptcy law and revolves entirely around legal claims under California law: “judicial economy warrants management of this litigation and these jury claims by a district court of general jurisdiction, not a bankruptcy court with no expertise in California law located 2,000 miles away from where the parties reside, all the evidence is located, and every relevant event took place.”
ITS’s damage claims closely track the wildly speculative losses that Superior Court Judge Noël Wise denied Phil Tagami in a California court decision earlier this year. The City asked Judge Lloyd to dismiss the new lawsuit outright, but the judge decided to give ITS a chance to substantiate its claims through discovery and further proceedings.
Tagami’s $159.6 million damage claim in the earlier California action rested on projections that the project would run into no further legal roadblocks and that massive shipments of coal and soda ash would occur without interruption for the entire 66-year term of his lease. Tagami’s claim relied entirely on the business prospects of ITS, a tiny startup which had signed a sublease to build and operate the coal terminal in September 2018, a few weeks before the City terminated Tagami’s lease for failure to meet construction deadlines
ITS had never operated anything, had at most a handful of employees, and had no significant assets at the time its owner, John Siegel, signed the lease. Siegel was trying to cobble together $250 million of financing from investors to build the coal export facility. His vision of an enormous and profitable coal terminal on the West Oakland waterfront would soon prove to be a mirage.
Tagami agreed to sublet the property to ITS for an upfront payment of $6 million and the promise of future rents. At the time the lease was signed, the City had already delivered to Tagami’s office notice that the City was getting ready to declare his lease of the West Gateway terminated because Tagami had not met the initial construction deadlines set forth in his lease. It seems doubtful that, when he signed the sublease, Siegel understood that Tagami’s right to sublet the property might be in jeopardy. Nor does it seem plausible that Jon Brooks, who lent Siegel the money to pay Tagami, understood the risk involved in lending money to ITS.
As ITS soon stumbled toward bankruptcy, Brooks found himself holding the bag. His Autumn Wind Lending LLC was ITS’s biggest creditor. Rather than writing off the loan, Brooks put forward a successful bid to take ITS out of bankruptcy. ITS’s only material asset was the sublease.
In its complaint, ITS, now owned by Jon Brooks, claims that ITS suddenly became worth between $1.3 and $2.0 billion on September 24, 2018, the day Siegel signed the sublease, but that the startup’s value collapsed to $20 million a few weeks later when the City terminated Tagami’s master lease.
ITS faces a steep challenge making this riches-to-rags story stick. To win “lost profits” damages, a plaintiff must prove the losses with “reasonable certainty.” A startup company with no track record is rarely able to show with certainty what profits it would have earned if a defendant had not interfered with its business plan. As Tagami’s claims relied entirely on rosy predictions of ITS’s success, Judge Wise found Tagami’s damages “inherently uncertain, contingent, unforeseeable, and speculative.”
Judge Wise pointed to numerous dubious assumptions made by Tagami’s damages expert, including that “the demand for coal will not decrease between now and 2082; no future federal, state or local regulation will have any negative financial impact on the Project …; no acts of war, earthquakes, storms, labor disputes, pandemics, or political controversies will ever impact the constant flow of coal and soda ash.”
ITS’s lawsuit now relies on the very same speculation that doomed Tagami’s damage claims.
ITS will also have to explain why John Siegel took out a sublease (which ITS now claims was worth over $1 billion) without first diligently determining whether the City had any concerns that might cloud Tagami’s ability to sublet the property. If Siegel’s failure to investigate Tagami’s tenuous situation led to ITS’s business losses, the case against the City could fall apart on that count alone. If Tagami concealed known risks from Siegel, Tagami may bear major responsibility for luring him to enter into the sublease. More about the dealings between Tagami and Siegel back in 2018 is likely to emerge.
Although ITS could have joined in Tagami’s lawsuit, it chose to finance the litigation and watch from a back seat. When the California case failed to deliver a massive “lost profits” award, ITS decided to engage in “forum-shopping.” ITS filed the new lawsuit against the City in the same U.S. Bankruptcy Court — in Louisville, Kentucky — where Brooks and his hedge fund manager Vikas Tandon gained control of ITS and the West Gateway sublease in 2020.
The City is appealing the decision in California Superior Court that its 2018 termination of Tagami’s master lease was invalid. If the City succeeds on its appeal and termination of Tagami’s lease of the West Gateway is ruled valid, the new suit will fail because ITS’s rights under its sublease, if any, depend entirely on the survival of Tagami’s lease.
The City brought the motion to dismiss in the hopes to avoid protracted litigation. Legal experts say motions to dismiss are difficult to win because the judge is obliged to accept as true all the facts alleged in the complaint. Denial of a motion to dismiss is not considered a determination that alleged claims have any merit.
Featured photo: Federal Courthouse in Louisville, Kentucky, where Jon Brooks’ Insight Terminal Solutions is pursuing a meritless lawsuit against the City of Oakland for $1 billion. Credit: U.S. Courts.