Ex-RCS directors' breach of contract claim moves ahead against Luxor Capital - Reuters

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• Plaintiffs say related Delaware suit claims violate a release agreement
• Decision follow RCS Capital's bankruptcy and failed attempts to sell business unit to Apollo Global Management

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(Reuters) - A New York trial judge has let a breach of contract claim brought by former directors at RCS Capital Corp proceed against hedge fund Luxor Capital Partners LP in connection with litigation over RCS Capital's 2016 bankruptcy.

New York Supreme Court Justice Andrew Borrok in Manhattan ruled on Monday that the ex-directors, led by former RCS Capital executive chairman and real estate investment trust pioneer Nicholas Schorsch, can move ahead with a claim accusing Luxor of violating an agreement to waive its right to sue over certain RCS Capital transactions.

Borrok dismissed two claims accusing Luxor and one of its senior executives of tortiously interfering with that same agreement by influencing another party to violate the contract too.

Attorneys for the former RCS board members and Luxor did not immediately respond to requests for comment on Tuesday. Neither did representatives for Luxor.

Schorsch and three other former RCS Capital board members sued Luxor and executive Michael Conboy in New York Supreme Court in May for allegedly inducing a creditor trust to file an action against the former directors, RCS Capital Management and several affiliates in May 2017 in the Delaware Court of Chancery.

The trust, called RCS Creditor Trust, filed the complaint over the investment firm’s 2016 bankruptcy and attempts to sell its distribution business. The creditor trust alleged that the former RCS Capital directors used their “virtually unfettered power” to benefit another of their businesses, AR Capital LLC, at RCS’ expense.

AR Capital was responsible for creating real estate investment trusts and other investment vehicles and then selling them to affluent individuals, while RCS Capital provided resources to support AR Capital's work, according to the Delaware complaint.

The trust also claimed that after AR Capital was involved in an accounting fraud scandal, the former RCS directors committed fraud and used other methods in attempt to sell a 60% stake in AR Capital to private equity giant Apollo Global Management for up to potentially $900 million. The deal also included the sale of RCS Capital’s wholesale distribution unit, according to the Delaware complaint.

The creditor trust specifically accused Schorsch of blocking the RCS Capital board’s efforts to pursue other deals that could have saved the company from bankruptcy.

Schorsch and the other ex-directors have denied any wrongdoing, and the case's trial in Delaware wrapped up in April.

The former RCS Capital board members and officers instead asserted in their New York complaint that when the proposed Apollo transactions were terminated in November 2015, RCS Capital, its board members, Apollo and Luxor agreed to release each other from all legal claims related to the transactions.

But Luxor “knowingly induced” the creditor trust "to breach its own contractual covenant not to investigate, file, or prosecute those claims" by filing the Delaware suit, Schorsch and the other former RCS Capital directors argued.

Luxor has denied the claims and moved to dismiss them.

Borrok on Monday found that the claims brought in the Delaware suit could plausibly be considered a breach of their agreement to not sue over the transactions.

The judge said he dismissed the former RCS directors’ other claims in the New York suit because the creditor trust is RCS Capital’s successor and it can’t be accused of interfering with its own contracts.

The case is Schorsch v. Luxor Capital Partners LP, New York Supreme Court, New York County, No. 657017/2019.

For Schorsch: Eric Seiler and John Orsini of Friedman Kaplan Seiler & Adelman

For Luxor: Julie Cohen and Joseph Larkin of Skadden, Arps, Slate, Meagher & Flom

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Sierra Jackson

Sierra Jackson reports on legal matters in major mergers and acquisitions, including deal work, litigation and regulatory changes. Reach her at sierra.jackson@thomsonreuters.com

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