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In re MSR Resort Golf Course LLC

United States District Court, Second Circuit

January 7, 2014

In re: MSR RESORT GOLF COURSE LLC, et al., Debtors.



This bankruptcy appeal stems from the financial collapse of a group of vacation resort properties (the "Resorts"). On February 22, 2013, the Honorable Sean H. Lane, United States Bankruptcy Judge for the Southern District of New York, issued an order (the "Confirmation Order") that confirmed a plan (the "Plan") liquidating the debtor entities and transferring their portfolio of resorts to GIC Real Estate, Inc. ("GIC" or the "Purchaser"). GIC, it bears mentioning, is both the sovereign wealth fund of the Government of Singapore and, as a result of certain mezzanine financing it arranged, a pre-petition creditor of the bankrupt debtor entities that collectively owned and managed the Resorts.

Appellant Five Mile Capital Partners LLC (the "Appellant") is also a prepetition mezzanine lender, and was the only such creditor to receive no return on its investment from the Plan. In this appeal, the Appellant seeks to modify the confirmed Plan in an effort to change that fact. For the reasons set out in the remainder of this Opinion, the appeal is dismissed.


A. Procedural History

1. The Parties and the Debt Structure

The entities involved in this bankruptcy (the "Debtors") are numerous and interrelated. A real estate investment trust, MSR Hotels & Resorts, Inc. (the "REIT"), sat at the top of the corporate structure.[2] The REIT owned a number of entities, some of which are Debtors in the bankruptcy proceeding from which the instant appeal was taken. (Conf. Order at 13). Certain Debtors actually owned the "the land, buildings, and improvements" on the Resorts. ( Id. at 8). Other Debtors leased the Resorts from the Owner Debtors and paid corresponding rent. ( Id. ). Still other Debtors acted as managers, managing the Resorts under contract with each Tenant Debtor in exchange for management fees. ( Id. at 8-9). And other Debtor entities acted as brokerages, selling and leasing elements of and rental rights in the Resorts. ( Id. at 9).

The Owner Debtors borrowed under a mortgage in the original principal amount of $1 billion (2/20/13 Tr. 7:23); this mortgage was placed into a securitization trust (the "Mortgage Trust") and serviced by Midland Loan Services, Inc. (Purchaser Opp. 3; Gallistel Decl. ¶ 3). The mortgage was secured by all the assets of the Debtors as a whole, including the Resorts themselves. (Conf. Order at 7). The Debtors also took out four mezzanine loans of decreasing priority, as well as certain other financing agreements not at issue here. ( Id. at 15). The first mezzanine loan was in the amount of $115 million and held for purposes of this bankruptcy by MetLife. (2/20/13 Tr. 8:3-7). The second and third mezzanine loans, for $110 million and $250 million, respectively, were held by 450 Lex Private Limited and C Hotel Mezz Private Limited ( Id. at 8:8-14); these entities are affiliates owned and controlled by the Purchaser, GIC. The fourth, and most junior, mezzanine loan for $50 million was held by Appellant Five Mile Capital Partners LLC. ( Id. at 8:15-19).

2. The 2011 Bankruptcy Filings

The Debtors filed Chapter 11 cases on February 1, 2011. (Appellant Br. 6). The following week, the Purchaser made an offer to serve as "stalking horse bidder"[3] in an asset auction to purchase "substantially all of the [D]ebtors' assets pursuant to a Chapter 11 plan." (2/20/13 Tr. 9:3-4).[4] From its inception, the stalking horse bid suggested by the Purchaser provided no value to the Appellant. As the juniormost mezzanine lender, the Appellant would be out of the money under the Purchaser's proposed bid, recovering neither the $50 million principal nor the $8 million in owed interest. ( Id. at 9:17-21).[5]

The Purchaser's initial offer, and a renewed offer made on April 25, 2011, were rejected by the Debtors. (2/20/13 Tr. 9:5-8). Instead, the Debtors entered into a settlement with all its creditors that allowed the Debtors to pursue alternative restructuring bids, while guaranteeing that the Purchaser's stalking horse bid would be entered into an asset auction with stipulated bidding procedures if and when the negotiated period expired or the Purchaser failed to receive interest payments on its mezzanine loans. (Conf. Order 18-19). In the interim, the Debtors successfully conducted a number of valuemaximizing restructuring initiatives. ( Id. at 17-18). These initiatives included reaching individual settlements with the mortgage lender and the creditors in general, all of which permitted the Debtors to solicit restructuring plans and to obtain concessions with respect to unpaid default interest owed on the mortgage and mezzanine loans. ( Id. at 19-20). Finally, during this time, the Debtors assiduously sought an alternative to the Purchaser's stalking horse bid to acquire their assets, preferring "to structure their restructuring as a reorganization or equity sale to present the best recovery to all stakeholders." ( Id. at 20). No such alternative materialized during this interval. ( Id. at 21).

The interest payment owed to the Purchaser in August 2012 was not made, thus triggering the Debtors' obligation to initiate an asset auction. (Purchaser Opp. 4). Even then, however, the Purchaser's bid was not immediately accepted. The auction process began in September 2012 and Debtors sought a superior bid to that proposed in the Purchaser's stalking horse bid. ( Id. at 4-5). During this period, the Debtors "identified dozens of parties potentially interested in acquiring the resorts, negotiated over thirty confidentiality agreements, launched and maintained a data room, and satisfied numerous incoming diligence requests." (Conf. Order 15). No other party ultimately entered a bid. (Purchaser Opp. 5).

The Purchaser's stalking horse bid was an offer to purchase the Debtors' assets for $1.50004 billion, which figure included a $378.8 million credit bid of the principal, non-default interest, fees, and expenses attributable to the Purchaser's mezzanine loans to the Debtors. (Gallistel Decl. ¶ 4).[6] This bid relied on concessions from the mortgage holder and the senior mezzanine lender to reduce their claims for default interest in the respective amounts of $56 million and $7.8 million. (Purchaser Opp. 5; see also 2/27/13 Tr. 40:20-22 (noting that the senior creditors would as of March 1, 2013, forgo a total of $73 million in default interest)).

3. GIC's Relationship with KSL

Prior to the filing of the Chapter 11 cases, the Purchaser had entered into agreements with KSL Capital Partners LLC, a non-party to this dispute and a former equity owner of the Resorts. (Purchaser Opp. 10). First, the Purchaser agreed, subject to certain triggering events, to purchase up to 100% of KSL's stake in the Mortgage Trust. ( Id. ). Second, KSL agreed, should the Purchaser ultimately acquire the Resorts, to serve as asset manager for those properties. ( Id. ). Third, each party agreed to permit the other to acquire up to 50% of any investment opportunity in the various loans or the Resorts. ( Id. at 11). Despite this last option, KSL did not participate in the Purchaser's stalking horse bid or the eventual acquisition of the Resorts. ( Id. ).[7]

Focusing principally on the Purchaser's relationship with KSL, the Appellant contended that the Purchaser was not acting in good faith. ( See 2/20/13 Tr. 58:16-19). A hearing on that subject was held on October 25, 2012 (the "Good Faith Hearing"), after which the Bankruptcy Court ruled that the Purchaser's good-faith status was at that time not ripe for decision, inasmuch as the relevant Bankruptcy Code provisions focus on actual, not prospective, purchasers. (10/25/12 Tr. 30:9-18). Though the Bankruptcy Court found no evidence that KSL had an interest in acquiring the Resorts, it concluded nonetheless that the Purchaser's disclosures at that time regarding its relationship with KSL were incomplete. ( Id. at 29:2-30:7). As a matter of "best practices" (2/20/13 Tr. 59:6), the Bankruptcy Court concluded that the Purchaser, if it eventually intended to seek a finding of good-faith status, should either amend its agreement with KSL or make additional disclosures regarding KSL's involvement in, obligation to, and potential compensation resulting from the Purchaser's bid, especially whether KSL stood to receive a fee in exchange for not entering a bid of its own for the Resorts. (10/25/12 Tr. 30:19-32:1).[8]

The Purchaser made certain additional disclosures at the Good Faith Hearing, and later provided further clarification regarding its relationship with KSL at the Confirmation Hearing held on February 4 and 5, 2013. ( See 2/20/13 Tr. 60:11-13 (recounting history)). The Bankruptcy Court eventually explicitly concluded, on the basis of the extensive record created at the Good Faith Hearing and the Confirmation Hearing, that the Purchaser had indeed acted in good faith in connection with the sale of the Resorts. ( Id. at 60:14-16, 71:8-16; Conf. Order 51-53).

4. The Asset Auction

In December 2012 the Purchaser was selected as the winner of the asset auction - a foregone conclusion in the absence of any bid from any other party. (2/20/13 Tr. 58:9-10). Significantly for purposes of the present appeal, all parties were on notice, throughout the pendency of the Chapter 11 cases, that an asset sale as contemplated by the Purchaser's stalking horse bid would create a large tax liability in the REIT that would go unfunded. (Conf. Order at 21-22; see also 2/28/13 Tr. 22:7-21).[9] Indeed, the Appellant accessed on four separate occasions, "far in advance... of an order approving [the Purchaser] as a stalking horse bidder, " a tax analysis by the Debtors' financial advisor that indicated the nature and likely magnitude of the REIT's tax liability. (Conf. Order at 22).

Understandably concerned about the anticipated tax consequences, the Appellant argued to the Bankruptcy Court that (i) an indemnification provision in the formation agreements of the nine limited partnership Debtors obliged the Debtors to indemnify the REIT for this tax liability, and (ii) a guarantee of obligations by the REIT to the Appellant meant that it could stand in place of the REIT to assert a senior claim for indemnification against the Debtors, subject to the total principal and interest owed under the Appellant's fourth mezzanine loan. (2/20/13 Tr. 19:16-21, 20:16-21:1).[10] This argument constituted, at confirmation, the "central bone of contention" ( id. at 18:21), and the "only remaining objection" ( id. at 19:16); indeed, the Bankruptcy Court observed that the Appellant and the Debtors "agree[d] that feasibility hinges upon whether the debtors have an indemnification obligation" for the REIT tax liability ( id. at 23:2-3). There was no dispute that the Plan could not fund this liability, if it existed; the senior creditors had already compromised on certain owed payments like default interest in order to reach agreement on a total sum acceptable to the Purchaser. ( See id. at 42:1-10).

The Bankruptcy Court examined the parties' dispute over this issue at great length and concluded for a multiplicity of reasons that neither the indemnification provisions nor the guarantee of recourse obligations could be read as the Appellant urged. (2/20/13 Tr. 23:21-43:18). Accordingly, ...

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