Bankruptcy Remote Entities and Single-Asset Real Estate Cases

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Bankruptcy Remote Entities and Single-Asset Real Estate Cases Leveraging Latest Developments in Commercial Real Estate Bankruptcy THURSDAY, APRIL 12, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Arthur J. Steinberg, Partner, King & Spalding, New York Patrick E. Mears, Partner, Barnes & Thornburg, Grand Rapids, Mich. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 PART I BANKRUPTCY REMOTENESS, BAD BOY GUARANTIES AND INTERCREDITOR AGREEMENTS/CRAMDOWN By: Arthur Steinberg King & Spalding LLP 5

6 A. Bankruptcy Remoteness Special Purposes Entities: Special purpose entities ( SPEs ), also called bankruptcy remote entities -- isolate borrower s assets from affiliates in order to simplify lender/borrower issues and thereby secure favorable loan terms. Specific provisions in borrower s organizational documents -- SPE separate existence from parent. Insolvency or bankruptcy of an affiliate will not render borrower insolvent or cause bankruptcy of borrower. In re General Growth Properties, Inc., 409 B.R. 43 (Bankr. S.D.N.Y. 2009). 6

7 General Growth Properties Quick Facts of General Growth Properties ( GGP ) Second largest mall owner/operator in the United States. End of $29.6 billion in assets and $27.3 billion in liabilities. Unable to refinance maturing debt as a result of the credit crisis. Filed for bankruptcy on April 16,

8 General Growth Properties Bankruptcy Filing Property level SPEs -- standard organizational documents. No notice requirement to lenders for replacement of managers. GGP replaced independent managers right before bankruptcy. Newly appointed independent managers voted in favor of the bankruptcy. Existing independent managers informed of replacements concurrent with bankruptcy. 8

9 Bad Faith Filing? General Growth Properties Motions to dismiss for bad faith filings. Second Circuit law: (1) Objective futility of the reorganization process, and (2) Subjective bad faith. In GGP, many subject debtors solvent so no objective futility to reorganize. Lenders arguments: (i) filing was premature and (ii) a plan could never be confirmed over lenders objection. 9

10 General Growth Properties Bad Faith: Premature Filing? Cases dismissed where (i) no financial distress; (ii) speculative prospect of liability; and (ii) filing to obtain litigation advantage. No requirement that debtor be insolvent -- some level of financial distress necessary. GGP Court: some debtors in varying degrees of financial distress. Inability to restructure all of GGP s debt prepetition. GGP Court: declines the invitation to establish an arbitrary rule that a debtor is not in financial distress and cannot file a Chapter 11 petition if its principal debt is not due within one, two or three years. 10

11 General Growth Properties Bad Faith: Considering Interests of Group as a Whole Filing by wholly-owned subsidiary appropriate where the parent filed in good faith and subsidiary is crucial to the parent company s reorganization plan. Organizational documents -- fiduciary duty of Independent Managers similar to state law. Delaware law regarding fiduciary duties: Solvent corporation -- consider interests of the shareholders. Insolvent corporations -- duties to creditors and shareholders. From GGP group perspective, bankruptcy filings appropriate. 11

12 Subjective Bad Faith General Growth Properties Lenders: Failure to negotiate and replacement of Independent Managers equals bad faith. Bankruptcy Court: No requirement to negotiate; repeated attempts by Debtors to restructure/refinance rejected. Dismissal of independent directors permitted by organizational documents. No subjective bad faith -- filing was to preserve value. Relied on advice of counsel. Lenders granted adequate protection. Motions to dismiss denied. 12

13 GGP s Plan of Reorganization Restructured approximately $15 billion in secured loans for over 140 properties through settlements. Lenders agreed: Maintain current, nondefault contract interest rate. Extended loan maturity dates. Debtors agreed: Catch up on unpaid amortization. Increase the timing of amortization on loans. 13

14 GGP s Plan of Reorganization Better control over the SPE situation by lenders: At least two independent directors approved by the lenders. Lender consent to any new or replacement independent director. Organizational documents utilized provisions under the Delaware law to narrow scope of a director s fiduciary duties: Each SPE debtor required to be a Delaware limited liability company -- under Delaware law, fiduciary duties of an LLC's directors can be expressly waived in its organizational documents. Set forth whose interests Independent Directors should consider (i.e. creditors only). Advance relief from the automatic stay for future defaults. The ultimate parent of the SPE agreed to provide a non-recourse carve-out guaranty (also known as a bad boy guaranty). See Part I.B, infra, for a general discussion of bad boy guaranties. 14

15 GGP s Plan of Reorganization (Cont.) 2010: GGP emerged from bankruptcy. Creditors paid in full; equity investors received a recovery. 15

16 Lessons Learned After GGP GGP -- minimal damage to SPE structure. No substantive consolidation. Bankruptcy remote does not equal bankruptcy proof. More closely scrutinize parent s solvency. Independent directors: Advanced notice of replacement; opportunity to object. Lenders -- should not exercise too much control. 16

17 Lessons Learned After GGP Maintain barriers between SPE and parent. Segregate accounts. Cross default provisions -- should be modified to provide for a possible default to be called by lender, not an automatic default. 17

18 Case Law Post GGP DB Capital Case In re DB Capital Holdings, LLC, Nos. CO , , 2010 WL (10 th Cir. BAP Dec. 6, 2010). Debtor: manager-operated luxury condominium; two members, one affiliated with Manager. Debtor defaulted on loan with lender. Lender commenced a receivership action in state court. Manager commenced Chapter 11 bankruptcy case for Debtor. Independent member filed motion to dismiss -- bad faith filing and no authorization. 18

19 DB Capital Case (Cont.) Case Law Post GGP (Cont.) Bankruptcy Court -- No authority to commence case; BAP affirmed. Look to state law regarding authority to commence case. In DB Capital case (Colorado law), operating agreement controlled issue. Relevant provision: expressly bars Debtor from filing bankruptcy petition unless consented to by both members. Manager: prohibition was against public policy; prohibition was for lender. Cases cited concerned agreement by Debtor with third parties, not among members. No coercion by lenders. 19

20 DB Capital Case (Cont.) Case Law Post GGP (Cont.) Even if provision in the operating agreement was disregarded, Manager still did not have authority to file bankruptcy petition. Operating Agreement provided Manager had to conduct and operate its business as presently conducted. Could not do this in bankruptcy. Debtor is fiduciary for estate, subject to court oversight. 20

21 DB Capital Case (Cont.) Case Law Post GGP (Cont.) Manager s powers -- management of affairs of business in ordinary course. Filing bankruptcy outside of powers. Bankruptcy Court: filing of petition constitute[d] an act preventing the carrying on of ordinary business of the debtor even though the Debtor was able to continue to conduct business. Bankruptcy Court: both members had to consent to filing. 21

22 In re JER/Jameson Case Case Law Post GGP (Cont.) In re JER/Jameson Mezz Borrower II, LLC, 461 B.R. 293 (Bankr. D. Del. 2011). Debtor was a mezzanine borrower formed as part of capital structure to acquire a chain of economy hotels (Jameson & Signature Inns). Debtor and its affiliates defaulted on the debt. Debtor filed for bankruptcy on the eve of lender s scheduled UCC sale of Debtor s ownership interest in its operating (property owner) subsidiary -- Debtor s affiliates filed a few days after. Lender filed motion to dismiss under Section 1112(b) for bad faith filing. 22

23 Case Law Post GGP (Cont.) In re JER/Jameson Case (Cont.) Bad Faith Bankruptcy Court applied factors laid out by Delaware District Court ( Primestone factors ), and determined that there was: (1) Only one asset held by Debtor; (2) few if any unsecured creditors; (2) no pressure placed by unsecured creditors on Debtor before filing; (3) petition filed on eve of bankruptcy solely to obtain automatic stay; and (4) Debtor had no cash or income and no chance of reorganization -- sole creditor would oppose any plan. 23

24 Case Law Post GGP (Cont.) In re JER/Jameson Case (Cont.) Valid Reorganization Purpose? Bankruptcy Court considered Debtor and affiliated debtors holistically to determine if Debtor could be rehabilitated. Court held Debtor had one creditor/one asset -- absent substantive consolidation, Debtor cannot confirm plan over lender s objection -- no accepting class. Debtor has no chance of confirming plan. Court does not have to wait until a plan is proposed to dismiss case. Case can be dismissed under 1112(b)(4)(A) on grounds that debtor does not have reasonable likelihood of rehabilitation, together with continuing loss. 24

25 Case Law Post GGP (Cont.) In re Zais Invesment Grade Limited VII (Zing VII) Case In re Zais Investment Grade Limited VII, 455 B.R. 839 (Bankr. D.N.J. 2011). Debtor was a Cayman Islands incorporated SPE created to issue collateralized debt obligations ( CDOs ). Debtor issued notes, used proceeds to acquire securities (mostly other CDOs), and pledged security as collateral to noteholders ( CDO Squared ). Covenant default occurred under indenture, which triggered requirement that indenture trustee take possession of collateral securities and distribute collected monies. Creditors, who bought notes post-default, filed involuntary petition to force liquidation of assets. 25

26 In re Zing VII Case (Cont.) Debtor s Eligibility Case Law Post GGP (Cont.) Section 109(a) - [O]nly a person that resides or has a domicile, a place of business, or property in the United States... may be a debtor... Bankruptcy Court: Debtor had a place of business in U.S. Place of business if person conducts business in U.S. or business is conducted in U.S. on person s behalf. Collateral manager, collateral administrator, and trustee services all performed in U.S. 26

27 In re Zing VII Case (Cont.) Case Law Post GGP (Cont.) Debtor s Eligibility (Cont.) Bankruptcy Court deemed Debtor to have property in U.S. Collateral securities and cash were held or registered in U.S. No Abstention/Dismissal for Improper Purpose or Bad Faith Bankruptcy Court: Liquidation is an appropriate purpose of a chapter 11 case. Absolute Priority Rule: Classes of unsecured creditors and equity interests can be wiped out so long as no junior claim or equity interest receives anything. 27

28 In re Zing VII Case (Cont.) Case Law Post GGP (Cont.) No Abstention/Dismissal for Improper Purpose or Bad Faith (Cont.) Creditors plan alleged that, even under best case scenario, runoff collection would result in no creditors beyond senior tranche of noteholders receiving payment. Bankruptcy Court: If creditors valuation is incorrect, and junior tranches might be in the money, then the Court can simply refuse to confirm the plan. No reason to dismiss case before confirmation has been heard. Because liquidation would realize greatest value for senior tranche creditors without negatively affecting junior holders -- filing was in good faith. 28

29 In re Zing VII Case (Cont.) Case Law Post GGP (Cont.) No Abstention/Dismissal for Improper Purpose or Bad Faith (Cont.) Bankruptcy Court: Dismissed significance of the fact that the petitioning creditors acquired their notes post-default, when the requirement of the indenture that the indenture trustee hold the collateral had already become effective. Indenture provisions only barred indenture trustee and junior noteholders from filing involuntary petition. Bar expires 1 year and 1 day after senior noteholders paid in full. Meant to be benefit for senior noteholders, not limitation. 29

30 In re Zing VII Case (Cont.) Case Law Post GGP (Cont.) Lessons Learned Offshore SPEs not necessarily outside jurisdictional reach. Pay attention to drafting: door left open in indenture agreement for senior noteholders to file involuntary petition. 30

31 In re Doctors Hospital Case Case Law Post GGP (Cont.) In re Doctors Hospital of Hyde Park, Inc., 463 B.R. 93 (Bankr. N.D. Ill. 2011). On remand from 7 th Circuit decision in Paloian v. LaSalle Bank, NA, 619 F.3d 688 (7th Cir. 2010). MMA Funding ( MMA ) was a wholly owned subsidiary of Debtor. Intended to be a bankruptcy remote entity. Debtor transferred accounts receivable to MMA prior to filing, as security for a revolving loan. Trustee moved for partial summary judgment seeking determination of whether MMA was a bankruptcy remote entity. 31

32 Case Law Post GGP (Cont.) In re Doctors Hospital Case (Cont.) Bankruptcy Court denied motion for summary judgment -- more facts needed to determine whether MMA was bankruptcy remote entity. Bankruptcy Court did an extensive analysis of what constitutes a bankruptcy remote entity. Key point: Bankruptcy Court applied a broader standard for testing legitimacy of bankruptcy remote entities. i.e., a need to show an operational function and independence as well as intent and documentary formalities. 32

33 Case Law Post GGP (Cont.) In re Doctors Hospital Case (Cont.) Seventh Circuit opinion: The separate entity must be, well, separate. It must buy assets and manage assets in own interest. Suggested MMA lacked the following usual attributes of a bankruptcy remote entity: 99% of equity in MMA owned by Debtor (lack of independence). MMA had no office, phone number, or letter head. MMA did not file tax returns or prepare financial statements. Debtor carried accounts receivable on books as corporate asset. 33

34 B. Bad Boy Recourse Guaranties Bad Boy Guaranties - Generally Many commercial mortgage loans structured as non-recourse loans. Bad-boy or non-recourse carve-out guaranty. Prohibited acts: Waste, fraud, etc. Bankruptcy by borrower. Used as a deterrent. 34

35 Extended Stay In re Extended Stay Inc., Case No (JMP) (2009). The largest owner and operator of mid-price extended stay hotels in the United States. June, 2007: Blackstone sold Extended Stay for $8 billion ($600 million of equity and $ 7.4 billion of debt). David Lichtenstein and Lightstone Holdings executed bad boy guaranties. June 15, Extended Stay filed bankruptcy. 35

36 Extended Stay (Cont.) Extended Stay -- prepackaged plan proposed: equity interests extinguished. formation of new holding company ( NewCo ). NewCo indemnify Lichtenstein and Lightstone up to $100,000,000 for violating bad boy guaranty. Lenders accepting benefits under plan would release Lichtenstein and Lightstone. Post-bankruptcy: multiple lawsuits against Lightstone and Lichtenstein on Guaranty. Removal of actions to Bankruptcy Court. Lenders seek remand. 36

37 Extended Stay Quick Facts Extended Stay Cont. Lightstone and Lichtenstein opposed remand: Actions arise in the bankruptcy cases. Bad boy guaranty against public policy. Bankruptcy Court:* no subject matter jurisdiction over bad boy guaranty. Standard contract case. No arise in or related to jurisdiction. Public policy only minimal relevant -- Extended Stay filed for bankruptcy. Appeal taken by Lightstone and Lichtenstein. *In re Extended Stay Inc., 418 B.R. 49 (Bankr. S.D.N.Y. 2009). 37

38 District Court:* Affirmed in part. State court actions: Not core. Extended Stay Cont. No arise in or arising under jurisdiction. However, there was related to jurisdiction. Claims could possibly have effect on Debtors estates because of Debtor Indemnification of litigation expenses incurred in enforcing the guaranties. Related to jurisdiction not exclusive; abstention appropriate; remand warranted. * In re Extended Stay, Inc., 435 B.R. 139 (S.D.N.Y. 2010) 38

39 Non-Bankruptcy Court Cases Upholding Bad Boy Guaranties Lightstone and Garrison Cases Bank of America, N.A. v. Lightstone Holdings, LLC, 2011 WL (N.Y. Sup. July 14, 2011) (state court action flowing from Extended Stay). UBS v. Garrison Special, 2011 WL (N.Y. Sup. March 8, 2011). Both cases involved bad boy guaranties triggered by bankruptcy filings. Both involved motions for summary judgment in lieu of complaint pursuant to CPLR CPLR 3213 available when action is based upon an instrument for payment of money only. 39

40 Non-Bankruptcy Court Cases Upholding Bad Boy Guaranties Cont. Lightstone and Garrison Cases (Cont.) Obligations under bad boy guaranties qualified as payment for money only. Guaranties did not require additional performance as condition precedent to payment. Garrison Court -- Guaranty not an unenforceable penalty. Both because guarantors waived right to assert defenses and because these types of guaranties are legitimate financing arrangements entered into by sophisticated parties. 40

41 Non-Bankruptcy Court Cases Upholding Bad Boy Guaranties Cont. Lightstone and Garrison Cases (Cont.) Public Policy Rejected defendant s argument that guaranties are unenforceable because they create conflict of interest between guarantor s self interest and fiduciary duty guarantor owes borrower. Not court s job to right the unfortunate state of real estate market. Garrison Court -- no distinction between these facts and corporate parent guaranteeing debt of subsidiary. 41

42 Non-Bankruptcy Court Cases Upholding Bad Boy Guaranties Cont. Cherryland and Gratiot Ave. Cases Wells Fargo Bank, NA v. Cherryland Mall Limited Partnership, 2011 WL (Mich. App. Dec. 27, 2011). Borrower was special purpose entity (SPE) which owned a mall -- mall used as collateral for loan. Borrower failed to make a mortgage payment. Lender foreclosed on mall and filed suit for deficiency against borrower and guarantor. Note, mortgage, and guaranty all stated that loan becomes fully recourse as to borrower or guarantor in event that borrower fails to maintain its status as a single purpose entity as required by, and in accordance with the terms and provisions of the[/this] Mortgage. 42

43 Non-Bankruptcy Court Cases Upholding Bad Boy Guaranties Cont. Cherryland and Gratiot Ave. Cases (Cont.) Court determined that in order for borrower to maintain SPE status, it had to comply with covenants in section of the mortgage entitled: Single Purpose Entity/Separateness. One covenant under section required borrower to remain solvent and pay its debts and liabilities as they come due in order to maintain SPE status. Borrower insolvent upon failing to pay mortgage. Bad boy provisions triggered. Guarantor on the hook. Court recognized its holding could spell economic disaster for Michigan business community, but stated it is not court s job to save litigants from bad bargains or their failure to read terms of a contract. 43

44 Non-Bankruptcy Court Cases Upholding Bad Boy Guaranties Cont. Cherryland and Gratiot Ave. Cases (Cont.) Gratiot Avenue Holdings, LLC v. Chesterfield Development Company, 2011 WL (E.D. Mich. Dec. 12, 2011). Identical facts to Cherryland. Note had a non-recourse carve-out for borrower failing to comply with Section 4.2 of mortgage. Section 4.2(j) of mortgage: Debtor shall not become insolvent or fail to pay its debts and liabilities from its assets as they become due. Borrower argued it must only pay debts and liabilities from its assets and since only asset was foreclosed on, it paid and did not breach. Court said that Borrower s argument impermissibly reads as they become due out of contract. Must pay debts and liabilities both from its assets AND as they become due. District Court held full recourse liability triggered. Shot down public policy arguments. 44

45 Non-Bankruptcy Court Cases Upholding Bad Boy Guaranties Cont. Cherryland and Gratiot Ave. Cases (Cont.) Michigan s Nonrecourse Mortgage Loan Act (Public Act 67 of 2012) (Enacted March 29, 2012) Enacted in response to Cherryland. Prohibits post-closing solvency covenants in non-recourse loans from being grounds of a non-recourse carveout or as the basis for claim against borrower, guarantor, or other surety. Act applies to all non-recourse loans in existence (retroactively) and also to any action pending on effective date of Act. 45

46 Six Ventures 111 Debt Acquisition Holdings, LLC v. Six Ventures Ltd., No , 2011 WL (6 th Cir. Feb. 7, 2011). Bad-boy guaranty case. Guaranty triggered if any guarantor consents to, aids, solicits, supports or otherwise cooperates or colludes to cause... or fails to contest a bankruptcy filing. Debtor defaulted on loan. 46

47 Six Ventures Cont. One guarantor authorized bankruptcy filing. Bankruptcy filing not authorized. Other guarantors argued no liability under bad boy guaranty. Bad-boy guaranty found enforceable. Other guarantors did not adequately contest filing. Even if they did, guaranty triggered when other guarantor filed petition. 47

48 Bad Boy Guaranties - Lessons Learned Bad boy Guaranties Bankruptcy-remote not bankruptcy proof. Generally upheld. 48

49 C. Intercreditor Agreements and Cram Down Cram Down - Generally Cram-down -- Section 1129(b) of the Bankruptcy Code. Seeking confirmation over an objecting class of impaired creditors. Intercreditor Agreements - Generally In real estate lending matters, usually multiple tiers of lenders. Intercreditor agreements: priority of payments and relative rights of lenders. Provisions limiting subordinated lenders actions in bankruptcy. 49

50 C. Intercreditor Agreements and Cram Down (Cont.) Intercreditor Agreements - Generally (Cont.) Section 510(a) of the Bankruptcy Code: A Subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law. Enforcement of intercreditor agreement: In re ION Media Networks, Inc., 419 B.R. 585 (Bankr. S.D.N.Y. 2009). ION Media Case A distressed investor ( Cyrus ) purchased second lien debt at a steep discount. Intercreditor agreement limited rights of second lien holders. Cyrus very active in the bankruptcy case, objected to disclosure statement and plan. 50

51 C. Intercreditor Agreements and Cram Down (Cont.) ION Media Case (Cont.) Cyrus: plan unconfirmable, value of certain assets going to senior lenders not Collateral. Bankruptcy Court: Cyrus lacked standing to challenge senior lenders liens and claims. Cyrus agreed in intercreditor agreement to remain silent regarding such disputes. Intercreditor agreement enforceable under section 510(a) of the Bankruptcy Code. 51

52 C. Intercreditor Agreements and Cram Down (Cont.) ION Media Case (Cont.) Cyrus also lacked standing to object to confirmation. Plan consistent with intercreditor agreement. Cyrus sought to protect rights as unsecured creditor. Bankruptcy Court: Cyrus misreading provision of intercreditor agreement. Cyrus argued that it should be allowed to object to plan pursuant to provision of intercreditor agreement granting rights and remedies to general unsecured creditors, but that provision explicitly incorporated the section of the agreement prohibiting objection to the plan by second lien holders. 52

53 TCI 2 Holdings TCI 2 Holdings Case In re TCI 2 Holdings, LLC, 428 B.R. 117 (Bankr. D. N.J. 2010). Intercreditor agreement not enforced. Debtors operated three hotel/casinos. The First Lien Lenders -- $488 million in claims. Second lien lenders -- $1.25 billion in claims. First Lienholder and Second Lienholders parties to an intercreditor agreement. 53

54 TCI 2 Holdings Cont. Two plans of reorganization filed. By First Lienholder. By Debtors and an ad hoc committee of Second Lienholders ( AHC/Debtors ). First Lienholder: AHC/Debtors Plan violated the intercreditor agreement. Second Lienholders receiving value in violation of intercreditor agreement. Bankruptcy Court: Review Section 1129(b)(1) of the Bankruptcy Code. Introductory phrase: Notwithstanding section 510(a) of this title

55 TCI 2 Holdings Cont. Bankruptcy Court: If nonconsensual plan meets all requirements of Section 1129(a) and (b), it will confirm plan. Notwithstanding section 510(a) of this title in Section 1129(b) removes section 510(a) from the scope of 1129(a)(1). Violation of intercreditor agreement not addressed as part of plan. Did not preclude State Court litigation. AHC/Debtors Plan confirmed -- more widely supported. 55

56 TCI 2 Holdings Cont. First Lienholders sued Second Lienholders. Matter settled: Mutual releases. Provisions of New Term Loan modified. 56

57 Case Law Post TCI 2 Holdings In re Croatan Surf Club Case In re Croatan Surf Club, LLC, 2011 WL (Bankr. E.D.N.C. Oct. 25, 2011). Debtor owned condominium building. Intercreditor agreement subordinated priority and right to payment. Followed TCI 2 Holdings and focused on language of 1129(b)(1): Notwithstanding section 510(a)... Bankruptcy Court held: Section 510(a) was not intended to give parties carte blanche to override other provisions of the Bankruptcy Code. [A] court can confirm a plan which disrupts bargained for priority, and thus is inconsistent with the terms of a subordination agreement, as long as it is fair and equitable and does not discriminate unfairly. 57

58 Case Law Post TCI 2 Holdings (Cont.) In re Zing VII Case See Part I.A Bankruptcy Remoteness, supra, for facts of case. Junior noteholders argued indenture agreement must be enforced under section 510(a). (citing ION Media). Bankruptcy Court swiftly dealt with this argument: One need only note that section 1129(b)(1) permits confirmation of a plan notwithstanding section 510(a). (citing TCI 2 Holdings). 58

59 Case Law Post TCI 2 Holdings (Cont.) In re SW Boston Hotel Case In re SW Boston Hotel Venture, LLC, et al., 460 B.R. 38 (Bankr. D. Mass. 2011). Intercreditor agreement not enforced. Debtor owned a W Hotel and condominiums. First Lienholder (Prudential) -- $180.8 million in claims. Second Lienholder (City of Boston) -- $10.7 million in claims. Intercreditor Agreement between First and Second Lienholders. Second Lienholder agreed to assign its voting rights to First Lienholder in event of bankruptcy. 59

60 Case Law Post TCI 2 Holdings (Cont.) In re SW Boston Hotel Case (Cont.) First Lienholder: Second Lienholder s vote in favor of Plan violated the intercreditor agreement. First Lienholder sought to strike Second Lienholder s vote and cast vote against Plan on behalf of Second Lienholder pursuant to intercreditor agreement. Bankruptcy Court: Assignment of voting rights not enforceable. Despite section 510(a), subordination agreements cannot nullify provisions of the Bankruptcy Code. Regardless of voting issue in subordination agreement, Bankruptcy Court crammed down plan over First Lienholder s objection because First Lienholder would retain its lien on condos until claim is paid in full and would receive indubitable equivalent. 60

61 Intercreditor Agreements and Cram Down - Lessons Learned May be different rules for intercreditor agreements depending on jurisdiction. No reference to Section 510(a) in Section 1129(a)(1). ION Media - intercreditor agreement enforced. TCI 2 Holdings, In re Croatan Surf Club, & In re Zing VII - Cram down plan - intercreditor agreement not enforced. For some rights, such as voting rights, despite section 510(a), courts might hold subordination agreements cannot nullify provisions of the Bankruptcy Code. 61

62 Arthur J. Steinberg Partner King & Spalding LLP 1185 Avenue of the Americas New York, New York Phone: Fax:

63 SINGLE ASSET REAL ESTATE CASES The court recognizes the difficulties presented by 1129(b)(2)(A) for real estate developers trying to reorganize, but Congress has decided that debtors must bear the risk of reorganization by contributing additional capital and/or pledging additional collateral to their undersecured creditors before debtors may enjoy the benefits of a confirmed plan. Presented by: Patrick E. Mears Barnes & Thornburg LLP (616) pmears@btlaw.com In re Saguaro Ranch Development Corporation, 2011 WL (Bankr. D. Ariz. June 1, 2011) 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

64 I. Introduction A. History of Single Asset Chapter 11 Cases Under the Federal Bankruptcy Code 1. These cases proliferated during the Recession 2. Borrowers/mortgagors sought (i) to delay liquidation proceedings and reorganize; or (ii) to delay liquidation to sell their projects in the absence of foreclosure Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

65 I. Introduction (cont d) 3. Substantial body of case law and commentary on single asset cases arose during this period concerning a. Dismissal of cases for bad faith filings; abstention under section 305 b. Use of cash collateral (e.g. rents or hotel revenues) subject to rent assignments/ security agreements c. Obtaining relief from the automatic stay for cause under 362(d)(1) Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

66 I. Introduction (cont d) d. Creation of artificially impaired class for confirmation under section 1129(a)(10) e. Classification of claims for plan purposes (viz., gerrymandering ) f. Section 1111(b)(2) elections by undersecured creditors to block plan confirmation g. Feasibility of the plan under 1129(a)(11) h. Fair and equitable treatment of claims and cramdown of claims, including new value contribution under 1129(b)(2) Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

67 I. Introduction (cont d) 4. Single asset real estate cases diminished in frequency and importance upon the recovery of the commercial real estate market in the mid-1990s Amendments to the Bankruptcy Code restricted somewhat the ability of single asset real estate debtors to reorganize in Chapter 11: Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

68 I. Introduction (cont d) a. Definition of single asset real estate in 11 U.S.C. 101(51B): real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property or activities incidental. See, e.g., In re Meruelo Maddox Properties, Inc., F.3d, 2012 WL (9 th Cir. Jan. 27, 2012); In re Whispering Pines Estates, 341 B.R. 134 (Bankr Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

69 I. Introduction (cont d) N.H. 2006); In re Kkemko, Inc., 181 B.R. 47 (Bankr. S.D. Ohio 1995); In re Philmont Development Co., 181 B.R. 220 (Bankr. E.D. Pa. 1995); In re Scotia Pacific Co., LLC, 508 F.3d 214 (5th Cir. 2007); In re: Prairie Hills Golf & Ski Club, 255 B.R. 228 (Bankr. D. Neb. 2000); In re CBJ Dev., Inc., 202 B.R. 467 (Bankr. 9 th Cir. 1996) for representative cases construing this definition. See also Kenneth N. Klee, One Size Fits Some: Single Asset Real Estate Cases, 87 Cornell L. Rev (2002) Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

70 I. Introduction (cont d) b. Requirement of (a) timely filing (viz., (i) within 90 days after the petition date or such later date determined by the court for cause; or (ii) 30 days after bankruptcy court determines the debtor to be a single asset real estate debtor) of a plan of reorganization having a reasonable possibility of being confirmed within a reasonable time ; or (b) commencing monthly interest payments to the secured creditor from rents or other revenues generated by the project in an amount equal Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

71 I. Introduction (cont d) to interest at the then applicable nondefault contract rate... on the value of the creditor s interest in the realty. 11 U.S.C. 362(d)(3). See, e.g., In re Planet 10, L.C., 213 B.R. 478 (Bankr. E.D. Va. 1997); In re LDN Corp., 191 B.R. 320 (Bankr. E.D. Va. 1996); and In re National/Northway Ltd. Partnership, 279 B.R. 17 (Bankr. D. Mass. 2002) for representative cases applying this provision Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

72 I. Introduction (cont d) 6. With the revitalization of the commercial real estate market in the mid-1990s, single asset real estate cases diminished in importance and frequency. However, many of these cases have been recently commenced after the collapse of this market in the wake of the world financial crisis Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

73 II. Commencement of a SARE Chapter 11 Case and the Automatic Stay A. The commencement of these cases normally does not come out of the blue. They are often preceded by attempts by the secured creditor after default to collect rents generated by the subject realty and/or commencement of mortgage/deed of trust foreclosure proceedings. As will be discussed below, rents are sometimes not available to a single asset real estate debtor depending upon whether (i) a particular rent assignment is structured as an absolute assignment and not as one for security; or (ii) whether the secured creditor holding the rent assignment has taken action in accordance with the assignment contract and applicable state law to terminate the debtor s interest in rents prior to the case s commencement Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

74 II. Commencement of a SARE Chapter 11 Case and the Automatic Stay (cont d) B. Upon the commencement of a single asset real estate ( SARE ) bankruptcy case, the automatic stay provisions will be imposed to protect the debtor from the commencement and continuation of creditor actions to collect indebtedness and to realize upon liens in property of the estate that secure repayment of the debt. 11 U.S.C Thus, most creditor actions to exercise rights under rent assignments where the debtor still holds an interest in the rents will be prohibited by the automatic stay. Most actions to foreclose real estate mortgages and deeds of trust will also be enjoined by the automatic stay and, to the extent that they take place after imposition of the stay, the foreclosure sale will be deemed void or voidable. See, e.g., ACands, Inc. v. Travelers Cas. & Sur. Co., 435 F.3d 252 (3d Cir. 2006). The automatic stay s function is to provide a breathing spell during which a Chapter 11 debtor can attempt to reorganize its business pursuant to a confirmed plan. H.R. Rep. No. 595, 95th Cong., 1st Sess. 340 (1977) Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

75 II. Commencement of a SARE Chapter 11 Case and the Automatic Stay (cont d) C. Creditors may file motions for relief from the automatic stay on the grounds described in 11 U.S.C. 362(d). As described above, if a SARE debtor fails to comply with the requirements of section 362(d)(3) by failing (i) to timely file a feasible reorganization plan; or (ii) to timely commence making monthly interest payments to the secured creditor, then the bankruptcy court shall grant relief from the [automatic] stay...by terminating, conditioning, or limiting the stay as to such action of such creditor. 11 U.S.C. 362(d) Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

76 II. Commencement of a SARE Chapter 11 Case and the Automatic Stay (cont d) D. The more orthodox grounds that would permit a secured creditor of a SARE debtor to obtain relief from the automatic stay are set forth in subsections (1) and (2) of section 362(d) of the Bankruptcy Code. The first such ground is for cause, including lack of adequate protection of the secured creditor s lien or security interest in the project and/or the rents generated therefrom. A relatively recent decision of the Bankruptcy Appellate Panel of the Sixth Circuit Court of Appeals has held that the offer by a SARE debtor to grant a replacement lien in after-acquired, post-petition rents to permit the debtor to use those rents to pay postpetition operating expenses and other debts did not constitute adequate protection where there was no equity cushion in the debtor s property. In re Buttermilk Towne Center, LLC, 442 B.R. 558 (6th Cir. BAP 2011) Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

77 II. Commencement of a SARE Chapter 11 Case and the Automatic Stay (cont d) The failure to provide adequate protection to such a creditor will normally prohibit the debtor from using this cash collateral during the SARE case and should result in a lifting of the automatic stay to permit the secured creditor to collect the rents. See also In re Smithville Crossing, LLC, 2011 WL (Bankr. E.D.N.C. Sept. 28, 2011); In re Murray, 2011 WL (Bankr. E.D.N.C. May 24, 2011); In re Union-Go Dairy Leasing, LLC, 2010 WL (Bankr. S.D. Ind. Mar. 6, 2010). In addition, the commencement of an SARE Chapter 11 case by a debtor with few assets and little or no business may constitute a lack of good faith that could result in lifting the automatic stay upon the motion of a secured creditor for cause under 11 U.S.C. 362(d)(1). See, e.g., In re Laguna Associates Ltd Partnership, 30 F.3d 734 (6th Cir. 1994); In re JER/Jameson Mezz Borrower II, LLC, 461 B.R. 293 (Bankr. D. Del. 2011) Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

78 II. Commencement of a SARE Chapter 11 Case and the Automatic Stay (cont d) E. The other, orthodox basis for a secured creditor seeking relief from the automatic stay is where (i) the debtor lacks equity in the collateral; and (ii) where the collateral is not necessary for the debtor s effective reorganization. 11 U.S.C. 362(d)(2). In determining whether the debtor lacks equity in the collateral, all encumbrances on the property are considered. In determining whether the property is necessary for the debtor s effective reorganization, the ability of the debtor to reorganize must be more than fanciful and be based on verifiable research and financial analysis. In re Pegasus Agency, Inc., 101 F.3d 882 (2d Cir. 1996). See also In re Grand Traverse Development Co. Ltd. Partnership, 150 B.R. 176 (Bankr. W.D. Mich. 1993) Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

79 III. Use of Property of the Estate and Granting Adequate Protection A. Upon the commencement of a SARE Chapter 11 case, an estate is created that will consist of property of the estate within the meaning of 11 U.S.C. 541(a). Property of the estate will consist of tangible and intangible real and personal property in which the debtor has an interest that is substantial. In the event that the debtor suffers the loss of its interest in the property prior to the commencement of the bankruptcy case, then that property is no longer property of the estate and, thus, cannot be used by the debtor during the course of its Chapter 11 case Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

80 III. Use of Property of the Estate and Granting Adequate Protection (cont d) B. An example of the foregoing involves rents that are the subject of a prepetition assignment for the benefit of a creditor that is either (i) an absolute assignment of rents and enforced as such under applicable state law; or (ii) an assignment of rents as security where the creditor has taken all necessary steps under applicable state law to terminate the debtor s interests in those rents prior to the petition date. Bankruptcy decisions that enforce absolute assignments and prohibit the debtor s use of rents include In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995). Cf., Soho 25 Retail, LLC v. Bank of America, 2011 WL (Bankr. S.D.N.Y. March 31, 2011). Contra, LT Propco, LLC v. Carousel Ctr. Co., L.P., 68 A.D.3d 1695 (N.Y. App. Div. 4th Dep t 2009); In re Senior Housing Alternatives, Inc., 444 B.R. 386 (Bankr. E.D. Tenn. 2011) and the cases and commentary cited therein. There are a few reported decisions, Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

81 III. Use of Property of the Estate and Granting Adequate Protection (cont d) primarily from Michigan, holding that the exercise of rights under an assignment of rents prior to the commencement of a bankruptcy case by the assignor results in the termination of the assignor s interest in those rents. Therefore, they are not deemed to be property of the estate and cash collateral subject to use by the debtor. See, e.g., In re Mount Pleasant Ltd. Partnership, 144 B.R. 727 (Bankr. W.D. Mich. 1992); In re Woodmere Investors Ltd. Partnership, 178 B.R. 346 (Bankr. S.D.N.Y. 1995) (applying Michigan law). Contra, In re Newberry Square, Inc., 175 B.R. 910 (Bankr. E.D. Mich. 1994) Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

82 III. Use of Property of the Estate and Granting Adequate Protection (cont d) C. Section 363(e) of the Bankruptcy Code prohibits a debtor from using, selling or leasing property of the estate subject to a lien unless the lienor consents to such use, sale or lease or unless the bankruptcy court permits such action after notice and a hearing and after granting adequate protection to the creditor s lien. As noted above, the recent decision of In re Buttermilk Towne Centre, LLC, supra, held that the grant of replacement liens in postpetition rents subject to a valid, prepetition rent assignment does not constitute adequate protection where the debtor lacks equity in its property Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.