Document Page 1 of 12 UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS EASTERN DIVISION ) In re ) ) Chapter 11 SW BOSTON HOTEL VENTURE LLC, et al., 1 ) Case No. 10-14535 (JNF) ) Debtors. ) Jointly Administered ) OBJECTION BY THE PRUDENTIAL INSURANCE COMPANY OF AMERICA TO DEBTORS CONTINUED USE OF CASH COLLATERAL As and for its Objection (this Objection ) to the Debtors continued use of cash collateral pursuant to the Debtors Motion for Authorization of (1) the Interim and Permanent Use of Cash Collateral, (2) the Granting of Replacement Liens, (3) Entry of Scheduling Order Regarding Continued Use of Cash Collateral and (4) Additional Relief [Docket No. 9] (the Motion ), The Prudential Insurance Company of America on behalf of and solely for the benefit of, and with its liability limited to the assets of, its insurance company separate account, PRISA ( Prudential ), by and through its undersigned counsel, respectfully states as follows: PRELIMINARY STATEMENT Despite having failed to meet any of their projections for the sale of new Condominiums, the Debtors brazenly ask this Court for a seven month extension on the use of cash collateral. In support of their request, the Debtors claim that they had positive net cash flow from operations of $900,000 for the period ending October 31, 2020 - but that figure is grossly misleading. The Debtors achieved this positive cash flow only as a result of excluding condominium fees and a 1 The Debtors are SW Boston Hotel Venture LLC (Case No. 10-14535-JNF), Auto Sales & Service, Inc. (Case No. 10-14528-JNF), General Trading Company (Case No. 10-14532-JNF), Frank Sawyer Corporation (Case No. 10-14533-JNF), 100 Stuart Street, LLC (Case No. 10-14534-JNF), 30-32 Oliver Street Corporation (Case No. 10-16173-JNF), General Land Corporation (Case No. 10-16174-JNF), and 131 Arlington Street Trust (Case No. 10-16177-JNF).
Document Page 2 of 12 portion of the real estate taxes on unsold units. If one were to include those amounts, the Debtors have negative cash flow from operations of approximately $330,000. 2 Despite being more than $5.7 million behind in forecasted versus actual proceeds from the sale of condominium units through November 14, 2010, the Debtors continue to blindly assert that Prudential is adequately protected. However, that is not the case. As losses continue to mount, the collateral securing Prudential s Loan continues to erode. Just as the Debtors could not meet their projections through October 31, 2010, they will not meet their projections through June 30, 2011. Seven more months of the status quo simply does not provide Prudential with the protection Congress intended to give secured creditors when it enacted Section 361 of the Bankruptcy Code. The Debtors assert that Prudential has no right to complain on the basis that if you consider the collateral package granted to Prudential by all of the Debtors, Prudential is oversecured. If that is the case, Prudential is entitled to postpetition interest on its secured claim. BACKGROUND 1. Prudential, on the one hand, and SW Boston Hotel Venture LLC ( SW Boston ) and the other parties thereto, on the other hand, entered into the Prudential Loan Agreement and the other Loan Documents (as defined in the Prudential Loan Agreement), dated as of January 15, 2008, pursuant to which Prudential agreed to lend SW Boston up to $190.2 million (the Prudential Loan ) for the construction of the hotel and condo project (the W Hotel and Residences ) located at 100 Stuart Street, Boston, comprised of a W Hotel, 123 Condominiums above the Hotel (the Condominiums ), a theme bar, Bliss spa, a restaurant and garage. 2. To secure SW Boston s obligations under the Prudential Loan Agreement, SW 2 Attached as Exhibit A is a cash flow statement for the period from April 28, 2010 through October 31, 2010, adjusted to include the taxes and condominium fees on the unsold condominium units. 2
Document Page 3 of 12 Boston and Prudential entered into a Mortgage, Security Agreement, Fixture Filing and Assignment of Sales Contracts and Deposits (together with the Prudential Loan Agreement and all exhibits, schedules, related documents, and supplements thereto, and as may be amended from time to time, the Prudential Loan Documents ), granting Prudential a first priority security interest and mortgage on SW Boston s real and personal property, and the proceeds of all of the foregoing (the Prudential Security Interest ). As of the date hereof, Prudential holds a valid, perfected, first priority security interest in the W Hotel and Residences. This interest has not been challenged by the Debtors or any other party in interest. 3. In addition to the Prudential Security Interest, the following parties, guaranteed and/or pledged collateral as security for the Prudential Loan as follows: Frank Sawyer Corporation ( FSC ) issued a Payment Guaranty, a Carveout Guaranty and a Completion Guaranty (collectively, the FSC Guarantees ) and executed pledge and control agreements with respect to a securities account. FSC also collaterally assigned its interest in the subscription agreement of the Frank Sawyer Trust; 30-32 Oliver Street Corporation granted Prudential a first priority mortgage on and an assignment of leases and rents from real property located at 25 and 27 Pinckney Street, Boston, Massachusetts and guaranteed FSC s obligations under the FSC Guarantees; Auto Sales & Services, Inc. guaranteed FSC s obligations under the FSC Guarantees and executed pledge and control agreements with respect to a securities account; General Trading Company guaranteed FSC s obligations under the FSC Guarantees and executed pledge and control agreements with respect to a securities account; SW Boston additionally executed pledge and control agreements with respect to two accounts at Sovereign Bank; 131 Arlington Trust guaranteed FSC s obligations under the FSC Guarantees and granted Prudential a first lien mortgage on real property located at 131 Arlington Street, Boston, Massachusetts; General Land Corporation guaranteed FSC s obligations under the FSC Guarantees and granted Prudential a first lien mortgage on real property located at 109 and 121-127 Arlington Street, Boston, Massachusetts; SE Berkeley Street, LLC and SE McClellan Highway, LLC obtained a letter of credit 3
Document Page 4 of 12 from Sovereign Bank in favor of Prudential (the Letter of Credit ); and 100 Stuart Street LLC pledged 100% of its membership interests in SW Boston Hotel Venture LLC. 4. On April 28, 2010 (the Petition Date ), certain of the Debtors filed petitions for relief under chapter 11. On June 4, 2010, the remaining Debtors filed their petitions for relief under chapter 11 (collectively, the Chapter 11 Cases ). 5. As of the Petition Date, the Debtors were indebted to Prudential in the principal amount of $180.8 million. Following the Petition Date, Prudential drew on the Letter of Credit in the amount of $17.3 million issued by Sovereign Bank in favor of Prudential as collateral for the Prudential Loan. 6. In addition to the Prudential Loan Agreement, SW Boston entered into a Subordinate Loan Agreement with the City of Boston (the City ), pursuant to which the City agreed to provide a $10,500,000 loan of HUD Section 108 funds (the City Loan ). The proceeds of the City Loan were intended to finance the completion of construction of certain facilities on the Property. 7. On the Petition Date, the Debtors filed the Motion seeking emergency relief. In response to the Motion, Prudential filed the Limited Objection and Reservation of Rights by the Prudential Insurance Company of America to the Debtors Motion for Authorization of (1) the Interim and Permanent Use of Cash Collateral, (2) the Granting of Replacement Liens, (3) Entry of Scheduling Order Regarding Continued Use of Cash Collateral and (4) Additional Relief [Docket No. 32] on May 4, 2010. Prudential and the Debtors subsequently reached a consensual resolution for interim use of Cash Collateral. 8. On May 5, 2010, this Court entered an Order Regarding Motion for Authorization of (1) The Interim and Permanent Use of Cash Collateral, (2) The Granting of Replacement 4
Document Page 5 of 12 Liens, (3) Entry of Scheduling Order Regarding Continued Use of Cash Collateral and (4) Additional Relief [Docket No. 48] (the Interim Order ). In the Interim Order, the Court limited the Debtors use of the proceeds of sales of the condominium units to payment of (i) the then owing HOA fees and utility costs, each on unsold units, (ii) closing costs associated with the sale of condominium units up to 8% of the adjusted gross condominium sales price and (iii) certain construction costs associated with the Hotel and the condominium project (collectively, the Prudential Funded Items ). The Court authorized and directed the Debtors to pay to Prudential the remaining balance of adjusted gross proceeds from the sale of the condominium units after the payment of the Prudential Funded Items. 9. One month later, however, concerned about the Debtors continued failure to meet its own weekly projections during the interim period, Prudential filed the Objection by Prudential Insurance Company of America to the Debtors Motion for Authorization of (1) the Interim and Permanent Use of Cash Collateral, (2) the Granting of Replacement Liens, (3) Entry of Scheduling Order Regarding Continued Use of Cash Collateral and (4) Additional Relief [Docket No. 105] dated June 1, 2010. 10. Again, Prudential and the Debtors reached a consensual resolution regarding the Debtors use of Cash Collateral. As a result of this resolution, on June 4, 2010, this Court entered the Agreed Order Regarding Motions for Authorization of (1) the Interim and Permanent Use of Cash Collateral, (2) the Granting of Replacement Liens, (3) Entry of Scheduling Order Regarding Continued Use of Cash Collateral and (4) Additional Relief [Docket No. 114] (the First Cash Collateral Order ) which authorized the use of Cash Collateral for the purposes of and in accordance with SW Boston s proposed budget filed with the Cash Collateral Order (the 5
Document Page 6 of 12 First Budget ). 3 Pursuant to the First Cash Collateral Order, Prudential was to receive the proceeds from any Condominium sales net of (i) any due and owing condominium fees, (ii) up to 8% of closing costs associated with any sales, and (iii) marketing and selling expenses. First Cash Collateral Order, 1. In addition, Prudential and the City were granted replacement liens purportedly on the same types of post-petition property as pre-petition property (the Replacement Liens ). Id. at 6. 11. On August 13, 2010, the Debtors filed the Second Statement Regarding Continued Use of Cash Collateral [Docket No. 219] (the Second Cash Collateral Statement ). Attached as an exhibit to the Second Cash Collateral Statements was a budget projecting operations, sales, and other cash outflow and inflow over the 25 weeks commencing as of August 9, 2010 (the Second Budget ). 12. Prudential, again concerned about the Debtors continued failure to meet their own projections, filed the Objection by Prudential Insurance Company of America to the Debtors Motion for Authorization of (1) the Interim and Permanent Use of Cash Collateral, (2) the Granting of Replacement Liens, (3) Entry of Scheduling Order Regarding Continued Use of Cash Collateral and (4) Additional Relief [Docket No. 225] dated August 16, 2010. 13. On August 24, 2010, this Court entered the Agreed to Order Regarding Motions for Authorization of (1) the Interim and Permanent Use of Cash Collateral, (2) the Granting of Replacement Liens, (3) Entry of Scheduling Order Regarding Continued Use of Cash Collateral and (4) Additional Relief [Docket No. 259] attaching the Second Budget as an exhibit. 14. The Debtors have grossly missed the performance in their primary revenue 3 On June 29, 2010, this Court entered the Agreed Order Regarding Motions for Authorization of (1) the Interim and Permanent Use of Cash Collateral, (2) the Granting of Replacement Liens, (3) Entry of Scheduling Order Regarding Continued Use of Cash Collateral and (4) Additional Relief in relation to 30-32 Oliver Street Corporation, General Land Corporation, and 131 Arlington Street Trust [Docket No. 165] upon the same terms and conditions as the First Cash Collateral Order. 6
Document Page 7 of 12 generating category, Condominium sales proceeds, projected in their Second Budget. The Second Budget projected $9.225 million from the sale of Condominiums for the period between August 9, 2010 through November 14, 2010. As of November 14, 2010, however, the Debtors were more than $2.2 million behind forecast versus actual sales proceeds. A comparison of the Second Budget to actual performance reveals a nearly 25% difference between projected and actual performance in the projected Condo Sales Proceeds category. 15. On November 10, 2010, the Debtors filed the Third Statement Regarding Continued Use of Cash Collateral [Docket No. 219] (the Third Cash Collateral Statement ). Attached as an exhibit to the Third Cash Collateral Statements was the Proposed Budget projecting operations, sales, and other cash outflow and inflow over the weeks and months commencing as of November 1, 2010 and ending June 30, 2011. Despite the Debtors ongoing and continued failure to meet the projections in their Second Budget, the Debtors seek an additional twenty-seven weeks of continued use of Cash Collateral based upon the Projected Budget and subject to the same terms and conditions of the prior orders. 4 OBJECTION I. The Debtors Have Failed to Provide Prudential with Adequate Protection 16. For the relief requested in the Motion to be granted, the Debtors must provide this Court with evidence that Prudential s interest in its collateral will be adequately protected. In any determination of adequate protection pursuant to 361 and 363, the debtor has the burden of proof on the issue of adequate protection. In re Harrington & Richardson, Inc., 48 B.R. 431, 433 (Bankr. Mass. 1985). Pursuant to section 363(e) of 11 U.S.C. 101 et seq. (the Bankruptcy Code ): 4 Also on November 10, 2010, the Debtors filed the Second Motion of the Debtors Pursuant to Sections 1121(d) and 362(d)(3) to Extension the Deadlines to File a Plan of Reorganization and Solicit Acceptances of a Plan [Docket No. 350] (the Second Exclusivity Motion ). 7
Document Page 8 of 12 11 U.S.C. 363(e). [o]n request of an entity that has an interest in property used, sold, or leased or proposed to be used, sold or leased the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest. 17. In turn, Section 361 of the Bankruptcy Code provides for three non-exclusive forms of adequate protection that may be offered by a debtor, including: (i) cash payments to the extent of the decline in the value of the interest in the property, (ii) additional or replacement liens to the extent that the stay results in a decrease in the value of the interest in the collateral, or (iii) compensation that will result in the creditor s realization of the indubitable equivalent of the interest in the property. 11 U.S.C. 361. 18. To date, the Debtors have not been able to adequately protect Prudential s interest as their actual performance of Condominium sales have been consistently under their projections. Nothing in the Projected Budget indicates that their performance will improve in the time period projected. See In re James River Assocs., 148 B.R. 790, 797 n. 11 (E.D. Va. 1992) (noting that it was proper for the Bankruptcy Court to reject the debtors arguments that increased bookings at the hotel the added value of a renovation provided a secured creditor with adequate protection where the debtor had previously failed to meet its projected schedule and the projections relied on by the debtor were speculative). Over the six month pendency of the Chapter 11 Cases, the Debtors have proven that their projections related to Condominium sales are inherently unreliable. 19. In order to claim that Prudential is adequately protected, the Debtors point to positive cash flow from operations but to reach such a result, the Debtors manipulate their projections and exclude fees and taxes that must be paid. Even if the Debtors were to all of a 8
Document Page 9 of 12 sudden achieve projections of the next month or two it is untenable for the Debtors to be given the right to use Cash Collateral through June 30, 2011 based on its historical performance. 20. The adequate protection in the form of Replacement Liens are of no value to Prudential and cannot protect its interest in the property. See 11 U.S.C. 361(2). Moreover, in the Motion by the Debtors Pursuant to 11 U.S.C. 1121(d) and 362(d)(3) to Extend the Deadlines to File a Plan of Reorganization and Solicit Acceptances of a Plan [Docket No. 203] (the First Exclusivity Motion ), the Debtors admitted that Prudential s interest in the Property is undersecured. See First Exclusivity Motion, 61 ( Since Prudential is undersecured as to each Debtor, it is not entitled to compensation for any delay in the payment of its claim, not is it entitled to post-petition interest or costs ). Thus, the Replacement Liens, offered to Prudential on the Property are of no value to Prudential. Kimbrough Inv. Co. v. Royal d Iberville Corp. (In re Royal d Iberville Corp.), 10 B.R. 37, 39 (Bankr. S.D. Miss. 1981) (debtor could not satisfy its adequate protection burden with property already subject to creditor s security interest); In re Swedeland Dev. Group, Inc., 16 F.3d 552, 565-67 (3d Cir.1994) (rejecting as adequate protection continued personal guarantees and liens on sales proceeds to which a creditor was already entitled); In re Pacific Lifestyle Homes, Inc., No. 08-45328, 2009 WL 688908 at *10 (Bankr. W.D. Wash. March 16, 2009) (replacement liens found inadequate where lenders deeds of trust already extended to those proceeds). Only liens in additional unencumbered collateral would serve as replacement liens and therefore serve as adequate protection. See Drubner v. Gaslight Vill., Inc. (In re Gaslight Vill., Inc.), 8 B.R. 866, 871 (Bankr. D. Conn. 1981) (junior liens on already encumbered property found insufficient protection). 21. As each Condominium is sold, no additional value is generated as the sale liquidates finite, consumable collateral on which Prudential already holds a valid and perfected 9
Document Page 10 of 12 lien. Further, the Condominiums that are being sold are being sold at prices lower than originally projected by the Debtors. The Debtors continued use of the Cash Collateral generated by the sale of the condominium units defeats the purpose of adequate protection. The Debtors on-going failure to meet their projections in compliance with their Budget and the resulting failure to grant Prudential adequate protection renders Prudential unable to consensually agree to the continued use of its Cash Collateral. 5 II. To the Extent this Court has Found Prudential is Oversecured, Prudential is Entitled to Postpetition Interest, Fees, and Costs. 22. To the extent that this Court determines that Prudential is oversecured, Prudential is entitled to postpetition interest and fees. Section 506(b) of the Bankruptcy Code provides: To the extent that an allowed secured claim is secured by property the value of which is greater than the amount of such claim, there shall be allowed to the holders of such claim, interest on such claim, and any reasonable fees, costs or charges provided for under the agreement under which such claim arose. 11 U.S.C. 506(b). Under the Bankruptcy Code, oversecured creditors are entitled to receive postpetition interest and loan-related fees and costs. United Sav. Ass n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 372 (1988). A creditor is oversecured when the value of its collateral exceeds the amount of its claim in which case postpetition interest and fees are allowable to the extent of that oversecurity. Id. at 372. 23. To date, accrued post-petition interest (excluding fees and expenses incurred in connection with the Chapter 11 Cases) totals approximately $9.5 million -- if one were to calculate that amount using default rate interest, post-petition interest (excluding fees and expenses) is at least $14.5 million. 24. If Prudential is oversecured as the Debtors continue to allege, then they are 5 Baybank-Middlesex v. Ralar Distrib., Inc., 69 F.3d 1200 (1st Cir. 1995) (stating that a finding that a creditor is adequately protected, made at an early hearing in a chapter 11 case cannot be binding at a later hearing to determine whether that protection ultimately proved inadequate). 10
Document Page 11 of 12 entitled to post-petition interest and loan related costs. [Remainder of page intentionally left blank] 11
Document Page 12 of 12 CONCLUSION The Debtors have failed to provide Prudential with adequate protection for its interest in the Property due to their failure to meet their own projections and to comply with the Cash Collateral Order. For these reasons and for the other reasons set forth herein, the Court should prohibit the Debtors continued use of Cash Collateral. Should this Court determine that Prudential is oversecured, Prudential requests any use of Cash Collateral be conditioned upon remittance of postpetition interest, fees, and costs to Prudential. Respectfully submitted, THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ Gina L. Martin Gina L. Martin (BBO# 643801) GOODWIN PROCTER LLP Exchange Place Boston, Massachusetts 02109 Telephone (617) 570-1000 Facsimile (617) 523-1231 Email: gmartin@goodwinprocter.com -and- Emanuel C. Grillo Meagan E. Costello GOODWIN PROCTER LLP The New York Times Building 620 Eighth Avenue New York, New York 10018 Telephone (212) 813-8800 Facsimile (212) 355-3333 Dated: November 15, 2010 Attorneys for The Prudential Insurance Company of America on Behalf of and Solely for the Benefit of, and with its Liability Limited to the Assets of, its Insurance Company Separate Account, PRISA 12
Case 10-14535 Doc 358-1 Filed 11/15/10 Entered 11/15/10 11:56:06 Desc Exhibit A Page 1 of 2 EXHIBIT A
Case 10-14535 Doc 358-1 Filed 11/15/10 Entered 11/15/10 11:56:06 Desc Exhibit A Page 2 of 2 Debtors' Results for Operations Section - April 28, 2010 to October 31, 2010 Week Beginning 4/28/2010 Week Ending 10/31/2010 Receipts Owner Distribution Hotel $ 2,200 Parking Income 559 Other receipts 274 Escrow Receipts 1,538 Reimbursement from Related Entities 845 Total Receipts $ 5,416 Disbursements Payroll, Payroll taxes, & Temps $ 778 Hotel Management Services 215 General Operating 719 Utilities on Unsold Units 31 Remaining build out 16 Remaining build out (Spa & Theme Bar) 1,552 Real Estate Taxes on unsold units 1) 71 1) Condo Fees on unsold units - Professional Fees 1,134 Total Disbursements $ 4,516 Net Cash Inflow (Outflow) from Operations excluding RE Taxes and Condo Fees $ 900 Less: Condo Fees on unsold units Less: Real Estate taxes on unsold units 2) 2) Net Cash Inflow (Outflow) from Operations including RE Taxes and Condo Fees $ (338) (886) (352) Notes: 1) Debtors' Exhibit A to Third Statement Regarding Continued Use of Cash Collateral excludes all condo fees and a portion of the real estate taxes on unsold units 2) Adjusted to reflect taxes and condo fees on unsold units