ALT Hotel, LLC v. Diamondrock Allerton Owner, LLC (In re ALT Hotel, LLC)

• Decision Date: 25 September 2012
• Docket Number: Adversary Nos. 11 A 1469,Bankruptcy No. 11 B 19401.,11 A 1651.
• Citation: 479 B.R. 781
• Parties: In re ALT HOTEL, LLC, Debtor. ALT Hotel, LLC, and Hotel Allerton Mezz, LLC, Plaintiffs, v. DiamondRock Allerton Owner, LLC, Defendant. Hotel Allerton Mezz, LLC, Plaintiff, v. Wells Fargo Bank, N.A., et al., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

479 B.R. 781

In re ALT HOTEL, LLC, Debtor.

ALT Hotel, LLC, and Hotel Allerton Mezz, LLC, Plaintiffs,

v.DiamondRock Allerton Owner, LLC, Defendant.

Hotel Allerton Mezz, LLC, Plaintiff,

v.Wells Fargo Bank, N.A., et al., Defendants.

Bankruptcy No. 11 B 19401.

Adversary Nos. 11 A 1469, 11 A 1651.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Sept. 25, 2012.

Neal L. Wolf, Dean C. Gramlich, Neal Wolf & Associates, LLC, Chicago, IL, for plaintiff ALT Hotel, LLC.

Michael J. O'Rourke, Michael C. Moody, O'Rourke & Moody, Chicago, IL, for plaintiff Hotel Allerton Mezz, LLC.

David W. Wirt, Michael J. Gaertner, Aaron C. Smith, Locke Lord LLP, Chicago, IL; Richard A. Chesley, Kimberly D. Newmarch, DLA Piper LLP (US), Chicago, IL, for defendants DiamondRock Allerton Owner, LLC, and Diamond Rock Hospitality Co.

George R. Dougherty, Jacob D. Smith, Grippo & Elden LLC, Chicago, IL, for defendant Wells Fargo Bank, N.A.

Jerry L. Switzer, Jr., Polsinelli Shughart PC, Chicago, IL; Brett D. Anders, Polsinelli Shughart PC, Kansas City, MO, for defendant U.S. Bank National Association.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

Two adversary proceedings in the Allerton Hotel bankruptcy case are before the court for ruling in different postures. One, ALT Hotel LLC, et al. v. Diamond–Rock Allerton Owner, LLC, No. 11 A 1469, is an action brought by the debtor and its parent against the debtor's senior secured creditor. Pending in the ALT Hotel adversary proceeding is the defendant's motion to dismiss all counts of the third amended complaint for failure to state a claim. The other, Hotel Allerton Mezz, LLC v. Wells Fargo Bank, N.A., et al., No. 11 A 1651, involves claims originally brought in an Illinois state court foreclosure action, removed to this court, and consolidated into a single amended complaint. Pending in the Hotel Allerton Mezz adversary proceeding is the court's suggestion that it lacks subject matter jurisdiction as well as the plaintiff's motion to consolidate the adversary proceeding with the ALT Hotel adversary proceeding.

For the reasons that follow, the motion to dismiss the third amended complaint in the ALT Hotel adversary proceeding will be granted in part and denied in part, and the Hotel Mezz adversary proceeding will be remanded to the state court for lack of jurisdiction. The motion to consolidate the two adversary proceedings will be denied as moot.

I. Background

A. The ALT Hotel Adversary Proceeding

The following facts are drawn from the third amended complaint in the ALT Hotel adversary proceeding, No. 1469, and are taken as true for purposes of the motion to dismiss under Rule 12(b)(6).¹Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 622 (7th Cir.2012).

In November 2006, an entity called Column Financial, Inc. made a $79 million loan, apparently to ALT Hotel, LLC (“the debtor”), secured by a mortgage on the well-known Allerton Hotel located at 701 N. Michigan Avenue in Chicago. (Third Am. Compl. ¶¶ 3, 19–20). That same year, at Column's direction, the debtor formed a bankruptcy remote “special purpose entity,” Alt Hotel Mezz, LLC. ( Id. ¶¶ 7, 11). Alt Hotel Mezz was intended to hold what is alleged to be “the membership interest” in the debtor ( id.), and the parties assume that Alt Hotel Mezz did in fact acquire the “membership interest” somehow and so became the debtor's “parent” ( id. ¶¶ 5, 7; DiamondRock Mem. at 3). Column had the debtor form Alt Hotel Mezz in order to securitize the mortgage loan. (Third Am. Compl. ¶¶ 7, 20).

In March 2007, Column proceeded with the securitization. (Third Am. Compl. ¶ 20). Column made a $10 million loan (“the mezzanine loan”) to Alt Hotel Mezz that was used to reduce the balance of the mortgage loan to $69 million. ( Id. ¶¶ 5, 8, 20). The mezzanine loan was secured by Alt Hotel Mezz's membership interest in the debtor. ( Id. ¶ 5). Column assigned the mezzanine loan to an entity called Hotel Allerton Mezz, LLC. ( Id.).²

The remaining $69 million mortgage loan was then split into two tranches. Tranche A, consisting of $40 million, was transferred to a securitization trust of which Key Bank, N.A., was the servicer. (Third Am. Compl. ¶ 20). Tranche B, the remaining $29 million, was sold to Wells Fargo Bank, N.A. ( Id.). Wells Fargo was also special servicer of Tranches A and B. ( Id. ¶ 21).

The mortgage loan was set to mature in November 2008. (Third Am. Compl. ¶ 21). The terms of the loan, however, permitted three one-year extensions of the maturity date provided the debtor met certain conditions. ( Id. at ¶¶ 21–22). The debtor sought a first extension on repayment, and Wells Fargo agreed. ( Id. ¶ 21). In 2009, the debtor sought a second extension. ( Id. ¶ 22). After initially negotiating the matter with the debtor, Wells Fargo refused to go along with a second extension. ( Id. ¶ 23). Wells Fargo took the position that the debtor was not entitled to a further extension because it had failed to maintain a “debt service coverage ratio” (“DSCR”) required under the loan agreement, one of the conditions for any extension of the maturity date. ( Id. ¶¶ 22–23, 30). When the debtor failed to pay the loan on the maturity date ( see id. ¶ 29), Wells Fargo treated the failure as a default ( id. ¶¶ 26, 29), and began negotiating with the debtor about the possibility of a deed in lieu of foreclosure ( id. ¶ 23). Wells Fargo also began assessing interest at a default rate. ( Id. ¶ 26).

In late December 2009, the debtor itself notified Wells Fargo that the mortgage loan was in default (Third Am. Compl. ¶ 24) and agreed to a deed in lieu of foreclosure under which the securitization trust or its assignee would take ownership of the hotel property ( id. ¶¶ 25, 37).³

That same month, the debtor also requested a “protective advance” of $400,000 from Wells Fargo. (Third Am. Compl. ¶¶ 24, 55). The purpose of the advance is not alleged. Wells Fargo later asserted the request for a protective advance as another default. ( See id. ¶¶ 35, 55–56).

On April 21, 2010, Wells Fargo formally declared a default in connection with the mortgage loan. (Third Am. Compl. ¶ 27). Nine days later, Wells Fargo filed an action in the Circuit Court of Cook County, Illinois to foreclose its mortgage on the hotel property. ( Id. ¶ 28). In its complaint, Wells Fargo alleged defaults based on the passage of the maturity date without full payment of the loan and on the request for a protective advance. ( Id. ¶¶ 29, 35, 55).

According to the debtor, the mortgage loan was not in material default. Wells Fargo had miscalculated the DSCR—and had done so deliberately for the purpose of “manufacturing a nonmonetary default”—by taking into account certain escrowed funds in determining net cash flow. (Third Am. Compl. ¶¶ 30–31, 33–34). As for the requested “protective advance,” the debtor asserts that it, too, was “contrived by Wells Fargo,” with the cooperation of Key Bank, Chartres, and Perry Capital, to give Wells Fargo an additional basis for asserting a default. ( Id. ¶ 38). The debtor concedes that the protective advance was a default but asserts the default was not material because the advance was reimbursed from hotel cash flow. ( Id. ¶ 36).

In May 2010, the month after the mortgage foreclosure action was filed, Wells Fargo transferred the mortgage loan to DiamondRock Allerton Owner, LLC (“DiamondRock”), an entity owned in some unspecified way by DiamondRock Hospitality Co. (Third Am. Compl. ¶¶ 13–14, 41). DiamondRock acquired the loan at the discounted price of $61 million for the purpose of acquiring the hotel property. ( Id. ¶¶ 39–41, 45). Wells Fargo used the $61 million from the sale to extinguish the Tranche A debt and to pay the Tranche B debt in part. ( Id. ¶ 42). According to the debtor, Wells Fargo received additional consideration for the mortgage loan. Specifically, DiamondRock Hospitality agreed to an increased interest rate on a $200 million unsecured loan from Wells Fargo to a DiamondRock Hospitality affiliate and also agreed to name Wells Fargo (or a related entity) as underwriter on a DiamondRock Hospitality stock offering. ( Id. ¶ 46).

One month later, in June 2010, Hotel Allerton Mezz foreclosed on the mezzanine loan to Alt Hotel Mezz and sold its membership interest in the debtor at a U.C.C. sale. (Third Am. Compl. ¶¶ 5–6, 51(d)). At the sale, Hotel Allerton Mezz was the successful bidder with a credit bid of $8.4 million. ( Id. ¶¶ 5–6). The sale left Hotel Allerton Mezz as (1) the owner and parent of the debtor and (2) the holder of a $1.6 million unsecured deficiency claim against the owner's former parent, Alt Hotel Mezz. ( Id. ¶¶ 4–6).

The debtor alleges, however, that Alt Hotel Mezz was its alter ego. Alt Hotel Mezz, the debtor asserts, was created solely to serve as the owner of the debtor and permit the securitization of the mortgage loan. (Third Am. Compl. ¶ ¶ 7, 10–12). The debtor conducted no business operations, had no employees, observed no corporate formalities, had no debt (other than the mezzanine loan itself), and had no cash flow other than cash flow from the operation of the hotel. ( Id. ¶ 10). The debtor and Alt Hotel Mezz operated as “a single economic unit.” ( Id.). Because the debtor and Alt Hotel Mezz should be treated as one and the same, the debtor alleges, the unsecured deficiency claim of Hotel Allerton Mezz against Alt Hotel Mezz is really a claim against the debtor, making Hotel Allerton Mezz a creditor in the bankruptcy case. ( Id. ¶ 12).

The third amended complaint has five counts. Of these, Hotel Allerton Mezz is a plaintiff only on Count V; the debtor is the sole plaintiff on the rest. Count I is a claim for breach of the mortgage loan agreement pre-petition. Count II is a claim for breach of an implied duty of good faith and fair dealing. Count III is a claim for unjust enrichment alleging that DiamondRock was unjustly enriched when it paid only $61 million for the $69 million mortgage loan. Count IV is another...