O'Connor v. DL-DW Holdings (In re Extended Stay, Inc.)

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
PartiesIn re: Extended Stay, Inc., et al., Reorganized Debtors. Finbarr O'Connor, as Trustee for and on behalf of the Extended Stay Litigation Trust, and The Extended Stay Litigation Trust, Plaintiffs, v. DL-DW Holdings, L.L.C., et al., Defendants.
Docket NumberAdv. Pro. No. 11-02254-JLG,Case No. 09-13764-JLG
Decision Date08 August 2020

In re: Extended Stay, Inc., et al., Reorganized Debtors.

Finbarr O'Connor, as Trustee for and on behalf of the Extended Stay Litigation Trust, and
The Extended Stay Litigation Trust, Plaintiffs,
DL-DW Holdings, L.L.C., et al., Defendants.

Case No. 09-13764-JLG
Adv. Pro.
No. 11-02254-JLG


August 8, 2020


Chapter 11



Venable, LLP
750 E. Pratt Street
Suite 900
Baltimore, Maryland 21202
By: Gregory A. Cross, Esq.
Mitchell Y. Mirviss, Esq.

Counsel to the Extended Stay Litigation Trust and Finbarr O'Connor, as Trustee for and on behalf of the Extended Stay Litigation Trust

Dechert, LLP
1095 Avenue of the Americas
New York, New York 10036-6797
By: Gary J. Mennitt, Esq.
Shmuel Vasser, Esq.

Counsel to the Arbor Parties

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Kasowitz, Benson, Torres & Friedman, LLP
1633 Broadway
New York, New York 10019
By: Robert M. Novick, Esq.

Counsel to the Lightstone Parties

Law Offices of Peter M. Levine
90 Park Avenue
New York, New York 10016
By: Peter M. Levine, Esq.

Counsel to Polar Extended Stay, USA

Simpson, Thacher & Bartlett, LLP
425 Lexington Avenue
New York, New York 10017
By: David Elbaum, Esq.

Counsel to the HVM Defendants

Butler, Rubin, Saltarelli & Boyd, LLP
321 North Clark Street
Suite 400
Chicago, Illinois 60654
By: Robert M. Hermes, Esq.

Counsel to PGRT ESH, Inc.

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In 2007, Extended Stay, Inc. ("ESI") and its affiliated entities (collectively, the "Debtors") owned and managed the leading mid-priced extended stay hotel business in the United States. In June of 2007, the Blackstone Group ("Blackstone") sold the Debtors and their business to a group led by David Lichtenstein ("Lichtenstein"), in a $8 billion leveraged buyout (the "LBO" or "LBO Transaction") comprised of $7.4 billion of debt, $400 million of cash, and $200 million of roll over equity. Approximately two years later, the Debtors filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in this Court.2 In July of 2010, the Debtors confirmed their joint chapter 11 plan of reorganization (the "Plan").3 Pursuant to the Plan and under the Confirmation Order, the Extended Stay Litigation Trust (the "Litigation Trust") was established for the benefit of certain of the Debtors' creditors (the "Litigation Trust Beneficiaries"). Finbarr O'Connor is the successor trustee (the "Trustee") under the trust. The trust's assets (the "Litigation Trust Assets") include claims and causes of action that are identified in the report (the "Examiner's

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Report") filed in this case by Ralph R. Mabey, Esq., the Court-appointed examiner (the "Examiner").4

In June of 2011, the Trustee's predecessor commenced five lawsuits that collectively asserted over 100 counts against dozens of defendants seeking damages aggregating more than $1 billion to address wrongdoing that allegedly occurred prior and subsequent to the closing of the LBO Transaction. The claims in those lawsuits fell into two categories. The first covered claims arising out of the LBO Transaction and were based on the conduct of the Debtors' officers and directors, lenders and advisors prior to and in connection with the closing of the LBO Transaction (the "LBO Claims"). The defendants in those actions included Blackstone and related entities (the "Blackstone Defendants"), as the seller in the LBO Transaction, various Bank of America N.A. and Citibank N.A. entities (collectively "BofA" and "Citibank," respectively), as advisors to the seller and purchaser in the LBO Transaction, respectively, and the banks that financed the LBO Transaction. The second category was for claims arising after the LBO Transaction closed (the "Post LBO Claims"). Those claims arose out of the conduct of the Debtors' members, officers, and directors that allegedly gave rise to the loss of the Debtors' funds through the payment of purportedly improper dividends and other distributions to equity holders and their affiliates. In September of 2012, the Trustee took his predecessor's place and assumed control over the lawsuits. In June of 2013, he entered into settlement agreements that resolved all litigation involving the LBO Claims. The Trustee did not settle the Post LBO Claims. Rather, with the Court's permission, the Trustee consolidated the lawsuits asserting the

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Post LBO Claims into this adversary proceeding and filed the amended complaint at issue herein (the "Amended Complaint").5

The defendants in the Amended Complaint (collectively, the "Defendants") are individuals and entities that supposedly owned, controlled, dominated or otherwise managed all aspects of the Debtors' businesses after the LBO Transaction closed. The Trustee and Litigation Trust, as plaintiffs (collectively the "Trust") contend in the Amended Complaint that the LBO Transaction left ESI and its affiliates in dire financial straits and in desperate need of cash. It asserts that the Defendants are "insiders" of the Debtors, who, despite being aware of ESI's financial difficulties, abused their authority either by improperly withdrawing cash and assets from the Debtors to benefit themselves and their affiliates, or by aiding and abetting such conduct. In substance, but without limitation, the Trust complains that the Defendants: (i) for no consideration, diverted so-called "LIBOR Floor Certificates" and $74 million in proceeds generated from those certificates, from the Debtors to their own benefit and control; (ii) arranged for more than $62 million in cash distributions to be paid to the Debtors' equity holders despite the fact that, among other things, the Debtors were insolvent when they made those distributions; and (iii) caused Lichtenstein or one of his affiliates to be paid management fees totaling up to $1 million per year for at least three years, notwithstanding that neither Lichtenstein nor the affiliate provided management services or other consideration for those payments.

The Trust contends that it is entitled to recover those transfers, and associated damages from the Defendants. In the seventeen count Amended Complaint, the Trust seeks to recover

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those payments and damages from all or some of the Defendants. The twenty-six Defendants are grouped, as follows:

(i) The "Lightstone Defendants," consisting of David Lichtenstein and individuals and entities (collectively, the "Lightstone Individuals" and "Lightstone Entities," respectively) allegedly affiliated with Lichtenstein, as follows:

Lightstone Individuals

David Lichtenstein
Bruno de Vinck
Peyton "Chip" Owen
Joseph Teichman

Lightstone Entities

DL-DW Holdings, LLC ("DL-DW")
BHAC Capital IV, LLC ("BHAC")
Lightstone Holdings, LLC ("Lightstone Holdings")
The Lightstone Group, LLC ("Lightstone Group")
Lightstone Commercial Management ("Lightstone Commercial")
Park Avenue Funding, LLC ("Park Avenue")

(ii) The "Arbor Defendants," consisting of individuals and entities (collectively, the "Arbor Individuals" and "Arbor Entities," respectively) allegedly affiliated with Ivan Kaufman ("Kaufman") (not a Defendant herein), as follows:

Arbor Individuals

Guy R. Milone, Jr.
Joseph Chetrit
Joseph Martello

Arbor Entities

Arbor ESH II, LLC ("Arbor ESH")
Arbor Commercial Mortgage, LLC ("Arbor Commercial")
Atmar Associates LLC ("Atmar Associates")
Glida One LLC ("Glida One")

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Mericash Funding LLC ("Mericash Funding")
Princeton ESH LLC ("Princeton ESH")
Ron Invest LLC ("Ron Invest")

(iii) The "HVM Defendants" consisting of Gary DeLapp, Dae Hum Kim (a/k/a David Kim), and F. Joseph Rogers.

(iv) Polar Extended Stay (U.S.A.) L.P. ("Polar Extended Stay")

(v) PGRT ESH, Inc. ("PGRT ESH")

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The five motions before the Court (the "Motions") are filed, respectively, on behalf of the Lightstone Defendants,6 PGRT ESH,7 the Arbor Defendants,8 Polar Extended Stay,9 and the HVM Defendants.10 Rule 12 of the Federal Rules of Civil Procedure is made applicable herein

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by Rule 7012 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). In broad strokes, in the Motions, the Defendants seek to dismiss all or specific Counts of the Amended Complaint pursuant to Rule 12(b)(1), on the grounds that the Trust lacks standing to assert the claims and, accordingly, the Court lacks subject matter jurisdiction to adjudicate them, and pursuant to Rule 12(b)(6), on the grounds that certain of the Counts fail to state claims for relief under applicable law. The Lightstone, Arbor and HVM Defendants have borne the "laboring oars" in support of the Motions. PGRT ESH and Polar Extended Stay submitted papers in support of their respective motions but are clear that they join in all the arguments made by the Lightstone Defendants and Arbor Defendants, respectively, in support of their motions to dismiss. The Trust opposes the Motions.11 For the reasons discussed herein, the Motions are granted in part, and denied in part.

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District courts have original bankruptcy jurisdiction over "civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). The "district court may provide that any or all" such proceedings "shall be referred to the bankruptcy judges for the district." Id. § 157(a). The district court has done so here pursuant to that certain Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York, dated January 31, 2012 (Preska, C.J.).

Core proceedings correspond to proceedings "arising under title 11" and proceedings that "arise in" cases under title 11. See Stern v. Marshall, 564 U.S. 462, 476 (2011). Proceedings that "arise under" the Bankruptcy Code are those that have their origin in the...

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