In re 1701 Commerce, LLC

Decision Date17 September 2014
Docket NumberCASE NO. 12-41748-DML-11
CourtU.S. Bankruptcy Court — Northern District of Texas

Before the court is Richfield Hospitality, Inc.'s Second Request for Allowance of Administrative Claim (docket no.1 536, the "Second Request"), filed by Richfield Hospitality, Inc. ("Richfield") in the chapter 11 bankruptcy case of 1701 Commerce, LLC ("Debtor"). Debtor objected to the Second Request. Debtor's Objection to [the Second Request], docket no.550. On July 15, 2014, the court held a hearing on the Second Request (the "Hearing") at which the court heard argument from counsel, received testimony from several witnesses,2 and admitted into evidence exhibits identified as necessary.3 Following the Hearing, the court took the Second Request and the Objection under advisement. At the court's request, both parties filed proposed findings of fact and conclusions of law after the Hearing.4

This contested matter is subject to the court's core subject-matter jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(b)(1), (2)(A)-(B), and (O). The court has constitutional authority to enter findings of fact and conclusions of law because determining the Second Request involves both estate administration and the claims allowance process. See Stern v. Marshall, 546 U.S. ___, 131 S. Ct. 2594, 2617-18 (2011) ("[T]he question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process."). The court now issues these findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure5 7052 and 9014.


The court, having reviewed the evidence admitted at the Hearing, as well as Debtor's and Richfield's respective Proposed Findings and Conclusions, now makes the following findings of fact by a preponderance of the evidence.6 All findings of fact, where appropriate, may be also construed as conclusions of law, and vice versa.

A. The Parties

1. Debtor filed the Case on March 26, 2012 (the "Petition Date"). During the Case, Debtor has managed its estate as a debtor-in-possession. No committee, trustee, or examiner has been appointed.

2. On the Petition Date, Debtor's primary asset was the Sheraton Fort Worth Hotel and Spa, located at 1701 Commerce Street, Fort Worth, Texas, 76102 (the "Property"). Debtor acquired the Property on February 7, 2012, as a secured lender from its borrower, Presidio Hotel Fort Worth, L.P. ("Presidio"), under a deed in lieu of foreclosure agreement.

3. Richfield managed the Property for Presidio pursuant to that certain Operating Agreement for Sheraton-Fort Worth (the "Operating Agreement") dated July 29, 2011, by and between Richfield and Presidio. Tr. 7/15 Hr'g at 9:22-10:5; J.-Ex. 49. The Operating Agreement is governed by, and to be construed in accordance with, Texas law. J.-Ex. 49 § 46.

4. Pursuant to the Operating Agreement, Richfield was appointed as the manager of the Property for a five-year period, which began on August 1, 2011, the date that Richfield initially took over the management of the Property. Id. § 4.2. In addition to the OperatingAgreement, Richfield was also a party to an Assignment and Subordination of Operating Agreement and Consent by and between Richfield, Presidio, and Dougherty Funding, LLC ("Dougherty"), Debtor's senior lender at the time. D.-Ex. 10 ¶ 6.

5. Richfield is an independent property and resort management company with over forty years of experience and an approved operator for franchisors such as Starwood (i.e., Sheraton), Hyatt, Hilton, Marriott, and similar national brands. Richfield employed over 160 employees who were directly involved in managing and operating the Property, as well as managed independent contractor-licensees who operated the spa, the gift shop, and the valet parking operations at the Property.

B. The Terms of the Operating Agreement

6. After Debtor acquired the Property, Richfield continued to manage the Property without a contract in place with Debtor, and Debtor paid Richfield's management fees in accordance with the rate set forth in the Operating Agreement. Tr. 7/15 Hr'g at 10:13-22. Under the Operating Agreement, Richfield accrued a base management fee of 2.5% of gross revenue (the "Base Management Fee"). The Base Management Fee was offset by a potential refund owed by Richfield to Presidio if Richfield missed certain target revenues (the "Rebate" or "Rebate Clause"). Specifically, section 20.1.1 of the Operating Agreement provided:

20.1.1. The Base Management Fee shall be calculated as equal to two and one half percent (2.5%) of Gross Revenue for each Operating Year or part thereof of the Operating Term; provided that, in the event the [Property] does not meet or exceed the budgeted Gross Operating Profit reflected on the Annual Budget for the Operating Year ending 2012 and each Operating Year thereafter, the Base Management Fee shall be reduced by the amount of the Gross Operating Profit shortfall, not to exceed 20% of the Base Management Fees otherwise due and payable. The Base Management Fee must be paid to (and may be withdrawn by) Operator from the Operating Accounts upon receipt of the monthly invoice for Management Fees from Operator.

J.-Ex. 49 § 20.1.1.

7. Accordingly, if actual performance, as measured by Gross Operating Profit,7 fell below budgeted performance, Richfield's total management fees would be reduced under the Rebate Clause by the lesser of the shortfall or twenty percent of the Base Management Fee. Id.

8. During its ownership of the Property, Debtor paid Richfield approximately $557,000, representing Richfield's full management fees. Tr. 7/15 Hr'g at 13:16-23; 64:23-65:4; D.-Ex. 26 at 3182 (2012 Financial Package); D.-Ex. 27 at 5592 (2013 Financial Package). But the Property had a $1,102,268 shortfall from the budgeted Gross Operating Profit in 2012, and a $288,823 shortfall during the time Richfield managed the Property in 2013. Tr. 7/15 Hr'g at 26:13-19; 33:17-34:6; D.-Ex. 26 at 3183; D.-Ex. 27 at 5593. Under the Operating Agreement, these shortfalls resulted in Debtor overpaying Richfield $75,716.80 for 2012 and $41,274.40 for 2013, totaling $116,991.20.8 Tr. 7/15 Hr'g at 30:6-12; 32:21-33:1; 33:17-34:6; D.-Ex. 26 at 3182-83; D.-Ex. 27 at 5592-93.

9. Section 20.2 of the Operating Agreement required Richfield to refund any Rebate within ninety days after the end of the Operating Year. J.-Ex. 49 §§ 19.3, 20.2. Consequentially, the refund for 2012 was due by March 31, 2013, and the refund for 2013 was due by March 31, 2014. Richfield did not pay Debtor the refunds for 2012 or 2013 as required by section 20.2 of the Operating Agreement. Tr. 7/15 Hr'g at 27:20-28:13; 30:6-21; 32:7-20; 68:19-23.

10. The Operating Agreement also included two provisions related to fees potentially accrued upon Richfield's termination as manager of the Property. First, section 28.3 included a liquidated damages clause if Presidio wrongfully terminated Richfield that stated:

28.3. Owner and [Richfield] further acknowledge and agree that [Richfield's] damages in the event of Owner's wrongful termination of this Agreement or [Richfield's] termination of this agreement due to Owner's breach (a "Breach Termination") it would be difficult or impossible to determine, including, without limitation, loss of the Management Fee and other revenue under this Agreement, harm to [Richfield's] reputation, loss of goodwill, disruption of operations, loss of contributions to budgeted system expenses and loss of a hotel with strategic significance to [Richfield's] system. Given the inherent uncertainty as the measure of damages and the Parties desire to establish a methodology for the calculation of damages, Owner and [Richfield] agree that [Richfield] shall be entitled to receive as liquidated damages in the event of a Breach Termination an amount (the "Liquidated Damage Amount") equal in aggregate to (i) the Imputed Management Fees times (ii) the Multiplier. For such purposes:
28.3.1. "Imputed Management Fees" shall be the monthly average of the aggregate Management Fees paid or payable to [Richfield] under this Agreement based on the 12-month period for which monthly operating reports have been delivered to the Owner immediately preceding the date of the written notice or other action of Owner which effects a Breach Termination . . . ; and

28.3.2. the applicable "Multiplier" shall be the greater of (i) number of months or partial calendar month from the effective date of termination through to the end of the eighteenth (18th) month of the Operating Term or (ii) six (6).

J.-Ex. 49 §§ 28.3, 28.3.1, 28.3.2 (emphasis in original).

11. In addition to providing liquidated damages based upon a Breach Termination, the Operating Agreement also provided that a termination fee accrued to Richfield if the Property was sold during the operating term (the "Termination Fee"). The Operating Agreement defines the Termination Fee as

[T]he sum of (i) Imputed Management Fees multiplied by three (3), plus (ii) repayment of all funds advanced by Operator for the Operation of the Hotel in accordance with this Agreement, including an amount equal to the Initial Working Capital Payment (to the extent actually contributed by Operator in accordance with this Agreement) together with accrued interest thereon from the date of initial payment of the Initial Working Capital Payment at the rate of five percent (5%) per annum.

J.-Ex. 49 at 9. Moreover, section 28.3.3 of the Operating Agreement provides:

28.3.3. Termination Upon Sale. In addition to the foregoing, Owner shall have the right to terminate this agreement upon a sale of the [Property] to any bona fide third-party purchaser at any time after the date which is twelve (12) months after the Takeover Date by providing Manager thirty (30) days prior written notice; provided that in such event,

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