In re 1701 Commerce, LLC

• Decision Date: 11 June 2014
• Docket Number: No. 12–41748–DML–11.,12–41748–DML–11.
• Citation: 511 B.R. 812
• Parties: In re 1701 COMMERCE, LLC, f/k/a Presidio Ft. Worth Hotel, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Texas

511 B.R. 812

In re 1701 COMMERCE, LLC, f/k/a Presidio Ft. Worth Hotel, LLC, Debtor.

No. 12–41748–DML–11.

United States Bankruptcy Court,

N.D. Texas,

Fort Worth Division.

Signed June 11, 2014.

Thomas Daniel Berghman, Munsch Hardt Kopf & Harr PC, Dallas, TX, Emily S. Chou, Michael D. Warner, Cole Schotz Meisel Forman & Leonard PA, Fort Worth, TX, Norman L. Pernick, Marion M. Quirk, Wilmington, DE, for Debtor.

MEMORANDUM OPINION AND ORDER

D. MICHAEL LYNN, Bankruptcy Judge.

Before the court is Debtor's Motion and Objection to Claim and Brief in Support Thereof (the “Objection,” docket no.¹ 513), filed by 1701 Commerce, LLC (“Debtor”) in response to claim 29–1 (the “Claim”) filed by Key Construction, Inc. (“Key”). The Objection was joined by Vestin Originations, Inc. (“Vestin”) and Vestin Realty Mortgage I, Inc.; Vestin Realty Mortgage II, Inc.; and Vestin Fund III, LLC (collectively, the “Vestin Affiliates”).² The court held a two-day trial on the Objection on February 11 and March 19, 2014 (collectively, the “Trial”), at which the court heard argument from counsel, received testimony from several witnesses, ³ and admitted into evidence exhibitsidentified as necessary below.⁴ In advance of the Trial, the parties each filed a pretrial brief and a response brief regarding the Objection.⁵ Debtor filed supplemental pretrial briefs on the eve of the second day of the Trial. ⁶ Following the Trial, the court took the Objection under advisement. Both parties filed post-trial briefs.⁷

The Claim hinges upon Key proving that Debtor was the recipient of a fraudulent transfer. For the reasons discussed below, the court concludes that no fraudulent transfer occurred. As a result, the Objection will be sustained, and the Claim will be disallowed.

Filing an objection to a proof of claim initiates a contested matter under Federal Rule of Bankruptcy Procedure ⁸ 9014.⁹ 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 a final order because determining the Objection involves the quintessential claims allowance process.¹⁰ This memorandum opinion and order constitutes the court's findings of fact and conclusions of law pursuant to Rules 7052 and 9014.

I. BACKGROUND

This matter centers on the checkered ownership history of the Sheraton Fort Worth Hotel and Spa (the “Property”). The court's earlier opinion in the Case details much of the history, but some recitation and additional discussion are necessary to determine the Objection.¹¹

A. The Prepetition Ownership of the Property

Presidio Hotel Fort Worth, L.P. (“Presidio”), a limited partnership formed under Texas law, acquired title to the Property on February 28, 2006. ¹² A year later, Presidio obtained financing through Dougherty Funding, LLC and ten junior note-holders (collectively, “Dougherty”) in the original principal amount of $38,975,000 ¹³ (the “Senior Loan”) to rehabilitate the Property. The Senior Loan was secured by a deed of trust and a first priority mortgage on the Property.

In May 2008, Presidio obtained $10,600,000 of mezzanine financing (the “Junior Loan”) from Vestin, which several months later was increased to $11,800,000. Vestin perfected a second lien on the Property and assigned the Junior Loan to the Vestin Affiliates in May 2008. Dougherty and Vestin then entered into a Subordination and Intercreditor Agreement (the “Intercreditor Agreement”) that established each creditor's rights to the Property, including situations in which each creditor could foreclose on the Property.¹⁴

In addition to the Junior and Senior Loans, the Property benefitted from a twenty-year tax incentive agreement with the City of Fort Worth (the “TOT Agreement”).¹⁵ By the TOT Agreement, the City of Fort Worth provided a rebate of the City's Hotel Occupancy Tax (also called a Transient Occupancy Tax) that generated to the TOT Agreement's owner hundreds of thousands of dollars annually.¹⁶ The evidence presented at the Trial established the TOT Agreement's value as approximately $6.3 million.¹⁷ Although the TOT Agreement could be owned separately from the Property, the TOT Agreement's value depended upon the Property's continued operations.¹⁸

Throughout 2011, Presidio, by and through Patel, worked with a broker to sell the Property. These efforts were unsuccessful in consummating a sale. Also in 2011, Patel worked with Vestin to extend the Junior Loan, which was to mature on December 30, 2011. Aware that Presidio would have difficulty meeting its obligations, Vestin created Debtor, a Nevada limited liability company, on October 31, 2011, “as a special purpose vehicle to take the place of the Vestin Affiliates in the future.” ¹⁹ Vestin declined to extend the Junior Loan and thereafter the Vestin Affiliates transferred their interests in the Junior Loan to Debtor, pursuant to an assignment of deed of trust.²⁰

Presidio defaulted on its obligations under both the Junior and Senior Loans in December 2011.²¹ Patel spent much of the next month scrambling to restructure the Junior and Senior Loans. Through negotiation, Debtor and Dougherty agreed on a framework that would have extended the maturity of both the Junior and Senior Loans until December 31, 2012, so that Presidio could market the Property for sale.²² As part of this framework, Presidio would have escrowed the Property's deed to be released if certain benchmarks for sale were not achieved.²³

While these negotiations were ongoing, Debtor sent the required notice of default to Presidio on January 4, 2012; ²⁴ filed a Notice of Trustee's Sale of the Property on January 17, 2012; ²⁵ and posted the Property for foreclosure sale on February 7, 2012.²⁶ Dougherty and Presidio tried to stop the foreclosure sale by filing suit in state court on February 3, 2012.²⁷ Negotiations to restructure the Junior and Senior Loans stalled during this time and reached an impasse on the afternoon of Monday, February 6, as Dougherty and Debtor could not agree as to which lender would acquire the Property's deed from escrow if Presidio failed to satisfy the required conditions.²⁸ The Property was slated to be sold the following morning.

B. The Deed in Lieu Agreement

Debtor never foreclosed upon the Property. Instead, before placing Presidio into bankruptcy to prevent foreclosure on the Property, Patel contacted Mike Shustek, CEO of Vestin, the evening of February 6 to discuss an alternative arrangement.²⁹ This phone call led to a Deed in Lieu Agreement (the “Deed in Lieu Agreement” or “DILA”), pursuant to which Presidio agreed to transfer to Debtor title to the Property subject to any superior liens and encumbrances in exchange for releases of Presidio's obligations under the Junior Loan and of Presidio's principals' personal guarantees.³⁰ Presidio executed a deed to implement the Deed in Lieu Agreement and recorded that deed the next day.³¹

The Deed in Lieu Agreement was signed by representatives of Presidio, Debtor, and PHM Services, Inc. (“PHM”), an affiliate of Presidio.³² PHM was appointed, as an independent contractor, as asset manager for the Property at a rate of $1000 per month—despite Richfield Hospitality, Inc. (“Richfield”) already managing the Property—and PHM was granted the exclusive right to sell the Property for approximately six months.³³ PHM would also potentially share in the profits of a sale. Paragraph 6 of the DILA included a “Profit Sharing” agreement that dictated the proceeds would be distributed: first, to satisfy Dougherty's Senior Loan; second, to pay Debtor $11 million; third, to pay PHM $3 million; and fourth, to divide between PHM and Debtor, in equal portions, any excess proceeds.³⁴ PHM—not Presidio—benefitted under this Profit Sharing agreement, such that any equity, if present, would flow to PHM and, eventually, to PHM and Debtor, rather than Presidio. Finally, the parties to the DILA were bound by a confidentiality provision not to disclose the terms of the DILA except as required by law.³⁵

Dougherty and Key ³⁶ were both notified of the Deed in Lieu Agreement. Dougherty was notified by a letter from Patel to Dougherty's principals dated February 10, 2012, that explained the Deed in Lieu Agreement. ³⁷ As to Key, Presidio did not respond to a demand letter dated January 10, 2012, regarding delinquent payments.³⁸ Instead, Walker emailed Patel on February 3, 2012, regarding the outstanding debt, to which Patel responded on February 14, 2012, stating that “The [P]roperty was deeded back to the lender on February 7th.” ³⁹ Moreover, on March 16, 2012, Vestin, a public company, filed its Form 10–K with the SEC in which it disclosed the Deed in Lieu Agreement, stating:

On February 7, 2012, [Vestin] entered into a Deed in Lieu Agreement with a borrower for a second deed of trust loan that matured on December 31, 2011 with a balance of approximately $11.8 million, of which our portion was approximately $0.2 million. These assets are subject to a first trust deed of approximately $39 million. The property includes a 430 unit full service hotel located in Ft. Worth, Texas. The hotel includes operations which will be consolidated into our financial statements from the date of this agreement. The property will be held for sale and pursuant to the terms of the agreement the net proceeds from the sale shall be distributed as follows through July 31, 2012: (i) satisfy all amounts due on the first deed of trust, (ii) $11 million to [Vestin], (iii) $3 million to the former borrower and (iv) all remaining amounts will be divided with 50% going to [Vestin] and 50% going to the former borrower.⁴⁰

While the text of Vestin's Form 10–K misstates that “the former borrower” (Presidio) rather than PHM would share in the profit distribution, the complete Deed in Lieu Agreement was attached as an exhibit to the Form 10–K and was accessible by a link alongside the Form 10–K on the SEC's public...