In re 8110 Aero Drive Holdings, LLC
| Decision Date | 08 May 2017 |
| Docket Number | BANKRUPTCY NO: 16-03135-MM11 |
| Court | U.S. Bankruptcy Court — Southern District of California |
| Parties | In re: 8110 AERO DRIVE HOLDINGS, LLC, Debtor |
Having made certain rulings during the pretrial proceedings on confirmation of the Plan, and having considered all of the testimony and evidence presented, the court makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052.1
The court required that all evidence be presented by declaration as part of each party's case in chief. Each declarant was required to be available for cross-examination at trial unless the opposing party waived that right. Under this protocol, the court considered the testimony of following witnesses:
Declarations from counsel for the parties were not considered as evidence for the confirmation trial. The court's findings of fact are based upon its review of the record and the credible testimony from witnesses.
Debtor owns and operates a Four Points by Sheraton Hotel located at 8110 Aero Drive, San Diego, CA 92123 ("Hotel"). The Hotel was valued at $16,800,000 in Debtor's schedules, and value was not contested at the confirmation trial. The Hotel was originally purchased by The Burni Family Trust ("Burni Family Trust") and R&D Trust Properties, LLC in 2007 and was transferred to Debtor in 2010. The Hotel is operated under a licensing and franchising agreement ("Licensing Agreement") with Sheraton,LLC ("Sheraton"). Debtor leases the real property on which the Hotel is located from the City of San Diego via a ground lease set to expire in 2052 ("Ground Lease").
In July 2013, Barclays PLC ("Barclays"), Lender's predecessor, extended Debtor a $9.5 million loan ("Loan") with a 5.977% interest rate secured by Debtor's interest in the Hotel and the Ground Lease. The Loan is a commercial mortgage-backed securitized ("CMBS") loan which matures on July 22, 2023. Wells Fargo is the Trustee of the trust holding the Loan among other assets, having received an assignment from Barclays on September 18, 2013. Midland Servicing ("Midland") is the special servicer for the Loan, having been appointed in December 2015.
The terms of the Loan are governed by numerous documents, including a loan agreement ("Agreement"), a Leasehold Deed of Trust and Security Agreement, and a deposit account control agreement ("Lockbox Agreement"), all of which are governed by California law. See Exs. 1-16.
The Loan was negotiated primarily by Ralph, who was in his late 80's at the time. Luz had no communications with Barclays or the mortgage broker for the transaction. Luz understood the purpose of the refinancing, however. She had discussions with Ralph, gathered documents for the mortgage broker, and served as a guarantor. As trustee of the Burni Family Trust which owned an 11% interest in Debtor, she signed off on the escrow instructions for the Loan. Ex. 12. Luz' testimony that Debtor obtained the Loan to refinance a short-term, hard-money loan with a higher interest rate of 10.75% because it was soon coming due was credible.
Heinz was retained to assist Debtor with the transaction in April 2013. She was referred to Debtor by the mortgage broker and had previously assisted other entities related to Ralph and Luz in obtaining financing from Barclays. Between April and July 2013, Heinz directly negotiated with Barclays' counsel regarding the terms of the Loan. Ultimately, Heinz issued an opinion letter dated July 22, 2013 ("Opinion Letter") regarding the Loan. Since no witness from the mortgage broker or Barclays testified,Heinz is the only witness with credible personal knowledge of the Loan negotiations.
After the Loan closed, Debtor continued to work on a remodel required by its franchisor, Sheraton. In November 2013, after an inspection of the Hotel, Sheraton insisted Debtor complete a Property Improvement Plan ("PIP") and make extensive improvements to the Hotel by December 2016. Due to Debtor's inability to meet guest satisfaction score requirements, Sheraton required Debtor hire a management company from a list it provided. Debtor hired HMG, who ran the Hotel's operations from November 2014 to April 2016, when HMG was replaced by a management company selected by Lender.
Ralph died in December 2014 shortly after HMG was retained. Given his age, the months preceding his death may have contributed to Debtor's management problems. Luz then took over management of the Debtor. There is no evidence she had previous experience running a Hotel, and she was not sophisticated in commercial matters.
Luz and Ron Chin (Trustees of the Ralph Burni Trust) thereafter received regular reports from HMG regarding the Hotel. These reports reflected that under HMG's management Debtor's expenses increased by approximately 33-40% without a corresponding increase in revenue. HMG also failed to allocate money necessary for Debtor to complete the PIP. This caused the profits of the business to decline. During HMG's management, Luz's communications with Lender were limited, as HMG was receiving all statements and communications Midland sent.
The decline in profitability of the Hotel caused the Loan to go into default when Debtor failed to make the September 2015 Loan payment. Initially, Debtor did not notice that it had missed a payment. Upon receipt of the October payment, Lender applied it to the September payment, which caused the October payment to go into default until the November payment was received. The same pattern applies to the December and January payments. Payments stopped until Debtor filed bankruptcy that May becauseLender declared a default on January 14, 2016. Midland froze Debtor's bank accounts by letter sent to Wells Fargo but did not send the letter to Debtor or describe the default.
Midland sent Debtor a notice of default on February 24, 2016, declaring a default as of December 6, 2015, based upon Lender's application of payments after the September payment, the only missed payment at the time. Luz did not receive this letter, which she assumed was received by HMG. Lender demanded a cure but did not provide the amount, advising the cure amount could be obtained from Midland.
Luz did not learn of the default until March 11, 2016, when she received a call from Brent Ramsey, a Regional Manager for Starwood Hotels & Resorts Worldwide, Inc. ("Starwood," Sheraton's parent company). She immediately called Midland's representative David LaFon ("LaFon") and asked for an accounting and the cure amount. She also requested that LaFon make any missed payments from the reserve accounts and release monies to HMG for Debtor's operations. Instead of responding to these requests, Lender filed suit seeking the appointment of a received to which Luz stipulated on April 6, 2016. The receiver replaced HMG as manager of the hotel.
Lender did not provide Luz a cure amount until April 28, 2016.3 Ex. 33. The cure amount provided was $1,672,343, including late fees, escrow deposits, protective advances, default interest, and special servicing, legal, and workout fees. Luz was shocked at the number, which was understandable. The cure amount was over five times higher than the five missed payments for January, February, March, April, and May 2016 totaling $293,556.80, even though Lender was holding sufficient funds to make these...
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