In re Dunes Hotel Associates

• Decision Date: 28 March 1997
• Docket Number: Adversary No. 95-08042.,Bankruptcy No. 94-75715-W
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: In re DUNES HOTEL ASSOCIATES, a South Carolina general partnership, Debtor. DUNES HOTEL ASSOCIATES, a South Carolina general partnership, in its capacity as the Debtor-in-Possession representative of its Estate, Plaintiff, v. HYATT CORPORATION, a Delaware corporation, and S.C. Hyatt Corporation, a South Carolina corporation, Defendants.

212 B.R. 110 (1997)

In re DUNES HOTEL ASSOCIATES, a South Carolina general partnership, Debtor DUNES HOTEL ASSOCIATES, a South Carolina general partnership, in its capacity as the Debtor-in-Possession representative of its Estate, Plaintiff, v. HYATT CORPORATION, a Delaware corporation, and S.C. Hyatt Corporation, a South Carolina corporation, Defendants.

Bankruptcy No. 94-75715-W, Adversary No. 95-08042.

United States Bankruptcy Court, D. South Carolina.

March 28, 1997.

Julio E. Mendoza, Jr., Columbia, SC, John J. Dawson, Phoenix, AZ, for Plaintiff.

Michael M. Beal, Columbia, SC, Claude D. Montgomery, New York City, for Defendants.

ORDER

JOHN E. WAITES, Bankruptcy Judge.

THIS MATTER is before the Court upon the "Order" and "Judgment in a Civil Case" entered July 30, 1996 ("Remand Order") by the United States District Court for the District of South Carolina. The District Court's Remand Order reversed, in part, this Court's "Order" and "Judgment" of August 25, 1995 ("Adversary Dismissal Order") and remanded to this Court for an evidentiary hearing the issue of whether the debtor, Dunes Hotel Associates ("Dunes") may reject the Agreement and Lease dated November 2, 1973 as amended and assigned (the "Agreement"), between Dunes and Hyatt Corporation as an executory management agreement under Section 365 of the Bankruptcy Code.¹ By Order entered November 26, 1996 on the motion of defendants Hyatt Corporation and S.C. Hyatt Corporation (together, "Hyatt"), this Court bifurcated the issues on remand into first, whether the Agreement is a lease of real property subject to the protections of Section 365(h)² or a management agreement, and second, whether Dunes has met the standard under Section 365(a) for rejecting the Agreement.

Based upon the testimony and other evidence presented in the hearing before the Court on February 12, 13 and 14, 1997 and consideration of the arguments of counsel and of all pleadings filed in this proceeding, the Court concludes that the Agreement is a lease of real property under South Carolina law. The Court makes the following Findings of Fact and Conclusions of Law pursuant to Fed.R.Civ.P. 52, made applicable by Fed.R. Bankr.P. 7052.

FINDINGS OF FACT³

1. Plaintiff Dunes Hotel Associates is a South Carolina general partnership formed in 1972 and located in Stamford, Connecticut.

2. The general partners of Dunes are Andrick Hotel Corporation ("Andrick") and Meyers Enterprises, Inc. ("Meyers"), both of which are Delaware corporations located in Stamford, Connecticut. The stock of Andrick and of Meyers is wholly owned by an affiliate of the General Electric Pension Trust ("GEPT"). GEPT is one of the largest trusts in the United States with assets of approximately $28-30 billion.

3. Dunes is the title holder of approximately 10 acres of land on Hilton Head Island, Beaufort County, South Carolina, which together with the buildings and improvements constitute the "Hotel Property". The Hotel is a 505-room resort/convention hotel known as the "Hyatt Regency Hilton Head" (the "Hyatt Regency").

4. On November 18, 1994, Dunes filed a voluntary petition under Chapter 11 of the Bankruptcy Code. At all times since the filing of the Dunes' Chapter 11 case, Dunes has been, and remains, the Debtor-in-Possession.

5. On February 27, 1995, Dunes filed its Complaint in this adversary proceeding.

6. The Complaint presented three (3) Claims for Relief, the second of which is the subject of the District Court's Remand Order. In that claim, Dunes seeks to reject the Agreement under Section 365(a) and requests a declaratory judgment that the Agreement is an executory management contract, not a lease which would be subject to the protections of Section 365(h).

7. This Court previously dismissed on summary judgment Dunes' Complaint in the Adversary Dismissal Order, entered August 25, 1995. Dunes sought reconsideration of that Order which this Court denied by an order entered December 6, 1995.

8. Dunes appealed from the Adversary Dismissal Order. In the July 30, 1996 Remand Order the District Court, inter alia, reversed in part and remanded Dunes' claim for rejection of the Agreement to this Court for further findings regarding whether Dunes could meet the standard for rejection of an executory agreement or lease.⁴

9. Messrs. Michael J. Strone ("Strone") and David W. Wiederecht ("Wiederecht") are authorized representatives of the Debtor.

10. Thomas S. "Sam" Cobb is a consultant hired by GEIC to be Dunes' local representative regarding the Hotel Property.

11. Alvin Dorsky is a senior real estate partner of the law firm of Wolf Block Schorr & Solis-Cohen who represented Dunes and its predecessors in the negotiation and subsequent amendments of the Agreement.

12. Hyatt Corporation is a Delaware corporation. S.C. Hyatt Corporation ("S.C.Hyatt") is a South Carolina corporation and a wholly owned subsidiary of Hyatt Corporation.

13. S.C. Hyatt occupies the Hotel Property and operates the Hyatt Regency pursuant to the Agreement.

14. The Agreement consists of the following five (5) documents:

a. The Agreement and Lease dated November 2, 1973, by and between Dunes Hotel Associates and Hyatt Corporation ("1973 Agreement and Lease");

b. The First Amendment to Agreement and Lease dated January 19, 1976, by and between Dunes Hotel Associates and S.C. Hyatt Corporation ("First Amendment");

c. The Letter Agreement dated July 1, 1983, by and between Dunes Hotel Associates and Hyatt Corporation ("1983 Amendment");

d. The Amendment to Agreement and Lease dated November 7, 1984, by and between Dunes Hotel Associates and S.C. Hyatt Corporation ("1984 Amendment"); and

e. The Letter Agreement dated November 6, 1985, by and between Dunes Hotel Associates and S.C. Hyatt Corporation ("1985 Amendment").

15. No copy of the Agreement or any memorandum of it has ever been recorded in the real property records of Beaufort County, South Carolina.

16. In 1972, Hyatt and Dunes' predecessor entities negotiated for an agreement by which Hyatt would operate a resort hotel to be built on Hilton Head Island.

17. Alvin Dorsky participated in the negotiation and drafting of the 1973 Agreement and Lease and drafted or reviewed each amendment for Dunes or its general partners. Specifically, Mr. Dorsky drafted the first draft of the 1984 Amendment, including its rental and profit retention provisions.

18. As a result, the following provisions of the 1973 Agreement and Lease are particularly pertinent to a determination of the nature of the Agreement:

a. Section 21 provides that the "Agreement shall be governed in all respects by the laws of the State of South Carolina."

b. The Recitals provide that Hyatt is willing to enter into an agreement to provide technical assistance to Dunes "in connection with the planning of a first-class hotel on the Site and its preparation for operation."

c. The Recitals provide that: "Owner Dunes and Hyatt desire to enter into an agreement for such assistance and for a lease of the Hotel."

d. Section 2 states in part that the "Owner hereby lets and leases the Hotel to Hyatt and Hyatt hereby rents the Hotel from Owner. . . . "

e. Section 2 also establishes a thirty (30) year "Term of Leasing" from December 31st of the year in which the Hotel first opens for business to the public, and grants to Hyatt an option to renew under the same terms of leasing for an additional ten (10) years, exercisable by Hyatt through written notice 18 months prior to expiration of the original term.

f. Section 3.1(a) provides Hyatt with a right of possession and right to operate the Hotel as a "business" conforming to a first class hotel standard, and for other activities which are customary and usual in connection with such operation. Under that provision, S.C. Hyatt has complete control and discretion over the operation of the Hotel, including, without limitation, the right to determine the terms of admittance.

g. Section 3.1(a) gives Dunes the right to approve Hyatt\'s choice of general manager for the Hotel.

h. Section 3.3 negates any implication that Dunes has some role in the operation of the Hotel which might arise from Dunes\' ability to veto Hyatt\'s choice of general manager. Section 3.3 states that "right of Owner to receive rental based on the financial returns from the operation of the Hotel shall not be deemed to give Owner any interest, control or discretion in the operation of the Hotel."

i. Section 4 is entitled "Rental", Section 4.1(a) states that "Hyatt shall pay to Owner a rental." Section 4.1(b) defines the manner of rent computation for a development period and a post development period.

j. Section 4.1(c) governs the rental after an initial three year period and provides that "Rental for each fiscal year shall be payable in tentative monthly installments" equal to the lesser of "80% of the Profit as defined elsewhere in the 1973 Agreement and Lease . . . or the Profit for such calendar month less 5% of the Gross Receipts of such calendar month. . . . "

k. Section 12.2 provides that Dunes may terminate for "Inadequate Rentals" defined as less than a yearly rental of $975,000 for each year from the third fiscal year following the opening of the Hotel.

l. Section 4.2 provides for the place of payment of and states that "Each payment of rental to be paid under Section 4.1 hereof shall be paid to Owner at its address . . . or at such other place as Owner may . . . designate in a notice to Hyatt."

m. Section 7.1 requires Hyatt to provide the Hotel with sufficient Working Capital Assets "to assure the uninterrupted and efficient operation of the Hotel at all times during the Term of Leasing." "Working Capital Assets" are defined as:

all liquor and other licenses required to meet the applicable legal requirements and the current assets of the Hotel, including, without limitation, cash on hand and in banks, accounts receivable (less a reasonable reserve for doubtful accounts), food and beverage industry

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