In re First Phoenix-Weston, LLC, Case No. 16–12820–cjf–11
| Decision Date | 14 August 2017 |
| Docket Number | Case No. 16–12820–cjf–11,Jointly Administered with Case No. 16–12821–cjf–11 |
| Citation | 575 B.R. 828 |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
| Parties | IN RE: FIRST PHOENIX–WESTON, LLC, and FPG & LCD, L.L.C., Debtors. |
Justin M. Mertz, Esq., Michael Best & Friedrich LLP, Milwaukee, WI, for Debtor.
Frank W. DiCastri, Esq., Husch Blackwell LLP, Milwaukee, WI, for Creditor.
This is a tale of two views of the same transaction. Debtor First Phoenix–Weston, LLC ("Weston") borrowed $14,694,599.73 from Sabra Phoenix TRS Venture, LLC ("Sabra Phoenix") in November of 2013. The transaction was documented by a Loan Agreement, Note, and Mortgage. In addition, an Option Agreement was executed the same day between Weston and Sabra Phoenix. The Loan Agreement and related documents—including the Option Agreement—were assigned to Sabra Phoenix Wisconsin, LLC ("Sabra") by Sabra Phoenix.
On August 15, 2016, Weston and Co–Debtor FPG & LCD, L.L.C. ("FPG") (collectively the "Debtors"), filed voluntary Chapter 11 petitions. On December 21, 2016, the Debtors' largest pre-petition lender, Sabra, filed Proof of Claim No. 16 in the Weston case. The claim was in an amount "not less than" $17,773,438.77.1 The Proof of Claim contains an addendum detailing the calculation of the stated amount and, further, asserts "an unliquidated, unsecured amount as damages for Debtors' pre-petition breach of the Option Agreement."
The Debtors objected to Sabra's Proof of Claim No. 16 ("Claim Objection"). The objection focuses on the claim for additional sums related to the Option.2
Sabra moved "for Entry of Orders: (I) Estimating Claim for Breach of Option Agreement; and (II), to the Extent Necessary, Temporarily Allowing Sabra's Claims for Voting Purposes" (the "Option Motion"). Weston filed a limited objection to Sabra's Option Motion contending that Sabra does not have a claim under the Option Agreement. An evidentiary hearing on the Claim Objection and the Option Motion was conducted. After that hearing, the parties made closing arguments, submitted post-hearing briefs, and the Court took the matter under advisement.
For the reasons stated below, the Court denies the Option Motion and grants the Claim Objection with respect to the unliquidated claim for breach of the Option Agreement.
The Debtors operate an assisted living and a skilled nursing facility (the "Facility") in Weston, Wisconsin.3 Construction of the Facility began in March 2012. The Debtors obtained a certificate of occupancy in February 2013.
In August 2012, Sabra Health Care REIT, Inc. ("REIT"), Sabra's corporate parent, and First Phoenix Group, LLC ("FP Group"), one of Weston's original members,4 executed a writing outlining circumstances that might result in potential business relationships between the parent companies. This writing was called a Pipeline Agreement (the "Pipeline Agreement").
FP Group was developing senior housing facilities in the Upper Midwest primarily in Wisconsin and Minnesota. REIT concentrates on health care real estate focusing primarily on senior housing and skilled nursing facilities. REIT does not operate any facilities and it typically looks to others to develop the facilities. The Pipeline Agreement set a framework for possible transactions. It provided the opportunity for FP Group to bring a project to REIT for approval or preapproval. If approved, REIT could—but was not required to—provide pre-development financing to assist FP Group with certain pre-construction financing expenses. After completion of construction, FP Group could approach REIT requesting short-term mortgage financing to refinance any construction mortgage. Any such mortgage was intended to remain in place no more than three years.
The Pipeline Agreement also required an option agreement with respect to any "Approved Facility." Section 4.5 of the Pipeline Agreement contemplated that for each Approved Facility, FP Group would grant REIT an option to purchase the applicable Approved Facility. In addition, REIT was to grant FP Group an option to "Put" the applicable Approved Facility.
Following completion of construction, refinancing of the construction loan was sought. Weston refinanced the Facility through a loan from Sabra Phoenix.5 The loan was evidenced by a Loan Agreement ("Loan Agreement"), Note, Allonge, Mortgage, and various modifications to or assignments of those documents (collectively, the "Loan"). Simultaneously, Weston and Sabra Phoenix executed an Option Agreement.
The need for money to pay off the construction loan was the golden thread that united Weston and Sabra. The Loan and Option were inextricably intertwined. The Option Agreement was a condition precedent to the Loan. Absent the Option there would have been no Loan, and absent the Loan there would have been no Option. At the moment the documents were signed, the Purchase Price was virtually zero and the calculation never materially changed in any way beneficial to Weston. The Loan Agreement and Option Agreement were signed concurrently.
The Option Agreement is, according to Sabra, a two-sided coin—separate from (though related to) the Loan. It granted Sabra an option to purchase at a price calculated based on EBITDAR minus estimated management fees of 5% of gross and further reduced by an adjustment factor and by an estimated initial lease rate of 7.75% for the Assisted Living Facility ("ALF") and 9% for the Skilled Nursing Facility ("SNF") during the "Call Option Period." The Call Option Period ran from the date of "Stabilization" and expired sixty (60) days following the "Outside Stabilization Date."6 The Facility never achieved the occupancy target. Thus, the Call Option Period was to expire on May 6, 2015.
The other side of the coin was a Put Option (the "Put" or "Put Option"). Under the Put Option Weston had the opportunity to provide notice to Sabra of its intention to sell to Sabra. Under such notice, and subject to certain conditions, Sabra would have been required to purchase. However, this notice could not be given until Stabilization occurred and it expired at the end of the Put Option Period.
Stabilization never occurred. The Put Option Period and the Call Option Period were to expire simultaneously on May 6, 2015. However, the parties amended the Option Agreement on May 5, 2015.7 Relevant here, the May 5, 2015 amendment ("Second Amendment") extended Sabra's Call Option Period to the Loan Maturity Date. The Amendment did not extend the Put. Simultaneously, the parties modified the Loan Agreement to amend the definition of Maturity Date as follows:
The Maturity Date with respect to the Loan shall be the earlier to occur of: (i) in the event that Sabra (or its Affiliate) elects to purchase the Facility pursuant to the Option Agreement, the Purchase Closing Date for the Facility, or (ii) any earlier date on which the Loan shall be required to be paid in full, whether by acceleration or otherwise, or Borrower elects to prepay the Loan in full pursuant to Section 3.6(d). Notwithstanding the foregoing, the Maturity Date for the Loan, including, without limitation, under the circumstances described under clause (i) above, shall in no event be later than the date that is thirty-six (36) months after the Closing Date.
On January 6, 2016, Sabra sent written notice to FP Group stating its intent to exercise its Call Option under the Option Agreement dated November 7, 2013, as amended. Thus, under the Third Modification, the Loan was to mature on the Purchase Closing Date for the Facility.
Weston disputes whether Sabra's January 6, 2016 letter comports with the Option Agreement's "post-notice procedures and deadline for closing." It argues that under the Option Agreement, as amended, Sabra had a duty to close the purchase of the Property before June 26, 2016. Weston maintains that through an email sent by FP Group dated January 22, 2016, it complied with all applicable closing requirements by furnishing Sabra with a calculation of the Property's purchase price.
On February 11, 2016, Sabra sent another letter to FP Group confirming a purchase price for the Facility as zero, and set a closing date of March 28, 2016. Following the February 11, 2016 letter, FP Group executed its right to extend the last day for closing to June 26, 2016. Neither Sabra nor Weston initiated a closing at any time on or before June 26, 2016. Sabra asserts the onus was on Weston to complete closing, and Weston contends the onus was on Sabra. Weston filed its Chapter 11 on August 15, 2016.
Per Sabra's February 11, 2016 letter, it approved the Debtors' calculation of the ALF amount and the SNF amount pursuant to the exercise of Sabra's Call Option under the Option Agreement. Sabra agreed that the Purchase Price for the Facility was "zero," "as the sum of the ALF Amount and the SNF amount was ($4,943,356)." FP Group was required to fund into escrow "any shortfall between the Loan Payoff Amount and the Purchase Price" at closing. Sabra defined the Loan Payoff Amount to be $16,079,104. With the Purchase Price at zero, FP Group was to deposit $16,079,104 into escrow.
For the reasons set forth herein, Sabra is not entitled to an additional claim for Weston's alleged breach of the Option Agreement. In reaching this conclusion, the Court finds the Option Agreement was inextricably linked to the Loan Agreement and served merely as additional security for the Loan transaction. The Court further finds a lack of consideration for the Second Amendment, that the Option was unconscionable, and that the Option impermissibly clogged Weston's right of redemption. Contrary to Weston's theory of the case, the Option did not expire upon Sabra's failure to set a closing time. Regardless, as a result of the Court's findings, Sabra is not entitled to damages under the Option.
To estimate Sabra's claim for Weston's alleged breach of the Option Agreement, the Court is...
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...to arbitration clauses have the burden to prove the defenses—including unconscionability ...."); see also In re First Phoenix-Weston, LLC, 575 B.R. 828, 843 (Bankr. W.D. Wis. 2017) (under Wisconsin law, "[t]he party claiming a contract is unconscionable has the burden to prove facts suffici......