In re Prime Motor Inns, Inc., Bankruptcy No. 90-16604-BKC-AJC. Adv. No. 91-1240-BKC-AJC-A.

• Decision Date: 12 May 1994
• Docket Number: Bankruptcy No. 90-16604-BKC-AJC. Adv. No. 91-1240-BKC-AJC-A.
• Parties: In re PRIME MOTOR INNS, INC., et al., Debtors. PMI INVESTMENT, INC., Plaintiff, v. Allan V. ROSE, Arthur G. Cohen, and Financial Security Assurance Inc., Defendants. FINANCIAL SECURITY ASSURANCE INC., Counterclaim-Plaintiff, v. PMI INVESTMENT, INC., Counterclaim-Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Florida

167 B.R. 261 (1994)

In re PRIME MOTOR INNS, INC., et al., Debtors.

PMI INVESTMENT, INC., Plaintiff, v. Allan V. ROSE, Arthur G. Cohen, and Financial Security Assurance Inc., Defendants.

FINANCIAL SECURITY ASSURANCE INC., Counterclaim-Plaintiff, v. PMI INVESTMENT, INC., Counterclaim-Defendant.

Bankruptcy No. 90-16604-BKC-AJC. Adv. No. 91-1240-BKC-AJC-A.

United States Bankruptcy Court, S.D. Florida, Miami Division.

April 18, 1994.

As Amended May 12, 1994.

Stephen D. Busey, Smith Hulsey & Busey, Jacksonville, FL, and Steven H. Reisberg, Willkie Farr & Gallagher, New York City, for PMI Inv., Inc.

Eric Roth, Wachtell Lipton Rosen & Katz, New York City, and Brian K. Gart, Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., Miami, FL, for Financial Sec. Assur., Inc.

Marshall J. Cooper, P.A., Fort Lauderdale, FL, for Allan V. Rose and Arthur G. Cohen.

Mark J. Sugarman, Robinson, Silverman, Pearce, Aronsohn & Berman, New York City, for Allan V. Rose.

George Wade, Shearman & Sterling, New York City, for Committee of Unsecured Creditors.

Robert A. Angueira, Miami, FL, Asst. U.S. Trustee.

MEMORANDUM DECISION

A. JAY CRISTOL, Chief Judge.

This cause came before this Court for trial on January 18, 19 and 20, 1994. The Court having reviewed the testimonial and documentary evidence, and having had the opportunity to observe the demeanor and candor of the witnesses at the trial, makes the following findings of fact and conclusions of law in accordance with Federal Rules of Bankruptcy Procedure 7052.

INTRODUCTION

1. On or about December 27, 1991, PMI Investment, Inc. ("PMI"), one of the debtors herein, filed its original Complaint in this action against Allan V. Rose and Arthur G. Cohen in which it sought to collect under a $50 million personal guaranty signed by Messrs. Rose and Cohen and delivered to PMI in return for PMI advancing a loan to certain companies they controlled. (See PMI Exh. 45.)

2. On or about July 20, 1992, Financial Security Assurance Inc. ("FSA") notified PMI that it intended to assert that FSA was entitled to any recovery PMI obtained in this action under the terms of a certain intercreditor agreement, dated November 6, 1989 (the "Intercreditor Agreement") between PMI and FSA. (See FSA Exh. 91 PMI Amended Complaint at s 38; Tr. Elwood at 392-93.)¹

3. On or about August 25, 1992, in response to FSA's statement, PMI filed an Amended Complaint. The Amended Complaint realleged PMI's claim against Rose and Cohen for recovery under the personal guaranty. The Amended Complaint also added FSA as a defendant in order to obtain a declaratory judgement that any recovery PMI obtained in this action belonged to PMI and to PMI alone. (See FSA Exh. 91 at s 40.) On or about October 14, 1992, FSA filed its answer to the Amended Complaint and asserted a counterclaim against PMI for its own declaratory judgment that it was entitled under the Intercreditor Agreement to any proceeds from the litigation.

4. PMI and Rose and Cohen reached a settlement in regard to PMI's claim for recovery under their personal guaranty. Pursuant to a Consolidated and Amended Settlement Agreement, dated as of October 12, 1992, PMI and Rose agreed to a settlement whereby Northeast Hotel Corporation ("NHC"), a corporation wholly owned by Allan Rose, is to purchase the underlying loan, including the personal guaranty, from PMI for a payment valued at the time of trial at approximately $30 to $32 million. (See PMI Exh. 1; Tr. Elwood at 375-80.)

FINDINGS OF FACT

(i) The Events of 1988 and 1989

5. On February 11, 1988, PMI entered into a loan transaction (the "PMI Loan") with borrowers Northeast Hotel Associates ("Northeast"), Universal Motor Lodges ("Universal") and Southeast Hotel Associates (collectively, the "PMI Borrowers").² The PMI Loan is documented by an agreement entitled Amendment and Restatement, dated February 11, 1988 (the "PMI Loan Agreement"). (See PMI Exh. 2)

6. The PMI Loan was funded in the initial amount of $60 million and allowed the PMI Borrowers to request additional loan advances up to a total amount of $200 million, subject to the terms and conditions of the Loan Agreement. (Tr. Bernadino at 66-67.) At the time of the transaction, Prime Motor Inns, Inc. ("Prime"), the parent company of PMI, owned the Howard Johnson franchise system. The purpose of the PMI Loan was in part to allow the PMI Borrowers to develop new hotels that would be added to the franchise system. (Tr. Bernadino at 65-66.)

7. The PMI Loan was secured by the PMI Borrowers delivering to PMI a mix of first and second mortgages on 50 hotel properties owned by them as the collateral for the Loan. (See Tr. Bernadino at 67; Tr. Bingham at 209-10; PMI Exh. 41.) The number of hotels pledged to PMI as security for the Loan soon increased to approximately 60 hotels. (Tr. Bernadino at 69; PMI Exh. 7.) The PMI Loan required that the value of these hotels, as calculated according to financial formulas set forth in the Loan Agreement, at all times exceed the outstanding amount of the Loan. (See Tr. Bingham at 206.)

8. PMI also required that Allan V. Rose and Arthur G. Cohen, two individuals who indirectly owned and controlled the PMI Borrowers, provide PMI with a personal guaranty of the PMI Loan. Rose and Cohen executed a personal guaranty, dated February 11, 1988 (the "Guaranty"), pursuant to which they "jointly and severally, absolutely and unconditionally" guaranteed to PMI all payments due under the PMI Loan up to the amount of $50 million. (PMI Exh. 3; Tr. Bernadino at 67-68.)

9. However, the PMI Loan Agreement provided that before PMI could seek any recovery under the Guaranty it first had to exhaust certain remedies against the PMI Borrowers in respect to payment in the form of Management Contracts.³ (See Tr. Bingham at 195-96; PMI Exh. 2 at Section 10.1(a).) The Guaranty also provided that PMI had to exhaust its remedies against the collateral before seeking recovery against the guarantors under certain circumstances. (See PMI Exh. 3 at 2.)

10. In late 1988, Mr. Rose decided to seek to refinance some of the first mortgage debt that he had on certain of the hotels that were pledged to PMI under the PMI Loan. As previously noted, the mortgages that were given to PMI were a mix of first and second mortgages. One group of hotels were subject to first mortgages in favor of General Electric Credit Corp. ("GECC"). Mr. Rose wanted to refinance these GECC mortgages because he could obtain lower interest rates. (See Tr. Bernadino at 71-73, 115; FSA Exh. 21.)

11. By early 1989, Mr. Rose had entered into negotiations with FSA in regard to obtaining a loan, (the "FSA Loan") the proceeds of which would in part be used to repay the GECC mortgages. The Loan from FSA was to be in the amount of $115 million. The borrower under the FSA Loan was to be Southeast Hotel Associates and the Loan was to be secured by approximately 21 hotels. (Tr. Bernadino at 71; Tr. Bingham at 197-98.)

12. The negotiations with FSA regarding the FSA Loan lasted almost a year. (Tr. Rose at 249-50.) On November 6, 1989, the parties were able to complete their transaction and executed a loan agreement entitled Loan and Security Agreement (the "FSA Loan Agreement"), by and between FSA Zeta Co. ("FSA Zeta"), as issuer, and Southeast Hotel Associates, R/C Hotel Associates, Hauppauge Hotel Corporation, Pennco Hotel Corp., PNP General Partner, Inc. and Livonia Realty Inc., as borrowers (collectively, the "FSA Borrowers").⁴ (See PMI Exh. 36.) While during the initial negotiations of the Loan only Southeast Hotel Associates was contemplated to be the Borrower, as finally structured the number of Borrowers increased. This was the result of some internal restructuring as to the owners of the hotels and an attempt to create single purpose bankruptcy remote entities as the Borrowers. (See Tr. Bernadino at 86; PMI Exh. 27 Final Executive Summary at 1.)

13. The FSA Loan to the FSA Borrowers was in the amount of $115 million. (See PMI Exh. 36 at 14; Tr. Utley at 489-91.) The FSA Borrowers provided to FSA as security for the FSA Loan mortgages and security interests in the 21 hotels owned or leased by the FSA Borrowers. FSA's internal documents show that FSA had these hotels appraised by Hospitality Valuation Service and at the time of the transaction such appraisals showed a value of these hotels of $167.3 million. (See PMI Exh. 27 Final Executive Summary at 5.) This value is also supported by the testimony of Mr. Rose. (Tr. Rose at 253.)

14. FSA also sought and obtained from Rose and Cohen additional collateral. This additional collateral was provided pursuant to an agreement entitled Cohen & Rose Guarantee # 1, dated November 6, 1989 (the "R & C Collateral Guaranty"). (PMI Exh. 37.) The R & C Collateral Guaranty was non-recourse to Rose and Cohen and provided that any payment thereunder was to be paid solely by recourse to two items of specified collateral. Under the agreement, Rose and Cohen pledged to FSA (i) a United States Treasury zero coupon security (the "Zero Coupon Security") in the face amount of $10 million at maturity, and (ii) a letter of credit in the initial amount of $5 million, but which increased annually until maturity. (PMI Exh. 27 at 2; Tr. Rose at 251-53.) FSA valued this additional collateral as worth approximately $20 million at maturity. (Tr. Rose at 253; see PMI Exh. 27 at 2.)

15. Thus, at the time FSA made its $115 million Loan, it had obtained from the FSA Borrowers and Rose and Cohen security which it valued at approximately $187 million.

16. As previously noted, at the time of the initial discussions with FSA, it was contemplated that the borrower under the FSA Loan would be Southeast Hotel Associates and that approximately 21 hotels would serve as collateral for the Loan. Southeast Hotel Associates was at that time also one of the three borrowers under the PMI Loan. Similarly, each of the 21 hotels that were to serve as the collateral for the FSA Loan...