In re SW Boston Hotel Venture, LLC

• Decision Date: 14 November 2011
• Docket Number: No. 10–14535–JNF.,10–14535–JNF.
• Citation: 55 Bankr.Ct.Dec. 204,460 B.R. 38
• Parties: In re SW BOSTON HOTEL VENTURE, LLC, et al.,1 Debtors.
• Court: U.S. Bankruptcy Court — District of Massachusetts

460 B.R. 38

55 Bankr.Ct.Dec. 204

In re SW BOSTON HOTEL VENTURE, LLC, et al.,1 Debtors.

No. 10–14535–JNF.

United States Bankruptcy Court, D. Massachusetts.

Nov. 14, 2011.

Charles R. Bennett, Jr., Christopher M. Condon, Donald Ethan Jeffery, Harold B. Murphy, John C. Elstad, Natalie B. Sawyer, Murphy & King, Professional Corporation, Boston, MA, for Debtors.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.I. INTRODUCTION

The matters before the Court for determination are the Debtors' Modified First Amended Joint Plan of Reorganization (the “Plan”) and the Objection to Confirmation of the Plan filed by Prudential Insurance Company of America (“Prudential”).² Interested party, the City of Boston (the “City”), supports confirmation of the Plan. The Debtors are SW Boston Hotel Venture, LLC (“SW”), Auto Sales & Service, Inc. (“Auto Sales”), General Trading Company (“General Trading”), Frank Sawyer Corporation, 100 Stuart Street, LLC (“100 Stuart Street”), 30–32 Oliver Street Corporation (“Oliver Street”), General Land Corporation (“General Land”), and 131 Arlington Street Trust (“Arlington Street”) (collectively, the “Debtors”).

The Court conducted a three-day evidentiary hearing on June 27, 28, and 29, 2011 with respect to this contested matter, as well as the contested matter relating to Prudential's Motion for an Order Authorizing the Application of Payments Received during the Chapter 11 Cases to Payment of Postpetition Interest pursuant to Section 506(b) of the Bankruptcy Code (the “506(b) Motion”). Nine witnesses testified and 28 exhibits were introduced into evidence. On October 4, 2011, this Court issued a decision with respect to the 506(b) Motion, which is incorporated herein by reference. See In re SW Hotel Venture, LLC, 460 B.R. 4 (Bankr.D.Mass.2011). On October 20, 2011, the Court entered an “Order Fixing Amount of Allowed Prudential Secured Claim as of October 4, 2011.”

The parties submitted Proposed Findings of Fact and Conclusions of Law and briefs on August 1, 2011, at which time the Court took these matters under advisement. The Court now makes the following findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.

II. BACKGROUNDA. Procedural Posture of the Debtors' Cases

On April 28, 2010, SW, Auto Sales, General Trading, Frank Sawyer Corporation, and 100 Stuart Street filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in this Court. On June 4, 2010, General Land, Arlington Street and Oliver Street filed Chapter 11 petitions. The Debtors' cases are the subject of an order for joint administration. All of the Chapter 11 Debtors have continued as debtors-in-possession since the commencement of the cases. The United States trustee appointed an Official Committee of Unsecured Creditors (the “Committee”) which serves in all of the cases. The Committee supports confirmation of the Debtors' Plan.

After evidentiary hearings held in November of 2010, the Court denied Prudential's Motion for Relief from the Automatic Stay. See In re SW Boston Hotel Venture, LLC, 449 B.R. 156 (Bankr.D.Mass.2011). The Court found that there was no cause for relief from the automatic stay under 11 U.S.C. § 362(d)(1) because Prudential did not lack adequate protection for its security interest as the value of all of the collateral it had been pledged by all the Debtors exceeded its loan balance, and, thus, it was adequately protected by an equity cushion. The Court also found that even though the value of the assets of SW, principally the W Hotel and condominiums, was less than the amount owed to Prudential, the Debtors had sustained their burden of demonstrating that a plan was in prospect, and, therefore, Prudential was not entitled to relief from stay under 11 U.S.C. § 362(d)(2).

As the Court observed in the Memorandum issued in conjunction with Prudential's 506(b) Motion, in light of events that transpired after the Memorandum issued on January 28, 2011, neither the parties nor the Court accurately valued the W Hotel as it sold for substantially more than the opinions expressed by both parties' appraisers and the value determined by the Court. In March of 2011, the Debtors entered into a purchase and sale agreement for the sale of the W Hotel to Razorbacks Owner LLC, an affiliate of Pebblebrook Hotel Trust, for the sum of $89.5 million. The sale required resolution of several contingencies, including the assent of the manager of the W Hotel, an affiliate of Starwood Worldwide Hotels and Resorts, Inc. (“Starwood”), and the assignment of warranties by the building's contractor, Bovis Lend Lease LMB, Inc. (“Bovis”). The contingencies were favorably resolved by agreements among the Debtors, Starwood and Bovis, and the sale of the W Hotel closed on June 8, 2011. As a result of the sale closing, Prudential was paid the total net proceeds of the sale, namely $83,322,017.

The Debtors filed their Joint Plan of Reorganization and Disclosure Statement on March 31, 2011. Thereafter, the Debtors amended their plan and subsequently filed a further modification. On June 27, 2011, the Debtors filed their Modified First Amended Joint Plan of Reorganization which is the subject of the Debtors' request for confirmation and Prudential's Objection. In summary, the Plan provides for payment in full of all allowed claims held by non-insiders from the income generated by the Debtors' operations and the sale of the Debtors' assets. The Debtors propose to sell the condominiums in the ordinary course of SW's business and the proceeds of the sales of the condominiums, and the assets and income of the affiliated Debtors will be used as necessary to pay allowed claims in full with interest.

B. Class 2—Prudential's Secured Claim

The treatment of Prudential's allowed secured claim is set forth in Sections 1.10 and 4.2 of the Plan. The Allowed Prudential claim is defined in the Plan as “$180,803,187.86 less all payments made to, or received by, Prudential on account of its Claims against the Debtors from the Petition Date through the Effective Date ...” or such other amount as determined by the Court. According to the Plan, Prudential's allowed Class 2 claim will be paid in full prior to March 31, 2014 with post-confirmation interest at a rate of 4.25%, or such other rate as determined by the Court. Additionally, through the Plan, the Debtors propose that Prudential shall retain its prepetition liens on the Debtors' property and it will be paid the “Residence Net Sales Proceeds,” specifically defined at Section 1.98, but generally the sales price of the condominiums, less 8% for closing costs and the amount necessary to pay outstanding real estate taxes and condominium fees, as well as budgeted operating expenses. Prudential also will receive, on a monthly basis, the aggregate of the Debtors' cash in excess of working capital amounts.

In addition, the Plan establishes both affirmative and negative covenants for the benefit of Prudential, as well as the City of Boston's Class 3 claim. The covenants are set forth in Exhibit A to the Plan. Generally, the Plan restricts the Debtors' ability to exceed budgeted expenses, to grant liens, to change management, to buy assets other than in the ordinary course of business, or to make any distribution to the holders of the equity interests in the Debtors. The affirmative covenants require the Debtors to file all post-confirmation tax returns, pay all condominium fees promptly, and maintain appropriate insurance policies. In addition, the Plan requires the Debtors to submit monthly financial reports to Prudential, including accountings of excess cash, financial statements, copies of leases and purchase and sale agreements for the condominiums, and bank account statements. The Debtors also must provide Prudential with quarterly reconciliations of actual and budgeted expenses, as well as annual unaudited financial statements and tax returns.

The Plan also established minimum prices for the sale of the condominiums which are approximately 2.5% lower than the contractual release prices in the prepetition Prudential loan documents. Finally, the Plan provides for Prudential to receive such additional treatment as the Court determines is necessary to provide Prudential with the indubitable equivalent of Prudential's allowed claim.

C. Class 3—City of Boston's Secured Claim

The Plan provides that the allowed secured claim of the City will be paid in full including interest at the contract rate of 8%. The City's allowed secured claim is defined at “$10,704,247 less all payments made to, or received by the City” on account of its claim during the pendency of the case. According to the Plan, the City will only be paid interest on account of its secured claim pending payment in full of Prudential's claim. The City will retain its liens on the Debtors' property.

D. Class 6—The Bovis Claim

The Plan provides for treatment of Bovis's claim in Class 6. Bovis was the construction manager for the SW project. The Plan incorporates a compromise between the Debtors and Bovis with respect to alleged breaches of contract pertaining to construction, payment, and contractual warranties. SW and Bovis agreed to a compromise, which the Court approved on March 30, 2011, after notice and a hearing and without objection from any creditors, including Prudential. Under the Plan, Bovis is a separately classified, impaired class. It will have an allowed claim in the approximate amount of $1.9 million to be paid in two equal installments, the first on the effective date of the Plan and the second in one year from the effective date. Bovis accepted and supports the Plan.

E. Classes 4 and 5—Miscellaneous Secured Claims and Mechanics Lien Claims

The Plan, in Class 5, provides that all creditors with mechanics liens against the Debtors' property will receive full payment of their claims from Bovis in accordance with the Court-approved compromise. Class 4 pertains to Miscellaneous Secured...