In re SW Hotel Venture, LLC

• Citation: 55 Bankr.Ct.Dec. 159,460 B.R. 4
• Decision Date: 04 October 2011
• Docket Number: No. 10–14535–JNF.,10–14535–JNF.
• Parties: In re SW HOTEL VENTURE, LLC, et al.,1 Debtors.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

460 B.R. 4

55 Bankr.Ct.Dec. 159

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

No. 10–14535–JNF.

United States Bankruptcy Court, D. Massachusetts.

Oct. 4, 2011.

Harold B. Murphy, Natalie B. Sawyer, Hanify & King, P.C., Boston, MA, for Debtors.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.I. INTRODUCTION

The matter before the Court for determination is the “Motion of The Prudential Insurance Company of America 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”).² Through its 506(b) Motion, The Prudential Insurance Company of America (“Prudential” or the “Secured Claimant”), which purportedly holds a first mortgage on real property owned by SW Hotel Venture, LLC (“SW” or the “Debtor”), as well as other collateral owned by SW and the Affiliated Debtors (together with SW, the “Debtors”), seeks a determination that it is an oversecured creditor entitled to accrued interest under 11 U.S.C. § 506(b) from the petition date ³ at the default rate of interest set forth in loan documents executed by the parties. It also seeks an order authorizing the application of postpetition payments made to it by the Debtors first to postpetition interest, fees and costs, and then to the principal balance of its loan. The Debtors, as well as the City of Boston (the “City”), object to the 506(b) Motion. The Debtors contend that Prudential was undersecured as to SW until June 8, 2011 following the closing of the sale of the W Hotel (the “Hotel”) and is an undersecured creditor as to the remaining Affiliated Debtors and as such is not entitled to default interest as Prudential requests. Furthermore, the Debtors and the City maintain that the default rate of interest sought by Prudential is unreasonable and inequitable; that it should not be allowed to accrue any interest; that Prudential should not be able to recover interest at the default rate set forth in the Loan Documents; and that Prudential has not itemized any fees or costs.

The Court held an evidentiary hearing on the 506(b) Motion in conjunction with the hearing on confirmation of the Debtors' Modified First Amended Joint Plan of Reorganization, and Prudential's Objection to that plan. After a three day trial beginning on June 27, 2011 and extensive briefing by the parties, the Court took the 506(b) Motion under advisement. As the Court observed in note 3, the Debtors commenced an action against Prudential on September 15, 2011 seeking to avoid various liens under 11 U.S.C. §§ 544 and 547.

The issues presented include whether Prudential is an oversecured creditor entitled to accrue and be paid postpetition interest after the commencement of the Debtors' Chapter 11 cases, and, if so, whether it is entitled to interest at the default rate. Resolution of those issues requires the Court to decide at what point in time a creditor's secured status is determined during the pendency of a Chapter 11 case for the purpose of determining whether a secured claimant is entitled to postpetition interest and other charges as an oversecured creditor pursuant to 11 U.S.C. § 506(b).

II. PROCEDURAL AND FACTUAL BACKGROUNDA. Procedural Background

On April 28, 2010 (the “Petition Date”), SW, General Trading Company (“General Trading”), Frank Sawyer Corporation (“FSC”), 100 Stuart Street, LLC (“Stuart Street”), and Auto Sales & Service, Inc. (“Auto Sales”) filed voluntary Chapter 11 petitions. Subsequently, on June 4, 2010, General Land Corporation (“General Land”), 30–32 Oliver Street Corporation (“Oliver Street”), and Arlington Street Trust (“Arlington Street Trust”) also filed voluntary Chapter 11 petitions.⁴ Approximately one year after the commencement of the Debtors' cases, Prudential, on April 15, 2011, filed its 506(b) Motion, asserting that it is entitled to default interest from April 28, 2010 in the amount of $24,740,835.30. The Debtors and the City filed Objections to the 506(b) Motion on June 21, 2011.

On November 1, 2010, Prudential filed proofs of claim in the Debtors' cases, identifying itself as the holder of a secured claim in an amount of “[n]ot less than $180,803,185.93 (plus all interest, costs, and fees).” Prudential attached to its proofs of claim an Addendum containing a narrative description of its claim and a schedule—Schedule 1—in which it referenced “Construction Loan Documents,” including a Construction Loan Agreement dated January 15, 2008, a Promissory Note dated January 15, 2008, a First Priority Mortgage, Security Agreement, Fixture Filing, and Assignment of Sales Contracts and Deposits dated as of January 15, 2008 (the “Mortgage”) on the land, improvements and personal property located on 100 Stuart Street, Boston, Massachusetts, and various other guaranties, assignments, pledge agreements, and mortgages affecting property of the Affiliated Debtors (the “Construction Loan Documents”). Despite the instruction on the proof of claim form (Official Form 10) to “attach copies of lien documentation,” none of the documents were attached to the proofs of claim, and, except for the Construction Loan Agreement, none of the loan documents, including amendments to the Construction Loan Agreement, the Promissory Note and the Mortgage on 100 Stuart Street, were introduced into evidence at the trial.

Prudential specifically asserted in paragraph 3(a) of the Addendum that, in addition to the aggregate principal amount of $180,803,185.93, it was owed “all interest accrued and unpaid both prior and subsequent to the Petition Date [April 28, 2010], calculated in accordance with the Construction Loan Documents, plus all fees, expenses and other amounts owed to Prudential pursuant to the Construction Loan Documents.....” Moreover, in paragraph 3(b) of the Addendum, Prudential asserted the following:

In addition to the principal balance of the Construction Loan, both prior and subsequent to the Petition Date, the Debtors are obligated and liable to the Claimant for all other amounts under the Construction Loan Documents including, but not limited to, (i) costs and expenses of counsel relating thereto including, without limitation, fees and expenses of counsel, experts, consultants, and witnesses; (ii) indemnification costs; (iii) all costs incurred in the payment, performance, cure or remedy of any defaults, failed payments, or failure to act of any of the Debtors, (iv) accrued and unpaid Net Sales Proceeds (as defined in the Construction Loan Agreement); (v) costs incurred in connection with any filing and recording fees and expenses, title insurance and other similar expenses incurred in creating and perfecting the Liens and Guaranty Obligations ..., (vi) costs incurred in connection with enforcing or preserving any rights in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation or otherwise affecting any of the Debtors, (vii) costs incurred in enforcing any obligations of or collecting any payments due from any of the Debtors ..., (viii) contract damages arising from misrepresentations, defaults and breaches of representations, warranties, and covenants under the Construction Loan Documents, (ix) fees, costs and additional interest; (x) accrued and unpaid interest, including default rate interest; and (xi) any and all other fees, expenses, charges or amounts, whether arising under federal or state law or under principles of equity or otherwise.

Prudential did not attach to its proofs of claim any accounting of any amounts owed for prepetition interest, postpetition interest, or any of the fees, costs or charges it now seeks. As noted above, it did not attach to its proofs of claim any of the Construction Loan Documents to which it referred in the Addendum, including the Construction Loan Agreement, Promissory Note or Mortgage.

On August 3, 2010, Prudential filed a Motion for Relief from the Automatic Stay pursuant to 11 U.S.C. § 362(d) (the “Lift Stay Motion”) with respect to the real property located at 100 Stuart Street, comprised of the Hotel and over 120 condominium units (the “Residences” or the “Condominiums”). On January 28, 2011, after briefing and a three-day evidentiary hearing, the Court denied the relief sought by Prudential. In the Court's Memorandum (the “Lift Stay Memorandum”), see In re SW Boston Hotel Venture LLC, 449 B.R. 156 (Bankr.D.Mass.2011), the Court denied Prudential's request for relief from the automatic stay after finding that when the total value of its collateral package was evaluated an equity cushion in excess of $19 million existed as to the amount of Prudential's claim.

Approximately two months after the Court issued the Lift Stay Memorandum and Order with respect to the Lift Stay Motion, the Debtors, on March 28, 2011, filed a motion seeking Court approval of the sale of the Hotel located at 100 Stuart Street owned by SW, along with approval of sales procedures for the Residences, specifically “Debtor's Motion for Order (I) Authorizing the Sale of the Debtor's Commercial Unit, Parking Garage Unit and Related Assets Free and Clear of All Liens, Claims, Interests and Encumbrances, (II) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in Connection Therewith and (III) Granting Related Relief” (the “Sale Motion”).

The Sale Motion evidenced that the Debtors had entered into a purchase and sale agreement with Razorbacks Owner LLC (the “Purchaser”), an affiliate of Pebblebrook Hotel Trust, pursuant to which the Purchaser agreed to acquire the Hotel for $89.5 million, subject to higher and better offers. On May 24, 2011, the Court approved the sale of the Hotel pursuant to 11 U.S.C. § 363 to the Purchaser. The closing occurred on June 8, 2011. After the closing, the Debtors caused net sale proceeds in the sum of $83,322,017 to be paid to Prudential.

Prior to the closing of the sale of the...