In re Urban Commons 2 W.

• Decision Date: 16 February 2023
• Docket Number: 22-11509 (PB)
• Parties: In re: URBAN COMMONS 2 WEST LLC, ET AL.,[1] Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

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In re: URBAN COMMONS 2 WEST LLC, ET AL.,^[1]Debtors.

No. 22-11509 (PB)

United States Bankruptcy Court, S.D. New York

February 16, 2023

Chapter 11

DAVIDOFF HUTCHER CITRON, LLP, Attorneys for the DebtorJonathan S. Pasternak, Robert Leslie Rattet

SILVERMAN ACAMPORA LLP, Attorneys for Creditors Committee By: Ronald J. Friedman, Haley Trust

PRYOR CASHMAN LLP Attorneys for Highgate Hotels, LP, By: Itai Y. Raz, Sameer M. Alifarag

KLESTADT WINTERS JURELLER SOUTHARD STEVENS, LLP Attorneys for The Residential Board of Managers of the Millennium Point Condominium, By: Tracy L. Klestadt, Kathleen M. Aiello

HILLER, P.C., Attorneys for The Residential Board of Managers of the Millennium Point Condominium, By: Michael Hiller, Scott Woller

FRIED, FRANK, HARRIS, SHRIVER JACOBSON LLP, Attorneys for Battery Park City Authority, By: Janice MacAvoy, Jennifer L. Rodburg

HERRICK, FEINSTEIN LLP Attorneys for BPC Lender, LLC, By: Steven B. Smith, Avery S. Mehlman, Silvia A. Stockman

COHEN, WEISS AND SIMON, LLP, Attorneys for New York Hotel Trades Council & Hotel Association of New York City, Inc. Employee Benefits Funds, By: Richard M. Seltzer

UNITED STATES DEPARTMENT OF JUSTICE, Attorneys for the U.S. Trustee, By: Tara Tiantian

MODIFIED BENCH DECISION GRANTING DEBTORS' MOTION FOR APPROVAL OF DIP FINANCING

PHILIP BENTLEY, UNITED STATES BANKRUPTCY JUDGE

Introduction

Before the Court is the Debtors' motion (the "DIP Motion" or "Motion") for a final order approving post-petition financing and granting related relief, including adequate protection to BPC Lender, LLC(the "Lender"), the Debtors' senior secured pre-petition lender and an affiliate of the DIP lender.The Debtors have consensually resolved all objections to the Motion except the limited objection filed by their former property manager, Highgate Hotels, L.P.("Highgate").^[2]

Highgate objects to only one aspect of the Motion: a provision of the DIP Order authorizing and directing the Debtors' former counsel to turn over approximately $5.6 million in insurance proceeds (the "Insurance Proceeds"), which counsel has been holding in a trust account since it received these monies from the Debtors' insurer last summer.The DIP Order requires these funds to be released to the Lender and applied to its pre-petition debt, as a form of adequate protection for the priming of that debt by the liens granted to the DIP lender.

Highgate contends that turnover of the Insurance Proceeds violates the terms of a purported escrow agreement, dated August 16, 2022(the "Agreement" or "Procuration Agreement"), which provides that no funds will be disbursed from the attorney trust account without the consent of all signatories, including Highgate.The Debtors' only right to or interest in these funds, Highgate claims, is their contingent right to receive the funds if and when Highgate consents.Highgate has neither consented nor given any indication of the circumstances in which it might be willing to do so.

The Court finds that Highgate's objection lacks merit for two independent reasons.First, it is a basic contract law principle that, when an agreement omits a term essential to a determination of the parties' rights and duties, the court will supply a term that is reasonable in the circumstances.Here, given the Agreement's failure to provide any conditions for release of the deposited funds other than the consent of all parties, and given the absence of any evidence that the parties intended otherwise, it is appropriate to add an implied term permitting the Court to determine the parties' respective rights to the funds and to direct that the funds be disbursed accordingly.

Second, even if the Court were constrained to construe the Agreement literally so as to bar release of the funds absent the parties' unanimous consent, turnover of the funds would still be appropriate.In that event, the Agreement would fail to satisfy the requirements for the creation of an escrow agreement under New York law - in particular, the requirement that the agreement specify the conditions under which the escrowed assets will be released.The Agreement's provision that the funds may be released if all parties agree does not satisfy this requirement, either as a matter of common sense or under the limited case law that has addressed this issue.

For both of these reasons, the Court holds that the Insurance Proceeds should be disbursed from the attorney trust account in accordance with the parties' underlying rights to these funds.Highgate does not dispute that the funds, which are proceeds of the Debtors' insurance policies, belong to the Debtors and are subject to the Lender's perfected senior lien.The funds therefore are property of the estate, and Highgate has no basis to challenge either turnover of these funds or their use to partially satisfy the Lender's pre-petition debt.

With Highgate's objection disposed of, approval of the DIP Motion requires little discussion.The Debtors have presented uncontroverted evidence that the DIP loan is necessary and in their estates' best interests, and that the loan's specific terms are fair and reasonable.The loan and the related grant of adequate protection to the Lender satisfy the requirements of Bankruptcy Code § 364(c) and (d) and should be approved.

Factual Background^[3]

The Debtors own a hotel located at 2 West Street in Manhattan (the "Hotel"), at the southern end of Battery Park City.The Hotel is part of a mixed-use condominium building, constructed in the early 2000s, which also includes a separate residential condominium portion.Until March 2018, the Hotel was operated by Ritz Carlton under the Ritz Carlton brand.At that time, the Debtors' predecessors hired Highgate to replace Ritz Carlton as the hotel operator and changed the Hotel's brand to "The Leading Hotels of the World" under the name "The Wagner at Battery Park."

In September 2018, the Debtors purchased the Hotel for the approximate purchase price of $147 million, of which $96 million was financed through a purchase money mortgage issued by the Lender, an affiliate of the seller.(That loan matured in 2020, and the amount owed under the loan has since grown to approximately $114 million, plus fees and costs.)The Debtors hired Highgate to continue to serve as the Hotel's property manager, pursuant to a operating agreement with the Debtors.

Prior to their November 15, 2022 bankruptcy filing, the Debtors were owned and managed by two individuals, Taylor Woods and Howard Wu.These two individuals have a checkered past, a topic that was the subject of much discussion at the initial hearing in this case.^[4] In early December 2022, Messrs. Woods and Wu voluntarily relinquished their management positions, and they have played no role in the Debtors' management or in these chapter 11cases since that time.

Highgate contends that, within months after acquiring the Hotel, the Debtors ceased providing the funds necessary for Highgate to pay the Hotel's operating expenses.In 2020, the Hotel ceased operating, and it has been shuttered ever since.By early 2021, Highgate claims, it was owed substantial monies by the Debtors not only for its own fees, but also for sums it had advanced to cover the Hotel's other obligations.Highgate claims it was concerned that, as the Hotel's property manager, it faced possible liability for certain of the Debtors' defaults, including for amounts owed to the Hotel's employees and union.

On January 5, 2021, Highgate entered into a letter agreement (the "January 2021 Letter") with the Debtors and Messrs. Woods and Wu.(Ex. A.)Among other things, the letter stated that the Hotel had suffered water damage in October 2020 and had filed a claim with its insurance carrier.The letter provided that the Debtors would cause any insurance proceeds received in satisfaction of this water damage claim to be deposited in an account "under [Highgate's] sole dominion and control," and that Highgate would use these insurance proceeds "to pay costs relating to the Hotel Employees and otherwise as [Highgate] determines in its sole and absolute discretion (notwithstanding any expiration or earlier termination of the Operating Agreement)."The letter further stated that the Debtors "appoint[ed Highgate] as [their] attorney-in-fact for any and all purposes of administering the Water Damage Claim and any insurance proceeds paid in partial or total satisfaction thereof."(Id. at 1.)

Subsequently, the Debtors' insurance counsel, Gauthier Murphy & Houghtaling, LLC ("GMH"), received an initial payment of approximately $6.4 million from the insurer to fund the mold remediation phase of the repairs.The Debtors, the Lender and Highgate then entered into an escrow agreement with GMH, dated October 26, 2021, to govern GMH's disbursement of these funds from its attorney trust account.(Ex. B.)The agreement attached a list of specific approved payments, and it authorized GMH to make additional payments "after approval by Lender."(Id. at 2.)

The following month, the Debtors and the Lender (but not Highgate) executed an addendum, dated November 10, 2021, to the October escrow agreement.(Ex. C.)The addendum stated that the Debtors intended to file additional water leak claims against their insurer for the repairs needed to restore the Hotel and its furniture, fixtures, and equipment to pre-loss condition.The addendum stated that, if any monies were recovered, the parties would execute a "procuration agreement" providing for these funds to be held in GMH's escrow account "until the parties with an interest in any such additional insurance proceeds execute an amendment . . . authorizing GMH to disburse any such additional insurance proceeds . . . ."^[5](Id.¶ 1.)

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