SW Bos. Hotel Venture, LLC v. SW Bos. Hotel Venture, LLC

• Decision Date: 11 April 2014
• Docket Number: 12–9012.,12–9011,Nos. 12–9008,12–9009,s. 12–9008
• Citation: 748 F.3d 393
• Court: U.S. Court of Appeals — First Circuit
• Parties: SW BOSTON HOTEL VENTURE, LLC; Auto Sales & Service, Inc.; General Trading Company; Frank Sawyer Corporation; 100 Stuart Street, LLC; 30–32 Oliver Street Corporation; General Land Corporation; 131 Arlington Street Trust, Debtors. The Prudential Insurance Company of America, Appellee, v. SW Boston Hotel Venture, LLC; Auto Sales & Service, Inc.; General Trading Company; Frank Sawyer Corporation; 100 Stuart Street, LLC; 30–32 Oliver Street Corporation; General Land Corporation; 131 Arlington Street Trust, Appellants. SW Boston Hotel Venture, LLC; Auto Sales & Service, Inc.; General Trading Company; Frank Sawyer Corporation; 100 Stuart Street, LLC; 30–32 Oliver Street Corporation; General Land Corporation; 131 Arlington Street Trust, Debtors. The Prudential Insurance Company of America, Appellee, v. City of Boston, Appellant.

748 F.3d 393

SW BOSTON HOTEL VENTURE, LLC; Auto Sales & Service, Inc.; General Trading Company; Frank Sawyer Corporation; 100 Stuart Street, LLC; 30–32 Oliver Street Corporation; General Land Corporation; 131 Arlington Street Trust, Debtors.

The Prudential Insurance Company of America, Appellee,

v.SW Boston Hotel Venture, LLC; Auto Sales & Service, Inc.; General Trading Company; Frank Sawyer Corporation; 100 Stuart Street, LLC; 30–32 Oliver Street Corporation; General Land Corporation; 131 Arlington Street Trust, Appellants.

SW Boston Hotel Venture, LLC; Auto Sales & Service, Inc.; General Trading Company; Frank Sawyer Corporation; 100 Stuart Street, LLC; 30–32 Oliver Street Corporation; General Land Corporation; 131 Arlington Street Trust, Debtors.

The Prudential Insurance Company of America, Appellee,

v.City of Boston, Appellant.

Nos. 12–9008, 12–9009, 12–9011, 12–9012.

United States Court of Appeals, First Circuit.

April 11, 2014.

Harold B. Murphy, with whom Charles R. Bennett, Jr., John C. Elstad, Christopher M. Condon, and Murphy & King, P.C., were on brief, for appellants SW Boston Hotel Venture, LLC; Auto Sales & Service, Inc.; General Trading Company; Frank Sawyer Corporation; 100 Stuart Street, LLC; 30–32 Oliver Street Corporation; General Land Corporation; and 131 Arlington Street Trust.

E. Kate Buyuk, with whom Joseph F. Ryan and Lyne, Woodworth & Evarts LLP were on brief, for appellant City of Boston.

Emanuel C. Grillo, with whom William M. Jay and Goodwin Procter LLP were on brief, for appellee.

Before LYNCH, Chief Judge, STAHL and HOWARD, Circuit Judges.

STAHL, Circuit Judge.

This appeal presents multiple issues arising from a heavily contested Chapter 11 bankruptcy proceeding. Stated simply, a secured creditor appealed to the Bankruptcy Appellate Panel for the First Circuit (“the BAP”) from the bankruptcy court's orders determining its entitlement to postpetition interest (and thus the total amount of its claim) and confirming the debtors' Chapter 11 plan. The BAP reversed in part, significantly increasing the secured creditor's entitlement to post-petitioninterest, and vacated and remanded the confirmation order. The debtors and the City of Boston (“City”), as a junior creditor, appealed to this court. After careful consideration, we conclude that the BAP erred in reversing the bankruptcy court's post-petition interest determination. And, because the BAP's confirmation order was based solely on its erroneous interest determination, we vacate that order as well.

I. Facts & Background

A. Financing and Construction of the W

In 2007, Debtor–Appellant SW Boston Hotel Venture, LLC, (“SW Boston”) sought financing to develop a mixed-used property that would become the W Hotel and Residences (“the W”) in Boston's theater district. In January of 2008, after a previous lender withdrew its financing commitment, the Prudential Insurance Company of America (“Prudential”) agreed to provide up to $192.2 million in financing (“the Prudential Loan”) pursuant to a construction loan agreement (“the CLA”). Prudential took a mortgage and first priority security interest in SW Boston's real and personal property and any proceeds thereof. It also required additional collateral and credit support in the form of certain real estate and other property owned by the remaining Debtors–Appellants (“Affiliated Debtors”), as well as a $17.3 million letter of credit. Sovereign Bank issued the letter of credit based on the credit provided by two non-debtor affiliates of SW Boston.

The W project consists of a 235–room hotel, 123 luxury condominium units, an underground parking garage, a restaurant, a spa and related retail space, and a bar. The hotel was to operate under the W Hotels brand of Starwood Hotels and Resorts Worldwide, Inc. (“Starwood”), with Starwood managing the operations.

The W opened on schedule in October of 2009, but, due in large part to the ongoing recession, obtained substantially fewer commitments to purchase condominiums than the CLA required. In addition, the restaurant, spa, and bar—all required to operate under the W Hotel flag—had not been completed, and the Debtors lacked sufficient funding to complete them. In December 2009, after Prudential declined to provide additional funds, SW Boston and the City entered into a loan agreement (“the City Loan”), with the City agreeing to provide $10.5 million in additional funding.¹ The City Loan was secured by a junior lien on most of the collateral that secured the Prudential Loan and a first lien on $4 million in cash provided by an Affiliated Debtor. The CLA required the Debtors to obtain Prudential's consent before entering into any junior loans. In return for its consent, Prudential required the City to execute an Intercreditor Agreement that, among other things, subordinated the City's right to payment to Prudential and purported to assign to Prudential the City's right to vote on any bankruptcy plan.

B. Bankruptcy Court Proceedings

On April 28, 2010, after SW Boston failed to make a mandatory quarterly paymentto Prudential and loan-restructuring negotiations failed, SW Boston and four of the Affiliated Debtors filed voluntary Chapter 11 bankruptcy petitions. The remaining three Affiliated Debtors commenced Chapter 11 cases on June 4. The bankruptcy court administered all of the Chapter 11 cases jointly. Prudential filed a proof of claim asserting secured claims of not less than $180,803,186, plus fees, costs, and pre- and post-petition interest. Shortly after the petition date, Prudential drew down the letter of credit, reducing its pre-petition claim to $165,592,659.

The filing of the bankruptcy petitions resulted in imposition of an automatic stay as to all creditors' efforts to enforce their liens. See11 U.S.C. § 362(a). However, § 362(d) requires the court to grant relief from the stay unless certain creditor safeguards are met. See id. § 362(d)(1).² In August of 2010, Prudential filed a motion for relief from the stay as to SW Boston only (“lift-stay motion”), arguing that it was undersecured because the amount of its claim against SW Boston exceeded the value of SW Boston's assets and that the Debtors lacked the means to provide alternative forms of adequate protection. It sought permission to exercise its contractual rights and remedies to, among other things, commence foreclosure proceedings. In its January 28, 2011, ruling, the bankruptcy court found that SW Boston's outstanding debt to Prudential, after deductions for payments made from ongoing condominium sales and exclusive of any post-petition interest or expenses, was approximately $154 million. Prudential's expert valued the remaining condominiums at $86 million and the W hotel at $55 million, while SW Boston's expert valued the remaining condominiums at $90.6 million and the hotel at $65.6 million. After a three-day evidentiary hearing, the bankruptcy court concluded that the value of the condominiums was $88 million and the value of the hotel was $65.6 million, making the total value of SW Boston's collateral $153.6 million. Thus, Prudential was undersecured as to SW Boston alone. However, the bankruptcy court noted that, with respect to the entire collateral package of all of the Debtors, Prudential had an equity cushion in excess of $19 million. Taking that finding in conjunction with the facts that SW Boston was reducing the amount of the outstanding debt through payments from condominium sales and that the value of its secured claim was not declining, the bankruptcy court concluded that Prudential was adequately protected under § 362(d)(1). With respect to § 362(d)(2), the bankruptcy court found that SW Boston lacked equity in the W project, but that the property was necessary to a successful reorganization, which the court ruled was reasonably likely. The bankruptcy court therefore denied Prudential's lift-stay motion on January 28, 2011.

On March 28, 2011, SW Boston filed a motion for court approval of a purchase and sale agreement (“the P & S”) for the sale of the hotel and garage to an unrelated third party for $89.5 million. The bankruptcy court granted the motion on May 24. But, before the sale could close, SW Boston was required to resolve several outstanding issues on which the P & S was contingent. For example, the P & S was conditioned on the assignment of certain construction warranties from the W's construction manager, Bovis Lend–Lease LMB, Inc. (“Bovis”), to the purchaser. Although the Bovis–SW Boston contract required assignment of the warranties to SW Boston upon completion of the project, Bovis claimed to be excused from this obligation due to various disputes with SW Boston. The P & S was also conditioned on the assignment to the purchaser of several Starwood–SW Boston contracts. However, Starwood alleged that various incurable non-monetary defaults—including failure to timely open the spa and bar—precluded assumption and assignment of the contracts. After SW Boston managed to resolve these contingencies, the sale closed on June 8, 2011, and the net proceeds of $88,322,017 were paid over to Prudential.

On March 31, 2011, three days after filing the hotel sale motion, the Debtors filed their reorganization plan. The plan need not be described in great detail, but, in broad strokes, it called for Prudential to be paid in full by March of 2014 if the hotel sale closed, or after a more extended period if it did not. The plan contemplated that Prudential would receive post-effective-date interest of 4.25% per annum, but it made no provision for postpetition, pre-effective-date interest. Prudential objected to confirmation of the plan on multiple grounds.

Throughout the pendency of the bankruptcy case, SW Boston continued construction. After SW Boston resolved various issues with contractors who had suspended their work because of the bankruptcy filings, the spa was completed and opened on August 18, 2010. That September, after two work interruptions caused...