Taberna Preferred Funding IV, Ltd. v. Opportunities II Ltd. (In re Taberna Preferred Funding IV, Ltd.)

• Decision Date: 08 November 2018
• Docket Number: Case No. 17-11628 (MKV)
• Citation: 594 B.R. 576
• Parties: IN RE TABERNA PREFERRED FUNDING IV, LTD., Alleged Debtor. Taberna Preferred Funding IV, Ltd., Interpleader Plaintiff, v. Opportunities II Ltd., HH HoldCo Co-Investment Fund, L.P., Real Estate Opps Ltd., KL Fund II, Hildene Opportunities Master Fund II, Ltd., Waterfall Asset Management LLC, Investors Trust Assurance SPC, and Citi Global Markets Inc., Interpleader Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

594 B.R. 576

IN RE TABERNA PREFERRED FUNDING IV, LTD., AllegedDebtor.

Taberna Preferred Funding IV, Ltd., InterpleaderPlaintiff,

v.Opportunities II Ltd., HH HoldCo Co-Investment Fund, L.P., Real Estate Opps Ltd., KL Fund II, Hildene Opportunities Master Fund II, Ltd., Waterfall Asset Management LLC, Investors Trust Assurance SPC, and Citi Global Markets Inc., InterpleaderDefendants.

Case No. 17-11628 (MKV)

United States Bankruptcy Court, S.D. New York.

Signed November 8, 2018

KLEE, TUCHIN, BOGDANOFF & STERN LLP, Counsel for the Petitioning Creditors, 1999 Avenue of the Stars, 39^th Floor, Los Angeles, California 90067, By: Robert J. Pfister, Esq., Whitman L. Holt, Esq.

PEPPER HAMILTON LLP, Counsel for Hildene Opportunities Master Fund II, Ltd., 620 Eighth Avenue, 37^th Floor, New York, New York 10017, By: H. Peter Haveles, Jr., Esq.

QUINN EMANUEL URQUHART & SULLIVAN, LLP, Counsel for Hildene Opportunities Master Fund II, Ltd., 865 S. Figueroa Street, 10^th Floor, Los Angeles, California 90017, By: Eric D. Winston, Esq., 51 Madison Avenue, 22^nd Floor, New York, New York 10010, By: Lindsay M. Webber, Esq.

DAVIS POLK, Counsel for Citigroup Global Markets, Inc., 450 Lexington Avenue, New York, New York 10017, By: Elliot Moskowitz, Esq., Brian M. Resnick, Esq., Justin Sommers, Esq.

MARKO & MAGOLNICK, P.A., Counsel for Investors Trust Assurance, SPC, 3001 South West 3^rd Avenue, Miami, Florida 33129, By: Joel S. Magolnick, Esq.

KASOWITZ BENSON TORRES LLP, Counsel for Waterfall Asset Management, LLC, 1633 Broadway, New York, New York 10019, By: Matthew B. Stein, Esq., Michael A. Hanin, Esq.

MILBANK, TWEED, HADLEY & MCCLOY LLP, Counsel for TP Management LLC, 28 Liberty Street, New York, New York 10005, By: Gerard Uzzi, Esq., Daniel M. Perry, Esq., Alexander B. Lees, Esq.

DECISION GRANTING MOTION FOR JUDGMENT ON PARTIAL FINDINGS AND DISMISSING THE INVOLUNTARY BANKRUPTCY PETITION

MARY KAY VYSKOCIL, UNITED STATES BANKRUPTCY JUDGE

This dispute concerns an involuntary chapter 11 petition filed against Taberna Preferred Funding IV, Ltd., a structured finance entity known as a collateralized debt obligation (commonly referred to as a "CDO"), that issued several series of notes, which descend in priority ("Taberna").The involuntary petition was filed by three holders of the two most senior classes of notes, Opportunities II Ltd., HH HoldCo Co-Investment Fund, L.P., and Real Estate Opps Ltd.(collectively, the "Petitioning Creditors"), and is opposed by Taberna, its collateral manager, and five holders of the junior classes of notes issued by Taberna.The movants seek a judgment that three Petitioning Creditors have failed to establish a prima facie case that they meet one of the requirements, set forth in section 303(b) of the Bankruptcy Code, to qualify as petitioning creditors eligible to commence this involuntary case, and as such, dismissal of this involuntary petition.

Although the parties opposing the involuntary petition have raised a number of arguments,¹they now seek judgment that the Petitioning Creditors have not made out a prima facie case with regard to only one of the eligibility requirements for filing an involuntary petition, namely, that Petitioning Creditors hold claims against the putative debtor, Taberna.The parties opposing the involuntary petition argue that the notes are nonrecourse, and accordingly, the Petitioning Creditors only hold claims against the collateral securing the notes; i.e.they do not hold claims against Taberna.

Whether the Petitioning Creditors hold claims against Taberna on account of the notes turns in the first instance on whether the notes are nonrecourse and, if the notes are nonrecourse, on whether sections 1111(b)and102(2) of the Bankruptcy Code eliminate any distinction between recourse and nonrecourse claims in bankruptcy for purposes of determining the eligibility of a petitioning creditor under section 303(b) such that, notwithstanding the nonrecourse nature of the claims, the Petitioning Creditors hold the requisite claims against Taberna.

This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52(c) of the Federal Rules of Civil Procedure, made applicable here by Rule 7052 of the Federal Rules of Bankruptcy Procedure.²For reasons set forth herein, the Court concludes that the Petitioning Creditors do not meet the requirements of section 303(b) of the Bankruptcy Code and are not eligible to commence an involuntary case against Taberna.Accordingly, judgment should be entered dismissing this case.

In addition, the Court finds that this involuntary case serves no legitimate bankruptcy purpose, Petitioning Creditors would not be prejudiced by dismissal, and it is in the best interest of the creditors and the estate that the case be dismissed.Accordingly, pursuant to sections 1112and105 of the Bankruptcy Code, in the exercise of the Court's discretion, the Court concludes that the case should be dismissed for cause.

JURISDICTION

This Court has jurisdiction over this chapter 11 case pursuant to 28 U.S.C. §§ 157and1334 and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York(M–431), dated January 31, 2012(Preska, C.J.).The determination of whether an order for relief should be granted in an involuntary case is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and (b)(2)(A) and (O).Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408and1409.All parties to this motion consent to the entry of a final judgment or order with respect to all matters now before the Court.See Joint Pretrial Order (the "JPO")§ II[ECF No. 132];see alsoObjecting Parties Proposed Findings of Fact and Conclusions of Law[ECF No. 144-1];Petitioning Creditors Proposed Findings of Fact and Conclusions of Law[ECF No. 147-1](stating that the parties have agreed that these proceedings are matters as to which the Court can enter final orders and judgment "including the specific issue presented by the Rule 52(c) Motion ....").

I.

A.Factual Background

In 2005, Taberna issued eleven classes of notes in the aggregate principal amount of $630,175,000, which descend in priority and have a stated maturity date of May 5, 2036(collectively, the "Notes").See JPO § III Stipulated Fact ("Stip.Fact")¶¶ 4-6;JX1³at 55-56.The Notes are governed by an indenture dated December 23, 2005(the "Indenture").SeeJPO § III Stip.Fact¶ 3;Indenture§ 14.9.The funds generated by the issuance of the Notes were used to purchase various types of securities that were intended to generate proceeds sufficient to repay the Notes and serve as collateral securing the Notes (collectively, the "Collateral").See Petitioning Creditors' Statement About the Involuntary Chapter 11 Petition Regarding Taberna Preferred Funding IV, Ltd.(the "PC Stmt.")[ECF No. 2]¶¶ 1, 2;JPO § III Stip.Fact¶ 1.The Collateral consists mostly of long-term securities issued by real estate investment trusts ("REITS") and other real estate entities, seePCStmt. ¶ 10;JPO § III Stip.Fact¶ 7, and is held in trust for the benefit and security of, inter alia , holders of Notes (collectively, the "Noteholders").See INDENTURE, Granting Clauses.The Indenture defines "Secured Parties" to include, among others, the Noteholders.SeeINDENTUREat 1, 44.

At all times, Taberna has paid Class A Noteholders pursuant to the terms of the Indenture.SeeJPO § III Stip.Fact¶¶ 12, 22.In August 2009, an event of default occurred under the Indenture due to Taberna's payment default on Class B Notes, notes junior to those now held by the Petitioning Creditors.SeeJPO § III Stip.Fact¶ 17.The Notes were accelerated the following month.SeeJPO § III Stip.Fact¶ 18.Over six years later, on March 22, 2016, the Petitioning Creditors purchased a total of $135,525,044.37 of the most senior class of Notes (the "A-1 Notes") and a total of $16.9 million of the second most senior class of notes (the "A-2 Notes").SeeJPO § III Stip.Fact¶¶ 29, 30.By virtue of these purchases, at the time of filing, the Petitioning Creditors held 100% of the A-1 Notes and approximately 34% of the A-2 Notes.SeePCStmt. ¶ 4.

As the Indenture does not permit the Petitioning Creditors unilaterally to liquidate the Collateral without the consent of other parties, prior to filing the involuntary petition, the Petitioning Creditors took a number of steps in a failed effort to liquidate the Collateral.SeePCStmt. ¶ 6;JPO § III Stip.Fact¶¶ 35-40.Petitioning Creditors' principal, Vikaran Ghei, demonstrated at trial that he has experience and expertise in working with complex financial instruments, and has a sophisticated understanding of the workings of the Bankruptcy Code.See11/28/17 Tr. 47:24—50:24, Adv. Pro.No. 17-01087 ECF No. 15 ("11/28/17 Tr.");see also11/29/17Tr. 177:1—17, Adv. Pro. No. 17-01087 ECF No. 16("11/29/17 Tr.").After hiring counsel that was specifically experienced bankruptcy counsel, see11/30/17Tr. 108:2—110:24, Adv. Pro. No. 17-01087 ECF No. 17("11/30/17 Tr.");see alsoJPO § III Stip.Fact¶ 1, among the steps the Petitioning Creditors took to break open the CDO, in November 2016, Mr. Ghei, on behalf of Petitioning Creditors, reached out to the indenture trustee and "requested that the indenture trustee solicit consents to allow the underlying collateral to be liquidated."PCStmt. ¶ 6;see alsoJPO § III Stip.Fact¶ 35; Email from Thomas Ji to Vik Ghei, [JX 66].Mr. Ghei did not offer any consideration in exchange for the requested consents, and the Petitioning Creditors ultimately failed to receive sufficient consent to sell the Collateral.See Consent Solicitation [JX 66]; See email from Brandon Meyer To Vik Ghei [JX 67];JPO § III Stip.Fact¶ 35.In March 2017, Mr. Ghei, on behalf of Petitioning Creditors, and with the advice and assistance of their current bankruptcy counsel, launched a tender offer to purchase Notes...