Revel hunts for buyer

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Revel hunts for buyer
by Patrick Holohan|Published June 23, 2014 at 3:46 PM

Revel AC Inc. will seek to sell its assets during its second trip through Chapter 11 with the aid of $125 million in debtor-in-possession financing that rolls up much of its prepetition debt.

Chief Judge Gloria M. Burns of the US Bankruptcy Court for the District of New Jersey in Camden was set at a Friday, June 20, hearing to consider the companys first-day motions for use of cash collateral and postpetition financing as well as joint administration of Revels case with those of five affiliates.

The owner of the Revel Casino Hotel in Atlantic City, NJ, filed for bankruptcy again on Thursday, just 13 months after completing a Chapter 11 case that cut its debt to $272 million from $1.5 billion.

The company filed a prepackaged case on March 25, 2013, in the same court, predicated on a debt-for-equity swap implemented May 21, 2013. Senior secured term lenders owed $896 million received 100% of the equity in the reorganized company. Second-lien lenders received a pro rata share of contingent payment rights, and general unsecured creditors were to be paid in the ordinary course of business.

Chief restructuring officer Shaun Martin of Winter Harbor LLC said in a Thursday declaration, however, that despite the debt reduction, the company still projected operating losses to continue through 2013.

Martin said the company therefore attempted to reduce its operational costs and shift from leisure-related services to focus on gaming. Revel laid off 18% of its employees, fired its talent buyer for events and moved the operations in-house. The debtor said it brought in a gaming consultant to improve its online presence and since exiting Chapter 11 has implemented a new filtration system for its smoking areas, invested in new signage, eliminated an underperforming poker room and improved its food options and its reward program.

Nevertheless, limited liquidity late last year forced Revel to amend its first- and second-lien debt.

First-lien lenders with JPMorgan Chase Bank NA as administrative and collateral agent on Nov. 8 upped the commitment on a $75 million revolver to $100 million and split the debt into a $25 million Tranche A-1 accruing interest at Libor plus 6% and a $75 million Tranche A-2 accruing interest at Libor plus 6.5%. An additional $50 million Tranche B term loan is priced at Libor plus 9%, with the entire commitment to mature on June 30, 2015, rather than the initial May 21, 2017, maturity date.

The increased financing required the debtor to retain an investment banker, and Revel hired Moelis amp; Co. LLC. The first-lien debt stands at $137 million.

The key terms of a $275 million second-lien term loan facility led by Wilmington Trust NA remained unchanged. The loan accrues interest at either 12.5% if paid in cash or 14.5% if paid in kind. The debt matures on May 21, 2018, with $310 million outstanding.

Wells Fargo Principal Lending LLC and JPMorgan are providing the DIP, with Wells Fargo Bank NA as administrative and collateral agent. With a total commitment of $125 million, the DIP would roll up $10 million of Tranche A-1 owed to JPMorgan and $73.1 million of Tranche A-2 owed to Wells Fargo, with $41.9 million in new cash available from Wells Fargo.

The debtor could use $23.5 million in new money with an interim order. Of the new money, $1.9 million would be available as letters of credit.

The DIP would accrue interest at Libor plus 6%, with interest increasing 2% on default. The loan carries an unused commitment fee of 4% on the new money, an unspecified upfront fee and a 6% letter of credit fee.

The DIP sets a number of milestones for the sale of the companys assets. The debtor must file bidding procedures by Sunday; win approval of bid procedures by July 11; and win final DIP approval by July 24. The financing requires a bid deadline by Aug. 3; an auction within five days of the bid deadline, a sale order by Aug. 23 and a sale closing by Oct. 14.

Although Revel has no stalking horse lined up, court papers show prepetition negotiations and expressions of interest are promising indications of the value of the debtors assets.

Revels estate would wind down following the asset sale, with a prearranged liquidation plan distributing the proceeds.

Under the plan, submitted Thursday, administrative, priority and nonlender secured claims would be paid in full on the effective date.

Tax claims would be paid in full within five years of the effective date.

First-lien lenders would receive a pro rata share of sale proceeds. Second-lien lenders would receive the same treatment once first-lien holders had been paid in full and general unsecured creditors the same once both classes of secured lenders had been paid in full.

Equity holders would be wiped out.

Revels resort has more than 1,800 ocean-view guest rooms and a 130,000-square-foot casino. It has more than 2,000 slot machines, nearly 100 table games, electronic tables and a poker room in its smoke-free resort. It acquired the unfinished property from affiliates of Morgan Stanley in February 2011 after roughly four years of construction.

At the time, Revel and New Jersey agreed to a deal under which the casino operator would receive about $261.4 million in grants to revitalize Atlantic City and its declining gaming market, which was then in a five-year slump. Revel opened its casino on April 2, 2012.

Revel listed $500 million to $1 billion in assets and liabilities in its petition.

The companys largest unsecured creditors are ACR Energy Partners LLC (owed $9.6 million), National Union Fire Insurance Co. of Pittsburgh, Pa. ($5.93 million), PHD Media LLC ($2.03 million), Atlantic City Alliance ($999,259) and the New Jersey Department of Labor and Workforce Development ($895,061).

The companys largest equity holders include Chatham Asset Management LLCs Chatham Revel VoteCo LLC, with a 27.4% stake; Canyon Capital Advisors LLCs Canyon RC Holdings LLC, with 15.7%; and Capital Group Cos. American High-Income Trust, with 11.5%.

Debtor counsel Richard S. Kebrdle of White amp; Case LLP and Michael J. Viscount Jr. of Fox Rothschild LLP were not available for comment.

John K. Cunningham and Kevin M. McGill of White amp; Case and Raymond M. Patella of Fox Rothschild also are debtor counsel.

Thomas Kreller of Milbank, Tweed, Hadley amp; McCloy LLP represents Wells Fargo.

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Winter Harbor LLC

Report due next week on League’s financial woes

The court-approved monitor overseeing the League group of companies restructuring process says a report that aims to answer the key question where did the money go? will be released next week.

According to a message released Monday by PricewaterhouseCoopers, which is overseeing the process under the Companies Creditors Arrangement Act, the waterfall report will cover such topics as what happened to the money raised from investors, what League founders Adam Gant and Emmanuel Arruda were paid and the estimated recovery that stakeholder groups can expect.

But the key report investors have been waiting for since the restructuring process started last fall is unlikely to offer much good news.

Leagues 4,280 investors have pumped about $370million into the companys investments.

During the process, the monitor has repeatedly warned investors they are likely to face huge losses as the company owes secured lenders $186 million and it has 460 trade creditors, considered unsecured lenders, who are owed $19.5 million.

Some investors contacted by the Times Colonist believe their money is gone, while others hold out slim hope they will get some return.

That hope was likely further diminished late last week after the court approved the sale of Leagues Residences at Quadra Village. Like the other property assets League has been selling, Quadra, a 64-unit complex in the 2800-block of Quadra Street, was mortgaged to the hilt. League bought the complex in 2011 for $6.65 million and did an extensive renovation. It was listed for sale at $14.1 million, and was reduced to $12.5 million.

It is being sold for $11million to Primex Investments, but there is a mortgage on the property for $10 million, meaning after costs there will be about $50,000 left to be distributed to creditors.

Frankly, the price is disappointing, but we really had to move the sales process along and thats what the market was willing to pay, said League chief executive John Parkinson, noting sales so far have suffered because of a weak commercial real estate market.

Also, a court-imposed deadline for sales means buyers know they can get properties at a discount, he said.

As for the small return on the sales, Parkinson said assets that had low mortgages and offered good cash flow for the company were held back.

But the bottom line is [the ones being sold now] were highly leveraged and that probably reflects the fact that the model in League seems to have been a highly leveraged model, he said. There was probably additional debt put on some of these properties as I guess cash flow became scarcer.

Many investors believe next weeks report will show money invested in other League projects was used to support the massive Capital City Centre project at Colwood Corners. Parkinson said the real estate market moved against League and the development 3.8 million square feet in nine building phases over 15 years that included 2,000 condos became less feasible as the process stretched out.

aduffy@timescolonist.com

 Copyright Times Colonist

SEC Investigating Carrington’s Mortgage Deal With New Century

On the eve of the financial crisis, the hedge fund manager Bruce M. Rose did a surprising deal that took his firm into the business of collecting mortgage payments from people with tainted credit.

Now, seven years later, securities regulators are scrutinizing the deal, looking in particular at how part of it was financed.

The Securities and Exchange Commission last fall began to subpoena documents from Mr. Rose’s Carrington Holding Company about the purchase of mortgage servicing operations from the failed subprime lender New Century Financial, according to regulatory filings. The previously unreported investigation is seeking information about how Carrington financed the $188 million deal, which relied in part on the firm’s later issuing special securities to the investors in its hedge fund.

Lightly regulated firms are moving into mortgage servicing, buying batches of the business from established banks. Regulators have recently expressed some concerns about how these new servicers are performing and their dealings with borrowers. In addition, the servicers’ financial strength has yet to be fully tested by a big drop in home prices.

Carrington services mortgages for tens of thousands of homeowners across the United States.

The firm was founded in 2003 by Mr. Rose, a former top mortgage trader at Salomon Brothers and later at Citigroup. The SEC.’s inquiry presents a challenge for Carrington, which started as a hedge fund that mainly invested in subprime mortgage debt but now is something of a full-service real estate company. The firm, with more than 2,900 employees, manages $17.6 billion in mortgages and more than 4,000 rental homes across the United States. Carrington has said in regulatory filings that the investigation could hamper its ability to raise capital.

Richard Horowitz, Carrington’s general counsel, declined to comment on the investigation. John Nester, an SEC. spokesman, also declined to comment.

A person briefed on the matter who spoke on the condition of anonymity said the SEC. investigation was being led by the agency’s Boston regional office. Carrington’s principal offices are in Greenwich, Conn., and Santa Ana, Calif.

The firm’s regulatory filings said that the SEC. also broadly requested information about Carrington’s business of servicing mortgages for itself and other firms.

It is not clear why the SEC., which issued its first subpoena in the matter in September, is looking into Carrington’s purchase of the New Century mortgage servicing platform now, given that New Century collapsed in bankruptcy in April 2007. In an investor letter in November, Carrington said that the SEC.’s subpoena requested documents relating to the New Century acquisition and the valuation of securities that Carrington issued to investors to help pay for the purchase.

The failure of New Century, a highflying subprime home lender from Southern California that provided $25 million in seed money to Mr. Rose to set up his hedge fund, was an early sign of the trouble to come for the housing market. Before the collapse of New Century, Carrington had $1 billion in assets under management and specialized in turning subprime loans issued by the firm and other mortgage lenders into mortgage securities.

In 2010, three former top executives of New Century reached a settlement with the SEC. over a lawsuit that alleged the mortgage lender had misled investors about the firm’s subprime mortgage business. The SEC. lawsuit against the former New Century executives ranks as one of the more notable cases from the financial crisis brought by securities regulators.

Around the time that New Century failed and the housing market went into a tailspin, Carrington prohibited its hedge fund investors from withdrawing money because the firm was heavily invested in mortgage bonds that had also lost much of their value and could not be easily sold. Carrington said at the time that its freeze on redemptions, something other hedge funds that invested in mortgage securities did as well, was an attempt to keep the firm afloat.

Hedge funds generally have broad powers to suspend investor redemptions during a time of crisis. But in recent years, the SEC. has penalized a few managers for freezing redemptions and giving some investors preferential treatment to withdraw their money. There has been no suggestion that any investors in Carrington got special treatment.

To buy New Century’s mortgage servicing business, Carrington issued preferred equity securities to its hedge fund that were used to refinance a note that the firm used to cover a portion of the purchase. The SEC. is looking into the valuation of these securities, according to the Carrington investor letter.

Last December, after a vote of the fund’s investors, Carrington effectively replaced those securities with $530 million of other securities that come due in 2021, though the firm can extend the maturation date until 2026. The new debt notes are listed for trading on the Irish Stock Exchange. The interest paid on the notes gradually rises to 6.5 percent from 2 percent.

But it is not clear just how good a deal the investors got.

The debt is unsecured, meaning that in the event of a bankruptcy, the investors will be paid after secured lenders like banks that provide financing to Carrington. Until January 2016, interest on the notes can be paid in either cash or alternative forms of payment, including additional securities or increases in the principal. (Carrington said in the investor letter that it opted for more flexibility in its payment terms because of the uncertainty surrounding the investigation.) After January 2016, all interest must be paid in cash. In the firm’s 2013 annual report, Carrington places a low valuation on the notes, giving them a fair market value of $374 million — a roughly 29 percent discount to their face value.

Carrington reported a net income of $119.5 million last year, but that included a $155 million accounting gain associated with the decline in value on the notes it sold to investors. Carrington’s operations consumed $15 million of cash last year.

“Normally, when you suspend redemptions, you don’t have a right to take that money to reinvest in brand-new ventures,” said Robert Mottern, a lawyer in Atlanta whose firm is overseeing the liquidation of two funds that invested with Carrington before the financial crisis. “That’s not the way these things work.”

One investor, Joseph Umbach, the founder of Mistic Beverages, which he sold in 1995, has been fighting with Carrington for six years in federal court to get back the original $1 million he invested with the firm in 2005. Mr. Umbach claims that Carrington improperly rescinded the redemption notice he submitted in the summer of 2007.

It has been a protracted legal battle that has produced a voluminous docket of court filings and acrimony on both sides. In a June 2 court filing, Mr. Umbach’s lawyer, Edward G. Toptani, noted that his client did not want to go along with the exchange of his preferred stock for the newly issued debt notes because the deal “was not accompanied by a fairness opinion.”

But lawyers for Carrington counter that Mr. Umbach’s complaints are misguided. “He has fared far better than investors in the other hedge funds employing the same investment strategy who lost everything during the historic subprime mortgage collapse,” said Sean F. O’Shea, an outside lawyer for Carrington.

Choosing the right financial professional

Millions of Americans invest their money every day, and many investors choose to rely on investment professionals to give them financial advice.

The process of finding the right financial professional is a very personal decision that involves feeling comfortable talking about your financial information and goals with an outside financial adviser. Before choosing an investment professional, assess your finances and determine your short-term and long-term goals.

There are numerous types of financial professionals available including brokers, accountants, insurance agents, investment advisers and financial planners. Different investment professionals can provide a variety of options for investing. You should determine the type of professional you need depending on your individual financial goals.

Once youve selected a few possible investment professionals, it is important to verify the license of their firm or individual practice. Investors can check the backgrounds of brokerage firms, individual brokers and investment adviser firms through a free tool called BrokerCheck, which is offered by FINRA, the Financial Industry Regulatory Authority.

BrokerCheck gives you access to any information regarding past complaints or regulatory actions by securities regulators and enforcement authorities.

Investment advisers must also register with the Securities Exchange Commission or a state securities regulator. The SEC offers each firms most recent registration document online through their Investment Adviser Public Disclosure website.

When verifying a registration, it is always a good idea to check with the Florida Office of Financial Regulation, www.flofr.com or call 487-9687, because we may have more information and will be happy to assist with questions.

Interviewing your potential financial professionals is just as important as verifying their license. It is essential to ask questions, such as, What experience do you have working with people in my situation?, How will you communicate investment performance results to me? and How often will you meet with me to review the performance results of my portfolio and changes in my personal finances?

Getting to know who will be investing your money and how they work is key to determining who the best investment professional is for your financial needs.

Dont forget to discuss the fees and payment structure as well. There are several ways investment professionals are compensated, including a flat fee, hourly fee, percentage of the value of the assets they manage or commission on the products they sell.

Finally, be sure to read any written document or information completely, particularly before signing anything.

Remember, it is your money. Make sure you feel comfortable with the professional or the product before you invest. These tips will keep you informed so you can make the best financial decisions for your future.

Drew J. Breakspear is commissioner of the Florida Office of Financial Regulation.

Creditors balk at bankruptcy loan teeing up Energy Future sale

n>(Reuters) – Bankrupt Energy Future Holdings novel plan to sell itself through a loan provision has Texass largest power company in hot water with creditors, who accuse it of trying to skirt a public sale process and hiding its true value.

The company and its creditors are heading for a courtroom showdown on Monday when Energy Future will seek a judges approval to take on a $2 billion loan that would give a group of hedge fund lenders 60 percent of the company when it emerges from its $48 billion bankruptcy.

Other creditors have cried foul, saying Energy Future hasnt considered competing offers and is selling itself without a traditional court-supervised bankruptcy auction. Creditors have estimated Energy Future has a total enterprise value, which includes debt, of $21 billion thanks to its EFIH unit, which owns Texass biggest power lines operator, Oncor.

The fight centers on EFIHs plan for a debtor-in-possession, or DIP, loan that would refinance high-yielding notes.

DIP loans are meant to sustain a bankrupt business during a reorganization, although lenders often use the loans to control the case. Converting the loan into an ownership stake is unusual, according to legal experts.

The companys legal team has said it spent a year negotiating with creditors prior to the April bankruptcy and the loan proposal was the best deal on the table.

In recent weeks two groups of creditors have offered their own converting DIP loans that they say offer better terms. One group teamed up with NextEra Energy Inc, the biggest producer of wind power in Texas, which would contribute $1.6 billion to the loan, according to court documents. NextEra declined to comment.

The debtors are selling their equity without having conducted any formal sale process or performed any formal valuation to determine if the proposed equity investment is on reasonable terms, wrote James Peck, a lawyer for the official committee of unsecured creditors, in a Tuesday objection to the proposed loan. He called the loan unprecedented.

The US Supreme Court has said bankrupt companies must sell assets in a way that is fair and transparent, said Stephen Selbst, a bankruptcy attorney with Herrick, Feinstein in New York who is not involved in the case. People keep trying to find ways around that.

Energy Future can consider alternate transactions, but creditors said once the loan is approved restrictive provisions will deter any potential bidders.

John Penn, a bankruptcy attorney at Perkins Coie in Dallas, who is not involved in the case, said the judge has flexibility to decide what to with the assets if he rejects the company proposal on Monday.

Sometimes it becomes a formalized process with bid procedures and other times you just have the competing parties show up in court with their offers and each makes their pitch, said Penn.

Separately, Energy Future is spinning off its TXU Energy retail utility and Luminant power generating business to the units secured lenders.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Leslie Adler)

Too Poor For College, Too Rich For Financial Aid

The news is constantly buzzing about the disappearing middle class, and nothing illustrates this better than the college financing problem – Too poor for college, too rich for financial aid . It’s a problem plaguing millions of families across the country, and it’s due to a combination of issues including rising college costs, smaller amounts of financial aid available, and difficult financial aid calculations that put the burden of paying for college on parents that can’t afford it.

In the end, students across the country are suffering from this gap.

Too Poor For College

It starts with joy! Your child gets accepted into their dream college and you’re so excited for them to be able to pursue their dreams. Then the acceptance packet comes and you see the cost of going to college. Your heart sinks.

This is what happened to Richard Morais. His daughter was accepted into Johns Hopkins University and the entire family was overjoyed! Then the admissions packet came, including the cost of attendance and financial aid award. The cost of attending Johns Hopkins for just one year was going to be $54,470, including room and board. And the total financial aid package amounted to just $6,000. That left $48,470 for the family to have to pay for, or for their daughter to get student loans for.

What’s a family to do? $48,000 is a lot of money – just shy of the median household income in the United States. If she takes out student loans, she’ll have close to $200,000 in debt when she graduates, which is outrageous. This is what makes families too poor for college.

Too Rich For Financial Aid

On the flip side, families in this situation are too rich for financial aid. Most financial aid is based on the FAFSA (Free Application For Federal Student Aid), which is then used to calculate the Expected Family Contribution. This is essentially how much the government thinks that families can afford to pay for their child’s college education. It’s based on a complex formula that takes into consideration income, assets, and more. You can find a breakdown of the Expected Family Contribution formula here.

Using this formula, schools calculate how much need-based financial aid a student should receive. For example, if the cost of attendance is $54,470, and the parent’s Expected Family Contribution is $48,470, the student won’t qualify for more than $6,000 in financial aid, like in Richard Morais’ example above.

The problem is that this formula doesn’t take into consideration your family expenses, your needs for saving for retirement, and possibly the costs of saving for your other kid’s college education. So, while the government may think you could contribute thousands of dollars, you may not be able to.

This is what makes families too rich for financial aid.

Equity Begets Flexibility: Valuing A Secured Creditor’s Claim In Bankruptcy …

The First Circuit Court of Appeals in In re SW
Boston Hotel Venture, LLC, 2014 US App. LEXIS 6768 (1st Cir.
Apr. 11, 2014) recently ruled on a number of issues critical to
valuing a secured claim in bankruptcy. Specifically, the court 1)
endorsed the use of a “flexible approach” to value
collateral under the circumstances of this case, 2) recognized that
the date collateral should be valued is the lender’s burden
to prove, and 3) confirmed that the pre-petition agreement’s
default interest rate should generally be used to determine the
post-petition interest rate. This case is of particular relevance
to secured creditors that may be (or become) oversecured during a
bankruptcy case.

In general, the Bankruptcy Code permits a secured
creditor to receive unmatured interest on its claim during a
bankruptcy case if and to the extent the claim is oversecured,
ie, that the value of the collateral securing the claim exceeds
the amount of the claim. However, determining the amount of
unmatured, post-petition interest can be complicated when the value
of the collateral changes over the life of the case. Indeed, in
SW Boston, the parties agreed that the secured creditor
was oversecured for at least part of the bankruptcy proceeding and
that the creditor was entitled to some amount of post-petition
interest. Yet, the parties disagreed on how to determine
oversecured status, when the creditor became oversecured and how to
calculate the appropriate amount of interest.

Background

SW Boston Hotel Venture, LLC (“SW
Boston”) developed a mixed-use property that would become the
W Hotel (the “Hotel”) and Residences (the
“Condos”) in Boston. SW Boston financed the project
through the Prudential Insurance Company of America
(“Prudential”), and Prudential received a mortgage and
first priority security interest in SW Boston’s real and
personal property, including the Hotel and Condos (collectively,
the “SW Boston Collateral”). SW Boston completed the
construction of the Hotel and Condos in October of 2009, but
purchases and occupancy rates were lower than expected.
Additionally, a number of the Hotel and Condo amenities – the
restaurant, spa and bar – remained incomplete. In December
2009, the City of Boston (the “City”) provided
additional funding to permit SW Boston to finish constructing the
amenities; the City was secured by a junior lien on most of the
collateral that secured the Prudential loan. Despite the additional
funding, on April 28, 2010, SW Boston and four affiliated entities
filed Chapter 11 bankruptcy petitions, which were followed on June
4 by three additional affiliated entities (collectively, the
“Debtors”).

Four months into the bankruptcy case, Prudential
filed a motion for relief from the automatic stay arguing that it
lacked adequate protection (ie, was undersecured) because the
amount of its claim exceeded the value of the SW Boston Collateral
(Prudential’s claim was approximately $154 million, exclusive
of any post-petition interest or expenses). After a three-day
hearing, the bankruptcy court found that Prudential was
undersecured with respect to the Hotel and Condos (valued
collectively at $153.6 million), but oversecured by an amount in
excess of $19 million when accounting for Prudential’s entire
collateral package, which included assets of the affiliated debtors
as well. Accordingly, the court ruled that Prudential was
adequately protected, and denied the lift-stay motion.

On May 24, 2011, the bankruptcy court approved the
Debtors’ motion to sell the Hotel for $89.5 million. The
proposed sale had several significant contingences to closing.
Three days after approval of the Hotel sale motion, the Debtors
filed their reorganization plan. The plan called for Prudential to
be paid in full by March 2014 if the hotel sale closed, or after a
more extended period if it did not. The plan further provided that
Prudential would receive interest of 4.25% per annum after the plan
became effective, but it made no provision for post-petition
interest during the case and prior to the effective date of the
plan. Prudential objected to the plan on multiple grounds. Relevant
for this advisory, ten months after it had moved for relief from
the stay by arguing it had an undersecured claim, Prudential moved
for a determination that it was oversecured and therefore entitled
to post-petition interest.

Flexible Valuation Approach

To address Prudential’s claim that it was
oversecured, the First Circuit first considered whether to apply a
flexible or single-valuation approach in determining the value of
Prudential’s collateral. Acknowledging a circuit split on
this issue, the court examined the two potential valuation methods.
The “single-valuation” approach involves a
determination of oversecured status at a fixed point in time
(generally either the petition date or the confirmation date). The
“flexible” approach allows the bankruptcy court
discretion to determine the appropriate measuring date based on the
circumstances of the case.

In this case, both the bankruptcy court and the
bankruptcy appellate panel (“BAP”) had adopted the
flexible approach, though their respective applications of the
approach differed. The First Circuit agreed with the lower courts
stating that “[t]he availability of a flexible approach
strikes us as more likely to produce fair outcomes than allowing
post-petition interest for the entire bankruptcy, or not at all,
based on a rigidly defined one-shot vantage point.” However,
the First Circuit refrained from mandating the flexible approach
holding that, “at least in the circumstances presented
here, a bankruptcy court may, in its
discretion, adopt a flexible approach.” (emphasis
added).

Date of Determination

The First Circuit then evaluated the appropriate
measuring date, along the continuum of the petition date to the
confirmation date, for determining oversecured status. The
bankruptcy court had found that the Hotel sale price provided the
best evidence of the Hotel’s value as of the sale date.
However, given the significant contingencies in the sale agreement,
the bankruptcy court concluded that the sale price was not
reflective of the Hotel’s value at any earlier time in the
case. The BAP agreed that the sale price was the best evidence of
value, but concluded that the sale price established that
Prudential was oversecured throughout the pendency of the
bankruptcy proceedings.

The First Circuit noted that the burden of proof
was on Prudential to establish when it became oversecured under the
flexible approach. Prudential unsuccessfully argued that earlier
valuations (eg, in the Debtors’ schedules, or through prior
adequate protection determinations) showed Prudential to be
oversecured. Noting the valuation determinations that occurred
during Prudential’s lift-stay motion, the First Circuit
explained that earlier valuations for one purpose do not bind
courts with regard to later valuations for some other purpose. In
fact, the changing scenarios (Prudential’s declining claim as
additional condos were sold, the Hotel and Condos’ increasing
value as improvements were made) throughout the bankruptcy case
showed these earlier valuations to be of questionable use. While
the First Circuit noted that it was plausible that
Prudential’s declining claim and the SW Boston
Collateral’s increasing value may have crossed paths at some
point before the Hotel sale date, Prudential had not carried its
burden of proof in demonstrating that it was oversecured at any
prior date. Thus, the First Circuit upheld the sale date as the
date from which post-petition interest should accrue.

Computation of Interest

Finally, the First Circuit examined the type and
rate of post-petition interest applicable to Prudential’s
oversecured claim. To calculate post-petition interest rates,
courts generally agree that where parties have contractually stated
interest terms, those terms should presumptively apply so long as
they are enforceable under state law, and equitable considerations
do not dictate otherwise. The bankruptcy court and the BAP both
held that Prudential was entitled to interest at 14.5% – the
default rate specified in the parties’ agreement. The First
Circuit noted that it was the Debtors’ burden of proof to
rebut the presumption in favor of enforcing the contractual rate,
and concluded that the Debtors failed to show that the default rate
was grossly disproportionate to anticipated damages or otherwise
unconscionable as to be unenforceable under Massachusetts law.
Therefore the 14.5% rate applied.

As to whether interest should be calculated as
simple or compounding, the First Circuit explained that compound
interest is disfavored under Massachusetts law, and is generally
not applicable absent an express agreement to the contrary. The
parties’ agreement in this case defined “Applicable
Interest Rate” as “9.50% per annum,
compounding monthly,” (emphasis added) and the
“Default Rate” as “a rate per annum equal to the
lesser of (i) the maximum rate permitted by applicable law, or (ii)
five percent (5%) above the Applicable Interest Rate.” The
courts found the language of the agreement was unclear as to
whether compound interest applied to the Default Rate. Importantly,
Prudential failed to raise the issue at trial. Prudential only
sought compound interest after the bankruptcy court ruled on the
appropriate interest rate.

Upon review of the issue, the First Circuit was
troubled by the fact that Prudential, “whether by
inadvertence or in an attempt to sandbag the Debtors and mislead
the bankruptcy court[,]” did not seek compound interest until
after the bankruptcy court granted Prudential post-petition
interest at the default rate. Accordingly, the First Circuit ruled
that “[w]e do not believe that Prudential, having failed to
give the bankruptcy court the opportunity to consider whether
application of compound interest (even if the contract calls for
it) would have been equitable, can now be heard to complain that
the court abused its discretion (or even erred) in disallowing
compounding.” Accordingly, and without deciding the issue on
its merits, the First Circuit ruled that Prudential was not
entitled to compound interest.

Conclusion

The First Circuit recognized equitable
considerations in affirming use of the flexible approach in
determining whether a claim is oversecured, leaving the issue to
the discretion of the bankruptcy court but not mandating the
approach as the only one available in the First Circuit. The court
did not break from precedent when affirming the use of the
contractually agreed default rate of interest as the applicable
rate for post-petition interest. And, in the face of ambiguity, the
court followed applicable nonbankruptcy law in determining that
simple, rather than compound, interest would apply
post-petition.

Secured lenders involved in bankruptcy cases must
remain vigilant and diligently pursue their rights or risk losing
them. Such lenders must be prepared to carry the burden of proof at
all times when asserting a claim for post-petition interest, as any
interest paid to a secured creditor means less cash available to
pay to unsecured creditors. The lender needs to be prepared to
prove the amount of the claim, the value of the collateral, the
time when the value of the collateral should be determined and
finally, if the claim is demonstrated to be oversecured, the amount
and type of interest that should be applied to the claim.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

Access to landlord’s property by a tenant’s lender

Landlords and secured lenders (ie, lenders with a security interest in tenant#39;s personal property as collateral for a large loan) should remember to consider underlying applicable state law governing removal of a defaulted tenant#39;s property when negotiating landlord waivers or collateral access agreements.

Competing interests are at play between landlords and secured lenders when it comes to how a defaulted tenant#39;s property should be handled. A landlord is most interested in its ability to reposition its building, either through signing a lease with a new tenant or by selling the asset – something that may be difficult with the property of its defaulted tenant still at the premises. For a landlord, setting a finite amount of time to allow tenant#39;s property to remain at the premises, or else be considered abandoned, is critical to this process. The secured lender, on the other hand, desires ample opportunity to devise a plan for the disposition of tenant#39;s property; and in some cases, if the secured lender does not want to terminate tenant#39;s financing, it may not be motivated to remove the tenant#39;s property quickly.

Depending upon where the property is located, it may be well worth the effort for a landlord to carefully negotiate a collateral access agreement with its tenant#39;s secured lender. For example, relying on applicable law in New York may not be in the best interest of Landlord, where rights at law only address the periodafterthe secured lender has decided to remove its collateral. (See UCC sect; 9-604(d) — Landlord has the right to:

  • receive reimbursement for the cost of repair of any physical injury caused by the removal
  • refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse –available athttp://www.law.cornell.edu/ucc/9/9-604).

It follows that simply relying upon applicable law in New York would not provide adequate guidance as to how long a landlord would be required to keep atenant#39;s property at the premises before it feels comfortable disposing of such property without liability to thetenant or secured lender. Landlords can make determinations as to what may be commercially reasonable (eg, providing the same notice that tenant would be entitled to at law to the secured lender prior to disposal), but any such actions could nevertheless be subject to legal challenge by the secured lender.

Several other commonly negotiated points, such as (1) the right to collect rent for the period in which secured lender#39;s collateral remains at the property and (2) the ability to receive an indemnification from the secured lender in connection with any damage to the property, are also not part of New York law. These points and those discussed above are good reasons for landlords to refresh themselves on local law before determining whether to stick with applicable rights at law or to negotiate an agreement with the secured party.