November 3, 2021 – The Debtor filed a Second Amended Plan and a related Disclosure Statement (the Plan attached as Exhibit A to the Disclosure Statement) and blacklines of each showing changes to the versions filed on October 15, 2021 [Docket No. 167].

A substantial portion of the revisions relate to the bitter and unresolved dispute with lender-turned-nemesis Benefit Street Partners ("BSP"); with some of the Debtor's more emotive language now toned down (but not by much, BSP, which views the Disclosure Statement as a "rant," still accused of "sequential, contrived, and overlapping actions" that hamstrung an otherwise allegedly profitable hotel valiantly struggling against COVID and drove it into bankruptcy) and "BSP disputes the foregoing" (and, to avoid the inevitable monotony, several variants thereof) tacked on to numerous elements of the Debtor's Disclosure Statement narrative. Now tacked on to the Disclosure Statement at Exhibit G is a "Performance Report," which the Debtor will hope is sufficiently robust to rebut allegations of poor management and further its contention that BSP's actions were driven by opportunism and bad-faith and not legitimate efforts to protect its collateral.

BSP, whose attempts to recover part of the $68.0mn it is owed by the Debtor through a foreclosure action precipitated the Debtor's bankruptcy filing, sees things rather differently, noting: "the individuals managing the Debtor and the Hotel Manager (who are one and the same) have acted dishonestly and engaged in clear (and potentially unlawful) self-dealing…its business is underperforming its competitors and failing to pay significant operating expenses….These disappointing results are consistent with the operating history of a hotel that opened in late 2016, and was already unable to pay its debt service a full 15 months before the pandemic even began, or repay its mortgage at maturity – again, before the pandemic." See more on BSP's October 29th objection to the Disclosure Statement ("a
misleading, inaccurate and incomplete picture of the Debtor’s history") [Docket No. 162] below.

To date, consistent efforts by BSP (and the U.S. Trustee assigned to the Debtor's case) to take control of the Chapter 11 process out of the hands of the Debtor have been largely rejected by the Court (although BSP did prevail in its call for the appointment of an examiner), but a November 5th hearing to consider termination of Plan exclusivity periods, access to cash collateral, the Debtor's motion to appoint a mediator (with the Court indicating on October 29th that it was leaning towards compelling Debtor/BSP mediation) may end up changing that. 

Certainly there is little in the revised Plan/Disclosure Statement (or in the BSP objection to it) that suggests that the parties are moving towards a consensual Plan/resolution of differences on their own. Judge Drain, who's painful experience with the Purdue cases likely influenced his decision to retire form the bench at the end of next June, may well be hoping that it is a lengthy mediation.

A Plan confirmation hearing remains optimistically scheduled for December 13th (not a Friday).

Overview of the Plan

The Second Amended Disclosure Statement [Docket No. 167] notes, “The Plan will be implemented by and through a cash infusion in the amount of $9 million to be contributed from the Plan Sponsor [96 Wythe New Acquisition LLC*], of which $1,438,000.00 million will be allocated for the PPP Settlement, as well as cash on hand, which the Debtor projects will aggregate approximately $3 million upon the Effective for a total available cash upon the Effective Date projected at about $12 million. It should be noted that the amount of cash on hand from operations upon the Effective Date may be higher or lower than the $3 million projected, but this will not impact the Plan going Effective.

The Reorganized Debtor will continue to operate from and after the Effective Date. The Plan Sponsor’s cash infusion and the income generated by the Reorganized Debtor’s operations will be used to fund operating expenses and to pay the amounts necessary to fund the Plan payments. The Plan Sponsor shall designate the managing member of the Debtor upon the Effective Date. As the Debtor intends to pay allowed claims in Classes 4 and 5 in full, up to their amount of their Allowed Claim, one-half (1/2) to be paid on the Effective Date and the remainder to be paid with interest (180) days after the Effective Date, the Debtor believes that the Plan will provide all holders of claims against the Debtor with a greater recovery than would be available if all of the assets and interests of the Debtor were liquidated in a case under chapter 7 of the Bankruptcy Code and distributed by a chapter 7 trustee in accordance with the statutory scheme and priorities contained in the Bankruptcy Code.”

In respect of funding, the Plan further explains: “The Plan Sponsor shall contribute $9,000,000.00 to the Reorganized Debtor upon the Effective Date, $7,562,000.00 of which shall be paid as a capital contribution as provided in Section 3.2(g) above.

In addition, and as set forth more fully in the Disclosure Statement, while the Debtor and the Management Company dispute any allegations made with respect to the PPP Loans and believe such claims are baseless, the Debtor and Management Company have agreed to settle any and all claims, if any, relating to the PPP Loans pursuant to the PPP Settlement and the PPP Stipulation. Pursuant to the PPP Settlement, which is approved herein, the Management Company has agreed to defer repayment of over $2,000,000.00 in claims for fees due to the Management Company through the Plan’s Effective Date, until after all Allowed Claims have been paid, and the Plan Sponsor has agreed to infuse an additional $1,438,000.00 to the Reorganized Debtor (for a total payment of $9,000,000.00 including such infusion and capital contribution of $7,562,000.00) which shall be earmarked as a settlement payment (together with deferral of debt by the Management Company) pursuant to the PPP Settlement. 

The Plan will be implemented by and through proceeds of the $9,000,000.00 in cash from the Plan Sponsor to be funded upon the Effective Date as part of the PPP Settlement and the Equity Infusion, any cash otherwise held by the Debtor upon the Effective Date, and ongoing income from the Debtor’s operations.”

* Toby Moskovits and Michael Lichtenstein are the operating members and managers of 96 Wythe New Acquisition LLC. Lockwood Development Partners will be a preferred equity holder of 96 Wythe New Acquisition LLC. 

The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see changes in bold), see liquidation analysis below:

• Class 1 (“Priority Claims”) is unimpaired and not entitled to vote on the Plan. The estimated recovery is 100%.
• Class 2 (“BSP [Benefit Street Partners Realty Operating Partnership, L.P. and BSPRT 2018-FL3 Issuer, Ltd.] Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $70.7mn [BSP argues it has a $90.0mn claim] and the estimated recovery is 100.0%.
  1. Treatment of the BSP Undisputed Claim. The BSP Undisputed Claim will be paid in full, together with interest to be paid as follows: (i) the Reorganized Debtor will pay BSP equal monthly payments of interest only at a rate of 4.5% per annum commencing on the Effective Date for four (4) years; (ii) commencing on the fourth (4th) anniversary of the Effective Date, the Reorganized Debtor will pay interest at a rate of 5% per annum for an additional two (2) years; and (iii) on the sixth (6th) anniversary of the Effective Date, the Reorganized Debtor will make a final payment consisting of the balance of the BSP Undisputed Claim. In addition, on the Effective Date, the Reorganized Debtor will (a) contribute $3 million into an interest account to serve as the Interest Reserve for the Reorganized Debtor’s payments on account of the BSP Undisputed Claim, which such account will be established at a third-party bank selected by the Debtor in its sole discretion and drawn on by the Reorganized Debtor to pay BSP interest payments in full or partially in the event that the Reorganized Debtor has not paid the required monthly interest payment in full or partially by the twentieth (20th ) of the month when such payment becomes due; and (b) pre-pay BSP the first two (2) monthly interest payments required to be paid under clause (i) above, such that on the Effective Date, the Reorganized Debtor will pay BSP a total of the first two (2) monthly interest payments as provided hereunder.
  2. Treatment of the BSP Disputed Claim. Upon a Final Order adjudicating the BSP Disputed Claim or by written agreement between the Debtor or the Reorganized Debtor (as applicable) and BSP, and subject to the Debtor’s right to seek an estimation of such claim pursuant to section 502(c) of the Bankruptcy Code, the Debtor will make additional distributions to BSP as follows: (i) in the event that amounts due to BSP are adjudicated by Final Order or by written agreement between the Debtor or the Reorganized Debtor (as applicable) and BSP to be in an amount that exceeds the BSP Undisputed Claim amount and if the BSP Disputed Claim is not subject to subordination, such additional Claim amounts will receive the funds in the Interest Disputed Claim Reserve corresponding to the interest payments otherwise payable on account of any such additional Allowed Claim amount, with ongoing interest payments from the time of such adjudication to be paid pursuant to the treatment of the BSP Undisputed Claim; and (ii) any excess amounts held in the Interest Disputed Claim Reserve above the amounts required for distributions to BSP under the Plan and as provided herein, will be released to the Reorganized Debtor, free and clear of any liens, claims and encumbrances.
• Class 3 (“Secured Property Tax Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $3,092,874.62 and the estimated recovery is 100.0%. The Reorganized Debtor shall comply with its obligations under that certain Property Payment Plan as between the Debtor and the relevant Taxing Authority with respect to the payment of real estate taxes, which provides for semi-annual installments in the amount of $443, 2011.41 over a period of ten years. The first installment is due January 1, 2022. The Reorganized Debtor shall pay such amounts as provided for under the Property Payment Plan. Liens shall continue with the same force and effect until such Allowed Secured Property Tax Claim has been paid in full as provided under the Plan.
• Class 4 (“Secured M&M Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $353,306.00 and the estimated recovery is 100.0%. The Reorganized Debtor shall pay Allowed Secured M&M Claims in full, up to the amount of their Allowed Claim, one-half (1/2) to be paid on the Effective Date and the remainder to be paid with interest (180) days after the Effective Date. Liens shall continue with respect to any Allowed Secured M&M Claim, with the same force and effect until such Allowed Secured M&M Claim has been paid in full as provided under the Plan.
• Class 5 (“Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1,970,936 to $2,570,936.00 and the estimated recovery is 100.0%.  Each holder of an Allowed Unsecured Claim will be paid in full, up to the amount of their Allowed Claim, one-half (1/2) to be paid on the Effective Date and the remainder to be paid with interest (180) days after the Effective Date. Although the Debtor’s estimate of Allowed Unsecured Claims is generally the result of the Debtor’s and its advisors’ analysis of reasonably available information, the projected amount of Allowed Unsecured Claims set forth herein is subject to change (either higher or lower), which difference could affect Class 5 recoveries. Finally, the Debtor may object to certain proofs of Claim, and any such objections ultimately could cause the total amount of Allowed Unsecured Claims to change. These changes could affect recoveries to holders of Allowed Unsecured Claims.
• Class 6 (“Subordinated Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
• Class 7 (“Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.

Key Documents

The Second Amended Disclosure Statement attached the following exhibits:

• Exhibit A: Chapter 11 Plan 
• Exhibit B: Liquidation Analysis 
• Exhibit C: Plan Projections 
• Exhibit D: Lockwood Letter of Intent 
• Exhibit E: PPP Stipulation and Settlement Agreement 
• Exhibit F: Projection Detail 
• Exhibit G: Performance Report

Proposed Key Dates:

• Voting Record Date: November 5, 2021
• Voting Deadline: November 23, 2021
• Plan Objection Deadline: December 6, 2021
• Confirmation Hearing Date: December 13, 2021

Background

On February 23, 2021, the Debtor, the owner of the "Brooklyn-Centric" Williamsburg Hotel in Brooklyn, N.Y., filed for bankruptcy protection with estmated assets of $0 and liabilities of $80.0mn. According to the Debtor's Petition, $68.0mn of the latter sum is owed to BSP which had filed a foreclosure action against the Debtor which effectively precipitated the Debtor's bankruptcy filing. 

Exasperated, BSP clearly views the Debtor's management little more able to manage bankruptcy then it was to able manage hotel operations prior to filing, noting in a Court filing as to the Debtor's operational ability: "its business is underperforming its competitors and failing to pay significant operating expenses….These disappointing results are consistent with the operating history of a hotel that opened in late 2016, and was already unable to pay its debt service a full 15 months before the pandemic even began, or repay its mortgage at maturity – again, before the pandemic."

The Debtor’s Petition also lists four “related” affiliate bankruptcy cases pending in the same Court, including 232 Seigel Acquisition LLC (Case No. 20-22845); 232 Seigel Development LLC (Case No. 20-22844); MY2011 Grand LLC (Case No. 19-23957); and S & B Monsey LLC (Case No. 19-23959). The 96 Wythe and 232 Seigel properties are backed by Franklin Templeton-owned Heritage Equity Partners.

In a February 16, 2021 opinion, the Appellate Division of the Supreme Court of the State of New York reversed an April 9, 2020 ruling that denied Benefit Street Partners’ motion for a summary judgment against 96 Wythe in connection with a foreclosure. The opinion states, “Order, Supreme Court, New York County (Barry R. Ostrager, J.), entered April 9, 2020, which, to the extent appealed from as limited by the briefs, denied plaintiff’s motion for summary judgment on its foreclosure claim as against defendants 96 Wythe Acquisition LLC, Toby Moskovits [Heritage’s founder and chief executive officer] and Yechiel Michael Lichtenstein, and dismissing defendants’ remaining affirmative defenses and counterclaims, unanimously reversed…and the motion granted.

Plaintiff established prima facie entitlement to summary judgment by producing the mortgage, note and guaranty executed by defendants, and evidence of defendants’ default on their obligations thereunder, including their failure to timely repay the principal balance of the loan… The record does not support defendants’ contention that the waiver of defenses provisions was rendered ineffective because the lender caused or contributed to the loan default. In any event, the defenses and counterclaims were not viable.”

BSP Objection to Disclosure Statement

The BSP objection provides: "Rather than provide the required 'adequate information' to allow creditors to make an informed decision about its Plan, the Disclosure Statement largely consists of a misguided (and disputed) rant about the Debtor’s history with Benefit Street, which omits or distorts many, many ‘facts’. Moreover, for an insider-sponsored Plan that was not subject to any Court-approved marketing test — yet gives Ms. Toby Moskovits and Mr. Michael Lichtenstein the exclusive right to retain control over and profits from the Hotel — the Disclosure Statement contains little, if any, discussion of factors relevant to creditors. This includes meaningful financial information to assess the Hotel’s current and future performance under a Plan that stretches all creditors out for years and leaves the Debtor highly-leveraged… 

Among other major short-comings, the Disclosure Statement fails to contain any details on the terms of Benefit Street’s treatment, going-forward loan documentation and collateral other than stating a below market interest rate and extreme six year maturity date. In short, the Disclosure Statement presents creditors with a
misleading, inaccurate and incomplete picture of the Debtor’s history, the proposed treatment of creditors, and the potential risks associated with the Debtor’s plan.
The Disclosure Statement touts the Debtor’s PPP settlement (negotiated by and among the insiders) and de minimis 'equity infusion' that allows the insiders to retain control while dragging the Lender and all other creditors along for years to see potential repayments.And all of this is in the face of repeated bad behavior by these insiders — who (shockingly) benefit from sweeping Plan releases. Neither the value of consideration provided for the Plan’s releases, nor the basis for this insider-sponsored, insider-released Plan, nor any of the readily available alternatives — other than a fictitious and false ‘fire sale liquidation’ — are discussed."

Motion to Dismiss

On October 13th, the Court hearing the 96 Wythe Acquisition case issued an order denying a motion to convert (or dismiss) filed by the U.S. Trustee assigned to the case [Docket No. 142, which we covered separately], with the Court holding in a short 2-page order that “the UST has not carried the burden of proof with respect to the Motion and that it and the Joinder should be denied, without prejudice to renewal upon materially changed circumstances and, with respect to the Joinder, the provision of due notice.”

The U.S. Trustee William Harrington, who has recently traded blows with presiding Judge Robert Drain in the Purdue cases, took particular umbrage at (i) the Debtor's recent claims that its employees actually work for a third-party management company (and the sudden production of a previously undisclosed management agreement to back up that assertion…with the suspect provenance of that document compunded by the failure to produce further requested supporting documents…and the existence of an earlier 2017 management agreement) and (ii) the Debtor's alleged siphoning of "millions of dollars from debtor-in-possession accounts to third party accounts, beyond the scrutiny of the Court" (with the inferrence being that those "non-authorized" accounts are controlled by the same individuals who otherwise own and control the Debtor).

BSP, whose attempts to recover part of the $68.0mn it is owed by the Debtor through a foreclosure action precipitated the Debtor's bankruptcy filing in the first place, had filed a joinder [Docket No. 127] noting: "the individuals managing the Debtor and the Hotel Manager (who are one and the same) have acted dishonestly and engaged in clear (and potentially unlawful) self-dealing. Such apparent mismanagement and dishonesty mandates the appointment of a trustee (whether under Chapter 7 or Chapter 11)."

The Debtor fired back an objection to the motion to convert [Docket No. 124] arguing that the U.S. Trustee was focusing on "discreet, technical" mis-steps in an order "derail" efforts of a Debtor that has already filed a Plan and is valiantly operating its viable, COVID-stricken business: "Despite the unprecedented effects of the ongoing COVID-19 pandemic that severely curtailed the Debtor’s operations early on, and continues to wreak havoc on the hospitality industry as a whole, the Hotel is open and fully operational – operating profitably and exceeding financial projections. 

Specifically, the Debtor, through its advisors, has finalized terms for its plan of reorganization [Dkt. 115] (the “Plan”), which includes the infusion of $8 million in new money (coupled with the over $2 million in cash the Debtor anticipates as of the effective date of the Plan, for a total of $10 million), forming the predicate for its Plan filed on September 20, 2021, and emergence from Chapter 11, while preserving the going concern value of the Hotel (which is significantly greater than in a forced liquidation). 

Notwithstanding the Debtor’s current profitability and plan for emergence (the hearing on approval of the Debtor’s disclosure statement has been set for November 5, 2021, with a proposed confirmation date of December 13, 2021), the UST curiously seeks to derail all of that by converting the Chapter 11 Case to a forced liquidation under Chapter 7 or dismissing the Chapter 11 Case…. Here, the sole basis for cause cited by the UST is the purported ‘gross mismanagement’ of the estate under § 1112(b)(4)(B). As an initial matter, however, such allegation of gross mismanagement is belied by the fact that the Debtor is running a profitable hospitality business during a global pandemic while formulating the Plan to reorganize and emerge from Chapter 11 protection. Further, and notwithstanding, in alleging mismanagement, the UST relies on discreet, technical discrepancies that have no effect on the estate or Chapter 11 Case…"

Liquidation Analysis (see Docket No. 167, Exhibit B for notes)

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