January 19, 2022 – The U.S.Trustee assigned to the Debtor's case objected to the Debtor’s Second Amended Chapter 11 Plan of Reorganization arguing that the Plan's release and exculpation provisions are too broad, particularly given that the releases cover the increasingly infamous duo of Toby Moskovits (Heritage's founder and chief executive officer) and Yechiel Michael Lichtenstein (a major shareholder) whose prepetition conduct is now being reviewed by an examiner (with the examiner's report not due until January 28th) [Docket No. 318]. Given the expected date of that report, the Debtor has now delayed a January 27th Plan confirmation hearing until February 15th.

This is not the U.S. Trustee's first objection to the Debtor's Plan (an earlier attempt to have these cases converted to Chapter 7 rebuffed by Judge Drain), nor is it the largest obstacle in the Debtor's path to Plan confirmation.

On January 17th, the Debtor's senior lender Benefit Street Partners ("BSP," owed an estimated $95.0mn with interest) filed an objection to the Debtor's Plan noting that the Debtor "has consistently run this case for the benefit of its dishonest, self-dealing insiders [ie Moskovits and Lichtenstein]" with the result being "an overreaching value-grab" benefitting those insiders. Like the U.S. Trustee, BSP also focuses on the ongoing examintion into "tens of millions of dollarsin suspect transactions" and the inappropriateness of the Plan's releases.

By way of reminder, it was BSP's foreclosure action that pushed the Debtor into Chapter 11 in the first place, and BSP has notified the Court (terms included in the Debtor's Disclosure Statement) that it stands ready to promulgate an alternative Plan.

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."

BSP’s alternative Plan would have the Debtor’s assets auctioned/sold (BSP to play credit bidding stalking horse); with BSP to provide $10.0mn in cash “to fund creditors’ recoveries, such that if the Asset sale proceeds (the ‘Sale Proceeds’) are ultimately insufficient to pay holders of Allowed Claims against the Debtor, creditors can get paid from the Lender Contribution.”

The U.S. Trustee Objection

The U.S. Trustee’s objection reads: “The United States Trustee objects to confirmation of the Plan because the Plan impermissibly imposes third party releases on parties who have not affirmatively and unambiguously demonstrated their consent to grant such releases. The Plan and balloting procedures require an affirmative ‘opt-out’ for classes that are entitled to vote. In addition, the releases will be imposed on creditor classes who do not have any right to vote because they are deemed to reject the Plan. The third-party releases in the Plan contravene established case law in this district and should be stricken. But the Court should strike the releases for a separate, independent reason. As described below, an examiner has been appointed in this case to review prepetition transfers to the Debtor’s equity holders – Ms. Toby Moskovits and Mr. Michael Lichtenstein. Yet, these equity holders are within the definition of ‘released parties.’ The examiner’s report is not due until January 28, 2022. Here, because the deadline to object to the Plan will pass before the examiner issues his report, the United States Trustee objects to the releases to preserve his rights in the event the examiner finds that the proposed released parties had engaged in improper conduct – assuming the Court is inclined to grant any third-party releases at all.

The United States Trustee also objects to the scope of the Plan’s exculpation language as beyond the temporal scope of customary provisions, and also because the exculpations provisions protect non-fiduciaries. Further, the Plan must provide a valid and legal basis for payments to the chief restructuring officer in this case. As set forth below, the Debtor does not, and cannot, provide a basis. Finally, it appears that the Plan violates the absolute priority rule.”

Benefit Street Partners Objection

On January 17th, lender BSP filed an objection to the Debtor's Plan [Docket No. 307].

The objection states, "The Debtor has consistently run this case for the benefit of its dishonest, self-dealing insiders. The proposed Plan – issued unilaterally rather than negotiated with key stakeholders – is the culmination of those efforts. It allows the Insiders (defined below) to keep their ownership interests (and all potential upside) for a minimal, non-market-tested cash contribution while placing virtually all reorganization risk onto Benefit Street without anything approaching fair compensation or treatment. Not surprisingly, this overreaching value-grab is unconfirmable for myriad, overlapping reasons:

First, and permeating all other issues, is the fundamental lack of good faith underlying this Plan. This is true in both senses contemplated by Bankruptcy Code section 1129(a)(3): The Insiders running the Debtor have repeatedly acted in subjective bad faith, and the Plan cannot be viewed as a serious, good faith effort to effect a feasible reorganization. Among other malfeasance, the Insiders: 

• fraudulently induced the Benefit Street loan by concealing a grossly unfair, off-market, insider management agreement that purports to strip the Debtor of key assets;
• collected but apparently improperly diverted millions of dollars in hotel occupancy taxes, thereby permitting massive additional priority claims to accrue; and
• engaged in millions of dollars of other, as-yet-unexplained insider transactions (including diverting PPP funds) still being unraveled by the Examiner (whose investigation the insiders have tried to thwart).

More generally, the entire Plan process was hobbled by the Debtor’s singular focus on benefiting its Insiders. It never seriously investigated a sale or refinancing of its key hotel asset, and it proposed a Plan that: permits the Insiders to retain their ownership for a minimal 'capital contribution;' buys the votes of certain unsecured creditors by promising favorable treatment that it cannot deliver to all unsecured creditors; provides Benefit Street, which was deceived into making the loan in the first place, with a six-year, non-amortizing note with a coupon far below the original loan, even though it will effectively be behind $4 million (and potentially much more) in tax claims that will accrue interest at 18% and be amortized; and offers broad releases for the Insiders while seeking to block the Examiner’s inquiries into 'tens of millions of dollars' in suspect transactions….

[T]he Plan fails the Best Interests test because, under the Debtor’s own valuation of the hotel property (but without applying an unjustified discount), Benefit Street would fare better in a liquidation than under the Plan."

Background

On February 23, 2021, the Debtor, the owner of the "Brooklyn-Centric" Williamsburg Hotel in Brooklyn, N.Y., filed for bankruptcy protection with estimated 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.

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