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January 11, 2023 – Further to a November 15th bidding procedures order [Docket No. 784], and a lengthy auction that concluded on January 11th, the Chapter 11 Trustee (the “Trustee”) appointed to the Debtor's case notified the Court that Quadrum Development Corp. (the “Buyer,” U.S. property portfolio here) had been designated as the successful bidder in a sale of substantially all of the Debtor’s assets (namely the Williamsburg Hotel located at 96 Wythe Avenue, Brooklyn, New York, $96.0mn cash purchase price) [Docket No. 869]. The Purchase and Sale Agreement governing the terms of the sale is attached as Exhibit A to the notice.
The $68.0mn mortgage from Benefit Street Partners ("BSP") that has been central to the Debtor's case "shall remain a valid and subsisting lien upon the Property ('Mortgage'), and which shall be assigned to Purchaser's lender."
Notwithstanding considerable pre-auction interest, only two parties were ultimately selected as qualified bids (the "Qualified Bidders") and these only after the entry hurdle was lowered for these bidders (both bids were below the $96.0mn that BSP was allowed to credit bid). The auction, which began on December 14th, was delayed several times as the Trustee, BSP and the Qualified Bidders worked on improving financing terms (offered to each of the Qualified Bidders by BSP) and on pushing up bids to BSP's $96.0mn threshold. On January 11th, that threshold was ultimately (just) met.
The identity of the second bidder was not disclosed and it has not been designated as a back-up bidder. "If the transactions contemplated by the Proposed Purchase Agreement do not close, the Trustee will promptly reconvene the Auction to permit the Secured Lender to tender a credit bid in accordance with its rights in this case".
In a declaration in support of a requested sale order, the Trustee provides the following detail: "I understand that more than approximately 190 potential bidders entered into confidentiality agreements and obtained access to the data room established by the Co-Brokers (the “Data Room”) and that more than approximately 30 interested parties conducted inspection tours of the Property escorted or arranged by the Co-Brokers….The Trustee received several bids from interested parties prior to the December 12, 2022 bid deadline set forth in the Bid Procedures Order, all of which were below the Secured Lender’s [ie BSP’s] maximum credit bid rights pursuant to the Settlement Agreement between the Trustee and the Secured Lender….Following discussions between the Trustee and his professionals and the Secured Lender and its professionals, the Trustee, in the exercise of his business judgment, determined to designate two bids as ‘Qualified Bids’ in accordance with the Bid Procedures Order and invited the associated bidders to participate in the Auction.
On December 14, 2022, the Trustee commenced the Auction… Despite multiple rounds of robust bidding and related discussions with the bidders, the maximum bid submitted by the Qualified Bidders at that time was still below the Secured Lender’s credit bid rights under the BSP Settlement Agreement. Following consultation with the Secured Lender and its advisors, the Trustee determined…to adjourn the auction until December 21, 2022. At the request of the Trustee, the Secured Lender prepared a term sheet for financing, which the Trustee made available to all potential bidders.2 Each of the bids submitted by the Qualified Bidders was contingent on obtaining financing from the Secured Lender to close the proposed Sale. In light of this contingency, following the initial Auction date, the Secured Lender, in consultation with the Trustee, determined to offer improved financing terms in order to increase bids and therefore the amount of cash proceeds generated by the Sale.
On December 21, 2022, the Trustee continued the Auction with the Qualified Bidders and their advisors and the Secured Lender and its advisors again in attendance. At this Auction, the Secured Lender announced on the record that it would offer improved financing terms for each of the Qualified Bidders on identical terms provided to both. Following continued bidding, the proposed Sale price improved but was still below the Secured Lender’s credit bid rights under the BSP Settlement Agreement. Following consultation with the Secured Lender and its advisors, the Trustee determined, in the exercise of his business judgment, to adjourn the auction several times to allow for continued discussions between the Qualified Bidders and Benefit Street regarding the terms of financing offered….On January 11, 2023, the Trustee again opened the Auction with the Qualified Bidders and their advisors and the Secured Lender and its advisors in attendance. At this time, the Trustee determined, in consultation with the Secured Lender and its advisors to designate Quadrum Development Corp. as the Successful Bidder (as defined in the Bid Procedures Order)….If the transactions contemplated by the Proposed Purchase Agreement do not close, the Trustee will promptly reconvene the Auction to permit the Secured Lender to tender a credit bid in accordance with its rights in this case".
Key Terms of SPA
- Seller: Stephen S. Gray, as a Chapter 11 Trustee of ‘96 Wythe Acquisition LLC’
- Buyer: Quadrum Development Corp., a Delaware corporation.
- Purchase Price: The purchase price for the Property to be paid to Seller by Buyer shall be Ninety-Six Million Dollars and No/100s ($96,000,000.00) (the “Purchase Price”), plus or minus any applicable prorations and adjustments calculated and payable as herein after provided.
- Earnest Money: Buyer has deposited into escrow (the “Escrow”) with the Title Company (as hereinafter defined) as Escrow Holder (“Escrow Holder”), in immediately available funds, the sum of Four Million Two Hundred Fifty Thousand and No/100s Dollars $4,250,000.00, together with any interest earned thereon, if any, the “Earnest Money”). Upon the closing of the transaction contemplated by this Agreement, the Earnest Money shall be paid to Seller and Buyer shall receive a credit against the Purchase Price in the amount thereof. If the transaction does not so close, the Earnest Money shall be disbursed in accordance with the terms of this Agreement.
A sale hearing is scheduled for January 17, 2023, with objections due by January 12, 2023.
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.
On May 26, 2022, the Court authorized the appointment of a Chapter 11 trustee (the “Trustee”). The order was entered on May 27, 2022 [Docket No. 591].
On October 21st, the Court issued an order approving a settlement between the Debtor’s Chapter 11 Trustee (the “Trustee”) and Benefit Street Partners Realty Operating Partnership, L.P. (“BSP” or “Lender” and, together with the Trustee, the “Parties”) [Docket No. 753]. A copy of the Settlement Agreement is attached as Exhibit 1 to the order. On September 13th, the Chapter 11 Trustee requested approval of the settlement [Docket No. 679].
On October 21st and further to a settlement between the Trustee and Benefit Street Partners Operating Partnership, L.P. (“BSP” or “Benefit Street”), the Trustee filed a motion requesting each of a bidding procedures order and a sale order [Docket No. 752, with the settlement covered in our story on Docket No. 753]. The settlement is relevant because it fixes BSP’s claim(s) and the parameters further to which it can credit bid those claim(s) in a section 363 auction or in a private sale. It also initially stipulated that a sale must occur by December 23rd and that the Debtor’s Plan must go effective by December 31st.
On December 2nd, the Trustee filed a Plan of Liquidation and a related Disclosure Statement [Docket Nos. 815 and 816, respectively] and separately filed a motion that would approve: (i) the adequacy of the Disclosure Statement (conditionally), (ii) proposed Plan solicitation procedures and voting procedures and (iii) a proposed timetable culminating in a January 31, 2023 Plan confirmation hearing [Docket No. 817].
Bidding Procedures Motion
The motion [Docket No. 752] states, “On September 13, 2022, the Trustee filed a motion [Docket No. 679] (the 'BSP Settlement Motion') to approve a settlement agreement between the Trustee, on behalf of the Debtor’s estate, and Benefit Street, a copy of which is attached to the proposed order of the BSP Settlement Motion as Exhibit 1 (the 'BSP Settlement Agreement'). The Court conducted a hearing on the BSP Settlement Motion on October 19, 2022 (the 'October 19th Hearing'), and orally approved the BSP Settlement Motion at the October 19th Hearing.
The BSP Settlement Agreement provides for BSP to have an allowed 'Senior Secured Claim' of $95,952,130.85, (as of August 14, 2022, with contract-rate interest, fees and other expenses continuing to accrue thereafter), which it is permitted to credit bid in connection with the Sale…and an allowed 'Subordinated Secured Claim' of $12,736,655.90 (as of August 14, 2022, with default-rate interest, fees and other expenses continuing to accrue thereafter), which is not part of any Benefit Street credit bid.
As noted above, the Trustee filed the BSP Settlement Motion to approve the BSP Settlement Agreement, which the Court approved orally at the October 19th Hearing. Pursuant to the BSP Settlement Agreement, BSP is entitled to credit bid up to the Senior Secured Amount (as defined in the BSP Settlement Agreement) for the Assets, at a Sale of the Assets, either under a confirmed chapter 11 plan or in a sale outside a plan pursuant to section 363 of the Bankruptcy Code.
….The ownership of certain intellectual property used at or in connection with the Assets is subject to dispute by the Debtor’s former management company and insiders. Potential bidders may include such intellectual property in the Assets they seek to purchase; however, in light of the dispute, the Trustee will deliver only the estate’s right, title and interest in and to such intellectual property, if any, without any representations or warranties whatsoever unless this dispute is resolved by the Court or otherwise prior to the Auction. Any potential bidder seeking to purchase intellectual property from the Trustee shall itemize in its bid specifically what intellectual property is included in its bid and ascribe a value to such intellectual property in order to aid the Trustee in evaluating whether such bid is a higher or better bid.”
Background on Trustee Appointment
On May 27, 2022, the Court issued an order appointing the Chapter 11 Trustee [Docket No. 591].
In a March 31st motion requesting the appointment, the U.S. Trustee assigned to the Debtor's case provided [Docket No. 491]: "An investigation by the examiner Eric Huebscher (the 'Examiner') uncovered evidence 'of a complex scheme to divert and siphon substantial amounts of money from the Debtor, through a labyrinth of banking relationships between the Debtor and the Manager, and other entities under common ownership and control of the Principals.' See Zipes Decl. Ex. A (Examiner’s Report) at 1. Although the Debtor filed a response finding fault with the Examiner’s ultimate conclusions, that response failed to address the most serious aspects of the Examiner’s Report. See Zipes Decl. Ex. B (Debtor’s response)….
The Debtor – a tightly controlled limited liability company – is incapable of investigating itself, reviewing the detailed information uncovered by the Examiner during the course of his investigation and taking action against its principals if such is required. This is abundantly clear because rather than investigating further into the detailed facts uncovered by the Examiner, the Debtor has unabashedly ignored those facts and conclusions, and instead, has proposed in its proposed plan of reorganization to bestow upon the Principals – who may have among other things caused federal funds to be transferred from the Debtor’s estate – broad releases and exculpations solely for the benefit of those very same Principals….In sum, there are ample cause [sic] to appoint a Chapter 11 Trustee – an independent fiduciary – pursuant to 11 U.S.C. § 1104."
On February 28, 2022, court-appointed examiner Eric M. Huebscher submitted a examiner's report, stating that his investigation 'uncovered evidence of a complex scheme to divert and siphon substantial amounts of money from the Debtor, through a labyrinth of banking relationships between the Debtor and the Manager and other entities under common ownership and control of' Debtor principals Michael Lichtenstein and Toby Moskovits. [Docket No. 418].
The examiner's report also finds that millions of dollars were diverted from the Debtor as a result of the alleged scheme and that Lichtenstein and Moskovits obstructed the investigation.
Meanwhile, the Debtor filed a response to the report [Docket No. 420], stating that "The report issued by Mr. Huebscher creates a false narrative, and is replete with deliberate misstatements, false claims and conclusions, in spite and in the face of evidence and facts that have proven such claims to be false." (see more on Debtor's response below).
The examiner's report states, "The Examiner’s mandate was to investigate and assess potential bankruptcy causes of action of 96 Wythe Acquisition LLC (the 'Debtor')… The Examiner reviewed over 48,000 banking transactions from, to, and among the Debtor, the Debtor’s management company (the Williamsburg Hotel BK, LLC) (the 'Manager') and other bank accounts linked to accounts in the name of the Debtor or the Manager. These transactions took place over an approximately four-year period….
The investigation uncovered significant potentially avoidable transfers. More specifically, the investigation uncovered evidence of a complex scheme to divert and siphon substantial amounts of money from the Debtor, through a labyrinth of banking relationships between the Debtor and the Manager and other entities under common ownership and control of Michael Lichtenstein ('Lichtenstein') and Toby Moskovits ('Moskovits,' and, together with Lichtenstein, the 'Principals').
Entities owned directly or indirectly by the Principals which received and sent transfers to the Debtor and/or the Manager include, but may not be limited to, 232 Seigel Acquisition, LLC, 232, Seigel Development, LLC, Mint Development Corporation, 564 St. Johns Acquisition LLC, 564 St. Johns Holdings LLC, Northside Development Holdings, LLC, Northside Acquisition Partners LLC, 215 Moore Street Acquisition LLC, 215 Moore Street Development LLC, 875 4th Avenue Acquisition LLC, 286 Rider Ave Acquisition, LLC, Heritage GC Walton Acquisition LLC, Brooklyn Bread Lab, Building Development Corp, 96 W Development, LLC and FIA Capital Partners (an entity owned directly or indirectly by the Debtor’s Chief Restructuring Officer (the 'CRO')).2 Significant transfers were also sent to and received from Lichtenstein, Moskovits and Marion (Miriam) Gross (an employee of the Debtor).
In total, the Examiner has identified at least an aggregate net amount of $12.5 million sent from the Manager to many of the above entities. In addition to these transactions, which may be subject to potential claw-back actions, there are several other areas of significant concern that will be identified in this report for possible legal action. Despite the fact that approximately $24.5 million was deposited into (and approximately $25.5 million was withdrawn from) the Debtor’s bank accounts during the period 2017 – 2020, the Debtor did not file tax returns for years 2017, 2018 or 2019.
Similarly, while approximately $68.2 million was deposited into (and approximately $68.7 million was withdrawn from) the Manager’s bank accounts during the period 2017 – 2020,4 with the possible exception the year 2019, these deposits and withdrawals by the Manager have not been reported to any taxing authority. Lichtenstein informed the Examiner that, other than the 2020 Federal tax return for the Debtor and the 2019 Federal tax return for the Manager, tax returns were not filed because the entities did not make a 'profit.'
The Principals obstructed the Examiner’s investigation, by actions and inactions, including significant delays in document production, interference with third party subpoenas and refusal to answer questions regarding thousands of financial transactions. While the Principals’ obstructive efforts are discussed in further detail in this report, (see Appendix), the following are two examples of efforts to hide certain transactions.
On January 5, 2022, the Examiner learned that two accounts (BOA 4400 and 3162), which he had discovered based on their link to other accounts in the name of either the Debtor or the Manager, and which the Debtor represented to have no relationship with the Debtor or the Manager, were, in fact, in the name of the Manager and received significant post-petition transfers that had not been disclosed:
- Through BOA 3162, in July of 2021, five months after the Debtor’s bankruptcy filing, the Manager received an economic disaster impact funds ('EIDL') grant in the amount of $350,000. The grant was obtained in the name of the Williamsburg Hotel. This amount was transferred on August 3, 2021 from the Manager to Northside Acquisition Partners, LLC. The application for the EIDL grant was not disclosed in any of the bankruptcy filings, and neither its receipt nor its disbursement was disclosed in the Debtor’s monthly operating reports.
- Additionally, $252,100 was transferred from BOA 4400, to Northside Management, LLC two days after the Petition Date and was not reported on the Debtor’s monthly operating report or the Debtor’s schedules of statement of financial affairs.
As a result of the Principals’ actions to delay and obstruct the examination, coupled with the short time period during which the investigation was conducted, the Examiner believes there may be additional valuable causes of action that he has not yet uncovered, and further investigation is warranted."
The report continues, "In summary, the Principals controlled both sides of the accounting ledger, preventing open disclosure of financial and accounting transactions, and allowing for the siphoning of funds (from the Debtor and through the Manager) to unrelated investments of the Principals and possibly other transferees. Further, some of the Principals’ other business enterprises are in bankruptcy e.g., Chapter 11 and 7. Given the intermingled finances with this Debtor/Manager and these other cases, consideration should be given to a further investigation of transactions among the related entities, including the other related debtors….
The Principals entered into the BSP Loan, which the Principals knew or should have known could never be performed. In essence, the Loan was in default at the time of closing. The Principals then engaged in a scheme to siphon off any monies generated by the Debtor’s hotel operations, through the illegitimate control of the Manager, to unrelated entities owned by the Principals. This scheme diverted millions of dollars from the Debtor. In addition to the discovery of significant potential causes of action by the estate, the investigation raises significant areas of concern surrounding the conduct of the Principals, both in their roles in the multitude of challengeable transactions identified in this report, but also in their fiduciary roles in administering the bankruptcy estate, including their lack of independence."
About the Debtor
According to the Debtor, “The Williamsburg Hotel is a 'Brooklyn centric' boutique hotel."
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