HRV Santa FE, LLC v. Wolf

1

HRV SANTA FE, LLC, Plaintiff, v. JAY WOLF; JUNIPER INVESTMENT ADVISORS, LLC; JUNIPER REAL ESTATE, LLC; JUNIPER CAPITAL PARTNERS, LLC; JUNIPER BISHOPS MANAGER, LLC; JUNIPER BISHOPS, LLC; JUNIPER BL HOLDCO, LLC; and JUNIPER BL PROPCO, LLC; ALEX WALTER; BRAD BROOKS; and MICHAEL NORVET; Defendants, BL SANTA FE (HOLDING), LLC, Nominal Defendant.

Adv. Proc. No. 24-01002-t

United States Bankruptcy Court, D. New Mexico

June 4, 2024

OPINION

Hon David T. Thuma United States Bankruptcy Judge

Before the Court is Plaintiff's motion to remand this removed adversary proceeding to state court or, alternatively, to abstain from hearing it. The contested matter has been fully briefed and argued. The Court finds that the motion is not well taken and will be denied.

A. Facts.^[1]

For the limited purpose of ruling on the motion, the Court finds:

Bishops Lodge in Santa Fe, New Mexico

This dispute involves the Bishops Lodge resort and hotel in Santa Fe, New Mexico (the "Resort"). Before 2021, the Resort was owned and operated by BL Santa Fe, LLC ("Resort Owner"). Resort Owner, in turn, was wholly owned by BL Santa Fe (Mezz), LLC ("Mezz"), which is wholly owned by BL Santa Fe (Holding), LLC ("Holding"). Holding is owned principally by four members: Evolution RE Bishops Lodge, LP ("Evolution"); Nunzio DeSantis ("DeSantis"); BL Resort Investment, LLC ("BL Resort Investment"); and HRV Santa Fe, LLC ("HRV") (together, the "Members"). Evolution, DeSantis, and BL Resort Investment own more than half of the membership interests in Holding (together, the "Majority Members"). Ownership can be diagrammed as follows:

(Image Omitted)

From 2017 to December 16, 2020, HRV was the manager of Holding Mezz, and Resort Owner. HRV is owned and controlled by Richard Holland.

Senior and Mezzanine Loans

Fortress Credit Co. LLC (together with its successors and assigns "Senior Lender") made a loan to Resort Owner (the "Senior Loan"). The Senior Loan was secured by the assets of Resort Owner.

On or about June 14, 2019, Juniper Bishops, LLC ("Juniper Bishops" or "Mezzanine Lender") made a $15,000,000 "mezzanine" loan to Mezz (as modified the "Mezzanine Loan," and together with the Senior Loan, the "Secured Loans") to fund renovation of the Resort (the "Project"). The Mezzanine Loan was secured by Mezz's 100% membership interest in Resort Owner.

Events Leading to the Bankruptcy Cases

The Project fell behind schedule and was over budget. Concerns about defaulting on the Secured Loans arose in mid-2020. On or about December 15, 2020, the Majority Members voted their membership interests to amend the First Amended BL Holding Limited Liability Company Agreement and to remove HRV and Mr. Holland from their positions as officers and managers of Holding, Mezz, and Resort Owner. On or about December 16, 2020, the Majority Members appointed a board of managers comprised of Brad Brooks, Michael Norvet, DeSantis, and Alex Walter (the "Board of Managers").

Mr. Holland and HRV disputed their removal from management. They contended that the attempted removal was contrary to the governing corporate documents and was therefore void. Mr. Holland refused to acknowledge the new governing structure of Holding and continued to hold himself out to third parties as the manager and controlling officer of Holding, Mezz, and Resort Owner.

In January 2021, Holland, Juniper Bishops, and the Board of Managers understood that additional capital would be required to fund completion of the Project. Holding's members were unwilling or unable to contribute additional equity, so they looked for a replacement lender(s). One prospective lender/investor was Andrew Blank, who stated that he was interested in infusing equity into the Project and paying off Juniper Bishops. Another prospective lender/investor was Juniper Bishops itself, which offered a term sheet to refinance the project in February of 2021.

In April 2021, Juniper Bishops submitted an updated term sheet (the "April Term Sheet"). The April Term Sheet was signed by the Majority Members but not by Mr. Holland o r H RV.

Also in April, Holland on behalf of H RV signed a term sheet with Mr. Blank, on behalf of Holding (the "Blank Term Sheet"). None of Holding's Board of Managers signed the Blank Term Sheet. Upon learning of the Blank Term Sheet, Juniper Bishops withdrew the April Term Sheet because of difficulty in obtaining title insurance and, consequently, financing.

On April 7, 2021, Juniper Bishops declared that Mezz was in default on the Mezzanine Loan. On April 19, 2021, Juniper Bishops gave notice that it would foreclose and sell its sole collateral, the 100% membership interest of Resort Owner, at a public sale. Mezz told Juniper Bishops it was prepared to file bankruptcy if the sale was not postponed. Juniper Bishops postponed the sale several times.

The Bankruptcy Cases

On August 30, 2021, Resort Owner and Mezz filed voluntary chapter 11 cases in the United States Bankruptcy Court for the District of Delaware, commencing jointly administered chapter 11 cases (the "Bankruptcy Cases"). On the petition date, the debtors filed a motion for approval of debtor-in-possession financing and related relief (the "DIP Financing Motion"). In accordance with the DIP Financing Motion, Juniper Bishops agreed to provide Mezz with postpetition financing of about $5,800,000, to fund the Debtors' operations during the Bankruptcy Cases.

On September 16, 2021, HRV objected to the DIP Financing Motion. HRV proposed to replace the DIP financing from Juniper Bishops with a purported 0% interest loan (but with a 15% default interest rate) provided by Mr. Blank.

The Delaware bankruptcy court held two hearings on the DIP Financing Motion and HRV's objection. Ultimately, the court overruled HRV's objection and granted the DIP Financing Motion.

The Plan and Disclosure Statement

On the petition date, the debtors filed a joint plan of reorganization and a joint disclosure statement. On October 14, 2021, the debtors filed an amended plan of reorganization (the "Plan"). The Plan generally provided for Mezz to convey 100% of the membership interest in Resort Owner to Juniper BL HoldCo, LLC ("JBL HoldCo"). In return, the Mezzanine Loan would be deemed paid in full; JBL HoldCo would finance the completion of the Resort renovations and its operations; the Senior Loan would be restructured; and Mezz, Juniper Bishops, and JBL HoldCo would sign an equity participation agreement, under which Mezz would be entitled to receive certain "back-end distributions."^[2] In addition, Mezz agreed to hold Juniper Bishops and JBL HoldCo harmless from all claims and suits relating to or arising out of the Plan and the Bankruptcy Cases.

Under the Plan, Mezz released its claims against Juniper Bishops, its affiliates, and Debtors' management. Holding did not release any claims. Holding's membership interest in Mezz was separately classified and Holding was allowed to retain it.

All classes entitled to vote on the Plan accepted it. Holding's equity interest was deemed unimpaired, so it did not get to vote.

On October 8, 2021, HRV objected to confirmation of the Plan. It argued:

The Debtors' execution and implementation of the [Restructuring Support Agreement]^[3], without consideration of other alternatives that offer a better return for the estate and all stakeholders . . . [is a] dereliction of duty to the estate and its stakeholders . . . .

Mr. Blank put forward an objectively better plan with committed equity and debt financing, including a 0% interest unsecured DIP Loan. . . .

A reasonable fiduciary would have used Mr. Blank's proposal to push the Mezzanine Lender to improve its terms; these Debtors have not. A reasonable fiduciary would have communicated with equity participants how it concluded that the current Plan is superior to Mr. Blank's plan; these Debtors have not. . . . [and]

[The Debtors'] failure to consider better alternatives persists to this day. The Debtors received Mr. Blank's competing proposal weeks ago, but have failed meaningfully to engage with Mr. Blank. Instead, for reasons that the Debtors fail to disclose, they are continuing forward with a flawed proposal without disclosing to the constituents and mom and pop investors the existence of a proposal that would provide the likelihood of meaningful results for equity in the reorganized debtor.

The Confirmation Hearing

To prepare for the confirmation hearing, HRV took several depositions. On October 19, 2021, Judge Walrath held an evidentiary hearing on confirmation of the Plan. The court heard testimony from five witnesses-Messrs. Mack, DeSantis Wolf, and Blank, and the debtors' expert witness, Dr. Scott Hakala. HRV's counsel actively participated in the confirmation hearing. He cross-examined Messrs. Mack, Wolf, Hakala, and DeSantis. In addition, HRV's counsel called Mr. Blank to testify.

During closing argument, HRV's counsel argued that the court should not confirm the Plan because the debtors did not act in good faith in discharging their fiduciary duties:

So I think what that tends to go to, Your Honor, is the Debtors' good faith in discharging their fiduciary duties in having what they tried to portray to Your Honor as a good process, and I'm not sure that process really got there. . . . The Debtors, for instance, never countered any of Mr. Blank's terms . . . .

At the conclusion of the hearing, Judge Walrath ruled that "the Debtors' conclusion to proceed with the Plan, which is based on the RSA, meets its fiduciary duty because it is the highest and best path forward for the Debtor to restructure the Debtors' principal asset, the Resort." The court found that the Blank alternative proposal was inferior to the transaction proposed through the Plan. Sp...