In re Times Square JV LLC

648 B.R. 277

IN RE: TIMES SQUARE JV LLC, et al.,¹ Debtors.

Case No. 22-11715 (JPM) (Jointly Administered)

United States Bankruptcy Court, S.D. New York.

Signed February 4, 2023

Seward & Kissel, LLP, Counsel to the above-captioned Debtors, One Battery Part Plaza, New York, NY 10006, (212) 574-1200, By: John R. Ashmead, Esq., Thomas Ross Hooper, Esq., Andrew J. Matott, Esq.

Kasowitz Benson Torres LLP, Counsel to Holiday Hospitality Franchising, LLC, 1633 Broadway, New York, NY 10019, (212) 506-1700, By: Matthew B. Stein, Esq., Paul M. O'Connor III, Esq.

DLA Piper LLP (US), Proposed Counsel to the Official Committee of Unsecured Creditors, 1251 Avenue of the Americas, New York, NY 10020, (212) 335-4500, By: Dennis C. O'Donnell, Esq., Rachel Ehrlich Albanese, Esq.

MEMORANDUM OPINION GRANTING DEBTOR'S MOTION TO REJECT EXECUTORY CONTRACT

JOHN P. MASTANDO III, UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is the above-captioned Debtors’ (collectively, the "Debtors ") Motion for Entry of an Order Authorizing Rejection of the License Agreement with IHG (Docket No. 18) (the "Motion "), which is supported by the Declaration of Richard J. Shinder in Support of Debtors’ Motion for Entry of an Order Authorizing Rejection of the License Agreement with IHG (Motion ex. A) (the "Rejection Declaration "). The Motion requests that the Court authorize Debtor CPTS Hotel Lessee LLC ("CPTS ") to reject that certain Crowne Plaza License Agreement (as amended, supplemented, or otherwise modified from time to time, the "License Agreement "), dated as of July 1, 2012, between CPTS and Holiday Hospitality Franchising, LLC ("HHF ") under Section 365 of the Bankruptcy Code (" Section 365 "), effective as of the Petition Date (as defined below). HHF objects to the Motion. (See Holiday Hospitality Franchising, LLC's Preliminary Objection to Debtors’ Motion for Entry of an Order Authorizing Rejection of the License Agreement with IHG [D.I. 18] , Docket No. 44 (the "HHF Objection ").) The HHF Objection is supported by: (i) the Declaration of Paul M. O'Connor III Support of Holiday Hospitality Franchising, LLC's Preliminary Objection to Debtors’ Motion for Entry of an Order Authorizing Rejection of the License Agreement with IHG [D.I. 18] , Docket No. 45 (the "O'Connor Declaration "), (ii) the Declaration of Colin MacDonald in Support of Holiday Hospitality Franchising LLC's Preliminary Objection to Debtors’ Motion for Entry of an Order Authorizing Rejection of the License Agreement with IHG [D.I. 18] , Docket No. 46 (the "MacDonald Declaration ") and (iii) the Declaration of Chris Bagnato in Support of Holiday Hospitality Franchising, LLC's Preliminary Objection to Debtors’ Motion for Entry of an Order Authorizing Rejection of the License Agreement with IHG [D.I. 18] , Docket No. 122 (the "Bagnato Declaration "). Debtors filed a reply to the HHF Objection. (See Debtors’ Reply to Holiday Hospitality Franchising, LLC's Objection to Debtors’ Motion for Entry of an Order Authorizing Rejection of the License Agreement With IHG , Docket No. 126 ("Debtors’ Reply ").) The Official Committee of Unsecured Creditors (the "Committee ") does not object to the Motion, although it expressed some concerns about possible consequences of rejecting the License Agreement. (See Statement of the Official Committee of Unsecured Creditors Regarding Debtors’ Motion for Entry of an Order Authorizing Rejection of the License Agreement with IHG , Docket No. 130 (the "Committee Statement ").) At the request of Debtors and HHF, the Court held a telephonic conference regarding discovery in connection with the Motion on January 10, 2023. The Court held a hearing on the Motion on January 24, 2023 (the "Hearing "). The Court has reviewed (i) the Motion; (ii) the Rejection Declaration; (iii) the HHF Objection; (iv) the O'Connor Declaration; (v) the MacDonald Declaration; (vi) the Bagnato Declaration; (vii) the Debtors’ Reply; (viii) the Committee Statement; (ix) the arguments of counsel from the Hearing; and (x) all other relevant material in the record. As set forth below, the Court finds that the License Agreement is an executory contract and that the Debtors properly exercised their business judgment in deciding to reject the License Agreement. Accordingly, the Court will GRANT the Motion.

I. JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1) and the Amended Standing Order of Reference dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).

II. BACKGROUND

Debtors own a mixed-use building in Times Square. (Declaration of Richard J. Shinder in Support of Chapter 11 Petitions and First Day Pleadings ¶ 8, Docket No. 5 (the "First Day Declaration ").) The building includes hotel space, office space, retail space, billboards and a parking garage. (Id. ) The hotel portion is currently branded as the "Crowne Plaza Times Square Manhattan Hotel" under the License Agreement with HHF. (Id. ¶ 9.) Both parties have ongoing obligations under the License Agreement: HHF must, among other things, provide Debtors with training services, afford access to reservation services, make available to Debtors consultation and advice, maintain standards of quality at other Crowne Plaza-branded hotels, and maintain a manual of hotel operations; Debtors must pay monthly fees and carry out and adhere to numerous operational requirements. (Motion ¶ 13.) The License Agreement is scheduled to expire in 2027, with HHF having the option to renew until 2036. (Id. ¶ 14.)

The relationship between Debtors and HHF has been strained. (Rejection Declaration ¶ 7.) Debtors believe that the License Agreement is unfavorable to them and that it is a primary source of their financial distress. (Motion ¶ 15; First Day Declaration ¶ 16; Rejection Declaration ¶ 8.) HHF contests this assertion and argues that the License Agreement has been, and continues to be, beneficial to Debtors. (HHF Objection ¶¶ 24-26; Bagnato Declaration ¶¶ 24-32; MacDonald Declaration ¶¶ 6-10.) CPTS and HHF entered into the License Agreement in 2012 to replace an earlier hotel management agreement between their respective affiliates. (O'Connor Declaration ¶ 6.) In 2016, CPTS came to believe that HHF was not complying with its obligations under the License Agreement and sent a "Notice of Default" demanding that HHF cure certain alleged breaches. (Id. ¶ 7; see id. ex. 5.) One month later, CPTS sent a "Notice of Termination" that purported to terminate the License Agreement in accordance with its terms. (Id. ¶ 7; see id. ex. 6.) On that same day, CPTS also initiated litigation (the "CPTS Action ") in New York State Supreme Court (the "State Court ") that asserted claims for breach of contract and sought a declaratory judgment that the License Agreement was terminated and unenforceable. (Id. ¶ 7.) In response, HHF filed a separate action (the "HHF Action ," and, together with the CPTS Action, the "New York Actions ") in the State Court seeking a declaratory judgment that the License Agreement was not terminated, an injunction preventing CPTS from terminating the License Agreement, and monetary damages in the event that CPTS had successfully terminated the License Agreement. (Id. ¶ 8.) In 2018, the State Court, considering the New York Actions together, issued a decision (see id. ex. 7 (the "State Court Opinion ")) denying motions to dismiss with respect to some claims, granting with respect to others, and issuing a preliminary injunction (the "Preliminary Injunction ") that barred CPTS from terminating the License Agreement until the New York Actions were resolved. (Id. ¶ 9.) The State Court granted the Preliminary Injunction because it found that an injunction was "necessary to preserve the status quo" as the New York Actions proceeded. (State Court Opinion 12.) The Preliminary Injunction was upheld on appeal to the New York Supreme Court, Appellate Division. (O'Connor Declaration ¶ 10; see also id. ex. 8.) The New York Actions have not yet proceeded to trial and are currently stayed by this bankruptcy case. (Hearing Tr. 15, Docket No. 169.) The Preliminary Injunction remains in place. (Id. at 29.)

Debtors filed for chapter 11 bankruptcy on December 28, 2022 (the "Petition Date "). On the Petition Date, Debtors filed a proposed plan of reorganization that features a "toggle" structure whereby Debtors will pursue an asset sale to repay creditors and, if such a sale is not consummated, certain creditors’ debt will be converted to equity. (First Day Declaration ¶ 53; see Debtors’ Plan of Reorganization under Chapter 11 of the Bankruptcy Code , Docket No. 21.) As part of the asset sale prong, Debtors want to be able to market their business without the License Agreement, so that the buyer has the option to partner with a franchisor of the buyer's choosing. (Rejection Declaration ¶ 12.) Debtors believe that auctioning their assets without the License Agreement will result in higher bids. (Rejection Declaration ¶¶ 11-13.) Accordingly, on the Petition Date, Debtors filed the Motion.

The Motion seeks: (i) to authorize Debtors to reject the License Agreement under Section 365 and (ii) to authorize the rejection of the License Agreement retroactive to the Petition Date. HHF objected to the Motion, arguing (i) that the License Agreement is not executory and so is not rejectable under Section 365 and (ii) that rejecting the License Agreement is not a proper exercise of the Debtors’ business judgment. Prior to the Hearing, HHF agreed to withdraw their objection challenging Debtors’ business judgment. (Hearing Tr. 7-8.) Debtors and HHF also agreed that, notwithstanding rejection, both parties would continue to perform under the License Agreement until a plan is confirmed, CPTS’ assets are sold, or Debtors give notice of termination.² (Hearing Tr. 8.) In light of this understanding, the Court considers the Debtors’ request to authorize rejection of the License...