Motion to Approve NNN 123 North Wacker

61905965.docx

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In re: NNN 123 NORTH WACKER, LLC, et al.,1 Debtors.

) ) ) ) ) ) )

Chapter 11 Case No. 13-39210 (JBS) (Jointly Administered)

NOTICE OF MOTION AND DEBTORS’ MOTION FOR ORDER APPROVING DEBTORS’ ENTRY INTO (A) POST-PETITION RESTRUCTURING SUPPORT

AGREEMENT, (B) CONSENT AND PARTICIPATION AGREEMENT WITH CO-OWNERS OF THE PROPERTY, AND (C) CERTAIN RELATED RELIEF

PLEASE TAKE NOTICE that on February 21, 2014, NNN 123 North Wacker, LLC

and NNN 123 North Wacker Member, LLC, debtors and debtors-in-possession herein (each a

“Debtor” and collectively, the “Debtors”), filed the attached Debtors’ Motion for Order

Approving Debtors’ Entry into (A) Post-Petition Restructuring Support Agreement (B)

Consent and Participation Agreement with Co-Owners of the Property, and (C) Certain

Related Relief (the “Motion”), a copy of which is hereby served upon you.

PLEASE TAKE FURTHER NOTICE that on February 28, 2014, at 11:00 a.m., or as

soon thereafter as counsel may be heard, the Debtors shall appear before the Honorable Jack B.

Schmetterer in Courtroom 682 at the United States Bankruptcy Court for the Northern District of

Illinois, 219 South Dearborn Street, Chicago, Illinois, or before any other judge who may be

sitting in his place and stead, and present the Motion at which time and place you may appear if

you so desire.

1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax

identification number, are: NNN 123 North Wacker, LLC (4336) and NNN 123 North Wacker Member, LLC (7290).

Case 13-39210 Doc 104 Filed 02/21/14 Entered 02/21/14 20:27:14 Desc Main Document Page 1 of 22

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PLEASE TAKE FURTHER NOTICE that you may obtain copies of all documents

filed in these chapter 11 cases by visiting the Court’s website at www.ilnb.uscourts.gov in

accordance with the procedures and fees set forth therein.

Dated: February 21, 2014 Chicago, Illinois

Respectfully submitted, NNN 123 NORTH WACKER, LLC AND NNN 123 NORTH WACKER MEMBER, LLC KAYE SCHOLER LLP By: /s/ D. Tyler Nurnberg

D. Tyler Nurnberg Seth J. Kleinman 70 West Madison Street, Suite 4200 Chicago, IL 60602 Telephone: (312) 583-2300 Facsimile: (312) 583-2360

Attorneys for the Debtors


61822005.docx

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In re: NNN 123 NORTH WACKER, LLC, et al.,1 Debtors.

) ) ) ) ) ) )

Chapter 11 Case No. 13-39210 (JBS) (Jointly Administered)

DEBTORS’ MOTION FOR ORDER APPROVING DEBTORS’

ENTRY INTO (A) POST-PETITION RESTRUCTURING SUPPORT AGREEMENT, (B) CONSENT AND PARTICIPATION AGREEMENT WITH CO-OWNERS OF THE PROPERTY, AND (C) CERTAIN RELATED RELIEF

NNN 123 North Wacker, LLC (“TIC 0”) and NNN 123 North Wacker Member, LLC

(“TIC Member”), debtors and debtors-in-possession herein (collectively, the “Debtors”), hereby

file this motion (this “Motion”), pursuant to section 363(b) of title 11 of the United States Code,

11 U.S.C. §§ 101 et seq. (“Bankruptcy Code”), for entry of an order, substantially in the form

attached hereto as Exhibit A, authorizing the Debtors’ entry into (i) the post-petition

restructuring support agreement attached hereto as Exhibit B (including the exhibits thereto, the

“RSA”),2 (ii) the tenant-in-common consent and participation agreement substantially in the

form attached hereto as Exhibit C (including the exhibits thereto, the “TIC Consent”),3 and (iii)

the Initial Release (attached as Exhibit D to the RSA).

In support of this Motion, the Debtors respectfully state as follows:

1 The Debtors, along with the last four digits of each Debtor’s federal tax identification number, are: NNN 123

North Wacker, LLC (4336) and NNN 123 North Wacker Member, LLC (7290).

2 Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the RSA.

3 Certain of the exhibits to the TIC Consent will be made available at a later date.


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Overview of the Restructuring Transaction

1. The Debtors’ principal asset is their interest in a 30-story office building located

at 123 N. Wacker Drive, Chicago, Illinois (the “Property”). There is no dispute that the Property

needs to be restructured; cash flow is not sufficient to service the mortgage debt and the building

requires a significant investment of additional capital. The possible alternatives are complicated,

however, by the fact that the Property is in a tenancy in common structure. TIC 0 is one of 33

owners (each a “TIC” and, with TIC 0, the “TICs”) and holds an undivided 13.917% interest,

making it the largest TIC owner of the Property. The TICs are jointly and severally liable for the

mortgage debt.

2. Following extensive negotiations, the Debtors, the Noteholder, ND Investment

and Sovereign have reached agreement on terms to restructure and recapitalize the Property,

which terms are set forth in the RSA signed on February 21, 2014.4 The proposed transaction

will be structured as a sale of the Property to a new entity, 123 North Wacker Borrower, LLC

(the “Approved Purchaser”). The sale will be implemented through a joint plan of

reorganization to be confirmed in the Debtors’ chapter 11 cases (as defined in the RSA, the

“Approved Plan”). As purchase consideration, the Approved Purchaser will agree to (i) assume

the existing mortgage debt in the full principal amount of approximately $134.5 million, with

certain modifications set forth in the Loan Modification Documents, (ii) invest up to an

additional $12 to $15 million in the Property, and (iii) provide a new guarantor for the modified

loan acceptable to the Noteholder. The proposed sale will be a private sale pursuant to the 4 The parties to the RSA include: (i) the Debtors; (ii) Wells Fargo Bank, N.A., as trustee and successor collateral

agent for the registered holders of GE Commercial Mortgage Corporation, Commercial Mortgage Pass-Through Certificates, Series 2005-C4 (“A Note Holder”); (iii) Wells Fargo Bank, National Association, as trustee for the beneficial owners of N-Star REL CDO VI Grantor Trust, Series H (“B Note Holder” and, together with the A Note Holder, “Noteholder”); (iv) ND Investment-123 N. Wacker-T, LLC (“ND Investment”); and (v) Sovereign Capital Management Group, Inc. (“Sovereign”). A copy of the RSA is attached as Exhibit B.


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Approved Plan but the sale will be subject in all respects to the rights of non-consenting TICs, if

any, to submit their own bids for the Property in accordance with section 363(i) of the

Bankruptcy Code5 and the Bid/Sale Procedures. As consideration to the Noteholder, the

Debtors, ND Investment, Sovereign, and SIMCO (as hereinafter defined) have agreed to provide

the Noteholder with an “Initial Release” of any claims accruing prior to February 21, 2014

relating to the Property or the Loan.

3. The RSA also provides the parties a right to terminate the agreement in the event

of a default. In particular, if the Debtors, ND Investment or Sovereign (collectively, the

“Borrower Parties”) default under the RSA and such default is not cured within five (5) business

or if any of the Milestones (as hereinafter defined) are not achieved timely, the Noteholder may

exercise its right to terminate the RSA and, as a result, without any further act of the Bankruptcy

Court or further notice, the following shall occur: (i) the Debtors’ exclusive period for filing a

plan of reorganization immediately terminates, (ii) the automatic stay under section 362 of the

Bankruptcy Code is modified such that the Noteholder is entitled to exercise any and all

available remedies, and (iii) if, within two (2) years following the date of the execution of the

RSA, any Debtor files a petition for relief under the Bankruptcy Code or if an involuntary

petition for relief is filed against any Debtor or Borrower Party in any federal bankruptcy court,

then such Debtor is deemed to have waived the benefits of the automatic stay provisions of

section 362(d) of the Bankruptcy Code in such bankruptcy case (collectively, the “Automatic

Remedies”). See RSA, Section 5(d)(iv)(1).

Treatment of Non-Debtor TICs

5 Section 363(i) of the Bankruptcy Code requires that, prior to a sale of property held in a tenancy in common

structure, pursuant to section 363(h) of the Bankruptcy Code, the other tenants in common be given the opportunity to buy the property at the price at which the sale is to be consummated. See 11 U.S.C. § 363(i).


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4. The economics of the Property are such that the TIC interests have no value, a

fact which the TICs themselves concede.6 Notwithstanding, a key feature of the transaction with

the Approved Purchaser will be that each TIC will be given an opportunity to exchange its

existing TIC interest for a limited interest in the Approved Purchaser’s parent. The exchange

offer will be structured in a way intended to permit electing TICs to continue to defer taxable

gains on prior real estate sales, which should be of substantial benefit to most TICs.

5. In order to participate in the Approved Purchaser’s transaction, a TIC will be

required to execute a TIC Consent.7 By consenting , a TIC will be agreeing to support the

Approved Plan and electing to participate in the transaction by either exchanging their interest in

the Property for a limited interest in the Approved Purchaser’s Parent or by investing new equity

alongside the committed investors in the Proposed Purchaser. The committed investors in the

Proposed Purchaser will be investing additional equity of $12 to $15 million. Of that amount,

90% will be contributed by ND Investment. The other 10% will be reserved for those TICs that

want to invest new money in the venture according to their existing ownership percentage in the

Property. Any portion of the 10% not raised from TICs will be contributed by Sovereign.

6. In sum, TICs may participate in the proposed transaction with the Approved

Purchaser in one of two ways -- by executing a TIC Consent and exchanging their interests for

new interests in the parent of the Approved Purchaser and, for TICs that want to invest alongside

the committed investors, by also purchasing their pro rata share of the 10% of the new equity.

The Debtors believe the foregoing treatment is in the TICs’ and the Property’s best interests.

6 See “Motion of TIC Members to Dismiss Debtor’s Bankruptcy Case Pursuant to 11 U.S.C. 1112(b)” [Docket

No. 25] (arguing that the lender is under-secured and has a “substantial unsecured deficiency claim” (at ¶ 3) and that, in the TICs’ estimation, there is no possibility of recovery by any creditor other than the lender (at ¶ 8).

7 The TIC Consent will be executed by each consenting TIC, the Debtors and the Approved Purchaser.


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TICs that choose to participate in the transaction can make their elections by executing a consent

and participation agreement. For TICs that chose not to participate or otherwise consent, the

Debtors plan to file an adversary complaint to force a sale of their interests in the Property

pursuant to section 363(h) of the Bankruptcy Code.8 The Debtors are optimistic that the

transaction will have the full support of the TICs; however, if not, section 363(h) provides a

mechanism to ensure that dissenting TICs, whose interests have no value, do not cause further

impairment to the Property, and the dissenting TICs will retain their the right to submit their own

bids for the Property pursuant to section 363(i) of the Bankruptcy Code.

Jurisdiction

7. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and

1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2).

8. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

9. The bases for the relief requested herein are sections 362, 363(b) of the

Bankruptcy Code and Rules 4001 and 6004(h) of the Federal Rules of Bankruptcy Procedure

(“Bankruptcy Rules”).

Relief Requested

10. By this Motion, the Debtors seek entry of an order (i) authorizing the Debtors’

entry into the RSA, the TIC Consent and the Initial Release, pursuant to section 363(b) of the

Bankruptcy Code, and (ii) waiving the requirements of Bankruptcy Rule 6004(h) so that the

order is effective immediately.

8 In general, section 363(h) of the Bankruptcy Code authorizes a debtor to sell a property held in a tenancy in

common structure without the consent of the other tenants in common only if (1) partition would be impracticable; (2) the estate would realize significantly less from a sale of just its interest in the property than a sale of the property free of the interests of the other tenants in common; and (3) the benefit to the estate from such sale outweighs the detriment, if any, to the other tenants in common. See 11 U.S.C. § 363(h).


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Background

A. Chapter 11 Filing

11. On October 4, 2013 (the “Petition Date”), each of the Debtors filed a voluntary

petition for relief under chapter 11 of the Bankruptcy Code, commencing these cases.

12. The Debtors are operating their businesses and managing their affairs as debtors-

in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.

B. Mortgage Loan

13. The TICs purchased the Property in 2005 for a purchase price of approximately

$175 million. The purchase was financed through a two-tranche mortgage loan in the total

principal amount of $136 million. The mortgage loan was evidenced by (i) a promissory note in

the principal amount of $122 million (the “A Note”) and (ii) a promissory note in the principal

amount of $14 million (the “B Note”, and together with the A Note, the “Notes”).9

14. The TICs are jointly and severally liable under the Notes.

15. The mortgage loan (the “Loan”) is administered by C-III Asset Management

LLC, as special servicer. The property manager is Thompson National Properties, LLC

(“TNP”).

16. The Notes are secured by a first-lien mortgage against the Property, fixture

filings, an assignment of leases and rents, and limited guaranties from, among others, Grubb &

Ellis Realty Investors, LLC (an affiliate of the Debtors), the principal of TNP, and the various

owners of the TICs.

9 The B Note is owned by a collateralized debt obligation fund (the “CDO”) that is managed by an affiliate of ND

Investment; an affiliate of ND Investment also owns the equity in the CDO.


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17. As of October 1, 2013, the outstanding principal balance on the Loan was not less

than $134,550,505.86. The TICs also owe accrued interest, fees and costs all as set forth under

the Loan Documents.

C. Circumstances Leading to Bankruptcy Filing

18. The TICs acquired the Property near the height of the real estate market in 2005.

The Property has since struggled to produce revenue sufficient to service the mortgage debt.

19. In November 2010, the payment obligation under the A Note shifted from interest

only to a regular amortization schedule, further impairing the TICs’ ability to service the Loan.

In September 2011, the Loan was modified to permit interest only payments, in connection with

which the TICs invested an additional $900,000 in the Property through affiliates of TNP.

20. Notwithstanding those loan modifications, the TICs are in default under the terms

of the Loan, including payment default, and are unable to satisfy the Loan in full.

The RSA, TIC Consent and Initial Release

A. Overview of Plan, Sale of Property

21. The RSA was executed on February 21, 2014. The RSA is binding and fully

enforceable in accordance with its terms, provided, however, that the Debtors’ obligations

remain subject in all respects to the Court authorizing the Debtors to enter into the RSA.

22. The RSA requires that the Debtors propose a plan of reorganization that provides

for the sale of the Property to the Approved Purchaser, to be capitalized as set forth below.

23. The consideration for the proposed transaction is as follows. The Approved

Purchaser has committed, on the terms and conditions of the RSA, to (i) assume the Noteholder’s

existing mortgage loan in the full principal amount, with certain modifications to the payment

and capital event waterfalls negotiated between the Approved Purchaser and the Noteholder and

reflected in the Loan Modification Documents; (ii) invest new equity capital of $12 to 15 million


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to fund tenant improvements, maintenance, leasing and other operating and transaction costs; and

(iii) provide a replacement guarantor for the modified loan acceptable to the Noteholder.

24. The RSA requires that the sale of the Property shall be conducted pursuant to

section 363 of the Bankruptcy Code, and that title pass “free and clear” of all liens, claims and

encumbrances other than (i) those liens, claims and encumbrances held by the Noteholder as

security in connection with the loan, as modified, and (ii) any other permitted liens identified in

the Loan Modification Documents. The sale will be a private sale to the Approved Purchaser

pursuant to the plan of reorganization but shall be subject in all respects to the rights of any TICs

that do not consent to the sale to bid for the Property pursuant to section 363(i) of the Bankruptcy

Code. In addition, in the event of a TIC Auction, the Noteholder retains the right to credit bid all

or any portion of its Allowed Noteholder Claim.

B. Overview of RSA10

25. The Debtors believe the terms of the RSA are customary for post-petition plan

support agreements. In general, the RSA binds the Noteholder, ND Investment, Sovereign and

the Debtors to support the transactions outlined in RSA and entitles the parties to enforce the

RSA through specific performance. The Noteholder also has the benefit of the Automatic

Remedies, as set forth in Section 5(d)(iv)(1) of the RSA, in the event that the Noteholder

terminates the RSA in the manner required therein.

26. In addition, the RSA sets forth plan milestones (collectively, the “Milestones”)

that, if not satisfied by the dates specified, will enable the any of the parties to terminate the

RSA. The milestones are as follows:

10 The summary of the RSA contained herein is for convenience only and does not modify the RSA. To the extent

of any inconsistencies between this summary and the RSA, the terms of the RSA shall control.


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a. Bankruptcy Court approval of the RSA on or before March 21, 2014 and such approval becoming a Final Order on or before April 8, 2014;

b. Debtors filing the Adversary Proceeding with the Bankruptcy Court on or

before three (3) business days after the Bankruptcy Court enters into an order approving the RSA, if an Adversary Proceeding if required;

c. Debtors filing the Approved Plan and Disclosure Statement with the

Bankruptcy Court on or before March 28, 2014; d. Bankruptcy Court approval of the Disclosure Statement on or before May

15, 2014; e. Bankruptcy Court confirmation of the Approved Plan on or before June

30, 2014; f. Entry of a Final Order in the Adversary Proceeding in favor of the Debtors

allowing a Sale Event to close by the date specified in the Approved Plan on or before July 15, 2014;

g. The Approved Plan becoming effective on or before July 15, 2014; h. The Sale Event closing on or before July 15, 2014; and i. All conditions precedent in the RSA being satisfied by July 15, 2014.

27. The RSA also contains a “fiduciary out” for the Debtors. See RSA § 5(d)(iii).

The provision gives the Debtors the right to trigger a termination of the RSA by written notice to

the other parties if the Debtors determine reasonably and in good faith, in consultation with

counsel, that the taking or not taking of any action required in connection with the RSA would be

inconsistent with the Debtors’ fiduciary duties under applicable law. If the Noteholder disputes

such election in good faith and notifies the Debtors in writing within three business days of the

Debtors’ election, the parties agree that the dispute will be submitted to the Bankruptcy Court.

Further, the Debtors may not terminate the RSA on the basis of a fiduciary obligation owed to a

direct or indirect equity holder unless it is to pursue a binding offer that would pay the Allowed

Noteholder Claim in full in cash.


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C. Overview of the TIC Consent

28. The TIC interests have no value, a fact which is not in dispute. Nevertheless, a

key feature of the transaction with the Approved Purchaser is that each TIC can execute a TIC

Consent and elect to become a “Participating TIC Non-Investor” or an “Electing TIC Investor”

(as defined in the RSA).11

29. If a TIC elects to participate in the transaction but not contribute additional equity,

the TIC will be a Participating TIC Non-Investor and exchange its existing interest in the

Property for a limited interest in 123 North Wacker Parent, LLC (“Parent”), which will own

100% of the equity of the Approved Purchaser. The limited interests in Parent will be structured

in a manner intended to permit the TICs to continue to defer taxable gains on sales from prior

“like kind” exchanges of real property under section 1031 of the Internal Revenue Code, which

should be a substantial benefit to most TICs. In addition, the limited interests in Parent will

allow those TICs to participate in the potential upside if the business plan is successful.

30. If a TIC elects to invest additional money in the transaction with the Approved

Purchaser, it will be an Electing TIC Investor. An Electing TIC Investor will exchange its

existing interest in the Property for a limited interest in the Parent in the same manner as a

Participating TIC Non-Investor and will also invest additional cash in a new entity, 123 North

Wacker Sovereign/TIC, LLC (the “Sovereign/TIC Entity”). The Sovereign/TIC Entity will be

responsible for contributing 10% of the $12 to $15 million of new equity committed by the

Approved Purchaser. The other 90% will be contributed by ND Investment. Sovereign has

11 A TIC that is a limited liability company organized under the laws of the United States may participate as an

Electing TIC Investor or a Participating TIC Non-Investor so long as it either has elected to be treated as a corporation for United States tax purposes or, if it has not so elected, so long as it is not wholly owned by a person that is not a “United States person” as defined in Section 7701(a)(30) of the U.S. Internal Revenue Code of 1986, as amended.


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agreed to backstop the 10% equity commitment of the Sovereign/TIC Entity to the extent that the

TICs do not fulfill the entity’s obligation to fund 10% of the New Equity. For the avoidance of

doubt, no TIC will be required to invest additional money in the transaction unless it so elects in

the TIC Consent.

31. If there are TICs that choose not to participate or otherwise consent to the

proposed transaction, the Debtors plan to file an adversary complaint pursuant to clause (3) of

the second sentence of Bankruptcy Rule 7001 to compel the sale of such interests pursuant to

section 363(h) of the Bankruptcy Code. As part of the transaction, those TICs who chose not to

participate or consent to the transaction will retain the right to bid for the Property pursuant to

section 363(i) of the Bankruptcy Code.

D. Overview of the Initial Release

32. As provided herein, the Transaction provides a path for the continued viability of

the Property and a means for the TICs to maintain their tax deferrals. As part of the overall

consideration to the Noteholder for the Noteholder’s agreement to modify the Loan on the terms

set forth in the Loan Modification Documents, the Debtors and certain other parties to the

transaction have agreed to execute and deliver the Initial Release (which is attached as Exhibit D

to the RSA).12 The Initial Release grants the Noteholder a release of all claims against the

Noteholder accruing prior to February 21, 2014 relating to the Property or the Loan. The Initial

Release is an integral part of the restructuring transaction.

12 Section 7 of the Initial Release provides that the Debtors’ execution and delivery of the Initial Release is subject

to Bankruptcy Court approval.


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Basis for Relief

I. The Debtors’ Entry into the RSA, TIC Consent and Initial Release Should Be Approved

33. Section 363(b)(1) of the Bankruptcy Code provides in pertinent part that the

“trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of

business, property of the estate.” 11 U.S.C. §363(b)(1).13 Traditionally, to obtain a court’s

approval of a transaction outside the ordinary course of business under section 363(b), the debtor

must demonstrate that the decision to enter into the transaction is based on a sound business

purpose. See, e.g., Fulton State Bank v. Schipper (In re Schipper), 933 F.2d 513, 515 (7th Cir.

1991); In re Telesphere Commc’ns, Inc., 179 B.R. 544, 552 (Bankr. N.D. Ill. 1994) (noting that

the “general thrust” for court approval under section 363 of the debtors’ use of estate property is

that the action be in “the best interest of the estate”). The “business judgment” test is deemed

satisfied when the debtor demonstrates a rational business purpose for the proposed use of

property. Official Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated

Res., Inc.), 147 B.R. 650, 656 (S.D.N.Y. 1992), appeal dismissed, 3 F.3d 49 (2d Cir. 1993).

34. Where the debtor articulates a valid business justification, the business judgment

rule creates “a presumption that in making a business decision the directors of a corporation

acted on an informed basis, in good faith and in the honest belief that the action taken was in the

best interests of the company.” Integrated Res., 147 B.R. at 656 (internal citations omitted).

13 Some courts have taken the view that a debtor’s entry into a post-petition restructuring support agreement does

not require court approval. See, e.g., Trans World Airlines, Inc. v. Texaco, Inc. (In re Texaco, Inc.), 81 B.R. 813, 818 (Bankr. S.D.N.Y. 1988) (“In sum, 11 U.S.C. § 363(b)(1) simply has no application to the Stipulation which Texaco and Pennzoil negotiated in furtherance of the goal of effecting a confirmed plan or reorganization. Hence, prior court approval of the Stipulation was not required . . . .”). However, there is no governing precedent in the Seventh Circuit on the issue and, in any event, the Debtors are seeking approval to enter into the RSA, to (1) lock-in the RSA’s benefits, and (2) provide parties with an opportunity to be heard on a decision of this importance, to the Property.


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Accordingly, the debtor’s business judgment “should be approved by the court unless it is shown

to be so manifestly unreasonable that it could not be based upon sound business, but only on bad

faith, or whim or caprice.” In re Aerovox, Inc., 269 B.R. 74, 80 (Bankr. D. Del. 2001) (internal

citations omitted).

35. In instances where an “insider” transacts business with the debtor, courts

considering whether to approve the transaction may apply heightened scrutiny. See In re

Firstmark Corp., 46 F.3d 653, 656 (7th Cir. 1995) (debtor’s sale of property to insider is subject

to close scrutiny; relationship needs to be fully disclosed and sale must benefit the estate). Here,

whether Sovereign’s relationship with the Debtors qualifies it as an “insider” has not been

determined and is an open question.14 However, under either test, the “business judgment” test

or the closer scrutiny applied to insider transactions -- the RSA satisfies these requirements.

36. The RSA, Initial Release and TIC Consent are in the estates’ best interests. The

RSA and the Approved Plan Terms set forth the terms of a consensual plan of reorganization that

will have the Noteholder’s support, and the Noteholder is the only stakeholder entitled to a

recovery at current values. The Initial Release is part of the overall consideration given by the

Debtors and certain other parties to the transaction to the Noteholder in return for the

Noteholder’s agreement to modify the Loan. Additionally, the TIC Consent provides the TICs

with a means to consensually sell the Property along with the Debtors, thus avoiding the Debtors

having to engage in unnecessary adversary proceedings with otherwise consenting parties.

37. The possible alternatives to a consensual plan with the Noteholder include: (i) a

14 The principal of Sovereign, Todd Mikles, is the President and CEO of the manager of TIC Member, NNN

Realty Investors, LLC (“NNN Realty”) and also the President of Sovereign. Aside from that connection, Sovereign does not own or manage NNN Realty and does not own, directly or indirectly, any of the equity of the Debtors.


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contested plan, which would entail expensive and time-consuming litigation that would

negatively impact the Property’s value; (ii) a potential auction of the Property pursuant to section

363(h) of the Bankruptcy Code, but without preservation of the TICs’ tax deferral;

(iii) conversion to a liquidation, which would also be expensive and time-consuming and have an

even greater negative impact on the Property; or (iv) lift stay or dismissal of these cases.

38. All signatories to the RSA agree that the proposed restructuring represents a

significant compromise by the Noteholder, and will maximize the value of the Property through

an orderly sale and a much-needed infusion of up to $12 to $15 million of new capital. The

Approved Plan will also provide the TICs, who acknowledge that their interests have no value,

with an opportunity to defer taxable gains, which will be of substantial importance to most TICs.

39. Sovereign’s role in the transaction will be minor compared to that of the

Noteholder or ND Investment. Sovereign is in effect agreeing to backstop the TIC’s cash

participation in the Sovereign/TIC Entity to the extent that the TICs elect not to contribute the

cash required to meet the Sovereign/TIC Entity’s 10% New Equity commitment. Therefore,

Sovereign’s maximum investment in the Sovereign/TIC Entity will be a total of $1.2 to 1.5

million (i.e., 10% of $12 to 15 million), and the amount could be much less depending on how

many TICs invest. In contrast, ND Investment is committing to invest 90% of the New Equity,

and under the operative organizational documents of Operator, will receive the type of decision-

making authority typical of a 90/10 split on investment in a joint venture.

40. In addition to Sovereign’s minor equity stake, the RSA provides that one of

Sovereign’s affiliates, Sovereign Investment Management Company GP, Inc. (“SIMCO”), will

be appointed property manager for the Property on the terms and conditions set forth in the

Property Management Agreement attached to the RSA as Exhibit F. Additionally, the Loan


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Modification Documents provide that Sovereign will be entitled to a fee of up to $1 million (after

satisfaction of the mortgage loan) in the event that proceeds on the future sale of the Property are

sufficient to pay off the mortgage loan in full and provide members of Operator with a 15%

cumulative return. Those terms were negotiated in good faith and at arm’s length with ND

Investment.

41. The terms of Sovereign’s participation in the transaction were heavily negotiated

with ND Investment at arm’s length and in good faith. The proposed restructuring of the

mortgage loan is the product of months of negotiation with the Noteholder and ND Investment.

The Debtors’ alternatives are limited, and the Debtors acknowledge that it would be difficult to

confirm a plan in a TIC bankruptcy case without the support of the Noteholder.

42. The restructuring outlined in the RSA is supported by the Noteholder as well as

the majority capital partner (90%), ND Investment. The amount owed on the mortgage debt is in

excess of the value of the Noteholder’s primary collateral, i.e., the Property. Moreover, the RSA

provides favorable treatment to the TICs, whose interests have no value, by (i) giving each TIC

the option to exchange its interest for a limited membership interest in Parent, (ii) allowing the

TICs to invest in 10% of the New Equity on the same terms as Sovereign, and (iii) by permitting

TICs who do not consent to the sale to submit their own bids under section 363(i) of the

Bankruptcy Code.

43. Finally, the RSA contains the fiduciary out described above. Moreover, the

restructuring outlined in the RSA will be implemented through a plan, and thus all parties that do

not consent to the transaction have their usual rights to contest confirmation.


61822005.docx 16

44. Accordingly, under either potential standard, the “business judgment” test or the

heightened scrutiny applied to certain insider transactions, the RSA and the TIC Consent should

be approved.

II. The RSA and TIC Consent Comply with Section 1125 of the Bankruptcy Code

45. To the extent that there is any question, the RSA and the TIC Consent also

satisfies section 1125 of the Bankruptcy Code. Section 1125(b) provides that “[a]n acceptance

or rejection of a plan may not be solicited after the commencement of the case under this title . . .

unless, at the time of or before such solicitation, there is transmitted . . . a written disclosure

statement approved, after notice and a hearing, by the court as containing adequate information.”

11 U.S.C. § 1125(b).

46. Most courts construe section 1125(b) narrowly and find that the provision should

not by itself be a reason to restrict a debtor’s ability to reach consensual resolutions after the

petition date. See e.g. Century Glove, Inc. v. First American Bank of New York, 860 F. 2d 94,

101 (3d Cir. 1988). For example, courts have consistently approved post-petition restructuring

support agreements where, as here, the agreements merely require the parties to use “best

efforts” to pursue confirmation of a specific plan of reorganization and not support any other

alternatives. See, e.g., In re Texaco, Inc., 81 B.R. at 815-16; In re Tronox Inc., No 09-10156

(ALG) (Bankr. S.D.N.Y. Dec. 23, 2009) [Docket No. 1030]; In re Visteon Corp., No. 09-11786

(CSS) (Bankr. D. Del. June 17, 2010) [Docket No. 3427].

47. In addition, courts have approved post-petition restructuring support agreements

that were entered into in the context of plan negotiations or settlement agreements, and have

recognized that such agreements comply with the requirements of section 1125(b). See, e.g., In

re Indianapolis Downs, LLC, 486 B.R. 286, 295 (Bankr. D. Del. 2013) (recognizing that parties

could memorialize agreements reached in support of plans because “Congress intended that


61822005.docx 17

creditors have the opportunity to negotiate with debtors and amongst each other . . . in a way that

allows a Chapter 11 case to move forward.”); In re Heritage Org., L.L.C., 376 B.R. 783, 789–95

(Bankr. N.D. Tex. 2007) (agreement to vote for plan set forth in term sheet was not solicitation

of official vote); In re Kellogg Square P’ship, 160 B.R. 336, 340 (Bankr. D. Minn. 1993).

48. In the instant case, the Debtors have not and will not solicit the votes of holders of

claims and interests unless and until a court-approved disclosure statement is transmitted to the

parties in accordance with section 1125 of the Bankruptcy Code. To date, the Debtors have only

sought to lock-in the necessary support to pursue the Restructuring memorialized in the RSA and

the consent of the TICs memorialized in the TIC Consent. The RSA authorizes the parties to

terminate in the event of a breach or default by another party thereto and the TIC Consent

terminates in the event the RSA is terminated.

49. For the foregoing reasons, the Debtors submit that entry into the RSA and TIC

Consent are not a post-petition solicitation in violation of section 1125(b) of the Bankruptcy

Code.

Waiver of Bankruptcy Rule 6004(a) and 6004(h)

50. In order to execute the proposed restructuring in the time permitted under the

RSA, the Debtors request that the Court determine that notice of the relief requested herein

satisfies Bankruptcy Rule 6004(a), and that the Debtors have established sufficient cause to be

excused from the requirement of a 14-day stay period under Bankruptcy Rule 6004(h).

Notice

51. Notice of this Motion has been given to (a) the Office of the U.S. Trustee,

(b) TNP; (c) the creditors listed on each of the Debtors’ List of Creditors Holding 20 Largest

Unsecured Claims, (d) the Noteholder, (e) ND Investment, (f) counsel to the non-debtor TICs,


61822005.docx 18

and (g) all other parties requesting notice in these cases pursuant to Bankruptcy Rule 2002. The

foregoing notice satisfies the requirements of Bankruptcy Rule 4001(d), to the extent applicable.

52. In light of the nature of the relief requested herein, the Debtors submit that no

other or further notice of this Motion is necessary or required.

No Prior Request

53. No prior request for the relief sought has been made to this or any other court.

[The remainder of the page is left blank intentionally]


61822005.docx 19

WHEREFORE, the Debtors respectfully request entry of an order, substantially in the

form attached hereto as Exhibit A, (a) approving the Debtors’ entry into the RSA, the TIC

Consent and the Initial Release, and (b) granting such other and further relief as may be just and

proper under the circumstances.

Dated: February 21, 2014 Chicago, Illinois

Respectfully submitted, NNN 123 NORTH WACKER, LLC AND NNN 123 NORTH WACKER MEMBER, LLC KAYE SCHOLER LLP By: /s/ D. Tyler Nurnberg

D. Tyler Nurnberg Seth J. Kleinman 70 West Madison Street, Suite 4200 Chicago, IL 60602 Telephone: (312) 583-2300 Facsimile: (312) 583-2360

Attorneys for the Debtors


EXHIBIT A TO THE MOTION

PROPOSED ORDER
