MSR Good Faith Bidder Opinion

7/30/2019 MSR Good Faith Bidder Opinion

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UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

.

. Chapter 11

IN RE: .

. Case No. 11-10372 (SHL)

MSR RESORT GOLF COURSE, LLC, .et al, . New York, New York

. Thursday, October 25, 2012

Debtors. . 2:15 p.m.

. . . . . . . . . . . . . . . .

*** CONFIDENTIAL TRANSCRIPT ***

BENCH RULING RE: GOOD FAITH HEARING

BEFORE THE HONORABLE SEAN H. LANE

UNITED STATES BANKRUPTCY JUDGE

APPEARANCES:

For the Debtors: Paul Basta, Esq.

Citigroup Center

153 East 53rd Street

New York, New York 10022

For the Official Committee

of Unsecured Creditors: Martin J. Bunin, Esq.

Craig E. Freeman, Esq.

ALSTON & BIRD, LLP

90 Park Avenue


(Appearances Continued)

Audio Operator: Electronically Recorded

by Amanda, ECRO

AudioEdge Transcription, LLC

425 Eagle Rock Avenue - Suite 201

Roseland, New Jersey 07068

(973) 618-2310

www.audioedgetranscription.com

Proceedings recorded by electronic sound recording,

transcript produced by certified transcription service.

11-10372-shl Doc 1819 Filed 12/05/12 Entered 12/05/12 12:03:49 Main DocumentPg 1 of 44

1110372121205000000000001

Docket #1819 Date Filed: 12/5/20


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APPEARANCES: (Continued)

For Five Mile Capital: Adam L. Shiff, Esq.

Michael C. Harwood, Esq.

KASOWITZ, BENSON, TORRES

& FRIEDMAN, LLP1633 Broadway


For GIC RE: Michael Sage, Esq.

Brian Greer, Esq.

DECHERT, LLP

1095 Avenue of the Americas


For Midland Loan

Services, Inc.: Atara Miller, Esq.MILBANK, TWEED, HADLEY

& MCCLOY, LLP

One Chase Manhattan Plaza


For MetLife: Lee S. Attanasio, Esq.

SIDLEY AUSTIN, LLP

787 Seventh Avenue


For KSL Capital: Sam C. Shulman, Esq.

CLEARY, GOTTLIEB, STEEN

& HAMILTON, LLP

One Liberty Plaza


For CNL Recovery: Benjamin I. Finestone, Esq.

QUINN, EMANUEL, URQUHART

& SULLIVAN, LLP

51 Madison Avenue, 22nd Floor


(Appearances Continued)



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APPEARANCES VIA TELEPHONE:

For Five Mile Capital: David M. Friedman, Esq.

KASOWITZ, BENSON, TORRES

& FRIEDMAN, LLP

For Midland LoanServices, Inc.: Mark Shinderman, Esq.

David Zolkin, Esq.

MILBANK, TWEED, HADLEY

& MCCLOY, LLP



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Confidential-4

INDEX

Page

COURT DECISION 6

SCHEDULING 36



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Confidential-5

(Proceedings commence at 2:15 p.m.)

THE COURT: Good afternoon. Please be seated.

All right. We're here today because I told the

parties I was going to deliver a ruling on the good-faith

issue.

And before I do that, I know there's an issue about

confidentiality, and so I wanted to make sure that,

procedure-wise, anything that we should do has been done;

that is, all the folks that are here, no one has any

objection to anybody being here.

And then I have a list of folks who are on the

phone, and I wanted to make sure that's all been worked out

with the parties.

And I'm seeing the nodding of heads, so I assume

that the answer is yes.

MR. BASTA: Yes, Your Honor. Paul Basta.

Everyone in the courtroom is subject to a confi.

We've listened to who dialed in, and believe everybody on the

phone, as well, is subject to a confidentiality agreement.

And I believe your court has sealed off the phones, so that

no one else can join.

THE COURT: I think that's correct.

All right. Is there anybody on the phone who has a

different understanding? And I will take silence as there's

no issue that we need to discuss further.



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Court Decision Confidential-6

THE COURT: All right. All right. With that said,

I was just going to render my decision, unless there's any

preliminary matters that we need to discuss.

Before the Court is the question of whether 450 Lex.

Private Limited and C Hotel Mezz. Private Limited;

collectively referred to in these proceedings as "GIC," is

entitled to good-faith purchaser protections under Sections

363(m) and 363(n) of the Bankruptcy Code in connection with

its stalking horse bid to purchase the debtors' assets.

As a stalking horse bidder, GIC has made an offer to

acquire the debtors' assets that will serve as a floor for

the value of the debtors' asset, at an auction currently

scheduled for November 8th, 2012. GIC's stalking horse bid

will be subject to higher and better offers at that auction.

GIC was approved as the stalking horse bidder

pursuant to a bid procedures motion filed by the debtors.

Various parties objected to the debtors' bid procedures

motion, including Five Mile Capital Partners, LLC; referred

to as "Five Mile," which is the debtors' fourth mezzanine

lender. As the fourth mezzanine lender, Five Mile would not

receive any recovery in this case if GIC's current stalking

horse bid prevails because there would only be enough money

to pay creditors and lenders who were entitled to payment

ahead of Five Mile under bankruptcy's absolute priority rule.

Rather than litigate the objections to the bid



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procedures motion, all interested parties entered into a

settlement whereby the debtors proposed bid procedures would

be approved, including GIC's role as a stalking horse bidder,

but Five Mile would preserve its right to object to GIC's

request for a finding of good faith under Sections 363(m) and

(n).

Not surprisingly, Five Mile has, in fact, objected.

It objects to a finding of good faith based on two

contentions:

First, its contention that GIC colluded with and

exercised control over Midland Loan Services, Inc.; or

"Midland," the special servicer of debtors' mortgage, and did

this with an eye towards improving GIC's position in this

case.

And two, its allegation that GIC never disclosed its

relationship with KSL Capital Partners, LLC, or its

affiliates, who I will refer to as "KSL," which is a

potential bidder for debtors' assets, with the allegation

being that GIC allegedly gave KSL various undisclosed rights

and benefits in connection with GIC's bid.

Pursuant to a stipulated schedule, the parties

briefed the issue of good faith and appeared for a one-day

hearing on the issue on October 15th.

For reasons I will explain more fully in a moment,

the Court rejects Five Mile's arguments related to Midland,



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but the Court concludes that, for GIC to be eligible for a

finding it is a good-faith purchaser, GIC needs to take

additional steps with regard to its relationship with KSL

before the auction.

So I'm going to first sketch the relevant factual

background. And starting at the beginning, the petition date

of February 1st, 2011, the debtors owned five luxury resort

properties and, in June 2012, sold one of those properties.

The remaining properties that are currently assets of the

estate include the Grand Wailea Resort Hotel and Spa in Maui,

Hawaii; the La Quinta resort and Club PGA West in La Quinta,

California; the Arizona Biltmore Spa and Resort in Phoenix,

Arizona; and the Claremont Resort and Spa in Berkeley,

California; and the White Course at Doral, which was excluded

from the Doral sale in June.

The debtors have several prepetition lenders.

Midland is the special servicer to the holder of a

senior mortgage in the original principal amount of $1

billion, which I'll refer to as the "mortgage." And that's

secured by substantially all of debtors' assets and placed

into a securitization trust.

Lexington Investment, Limited, which I'll refer to

as "Lexington," is a certificate holder that is the operating

advisor to Midland. Lexington is fifty-one percent owned by

ZZZ Investments, Limited, which is an affiliate of KSL and



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forty-nine percent owned by NA RE Private, Limited, which is

an affiliate of GIC.

As for the other lenders, MLIC Asset Holdings II,

LLC, with its respective successors and assigns, referred to

as "MetLife," is a holder of the first mezzanine loan in the

original principal amount of $115 million.

GIC holds a second mezzanine loan in the original

principal amount of $110 million, and a third mezzanine loan

in the original principal amount of $250 million.

Five Mile holds a fourth mezzanine loan in the

original principal amount of $50 million.

Since 2010, GIC has been positioning itself to

potentially purchase the resorts. Adam Gallistel, Senior

Vice President of GIC Real Estate, Inc., testified that, in

the event of a default of its loan, GIC planned to exercised

its foreclosure rights under the governing third mezzanine

loan documents and applicable law, pay off any senior debt,

and take ownership of the resorts.

Part of GIC's plan included bringing in KSL, a

former equity-owner, asset manager, and property manager of

the resorts as the property manager of the resorts if GIC

became the owner. And that's in the Gallistel declaration,

in Paragraph 3.

To memorialize the relationship, GIC and KSL entered

into two agreements:



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The first agreement is the investment and

shareholder agreement by and between ZZZ Investment, Limited,

and NA RE, dated May 14th, 2010, which I'll refer to as the

"investment agreement." Pursuant to that agreement, ZZZ

agreed to transfer KSL certificates; that is, KSL's one-

hundred-and-eleven-million-dollar position in the debtors'

mortgage, to its subsidiary Lexington, and NA RE agreed to

purchase up to 100 percent of the shares of Lexington from

ZZZ.

Upon the earlier event of a default under the

mortgage or the maturity date, NA RE would be obligated to

purchase forty-nine percent of the shares of Lexington, and

would have the right to purchase a hundred percent of the

shares.

Under the investment agreement, Lexington and ZZZ

could not have any assets or business other than its

ownership in the KSL certificates, and had to maintain its

special purpose entity status.

The second agreement is a letter agreement between

KSL and NA RE, dated May 14th, 2010, the so-called "letter of

understanding," whereby the parties agreed that, if GIC

became the owner of the resorts, KSL would be the asset

manager. The parties would determine the terms of the asset

management agreement at a future date.

Additionally, pursuant to the letter of



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understanding, the parties agreed to cooperate in the

acquisition of any additional interests in the MSR loans or

in the resorts.

The parties also agreed that, if either had the

right to purchase or otherwise acquire any interest in any of

the MSR loans or resorts, they would offer the other party

the right to acquire up to a fifty percent interest in the

equity or debt investment. And this is set forth at the

Gallistel declaration at Paragraph 4.

When the MSR loans matured and the debtors filed for

bankruptcy on February 1st, 2011, NA RE purchased forty-nine

percent of the Lexington shares in accordance with the

investment agreement. To date, GIC has not exercised its

right to purchase the remaining fifty-one percent, and has

until February 1st, 2013 to purchase those shares if the

mortgage remains outstanding as of such date. And that's in

the Gallistel declaration at Paragraph 7.

Shortly after the debtors filed for bankruptcy, GIC

offered to purchase substantially all of the debtors' assets.

The debtors rejected that offer. In that offer of February

2011, it disclosed that GIC -- it was an indirect affiliate

of the Government of Singapore Investment Corporation Realty

Private, Limited; that is, a lender under the second and

third mezzanine loans, and that it owned forty-nine percent

of Lexington.



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The February offer was subsequently filed on the

electronic case docket as Exhibit A to GIC's objection to

Houlihan Lokey Capital's retention application. That's at

the Gallistel declaration, Paragraph 10.

In response to that offer, the debtors inquired as

to the nature of the relationship between GIC and KSL. By

response in an email dated February 22nd, 2011, counsel for

GIC made the following disclosures to the debtors:

"No party has an interest in GIC RE's proposal.

However, KSL Capital Partners, LLC, or its

affiliates, KSL, may have a right to participate in

GIC RE's new investment under certain terms and

conditions. GIC RE does not require KSL's

investment in order to proceed. In the interest of

full disclosure, KSL is serving as a consultant to

GIC RE and would function as the asset manager in

the event GIC RE's bid was ultimately successful."

And that's Exhibit F to the Greer declaration, and

is also set forth in the Gallistel declaration, Paragraph 13.

This email correspondence was disclosed to the Court

in connection with the hearing held on this issue.

Nevertheless, despite the debtors rejecting the offer made in

February 2011, about two and a half months later, GIC renewed

its offer to purchase the asset, and that offer, too, was

rejected.



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Shortly afterwards, the debtors, their lenders, and

certain equity-holders engaged in a contentious hearing on

the debtors' first motion to extend exclusivity; the end

result being that the Court eventually granted an extension

of exclusivity for a period of ninety days.

In February 2011, the debtors filed a second motion

to extend exclusivity. Just prior to the objection deadline

for that motion, the debtors, GIC, Five Mile, Paulson, 111

Debt Acquisition-Key, LLC, and CNL-AB, LLC, executed a

certain exclusivity termsheet, dated September 19th, 2011.

This is referred to as the "GIC settlement." And that

settlement was approved over Midland's objections.

Pursuant to the settlement, if GIC's claims were not

paid in full, in cash, prior to September 1st, 2012 or

earlier, or if a termination event occurred, the debtors had

to file a bid procedures motion to approve bidding procedures

for an auction to sell substantially all of the debtors'

assets and a related plan and disclosure statement.

As part of the GIC settlement, Lexington executed a

side letter, pursuant to which they would agree to abstain

from offering any formal advice to the special servicer of

the mortgage loan related to an extension of the debtors'

exclusive periods to file or solicit acceptance of a Chapter

11 plan.

The GIC settlement acknowledged that GIC's affiliate



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NA RE had an interest in the debtors' mortgage by noting its

capacity as a director and direct holder of certain interests

in the debtors' mortgage. And that's at the GIC settlement

at 1, in ECF Docket No. 637.

On or about August 1st of 2012, the debtors failed

to pay GIC its monthly interest payment, with that failure

constituting a terminating event under the GIC settlement,

and that triggered debtors' obligation to proceed with bid

procedures and an auction. GIC then became the stalking

horse bidder almost a year after the order approving the GIC

settlement was entered, and almost two years after GIC's

initial offer to purchase the debtors' assets.

In structuring its stalking horse bid, GIC

negotiated with Midland and MetLife to obtain their support.

Midland and MetLife rejected GIC's initial proposal requiring

a waiver of all default interest under the mortgage and the

first mezzanine loan. That's at the Gallistel declarations,

Paragraphs 15 and 16.

Around this time, GIC offered KSL the opportunity to

participate in its offer to serve as a stalking horse bid,

but KSL declined. Gallistel, Paragraph 9.

To obtain Midland's support, GIC, after

negotiations, agreed to pay Midland $7.5 million in default

interest. Gallistel, Paragraph 16.

In addition, Midland and MetLife demanded that their



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claims must otherwise be paid in full, in cash, by the end of

the year; that all overbids must be in cash; that overbid

amounts must pay the outstanding default interest under the

mortgage first, and then the first mezzanine loan prior to

any distribution to more junior creditors; and that GIC's

stalking horse bid could not include a credit bid of default

interest until the default interest under the mortgage and

first mezzanine loan were paid in full. And that's Exhibit H

to the Greer declaration.

GIC finally executed its stalking horse bid on

August 16th, 2012, with the support of Midland, MetLife, and

the debtors. And this occurred only after multiple rounds of

negotiating among the interested parties.

Midland and MetLife ultimately agreed that, for any

bid that pays their claims in full, in cash, and otherwise

provides the same consideration to creditors as under the GIC

stalking horse bid, they would consent to an incremental

waiver of default interest owed under their respective loan

agreements and applicable law. For any bid that proposed to

give Midland and MetLife any consideration other than cash,

Midland and MetLife would demand the full payment of default

interest that they are owed and reserve any rights, including

any rights with respect to cram-down.

There are two relevant Midland agreements here, to

switch focus for a moment.



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The first is a servicing agreement between Midland

and the holder of the senior mortgage on the debtors' assets,

which is referred to as the "servicing agreement," which sets

forth the terms as to which Midland's rights and duties as

special servicer.

And the second is a letter agreement between Midland

and an affiliate of Lexington, whereby Midland agreed to

share a portion of its fee as servicer with an affiliate of

Lexington, which is referred to as the "fee-sharing

agreement."

On October 15th, the Court held a hearing on this

issue of good faith.

I now turn to the applicable legal standard in

considering the issue. Section 363(m) of the Bankruptcy Code

provides that a party that purchases a debtor's assets in

good faith has certain protections on appeal. That section

states that:

"The reversal or modification on appeal of an

authorization under Subsection (b) or (c) of this

section of a sale or lease of property does not

affect the validity of a sale or a lease under such

authorization to an entity that purchased or leased

such property in good faith, whether or not such

entity knew of the pendency of the appeal, unless

such authorization or such sale or lease were stayed



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pending appeal."

And that's 11 U.S.C. Section 363(m).

A related provision, Section 363(n), allows a

trustee to avoid a sale if a purchaser is not acting in good

faith. See In Re Gucci, 126 F.3d 380, at 390, a Second

Circuit case from 1997.

Section 363(n) provides in part that a trustee:

"-- may avoid a sale under this section if the sale

price was controlled by an agreement among potential

bidders at such sale, or may recover from a party to

such agreement any amount by which the value of the

property sold exceeds the price at which such sale

was consummated."

And that's 11 U.S.C., Section 363(n), in relevant

part.

While Section 363(n) requires the successful bidder

to have purchased or leased property "in good faith," the

Bankruptcy Code does not define that term. Other circuits

have held that the phrase encompasses one who purchases in

good faith and for value. See In Re Colony Associates, 111

F.3d 269, at 276 (2d. Cir. 1997). That's quoting a Third

Circuit decision, In Re Abbots Dairies of Pennsylvania, Inc.,

788 F.2d 143, at 147 (3d Cir. 1986). See also the In Re

Gucci case, 126 F.3d at 390. And that Gucci case has the

following quote:



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"Although the Bankruptcy Code does not define the

meaning of 'good faith purchaser,' most courts have

adopted a traditional equitable definition: One who

purchases the assets for value, in good faith, and

without notice of adverse claims."

The good-faith component of the test under 363(m)

speaks to the equity of a bidder's conduct in the course of

sale proceedings. Typically, the misconduct that would

destroy a purchasers good-faith status at a judicial sale

involves fraud, collusion between the purchaser and other

bidders or the trustee, or an attempt to take grossly unfair

advantage of other bidders. And that's from In Re Colony

Associates, 111 F.3d at 276, quoting In Re Rock Industries

Machinery Corp., 572 F.2d 1195, at 1198, a Seventh Circuit

case from 1978. See also In Re Gucci, 126 F.3d at 390.

The burden of proof to show good faith is on the

proponent of good faith, as explained in the In Re Borders

Group decision of Judge Glenn, 453 B.R. 477, at 484, which

quotes 3, Collier on Bankruptcy, Paragraph 363.11.

Courts generally reject a claim of bad faith,

however, where the objector cannot prove collusion or fraud

in the conduct of negotiations. See In Re New York Trap Rock

Corp., 42 F.3d at 752, 753 (2nd Cir. 1994).

See also In Re Motors Liquidation Co., 430 B.R. 65,

at 78-79 (Bankr. S.D.N.Y. 2010), which notes that a party



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challenging good faith did not satisfy the controlling

standard of Section 363 because the party failed to

demonstrate that bad faith occurred in the conduct of

negotiations, or there was a suggestion of fraud or

collusion.

See also In Re Lehman Brothers Holdings Corp., 415

B.R. 77, at 84 (S.D.N.Y. Bankruptcy 2009), where the

Bankruptcy Court found that bad faith and collusion claims

were irrelevant as to the buyer's good-faith status because,

among other things, they were based on speculation, rather

than evidence.

In addressing a challenge to a purchaser's good

faith, a court generally focuses on whether the conduct

complained of was disclosed to the Bankruptcy Court. See In

Re Colony Associates, 111 F.3d at 277.

Full disclosure to the Bankruptcy Court may not

always neutralize conduct that would otherwise constitute bad

faith; however, disclosure should certainly weigh heavily in

a Bankruptcy Court's decision on that issue. Also In Re

Colony Associates at 277.

The Second Circuit has suggested that Section 363(n)

prohibits secret cooperation between bidders, meaning a

failure to disclose the agreement to either the Bankruptcy

Court or the debtors.

Section 363(n) does not apply to all agreements



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among potential bidders, however, that may relate to the

price in a bankruptcy sale, and instead covers only

agreements that control the sale price. Moreover, an

agreement to control the sale price is very different from an

agreement that affects the sale price, as explained in In Re

New York Trap Rock Corp., 42 F.3d at 752. The term "control"

implies:

"-- more than acts causing incidental or unintended

impact on the price; and implies an intention or

object to influence that price."

See In Re Trap Rock.

Congress intended Section 363(n) to prohibit only

agreements that are intended to control a sale price. A

prohibition on all agreements that affect a sale price would

cover a vast range of innocent agreements among potential

bidders and would be very difficult for the parties to an

agreement to recognize that their conduct was, indeed,

unlawful. Id.

The plain meaning of the statute is that there must

be an agreement among the bidders to influence the sale

price, not simply the influence on sale price as an

unintended consequence of the agreement. See In Re Gucci,

126 F.3d at 390; New York Trap Rock, 42 F.3d at 752.

A bid is not improperly chilled by the mere fact of

an association of persons formed for the purpose of bidding



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at a sale, since this may not be unobjectionable, and is

sometimes in fact meritorious, if not necessary. See Ross v.

Kirschenbaum (In Re Beck Industries), 605 F.2d 624, at 635-

636 (2d Cir. 1997).

With the factual and legal background behind me, I

turn to the present dispute relating to Midland.

Five Mile's briefs present a variety of arguments as

to GIC's allegedly improper relationship with Midland. For

example, it argues that KSL and GIC are controlling and using

Midland through Lexington to discourage third parties from

bidding. More specifically, it contends that the investment

agreement requires Lexington to obtain consent from GIC and

KSL regarding any major decisions, and that the servicing

agreement requires Midland to obtain written approval from

GIC and KSL through Lexington prior to taking certain

actions, including Midland's subordination of its default

interest, discounted payoff of the mortgage, and any sale of

the mortgage to a foreclosed property.

Five Mile further claims that, since GIC and Midland

both use KSL as their advisor, there was an improper flow of

information between GIC and Midland through KSL.

Five Mile also claims that, since GIC and KSL, as

owners of Lexington, can fire Midland, therefore Lexington

controls Midland's position regarding the restructuring of

the mortgage, and this inhibits Midland from exercising its



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independence because it fears losing millions of dollars in

fees.

It also complains that the fee-sharing agreement is

a side deal benefitting only GIC and KSL, and contends that

Midland's actions to seek payment of default interest were

for the benefit of GIC and to chill bidding.

Furthermore, Five Mile contends that the

negotiations between GIC and Midland through their

relationship with KSL were not product of arm's length

negotiations.

And lastly, it argues that Midland failed to

disclose material information, and thus concealed its

allegedly improper relationship with GIC.

For all these allegations, however, Five Mile has

failed to prove any improper collusion or control involving

Midland, something that Five Mile appeared to concede at the

end of the recent hearing.

Five Mile has, in fact, not demonstrated that

Midland was controlled by or colluded with GIC or KSL, or

that Midland colluded with GIC to chill the bidding to the

detriment of the estate. In fact, the evidence submitted

refutes Five Mile's arguments.

For example, Mr. James Glasgow, Managing Director

and Portfolio Manager of Five Mile, testified only that the

evidence of bad faith that he was aware of related to the



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bidding procedures because, in his view, the breakup fee and

default interest, with the other provisions in here, would

keep others away from the auction.

He further testified that Five Mile was conducting

discovery to unearth evidence that GIC, KSL, and Midland

colluded, but conceded at his deposition that:

"To date, I am not aware of any evidence."

And that's the Glasgow deposition at Pages 15 and

16.

He also testified that he does not have any evidence

demonstrating that GIC or KSL controlled Midland. Glasgow's

deposition at Page 16.

He stated, hypothetically, that in fact it would not

be improper for Midland to tell GIC that it would support a

deal that was acceptable to Midland.

Mr. Kevin Semon, the Vice President and Special

Servicing Manager at Midland Loan Servicing, testified that

in fact it was commonplace for Midland in its role as special

servicer to enter into fee-sharing agreements with a

controlling certificate holder. And that's the Semon

declaration, Paragraph 8.

Pursuant to the fee-sharing agreement, the money

flows from Midland to Lexington's affiliate. KSL, not GIC,

shares in those fees. And that was explained at the hearing

transcript, Page 137, and also the Gallistel deposition, Page



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129.

Midland notes that its arrangement here cannot come

as a surprise to Five Mile because it mirrors the

relationship that Five Mile had with Midland in the

Innkeepers bankruptcy case. In that case, Five Mile was the

controlling certificate holder, and Midland was the special

servicer, and the parties entered into a similar fee-sharing

agreement.

Further, the activity in this case demonstrates that

Midland, in its role as special servicer, has acted

independently of GIC and KSL. For example, the credible

evidence demonstrates that Midland independently agreed to a

cash bid discount in accordance with the servicing standards

under the servicing agreement, and because it maximizes the

value for the trust. There is no evidence that it did so at

the behest of Lexington. It was only after Midland made its

own independent determination about the appropriate course of

action that Midland sought authorization from Lexington. And

that's the Semon deposition, Pages 51, 54, 80, 81, and 78.

It's also the hearing transcript at Page 138 through 140.

Midland accepted, after multiple negotiations, the

cash discount because it believed that the GIC stalking horse

bid was the only viable exit strategy and presented an

opportunity for the debtors to exit bankruptcy in the near

future, and would result in payment of substantially all the



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mortgage in cash and full, and will satisfy in full the

first, second, and third mezzanine claims. And that's the

Semon deposition, Pages 71 and 72; Burian deposition at Page

114 to 115, and the hearing transcript, Pages 144 through

147.

That cash discount is in fact available to any other

cash bidder, and it was heavily negotiated between Midland

and GIC. Moreover, Midland, in its capacity as special

servicer, only consulted with KSL, not GIC, when meeting with

its operating advisor Lexington.

Five Mile's briefing makes a good deal over Midland

seeking payment of default interest, but no party, including

the debtors, appears to dispute that Midland, as an over-

secured creditor, is entitled to and contractually obligated

under its loan agreement to collect default interest and give

it to the trust. Midland in fact reserved its right to seek

default interest under the cash collateral.

Neither Midland, nor GIC, nor KSL are recipients of

the default interest payment. The fact that Midland asserts

its right to default interest, to which its certificate

holders are entitled, even without knowing the exact

identities of these certificate holders. This fact does not

support a claim of control or collusion. Indeed, Five Mile

does not proffer an alternative course of action that Midland

could have taken in its capacity as special servicer on the



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issue of default interest.

Finally, Midland's independence from GIC is amply

demonstrated by Midland's vehement objection during an

extended evidentiary hearing to the GIC settlement, which

provided an extension of the exclusivity period.

On a side note, the Court notes that, under the

servicing agreement, if Midland is terminated without cause,

it would still receive its workout fee, approximately one

percent of the outstanding mortgage, of some $8.5 million.

So there is no cost, as asserted by Five Mile, to Midland for

exercising its independent judgment if it conflicts with

Lexington. And see the service agreement, Section 4.1.1(b),

and the hearing transcript, Page 141.

Midland's one-hundred-and-eighty-thousand-dollar

monthly servicing fee is a fraction in comparison.

Conversely, if Midland is terminated for cause,

Midland would not receive such fee; thus, Midland has an

incentive to conduct itself in accordance with the servicing

standard under the servicing agreement and applicable law.

See servicing agreement, Sections 2.1.0(c) and 2.1.

Any actions taken by Midland in contradiction of

Lexington's direction does not constitute a breach under the

servicing agreement, nor expose Midland to termination, if

the directed action violates the servicing standards or

applicable law. Serving agreement, Section 7.2(b).



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In conclusion as to Midland, counsel to Five Mile

stated at the hearing:

"We are not asking Your Honor to find that Midland

colluded with GIC or that Midland acted in bad

faith; we are taking that off the table. We have

concluded that that's not in the record, on this

record."

Hearing transcript at Page 211 to 212.

The Court agrees. But since Five Mile has been

unwilling, formally, to withdraw its allegations of control,

collusion, and bad faith relating to Midland, the Court will

take that step for it.

For the reasons previously stated, therefore, the

Court finds that GIC did not collude or otherwise exercise

any improper control of Midland.

The Court turns now to the dispute relating to KSL.

As to this dispute, Five Mile argues that GIC did

not disclose material facts regarding its relationship with

KSL. It complains that GIC did not publicly disclose that

KSL is its partner in GIC's stalking horse bid, and instead

materially misrepresented their relationship.

Five Mile further complains that GIC did not

disclose it had entered into an agreement to hire KSL, a

former insider of the debtors and a current business

competitor, to manage the resorts if GIC is the successful



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bidder.

Five Mile also contends that GIC has not disclosed

the payments and consideration it has agreed to make and

receive from KSL, a potential competing bidder.

GIC has essentially two responses:

First, it relies on its disclosures in February 2011

to the debtors that KSL would act as asset manager if GIC

acquired the resorts, and that KSL "may have" the right to

participate in GIC's investment under certain terms and

conditions.

Second, GIC responded at the hearing with additional

facts about the current intentions of KSL. Specifically,

GIC's counsel represented that KSL is, in fact, free to bid

independently if KSL so desires; that KSL, in fact, currently

has no desire to join in any GIC bid for the assets at this

price level; and that KSL would only be paid "carried

interest" if it becomes the asset manager for the resorts.

Given these facts, GIC contends that any alleged

lack of prior disclosure is harmless.

The Court disagrees with Five Mile that the February

2011 disclosures are irrelevant. Five Mile claims the

disclosures pertain only to GIC's so-called "first bid" for

the assets, and thus, are currently irrelevant to any

successive bid. But Five Mile's argument ignores the fact

that GIC's offer to buy these assets has essentially been one



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longstanding offer throughout this case.

Nonetheless, while the February 2011 disclosures do

support GIC's position to some extent, they do not resolve

the issue entirely, and that's because those disclosures are

not complete. While those disclosures do state that GIC

intends to hire KSL as asset manager if it acquires the

resorts, the disclosure states only that KSL may have a right

to participate in GIC's bid under certain circumstances. In

fact, it appears that KSL does have such a right under the

written agreements provided to the Court.

GIC's counsel made representations at the hearing

that KSL does not have any interest in bidding on these

assets, either alone or by joining in GIC's bid. But the

written agreements between KSL and GIC grant KSL the right to

join in GIC's bid at any time. The mere fact that KSL

currently does not have such an interest does not mean that

KSL lacks the right to do so if KSL changes its mind.

And while GIC's counsel represents that KSL is free

to bid separately on the assets, such a right is arguably

inconsistent with the agreement's requirement that KSL and

GIC cooperate to obtain these assets.

So based on these facts and applicable law, the

Court concludes that there are certain aspects of GIC's

relationship with KSL, as embodied in the written agreements,

that raise the possibility of collusion in three ways:



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First, the agreements can be construed to prevent

KSL from directly bidding on debtors' assets.

Second, the agreements arguably grant KSL an

unfettered right to join in GIC's bid at any time for the

assets.

And third and finally, there is some question about

whether the agreements monetarily reward KSL for not bidding.

Five Mile takes the position that the Court must

disqualify GIC as a good-faith purchaser at this time. The

Court disagrees. It is premature to rule on the issue of

good faith under Section 363(m) and 363(n), because those two

sections of the Bankruptcy Code contemplate protections for a

successful purchaser. No sale has occurred yet in these

cases. In fact, the debtors are still weeks away from a

scheduled auction of their assets, and debtors have suggested

an adjournment of such an auction if the Court finds that any

additional disclosures or actions are needed to be taken by

GIC.

Given that the auction and sale have not yet

occurred, GIC may remedy any potential problems, so that the

auction and sale can be conducted to maximize the value of

debtors' assets, with the appropriate level of transparency,

and without any hidden barriers to bidding by a potentially

interested party such as KSL. Therefore, if GIC wishes to

seek a finding that it is a good-faith purchaser, if and when



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it finds itself to be the successful bidder, it needs to take

additional steps.

On the one hand, it could amend its agreements with

KSL, consistent with the representations of GIC's counsel at

the hearing. And those amendments would include the

following:

One, that KSL has a right to bid independently of

GIC for the debtors' assets.

Two, that KSL will not acquire an interest through a

GIC bid of these assets.

And three, that KSL will not be compensated for

sitting on the sideline as a non-bidder, but rather will only

receive compensation for services rendered in its role as

manager of the resorts.

To the extent that GIC decides not to take these

steps, however, it can alternatively promptly disclose any

agreements it has with KSL that might impact bidding here,

and the parties then can take whatever steps they wish to, to

act upon that information. And this includes, of course, the

debtors acting in their role as fiduciaries for the estate.

And of course, GIC must make sure to fully disclose

any and all relevant agreements and relationships relevant to

GIC's bid to purchase the debtors' assets, including any

investors or asset and property managers. The debtors'

submission sets for an appropriate mechanism for making such



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disclosures.

The Court's conclusion on the appropriate action

here going forward and the rejection of Five Mile's position

is supported for at least four reasons:

First and foremost, the purpose of the good faith

requirement relates to ensuring the fairness of the process,

so as to maximize value for the estate. See Ross v.

Kirschenbaum, In Re Beck Industries, 605 F.2d, at 637 (2d.

Cir. 1979).

See also The Wine Group and Sharon Diamante, In Re

Hat, 310 B.R. 752, at 761, from the Eastern District of

California, which has the following quote:

"Beck Industries clearly stands for the proposition

that the Court may fashion equitable remedies from

its conduct in connection with the sale that

subjects the bankruptcy estate to expense and delay,

the object being to maximize bidding, not restrict

it."

A ruling now to disqualify GIC for good-faith

protections could potentially remove the only known bidder

for the debtors' assets, even before bidding has occurred.

When viewed in the current procedural context of this case,

Five Mile's proposal makes little sense, given that there is

more than sufficient time address the issues identified by

the Court.



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Second, the Court is mindful that its view about the

appropriate course of action going forward is shared by other

constituencies in this case. In considering the appropriate

course of action here, the Court requested additional

briefing from the interested parties, including not only Five

Mile, GIC, and Midland, but also the debtors and the

committee.

Importantly, the debtors, as fiduciaries for the

estate, proposed that, to the extent the Court found there to

be problems with GIC's prior disclosures, that GIC be given

an opportunity to remedy those disclosures in advance of the

auction, and that the auction be adjourned briefly to allow

all parties to consider additional disclosures. The

committee offered similar comments as the debtors.

Third, the Court has equitable power to fashion an

appropriate course of action under these circumstances. See

New England Dairies, Inc. v. Dairy Mart Convenience Stores,

Inc., In Re Dairy Mart Convenience Stores, Inc., 351 F.3d 86,

92 (2d Cir. 2003), which has the following quote:

"The equitable power conferred on the Bankruptcy

Court by Section 105(a) is a power to exercise

equity in carrying out the provisions of the

Bankruptcy Code."

See also In Re Target Two Associates, 2006 W.L.

3068668, at *5 (S.D.N.Y., October 27, 2006), which has the



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following quote:

"Section 105(a) provides the authority for the

Bankruptcy Court to carry out the provisions of

Section 363(b)."

See also Momentum Manufacturing Corp. v. Employee

Creditors' Committee, 25 F.3d 1132, at 1136 (2d. Cir. 1994):

"Bankruptcy Courts are courts of equity and have

power to invoke equitable principles to achieve

fairness and justice in the reorganization process."

Indeed, the Court notes that GIC's prior disclosures

in February 2011 weigh in favor of this path forward, rather

than Five Mile's more draconian approach. See Kabro

Associates of West Islip v. Colony Hill Associates, 111 F.3d

at 277:

"Although full disclosure to the Bankruptcy Court

may not always neutralize conduct that would

otherwise constitute bad faith, disclosure should

certainly weigh heavily in a Bankruptcy Court's

decision on the good-faith purchaser issue."

Fourth and finally, this case is very

distinguishable from the cases relied upon by Five Mile for a

disqualification of the bidder, for any good-faith finding.

Those cases involve secret agreements, undisclosed at the

time of bidding, that had a demonstrated anti-competitive

effect.



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For example, the successful bidder status as a good-

faith purchaser and New York Trap Rock Corp., 42 F.3d 747,

was challenged not only because it failed to make

disclosures, but also because there was a secret agreement

with another bidder that curtailed competitive bidding.

Similarly, in In Re Beck Industries, 605 F.2d 624,

the successful bidder had secretly entered into an agreement

with a silent bidder, whose competitor was actively bidding

for the assets. The Second Circuit there ultimate concluded

that the undisclosed agreement permitted the assets to be

sold at a price below what the competitor would have paid to

keep the assets out of the hands of the silent bidder.

In the present case, by contrast, there's no

evidence that GIC and KSLs agreements have controlled the

price, and that's because there has been no auction to date,

and KSL appears, in fact, to have no interest in these assets

at the price point set forth in the stalking horse bid.

Here, the debtors have agreed to extend the auction

date by approximately one month to December 5th, 2012, to

allow for further marketing of the debtors' assets, with the

benefit of any GIC additional disclosures or changes in its

representations. And this is provided that Five Mile, one of

debtors' post-petition financing lenders, commits to provide

additional debtor-in-possession financing reasonably required

to fund the debtors' operations through the consummation of



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any plan of reorganization.

The Court agrees that the one-month extension is

wise. If GIC addresses the issues identified in this ruling

promptly, there is no reason why it cannot subsequently be

considered for a finding as a good-faith purchaser under

363(m) and 363(n) of the Bankruptcy Code, if in fact it is

determined to be the successful bidder at the auction.

So that's my ruling. And in light of that, I

thought it made sense to talk about scheduling going forward.

MR. BASTA: Thank you, Your Honor.

I think what will happen is we'll -- we will put out

a notice on an adjourned auction date to that December 5th

date.

There are changes to the schedule that have to flow

from that, relating to how to implement whatever winning bid

comes out of that auction. And if it's acceptable to the

Court, the debtors would like to circulate a revised

confirmation schedule that works off of that one-month date

to the parties, and then -- and then distribute it to the

Court.

THE COURT: All right. That would be fine.

Remind me what the current confirmation date is.

(Participants confer.)

MR. BASTA: I think it's December 13th.

THE COURT: All right.



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Confidential-37

MR. BASTA: My guess is that it will go to the -- to

the middle of January.


MR. BASTA: The one month will just extend.

And then I believe that we're going to have to work

backwards, Your Honor, because we want to make sure that we

do it within the time period of the financing commitment that

is the basis for the GIC offer.

THE COURT: Right. All right.

MR. SHIFF: Your Honor, Adam Shiff of Kasowitz,

Benson, Torres & Friedman, on behalf of Five Mile.

I think what Mr. Basta proposes obviously makes

sense. Let's go back and plug in all the dates.

There's just one issue I just want to raise to the

Court because the way the default interest hearing is set to

take place, it's supposed to be when the new -- when the

disclosure statement hearing takes place. As you heard from

Mr. Basta, that's likely to move approximately a month, or

whatever the time is. Currently -- and since I have a

feeling it will take probably more than the next hour or so

to figure out the details in this order, currently, I think

the initial briefs on the default interest hearing are due

tomorrow, with, you know, replies due two weeks later, all

timed to the disclosure statement hearing --

THE COURT: I think it's safe to say they're --



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Confidential-38

MR. SHIFF: I just want to make sure that we don't

need to get this done, and we can work --

MR. BASTA: No, we can --

THE COURT: I don't expect anything to arrive in the

in box tomorrow.

MR. SHIFF: Thank you, Your Honor.

MR. BASTA: Yeah, we believe that it should all

roll, Your Honor.

THE COURT: Right.

MR. SHIFF: Thank you.

THE COURT: No. I trust counsel will be able to --

MR. SHIFF: Yeah, I just wanted to clarify that one,

just so --

THE COURT: No, no. That --

MR. SHIFF: -- someone doesn't have to stay up all

night tonight.

THE COURT: No. No. That's -- there's no need.

MR. SHIFF: Right.

THE COURT: There's no need for that.

MS. MILLER: Your Honor, Atara Miller from Milbank

Tweed on behalf of Midland.

I'm not sure why the default interest hearing has to

necessarily roll with the disclosure. I think it was in some

ways coincidental that it ended up being together. We're

happy to have a default interest hearing proceed as quickly



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Confidential-39

as we possibly can.

MR. BASTA: Your Honor, it's Paul Basta for the

debtors.

I don't -- we don't believe that makes any sense for

the following reason: This was part of the negotiation on

the bidding procedures and --

THE COURT: I thought it was related to that.

MR. BASTA: And it was related. And the reason why

it's related to that is, like why fight about something that

you don't need to fight about because, if the auction doesn't

yield another bid than the GIC bid, then why are we fighting

about default interest. It's going to be likely to be

rendered moot. In other words, the outcome of the auction is

a significant input for the determination of the Court.

That's why it was supposed to be commensurate with the

disclosure statement hearing.

THE COURT: That was my understanding. And I'm sure

the parties have other things to do than to fight about

things that may not have to be resolved. And I will confess

that I have plenty of other things to do than to go down that

path, as well, so ...

And I know that there was a very delicate balance

struck in the bid procedures as to horse-trading, and I have

no desire to wade into that and upset the apple cart,

particularly in the first instance, before parties get a



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Confidential-40

chance to talk about it.

So I will wait for a proposed scheduling order on

that, rather than weighing in on it. It does seem to me

that, if there's a chance -- a significant chance that the

issue does not have to be litigated, then there's no reason

for me to deal with it.

And I understand in Bankruptcy Court that there are

definitely times when it is helpful and appropriate to give

what any district judge would consider a "wildly advisory

ruling."

(Laughter.)

THE COURT: It's certainly not something to do in

the first instance. So I'll steer clear of that now, and you

all can tell me how that works out, but I don't want to go

down that road if we don't have to.

All right. Anything else that we should chat about?

MR. BASTA: One second, Your Honor.

(Participants confer.)

MR. SHINDERMAN: (Via telephone). Your Honor, this

is Mark Shinderman. Can you hear me?

THE COURT: Yes.

MR. SHINDERMAN: Your Honor, if I may. Is Your

Honor's ruling about the timing predicate on Five Mile

agreeing to the DIP, as the debtors suggested?

THE COURT: I am repeating, essentially, if not



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Confidential-41

verbatim, as close as I could get in rendering this, what

debtors said in their papers, again with my intent not to

wade into how some of these details might get worked out.

So what I am saying is that I think any issues that

have been raised about good faith are, in many ways,

premature and can be remedied before they are ripe, through

an auction, through various different ways addressing it.

And I think, as you can tell, I laid out at least two that I

could think of. And so I'm trying not to weigh in on some of

the other details that may flow from that, except to the

extent that the parties have a -- have a chance to talk about

some of those things and work some of those things out and

find themselves at loggerheads.

But I think the idea is that no one asked me to

decide the issue without the one month -- there was an offer

to make it -- to adjourn it out a month. Given the history

of the case and the importance of GIC as the stalking horse

bidder, currently, I think the one month is wise, to make

sure that any issues relating to this are -- parties can

comment on them. And I wouldn't say they're fully cured,

because I don't think they were really ripe to be addressed

today, necessarily, but that any concerns I may have that

have been identified for me would be resolved.

So that's a long way of saying I'm not going to

answer your question.



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Confidential-42

(Laughter.)

MR. SHINDERMAN: Thank you, Your Honor.


MR. BUNIN: Your Honor, Marty Bunin on behalf of the

creditors' committee.

A very minor point. While you were reading your

bench ruling, in your conclusion the Midland allegations, I

think at one point you may have said "Midland" when you meant

Five Mile. In the conclusions section on --

THE COURT: Oh, all right. To the extent I did that

in reading this, what I would say is just call that to my

attention in the transcript, and we'll fix that. I think

everybody gets the gist.

I think the Midland allegations are -- I think as

conceded at the end of the hearing, are a non-starter. And I

think the issues as to -- as to the KSL issues, I think are -

- either can be addressed through the papering of people's

understanding of the current relationship or through some

additional disclosures, depending on how that -- they decide

to proceed.

All right. Anything else we should discuss?

MR. BASTA: Thank you, Your Honor.

THE COURT: All right. Thank you.

UNIDENTIFIED: Thank you, Your Honor.

THE COURT: And if you would do me the favor of --



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Confidential-43

well, let me ask it this way. When would you expect to be

able to get me a schedule? I only ask because I want to make

sure to block off the dates necessary for this case in the

calendars.

MR. BASTA: My guess is Monday at the latest.

THE COURT: All right. That would be fine. Thank

you very much.

MR. BASTA: Thank you.

(Proceedings concluded at 3:05 p.m.)

*****



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Documents

MSR Good Faith Bidder Opinion