By Joseph Checkler
NEW YORK--Lawyers for a group of well-known luxury resorts
controlled by hedge-fund manager John Paulson Monday fought an
investment firm's attempt to derail the resorts' $1.5 billion
reorganization plan.
At a contentious hearing in what has almost always been a
contentious Chapter 11 case, a lawyer for lender Five Mile Capital
Partners LP grilled a financial adviser to the resorts over what
would happen if the company were to liquidate.
The lawyer, Kasowitz, Benson, Torres & Friedman LLP's David
M. Friedman, asked company adviser Saul Burian of Houlihan Lokey
Capital Inc. about whether a controversial tax issue would have
existed if the resorts simply liquidated. Unlike most other
creditors in the case, Five Mile is set to get none of the proceeds
from the $1.5 billion sale of the resorts to the real-estate arm of
Singapore's sovereign wealth fund, and has been fighting the sale
vehemently.
At the hearing, which will continue Tuesday, the resort group is
asking Judge Sean H. Lane of U.S. Bankruptcy Court in Manhattan to
confirm a proposal to sell its four remaining resorts to the
Singapore fund, called GIC RE. But Five Mile is railing against the
plan, saying it created a $331 million tax liability not disclosed
to anyone.
Five Mile argues the money, which the Internal Revenue Service
wants to go after, wouldn't be owed if the resorts pursued a
different path out of bankruptcy. Five Mile is separately going
after the GIC RE sale on appeal, saying it was done in bad faith
because another firm was encouraged not to compete for the
properties.
A lawyer for the resorts, officially called MSR Resort Golf
Course LLC, said Five Mile is simply trying to stall the case
because it isn't getting any of its money back for a $50 million
mezzanine loan it made before the bankruptcy.
"The concept that anybody in this deal did not know about this
tax is completely outrageous," said Kirkland & Ellis LLP's Paul
M. Basta, a lawyer for the resorts. "Completely outrageous."
Dechert LLP's Michael J. Sage, a lawyer for GIC RE, said Five
Mile had already agreed to the terms of the deal. "A deal is a
deal, an order's an order, and enough is enough," Mr. Sage
said.
The hearing will resume Tuesday, with Five Mile and the IRS
expected to fight MSR's bid to get Judge Lane's blessing on the
plan.
In December, no one bid against Singapore at a scheduled auction
of the resort group's properties: Maui's Grand Wailea Resort Hotel
& Spa, the La Quinta Resort & Club in La Quinta, Calif.;
the Arizona Biltmore in Phoenix; and the Claremont in Berkeley,
Calif.
The $1.5 billion deal includes a $1.1 billion cash payment for
the properties and $360 million in debt forgiveness. The resort
owner will pay 100% of the claims of Hilton Worldwide and Marriott
International Inc. (MAR), which have managed several of the
resorts. The owners of some of the resorts' so-called mezzanine
debt will get 100% of their money back, while another tier of those
lenders will get between 8% and 68%. Five Mile stands to get
nothing for its junior mezzanine loan.
The deal also includes the Great White Course, a Greg
Norman-designed golf course adjacent to the Doral Golf Resort &
Spa in Miami. A company controlled by Donald Trump in June bought
the Doral from Paulson for $150 million.
The resorts' trip through bankruptcy began in February 2011,
when Paulson teamed with Michael Ashner's Winthrop Realty Trust
(FUR) to seize the properties through a foreclosure proceeding.
Days later, the group put the resorts into Chapter 11 to avoid
paying more than $1.5 billion in senior debt.
Since the filing, the company has made several structural
changes, reshaping contracts with property managers Hilton and
Marriott, before preparing its resorts for the sale so it can repay
creditors.
To begin the hearing Monday, MSR lawyer Mr. Basta referred to
the length of the case, saying, "So we're here on confirmation, two
years later."
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Joseph Checkler at joseph.checkler@dowjones.com
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