HTML Document View

Full title: Reply Reply and Joinder of Monarch Alternative Capital LP in Support of the Debtors' Sale Motion (related document(s)334, 707, 770) Filed by Monarch Alternative Capital LP (Attachments: # 1 Certificate of Service) (Dehney, Robert) (Entered: 05/27/2021)

Document posted on May 26, 2021 in the bankruptcy, 7 pages and 0 tables.

Bankrupt11 Summary (Automatically Generated)

The Debtors in these chapter 11 cases, along with the last four digits of each debtor’s tax identification number, as applicable, are as follows: EHT US1, Inc. (6703); 5151 Wiley Post Way, Salt Lake City, LLC (1455); ASAP Cayman Atlanta Hotel LLC (2088); ASAP Cayman Denver Tech LLC (7531); ASAP Cayman Salt Lake City Hotel LLC (7546); ASAP Salt Lake City Hotel, LLC (7146); Atlanta Hotel Holdings, LLC (6450); CI Hospitality Investment, LLC (7641); Eagle Hospitality Real Estate Investment Trust (7734); Eagle Hospitality Trust S1 Pte Ltd. (7669); Eagle Hospitality Trust S2 Pte Ltd. (7657);UCCONT1, LLC (0463); UCF 1, LLC (6406); UCRDH, LLC (2279); UCHIDH, LLC (6497); Urban Commons 4th Street A, LLC (1768); Urban Commons Anaheim HI, LLC (3292); Urban Commons Bayshore A, LLC (2422); Urban Commons Cordova A, LLC (4152); Urban Commons Danbury A, LLC (4388); Urban Commons Highway 111 A, LLC (4497); Urban Commons Queensway, LLC (6882); Urban Commons Riverside Blvd., A, LLC (4661); and USHIL Holdco Member, LLC (4796).Granting Related Relief (D.I. 334) (the “Sale Motion”) and hereby joins, in part, EHT US1, Inc. and its affiliated debtors and debtors in possession (the “Debtors”) in response to the Objection of Q34, LLC to Motion of Debtors for Entry of Orders (I)Because the REA is an easement appurtenant to the property, and its primary nature is preservation of a property interest (not the imposition of ancillary maintenance, repair, and reimbursement obligations) it cannot be assumed or rejected as an executory contract under section 365 of the Bankruptcy Code, and the property should be acquired by the Purchaser subject to the REA.Thus, all claims arising from or related to breaches of the REA prior to the closing of the Stapleton Hotel and related property are responsibilities of the Debtors and, as an easement appurtenant to the land being acquired, Monarch intends for both itself and Q34 to be bound by the terms of the REA from and after such closing.

List of Tables

Document Contents

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ------------------------------------------------------- x : In re: : Chapter 11 : EHT US1, Inc., et al., : Case No. 21-10036 (CSS) : : (Jointly Administered) Debtors.1 : : Re: D.I. 334, 707 & 770 ------------------------------------------------------- x REPLY AND JOINDER OF MONARCH ALTERNATIVE CAPITAL LP IN SUPPORT OF THE DEBTORS’ SALE MOTION Monarch Alternative Capital LP, acting on behalf of one or more advisory clients and/or related entities, including Madison Phoenix LLC (the “Purchaser”), (collectively, “Monarch”) respectfully submits this reply and joinder in support of the Motion of the Debtors for Entry of Orders (I) Approving (A) Bidding Procedures, (B) Designation of Stalking Horse and Stalking Horse Bidder Protections, (C) Form and Manner of Notice of Sale, Auctions, and Sale Hearing, and (D) Assumption and Assignment Procedures, (II) Scheduling Auctions and Sale Hearing, (III) Approving (A) Sale of Substantially All of Debtors’ Assets Free and Clear of Liens, Claims, Interests, and Encumbrances, and (B) 1 The Debtors in these chapter 11 cases, along with the last four digits of each debtor’s tax identification number, as applicable, are as follows: EHT US1, Inc. (6703); 5151 Wiley Post Way, Salt Lake City, LLC (1455); ASAP Cayman Atlanta Hotel LLC (2088); ASAP Cayman Denver Tech LLC (7531); ASAP Cayman Salt Lake City Hotel LLC (7546); ASAP Salt Lake City Hotel, LLC (7146); Atlanta Hotel Holdings, LLC (6450); CI Hospitality Investment, LLC (7641); Eagle Hospitality Real Estate Investment Trust (7734); Eagle Hospitality Trust S1 Pte Ltd. (7669); Eagle Hospitality Trust S2 Pte Ltd. (7657); EHT Cayman Corp. Ltd. (7656); Sky Harbor Atlanta Northeast, LLC (6846); Sky Harbor Denver Holdco, LLC (6650); Sky Harbor Denver Tech Center, LLC (8303); UCCONT1, LLC (0463); UCF 1, LLC (6406); UCRDH, LLC (2279); UCHIDH, LLC (6497); Urban Commons 4th Street A, LLC (1768); Urban Commons Anaheim HI, LLC (3292); Urban Commons Bayshore A, LLC (2422); Urban Commons Cordova A, LLC (4152); Urban Commons Danbury A, LLC (4388); Urban Commons Highway 111 A, LLC (4497); Urban Commons Queensway, LLC (6882); Urban Commons Riverside Blvd., A, LLC (4661); and USHIL Holdco Member, LLC (4796). The Debtors’ mailing address is 3 Times Square, 9th Floor New York, NY 10036 c/o Alan Tantleff (solely for purposes of notices and communications).

1

Assumption and Assignment of Executory Contracts and Unexpired Leases, and (IV) Granting Related Relief (D.I. 334) (the “Sale Motion”) and hereby joins, in part, EHT US1, Inc. and its affiliated debtors and debtors in possession (the “Debtors”) in response to the Objection of Q34, LLC to Motion of Debtors for Entry of Orders (I) Approving (A) Bidding Procedures, (B) Designation of Stalking Horse and Stalking Horse Protections, (C) Form and Manner of Notice of Sale, Auctions, and Sale Hearing and (D) Assumption and Assignment Procedures, (II) Scheduling Auctions and Sale Hearing, (III) Approving (A) Sale of Substantially All of Debtors’ Assets Free and Clear of Liens, Claims, Interests and Encumbrances, and (B) Assumption and Assignment of Executory Contracts and Unexpired Leases, and (IV) Granting Related Relief (D.I. 707) (the “Q34 Objection”). In further support of this reply and joinder, Monarch respectfully states the following: 1. Monarch joins in the Debtors’ Omnibus Reply in Support of Motion Seeking Entry of Orders Approving (A) Sale of Substantially All of Debtors’ Assets Free and Clear of Liens, Claims, Interests, and Encumbrances, and (B) Assumption and Assignment of Executory Contracts and Unexpired Leases (D.I. 770) (the “Reply”) and incorporates all of the facts and arguments set forth in section IV of the Reply, except the arguments in paragraphs 66-67, as if fully set forth herein. Specifically, Monarch disagrees with the Debtors that the Related Obligations2 are executory and that the REA is executory and, at the same, an easement running with the land. 2. In addition to, or in alternative to, the reasons explained in the Reply, the Debtors are not required to assume the REA and assign it to the Purchaser for a simple 2 Capitalized termed used but not defined herein shall have the meanings ascribed to them in the Sale Motion, the Q34 Objection or the Reply.

2

reason—the REA itself is a covenant that runs with the land granting property interests, and those property interests are a series of one-way and reciprocal easements appurtenant to the acquired property, which are not subject to rejection or assumption under section 365 of Title 11 of the United States Code (the “Bankruptcy Code”). Labelling the REA an executory contract, as opposed to a real property interest that contains ancillary contractual covenants, is not only inconsistent with the primary nature of the REA, but it would also give Q34 a windfall in the form of cure costs that it is not entitled to receive—both in the amount of its claim and the timing of payment of such claim. 3. There is no dispute that the REA is a covenant that runs with the land. See Q34 Objection ¶18. However, Q34’s argument that the REA is executory even though the REA grants easements that run with the land misinterprets the law. Covenants that run with the land that are contractual obligations and executory in nature can be assumed or rejected, but covenants that run with the land that are property interests are non-executory and not subject to section 365 of the Bankruptcy Code. See In re Extraction Oil & Gas, 622 B.R. 608, 623 (Bankr. D. Del. 2020) (“[T]he Court concludes that these covenants that run with the land are not rights to the use of land, but contractual obligations on others that may be enforced against parties not bound by privity of contract but, rather, through privity of estate. Rejection will relieve the Debtors of all future performance obligations to deliver its oil to the Rejection Counterparties for transportation services (or pay any fee) . . . .”). 4. The REA is clearly an easement that is a property interest to the use of the land rather than a contractual obligation and thus cannot be assumed or rejected. Indeed, Q34 admits in its objection that the “reciprocal easements granted in the REA are property interests.” Q34 Objection ¶ 37. Moreover, as distinguished from contractual obligations,

3

the REA grants easements burdening the land and requires enforcement through “an injunction to specifically enforce the performance of [an] obligation.” REA § 18(b). See Extraction, 622 B.R. at 622-23 (“[A]n easement is a burden on the land whereas a contractual obligation is a burden on the owner of the land. Thus an easement must be enforced with an injunctive type action and a contractual dispute is an action for money damages.” (footnotes omitted) (emphasis in original)). 5. As Q34 admits, Q34 cannot be compelled to accept a money judgment. Q34 Objection ¶¶ 50-52. Since the parties cannot cancel, rescind or otherwise terminate the REA, or halt performance of its own obligations, even if a party breaches, obligations under the REA continue into perpetuity such that monetary damages would be an inadequate remedy for any breach. See REA § 18(d). The lack of any provision in the REA providing for liquidated damages for a breach, including for the deemed prepetition breach of the REA if the Debtors reject it, further supports the non-executory nature of the REA. See Extraction, 622 B.R. at 624 (“[T]he TSAs explicitly provide for a specific amount of monetary damages to remedy a breach of the alleged real covenants. Consequently, the Rejection Counterparties will be fully compensated for the deemed prepetition breach of their contracts with an unsecured claim for money damages, pursuant to section 365.”); see also Southland Royalty Co. v. Wamsutter LLC (In re Southland Royalty Co.), 623 B.R. 64, 89-90 (Bankr. D. Del. 2020) (“With respect to the continued enforcement of any real covenants in the rejected L63 Agreement against subsequent purchasers of the Wamsutter Assets, it appears to the Court that the purpose of the L63 Dedication will be satisfied by Wamsutter’s bankruptcy claims for fees.”).

4

6. Q34 is also incorrect that there are material remaining obligations to be performed under the REA. See Q34 Objection ¶¶ 27, 37; Spyglass Media Grp., LLC v. Bruce Cohen Prods (In re Weinstein Co. Holdings LLC), --- F.3d ----, 2021 WL 2023058, at *4 (3d Cir. May 21, 2021) (“[T]he test for an executory contract is whether, under the relevant state law governing the contract, each side has at least one material unperformed obligation as of the bankruptcy petition date.”). As evidenced in the perpetual nature of the easements, the inability of either party to terminate the REA, the express intention to bind all successors and assigns, and the injunctive relief for a breach, the primary nature of the REA is the preservation of a land interest, the easements. See Water Ski Mania Estates Homeowners Ass’n v. Hayes (In re Hayes), 2008 WL 8444812, at *10 (B.A.P. 9th Cir. Mar. 31, 2008) (“[A]lthough [real] covenants contain the characteristics of both a contract and an interest in land, the primary nature of such covenants is preservation of a land interest, not future duties in contract.”) (citing Gouveia v. Tazbir, 37 F.3d 295, 298-99 (7th Cir. 1994)). Contractual obligations that may arise under the REA, such as those related to maintenance, repair, and reimbursement of costs, are merely ancillary to the preservation of the easements and have no effect on whether the REA is executory. Id. (“Although there will almost always be some incidental continuing obligations under a [real] covenant, those duties were not the kind of obligations Congress intended to impact in enacting § 365.”) (citing Gouveia v. Tazbir, 37 F.3d 295, 298-99 (7th Cir. 1994)); cf. In re Case, 91 B.R. 102, 104 (Bankr. D. Colo. 1988) (concluding that a declaration was a covenant running with the land that granted ownership rights to property and could not be rejected even though there were contractual obligations to pay assessments under the declaration).

5

7. Because the REA is an easement appurtenant to the property, and its primary nature is preservation of a property interest (not the imposition of ancillary maintenance, repair, and reimbursement obligations) it cannot be assumed or rejected as an executory contract under section 365 of the Bankruptcy Code, and the property should be acquired by the Purchaser subject to the REA. 8. As section 365 of the Bankruptcy Code is inapplicable, Q34’s assertion that the Purchaser must cure the Debtors’ defaults under the REA is unfounded. Claims that arise under the REA prior to the acquisition of property are not the burden of the Purchaser. See Monarch Midstream, LLC v. Badlands Production Co. (In re Badlands Energy, Inc.), 608 B.R. 854, 876 (Bankr. D. Colo. 2019) (“[A] subsequent owner of land burdened by a real covenant takes subject to the covenant, but is not liable for his predecessor’s breach . . . .”); see also U.S. v. Chrysler Corp., 1990 WL 127160, at *4 (D. Del. Aug. 28, 1990) (“A purchaser of assets usually is not liable for the acts for its predecessor or the seller organization . . . [except] when the purchasing corporation expressly or implicitly agrees to assume the liabilities of the seller; when the transaction amounts to a consolidation or merger; when the new corporation is a continuation of the predecessor or seller corporation; and when the transaction is fraudulent.”). Thus, all claims arising from or related to breaches of the REA prior to the closing of the Stapleton Hotel and related property are responsibilities of the Debtors and, as an easement appurtenant to the land being acquired, Monarch intends for both itself and Q34 to be bound by the terms of the REA from and after such closing. 9. Monarch hereby reserves its right to join in and support the arguments of other parties, in writing or at the hearing to consider the Sale Motion and adopt any

6

arguments and/or authorities cited by other parties. Monarch also reserves the right to supplement this reply and joinder as more information becomes available to Monarch between the date hereof and the date of the hearing to consider the Sale Motion. WHEREFORE, Monarch respectfully requests that the Court (i) overrule the Q34 Objection on the basis that the REA is not an executory contract, (ii) grant the Sale Order and the relief requested therein and (iii) grant such other and further relief as is just and proper. Dated: May 27, 2021 MORRIS, NICHOLS, ARSHT & TUNNELL LLP /s/ Robert J. Dehney Robert J. Dehney (No. 3578) Andrew R. Remming (No. 5120) Michelle M. Fu (No. 6661) 1201 North Market Street Wilmington, DE 19899-1347 Telephone: (302) 351-9353 Facsimile: (302) 425-4673 Email: rdehney@morrisnichols.com aremming@morrisnichols.com mfu@morrisnichols.com - and - WEIL, GOTSHAL & MANGES LLP Gary T. Holtzer (admitted pro hac vice) Gabriel A. Morgan (admitted pro hac vice) Chase A. Bentley 767 Fifth Avenue New York, NY 10153-0119 Telephone: (212) 310-8000 Facsimile: (212) 310-8007 Email: Gary.Holtzer@weil.com Gabriel.Morgan@weil.com Chase.Bentley@weil.com Counsel to Monarch Alternative Capital LP

7