Waikiki, Marriott ready final plan arguments

A Honolulu judge will soon rule on whether hotel owner M Waikiki LLC can check out of Chapter 11 -- and under what terms.

Waikiki and former hotel managerMarriott International Inc.have clashed since before the debtor's bankruptcy, with the parties trading breach of contract allegations regarding the management agreement between them. The adversaries each submitted rival reorganization plans for the owner of the Modern Honolulu, a 353-room luxury hotel formerly known as the Waikiki Edition.

According to Marriott counselCarren B. ShulmanofSheppard Mullin Richter & Hampton LLP, Judge Robert J. Faris of the U.S. Bankruptcy Court for the District of Hawaii in Honolulu presided over a confirmation hearing from June 1 to June 8. Marriott and Waikiki have until June 22 to file post-confirmation briefs, and Faris will subsequently rule on whether one or both of the plans are feasible.

Faris also will determine the validity and size of any claim Waikiki may have against Marriott for its alleged breach of the management agreement. A hearing on the matter is set for an undetermined date in July, Shulman said.

She added that if Faris confirmed Marriott's plan for the debtor, the Bethesda, Md., hospitality company would drop all litigation against the debtor, as Marriott would receive Waikiki's equity under the plan. On the other hand, if the judge confirmed the Waikiki plan, Marriott would continue pursuing legal actions against the hotel owner.

Waikiki has already won an apparent victory on a different front, though, with Faris estimating on June 7 that Marriott's secured and unsecured claims in the case total $20.66 million. Marriott initially had asserted total claims of $73.06 million before cutting them to an estimated $38.8 million.

It was unclear when the judge might make a final ruling on the amount of the claims or if a decision would be contained in his confirmation order.

Debtor counsel William A. Brewer III ofBickel & Brewerthrough a spokesman called the claims estimate a "significant victory."

The claims valuation is critical for Marriott, as Waikiki's total debt was the subject of Marriott's objection to the debtor's reorganization plan.

Marriott's objection, filed ahead of the confirmation hearing, alleged that Waikiki's plan was not feasible because it would leave the San Diego company with more secured debt than it could handle. The debt also includes $114.9 million owed toWells Fargo Bank NA.

Waikiki filed a third amended reorganization plan on June 4 after the objection from Marriott.

Under the plan, priority tax and secured tax claims would be paid in full.

Wells Fargo would receive $30 million on the effective date of the plan as well as a new note for the balance, with monthly interest payments of 6.5% per annum that would mature in five years. A $5 million interest reserve also would be funded on the effective date.

Secured creditorR.D. Olson Construction, owed $1.83 million, would receive $1.43 million in cash on the effective date and a note bearing 5% per annum interest from June 1, 2011, until paid in full.

Marriott's secured and unsecured claims would be paid in full.

For its $15 million secured claim,Davidson Family Trustwould receive 33.7% of new senior Class 1 units in the reorganized debtor. The creditor would receive an additional 1.5% of Class 1 units for its $845,000 unsecured claim and an additional 64.7% of the units for providing $54.56 million on the effective date to fund the plan. (Court papers did not explain if another creditor would receive the remaining 0.1% of Class 1 units.)

Davidson would also provide an $18.86 million exit loan, which would be paid in full in 15 years. The loan would carry interest at 2% or the minimum rate required by theInternal Revenue Serviceto avoid imputation of interest income.

Miscellaneous secured and general unsecured claims would be paid in full.

The unspecified claim of Aqua Hotels & Resorts would be paid in full once settled. An Aqua unit manages the Modern Honolulu.

Holders of Class A, B, and C equity interests in the debtor would receive new Class A, B, and C interests, respectively.

Marriott filed its own reorganization plan on April 2, basing its treatment of creditors on its valuation of its own claims.

Under the plan, Marriott would receive 100% of the equity in a reorganized Waikiki in exchange for its claims. Marriott would contribute cash in an amount sufficient to fund the plan, pay secured and unsecured claims in full and establish reserves to satisfy the outcome of disputed claims.

Existing equity interests would be canceled.

Waikiki bought its hotel for $112 million in July 2006 and spent $138 million on renovations, court documents show. Before the acquisition, the hotel was operated as the Renaissance Ilikai Waikiki.

In 2008, Waikiki and Marriott entered into a management agreement and a technical services and pre-opening agreement related to the hotel's design.

During the construction process the debtor experienced cost overruns, which it alleged in court papers were "largely the fault of Marriott" because of a lack of design standards and inattention to the project. From its opening in September 2010 through August 2011, the hotel lost more than $8.4 million. Waikiki asserted Marriott missed its financial projections by a wide margin, failed to control expenses and failed to attract customers, causing the hotel to underperform.

On May 26, 2011, Waikiki sued Marriott affiliateMarriott Hotel ServicesInc. in the Supreme Court of theState of New Yorkin Manhattan, asserting the manager had materially breached the agreement with Waikiki by failing "miserably" to operate the hotel in a reasonable and prudent fashion, court documents show.

Waikiki also charged Marriott and co-defendants I.S. International LLC andIan Schrager, Marriott's partner in the new Edition brand, with breach of fiduciary duty and negligent misrepresentation. The hotel owner sought compensatory damages, the disgorgement of profits and a declaration of default under the management agreement.

Waikiki terminated the management agreement and fired Marriott as hotel manager on Aug. 28, 2011, court documents show. Waikiki removed all Marriott staff from the hotel early in the morning with the aid of 50 hired security officers in what Marriott termed a "sucker punch" in court papers.

The hotel hired Modern Management Services LLC, an affiliate of Aqua Hotels & Resorts, as interim hotel manager. Modern Management is still in place, according to court papers.

Marriott struck back with its own complaint on Aug. 30, 2011, alleging Waikiki breached the management agreement through its actions, in the process depriving Marriott of compensation and harming its reputation.

Waikiki "could easily have sought an injunction ejecting Marriott as operator of the hotel. Instead, [Waikiki] elected to evade legal process, and under cover of darkness, [it] stormed the hotel," Marriott said.

It sough the reinstatement of itself as manager, the turnover of property and damages.

The hotel filed for Chapter 11 protection on Aug. 31, 2011, when its secured debt owed to Wells Fargo and the Davidson Family Trust matured, according to court documents. The filing also prevented Marriott from fulfilling a temporary restraining order issued the same day in New York Supreme Court, which would have restored it as hotel manager.

Waikiki said the hotel, which has historically operated at a loss, has improved its performance under the new management.

Alexander Widellof Bickel and Brewer, Patrick Neligan of Neligan Foley LLP andSimon KlevanskyofKlevansky Piper LLPare also debtor counsel.

Shulman andAlan Feldof Sheppard Mullin andSusan TiusofRush Moore LLPrepresent Marriott.