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Barnes Bay judge takes issue with creditor treatment

by Hayley Kaplan | Published September 27, 2011 at 5:16 PM

A Delaware judge has denied confirmation of bankrupt Barnes Bay Development Ltd.'s liquidation plan because he took issue with the treatment of individual creditors whose claims stem from purchase and sale agreements, or PSAs, according to a memorandum obtained by The Daily Deal.

Judge Peter Walsh of the U.S. Bankruptcy Court for the District of Delaware in Wilmington on Sept. 20 rejected the plan of the bankrupt owner of the Viceroy Anguilla Resort and Residences because he found the PSA creditors' classification under the plan "improper," the Sept. 23 memo read. Holders of the claims own residential property at the Viceroy Anguilla.

Despite revisions to the plan, Walsh also said he didn't see a reason for separating the PSA creditors into two classes, since the claims are similar in nature, according to the memo.

After denying confirmation, Walsh did order the debtor to file an amended liquidation plan by noon on Sept 21. No plan had been filed as of Tuesday, Sept. 27, however.

What was filed on Sept. 22 was a dismissal motion by PSA creditors Jonathan Simon and W.O. Viceroy I Ltd. The creditors asserted in court documents that since there appears to be no chance of successfully confirming a plan, Barnes Bay's case should be dismissed.

The official committee of unsecured creditors objected to the dismissal motion only on the grounds that the motion should be adjourned to allow the parties time to reflect on the court's rejection of the confirmation, court documents said.

A hearing on the dismissal motion has been scheduled for Oct. 3. The response deadline is Sept. 29.

Barnes Bay and its official committee of unsecured creditors filed a second amended modified liquidation plan on Aug. 19 in the hopes of addressing the PSA creditors' objections.

The debtor's original plan included three separate classes and treatments of PSA claims and divided the creditors depending on how much they were owed, which resulted in objections and confusion over the divisions.

Under the modified plan, PSA claims are divided into only two creditor classes instead of three. The modified plan also offers alternative treatment to the holders of PSA claims. PSA creditors can choose to receive cash, pursue the recognition of a secured claim or execute a new PSA.

Holders of PSA claims that choose cash would receive either 50% or 15% of their allowed claim, depending on the size of their claim, as opposed to 50%, 25% or 15% of their claim under the debtor's previous plan. The group holds a combined $52.81 million in unsecured claims.

An ad hoc group, consisting of 35 individuals who hold 16 PSA claims and are set to receive 15% of their allowed claim, filed an objection to the plan because of the "unjustified" disparity between the treatments of the two groups of PSA creditors.

The ad hoc group wanted the PSA creditors combined into one group, calling the separation of the PSA holders "unfairly discriminatory."

Several other PSA creditors filed individual objections, and U.S. Trustee Roberta A. DeAngelis also objected to the treatment of the PSA creditors.

Under the plan, general unsecured claims of between $8.5 million and $9.5 million would be paid in full without interest. Holders of intercompany claims and old equity interests would receive no recovery.

Walsh approved the plan's disclosure statement on July 6.

Starwood Capital Group won the debtor's assets at a July 27 auction with a $165 million credit bid. No other bidders attended the auction. The debtor had expected Starwood, owed $392 million in secured debt and $14 million in unsecured debt, to credit-bid its claims, which it did.

Starwood was granted relief from automatic stay, which would sign the title of the Viceroy Anguilla over to Starwood on Sept. 20.

Since Starwood was the winner of the public auction, failure to allow Starwood to claim its legal right to the resort would have had a negative effect on Barnes Bay's creditors, court documents said.

Because Starwood won the auction, its allowed secured claim was paid in full, and it waived any right to a distribution on its unspecified deficiency claim.

The PSA creditors, unsecured creditors and Starwood, by virtue of a deficiency claim, were the only creditors eligible to vote on the plan.

Starwood, the unsecured creditors and the PSA creditors receiving a 50% recovery voted in favor of the plan.

According to court filings, 82.68% of PSA creditors getting a 15% recovery voted to reject the plan's confirmation.

Barnes Bay conducted the auction without a stalking-horse bidder or any of the customary bid protections under Section 363 of the Bankruptcy Code, such as a breakup fee or expense reimbursement, because of restrictions in Anguillian law.

The Viceroy Anguilla sits on 35 acres and has more than 3,200 feet of beach frontage along both Barnes Bay and Meads Bay. The Caribbean resort has 166 beachfront and bluff-top villas, town homes and resort residences.

Barnes Bay opened the resort on a limited basis in late 2009 with 31 freestanding oceanfront villas and 34 oceanview residences. In 2010, the remaining 69 residences and 32 hotel rooms were completed along with four restaurants, two additional community pools and other amenities, including a 250,000-gallon reverse osmosis water purification plant and rooftop rainwater collection systems. Residences at the Viceroy Anguilla sell for $600,000 to $6.5 million apiece.

As of October 2010, buyers had signed up for 70% of the Viceroy Anguilla's units.

The Viceroy Anguilla was constructed on the site of the old Coccoloba Beach Resort. Barnes Bay noted that while attempts from previous owners to develop the location had ended unsuccessfully, the debtor hoped that a "new perspective" would work when it took over the property in 2004 and tried to redevelop it.

Starting from scratch, Barnes Bay began construction in 2005 and predicted a two-year build-out costing $144 million. Construction, however, proved to be far more difficult than anticipated "almost from the beginning."

Barnes Bay's building costs had ballooned to $327 million by January 2007, and for various reasons the company didn't finish the project until October 2010.

One of Barnes Bay's problems was a spat the company had with its construction workers. Noting Anguilla's small size and population, Barnes Bay said it had to recruit construction workers from abroad, namely India, on a temporary basis. Workers, however, complained of low pay and insufficient benefits, and a series of labor strikes ensued. Barnes Bay settled with the workers in November 2007, but the fight delayed construction.

The debtor suffered another setback when Hurricane Omar battered Anguilla in October 2008.

In total, the Viceroy Anguilla took almost five years to complete. As a result, Barnes Bay hasn't been profitable since the project began, leaving it with a massive pile of debt that it cannot service.

Barnes Bay filed for Chapter 11 on March 17, along with affiliates Kor Duo Investment Partners II LP and Kor Duo II LLC.

The Beverly Hills, Calif., debtor had $530.99 million in assets and $461.95 million in debts as of Dec. 31. It suffered a $13.65 million net loss on $16.72 million in revenue in 2010.

Barnes Bay has operated in bankruptcy through the use of both cash collateral and a $12.5 million debtor-in-possession loan from Starwood. Walsh approved final use of the funds on June 14. According to court documents, the debtor's DIP facility expires Sept. 30.

Charles Gibbs, Michael Cooley and Sara Wahl of Akin Gump Strauss Hauer & Feld LLP and Paul Heath and Chun Jang of Richards, Layton & Finger PA are debtor counsel.

Edward S. Weisfelner, Gordon Z. Novod and Andrew Dash of Brown Rudnick LLP and Steven K. Kortanek of Womble Carlyle Sandridge & Rice PLLC represent the creditors' committee.

Stuart M. Brown, Cynthia Moh and Richard Chesley of DLA Piper US LLP are counsel to Starwood.

William D. Sullivan of Sullivan Hazeltine Allinson LLC and John J. Monaghan and Diane N. Rallis of Holland & Knight LLP represent the ad hoc committee of PSA creditors.

Donald J. Detweiler and James C. Carignan of Pepper Hamilton LLP represent W.O. Viceroy and Jonathan Simon.

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Tags: bankruptcy | Barnes Bay Development Ltd. | U.S. Bankruptcy Court for the District of Delaware

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