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Waikiki settles with Marriott

by contributor Pat Holohan | Published July 11, 2012 at 12:11 PM

Bankrupt hotel operator M Waikiki LLC can look forward to a plan confirmation hearing after reaching a settlement with secured creditor Marriott International Inc.

Marriott counsel Carren B. Shulman of Sheppard Mullin Richter & Hampton LLP would say only that the amount of the settlement is "confidential."

Waikiki and former hotel manager Marriott have traded breach of contract allegations regarding a management agreement since before Waikiki's bankruptcy. Judge Robert J. Faris of the U.S. Bankruptcy Court for the District of Hawaii in Honolulu had estimated that Waikiki would owe Marriott $20.66 million in secured and unsecured claims.

The settlement stipulates that if the plan's effective date has not occurred by July 27, then Marriott must receive its payment July 30. Waikiki must also return all of Marriott's Edition-branded materials from the hotel.

There is not currently a confirmation hearing scheduled.

Waikiki announced its agreement in the July 2 filing of its fifth amended reorganization plan, which did not otherwise change the treatment of claims from its June 4 plan.

Marriott withdrew its own plan and objections to Waikiki's plans on July 5.

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

Wells Fargo Bank NA 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 creditor R.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 settled secured and unsecured claims would be paid in full.

For its $15 million secured claim, the Davidson Family Trust would 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 a further 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 repaid in full in 15 years. The loan would carry interest at 2% or the minimum rate required by the Internal Revenue Service to 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.

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 affiliate Marriott Hotel Services Inc. in the Supreme Court of the State of New York in 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 and Ian 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 sought the reinstatement of itself as manager, the turnover of property and damages.

The hotel filed for Chapter 11 protection on Aug. 31, 2011, when the secured debt it 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.

Debtor counsel William A. Brewer III of Bickel & Brewer could not be reached for comment.

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Tags: Carren B. Shulman | Judge Robert J. Faris | M Waikiki LLC | Marriott International Inc.

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Waikiki settles with Marriott

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