Archives

Published on:

17 May 2020
Click to see our category-killer experience with hotels. See also our distressed loan credentials. And click here for the latest blog articles on loan modifications, workouts, bankruptcies and receiverships, and here for The Lenders Handbook for Troubled Hotels.

 

Hotel Lawyer: Increasing Distressed Hotel Loans and Troubled Hotel Assets

Originally published in November 2008 on HotelLawBlog.com, then updated in 2010 for our Lenders Handbook for Troubled Hotels, we have updated this article through May 2020 to assist industry friends in dealing with distressed loans provoked by the COVID-19 crisis. 

How can a “special purpose entity” borrower ever file bankruptcy
if independent directors must approve the filing?
by
Jim Butler, Bob Kaplan, and Nick De Lancie

Since the mid-1990s, lenders on hotels and resorts have generally required their borrowers to transfer the asset being financed into a “single purpose” LLC or other “bankruptcy remote” entity sometimes respectively referred to as an “SPE” and “BRE.” The main feature of an SPE is that it owns only the single asset being mortgaged, is unlikely to become insolvent due to its own activities, and is generally protected from the effects of the insolvency of its affiliates. The main feature of a BRE is that filing bankruptcy is only a remote possibility because of various inherent or contractual legal requirements built into the very entity.

What is a bankruptcy remote entity? Why use one?

A BRE is an entity (usually an SPE) that has a structural layer of protection in its organic documents that makes it more difficult for the entity to seek bankruptcy protection. A number of approaches have been developed to create this “bankruptcy remote” structural layer.

Today, a BRE’s structural protection for the lender typically provides in its organic documents that in order to commence a bankruptcy case, approval must first be obtained from one or more independent directors or the equivalent, depending on the entity. Such a person must be independent of the borrower and is appointed by the lender, or approved by the lender. For simplicity, we will call such persons “independent directors.”

The lender expects that the independent director simply will not approve the entity’s commencement of any bankruptcy case. Thus, without a bankruptcy, the lender would be able to foreclose on the hotel or real estate without the delay and cost of bankruptcy.

Clashing fundamental principles – state corporate governance vs federal bankruptcy relief

At root, each BRE approach or strategy is based on the long-established, fundamental principle that, even though bankruptcy is a federal law matter, the entities in question are created under and governed by state law. Some believe that such corporations, limited liability companies, limited partnerships or other types of “corporate” entities can only be governed by the law of the state in which the corporate entity was organized. Therefore, the organic documents of the entity (adopted pursuant to that state’s law), govern who has the authority to decide that the entity will commence a bankruptcy case.

But this long-established principle of state law controlling corporate governance runs headlong into another long-established, fundamental principle of bankruptcy. The Bankruptcy Code (section 109(a)) expressly authorizes any “person” to file a bankruptcy petition. A person includes any corporation, limited liability company, and general or limited partnership. Waivers or attempts to contractually surrender this right are void as against public policy and, thus, unenforceable. CONTINUE READING →

Published on:

27 April 2020

Click to see our category-killer experience with hotels. See also our distressed loan credentials. And click here for the latest blog articles on loan modifications, workouts, bankruptcies and receiverships, and here for The Lenders Handbook for Troubled Hotels.

 

Hotel Lawyer: Increasing Distressed Hotel Loans and Troubled Hotel Assets

This article was published originally in November 2008 on HotelLawBlog.com and then updated in 2010 for our Lenders Handbook for Troubled Hotels. In light of the recent increase in distressed loans provoked by the COVID-19 crisis and resulting economic impact, we thought it might be important to bring the information current through April 2020.

Can a hotel ever be “single asset real estate” for bankruptcy purposes?
What is “SARE” and who cares?

by
Jim Butler, Bob Kaplan, and Nick De Lancie

Hotel Lawyers: Lender tips on forbearances, loan modifications, recapitalizations, receiverships, workouts, turnarounds, restructurings, and bankruptcies

CMBS lenders and others use SPEs for expedited remedies

Hotels, resorts, marinas, retail mixed-use, and other hospitality-related assets will likely continue to present challenges to lenders seeking expedited relief from bankruptcy stay provisions available to creditors in “single asset real estate” bankruptcy cases.

Since the mid-1990s, lenders on hotels, resorts, and other hospitality properties have generally required their borrowers to transfer the asset being financed into an entity (generally a corporation, limited liability company, or limited partnership) that was both “bankruptcy remote” (a “BRE”) and “special purpose” (also called “single purpose”) (an “SPE”). An SPE is an entity that owns only the asset being mortgaged, is unlikely to become insolvent due to its own activities, and is generally protected from the effects of the insolvency of its affiliates. A BRE is an SPE that has a further, structural layer of protection for the lender provided by provisions, such as the requirement for an independent director or manager who must approve the commencement of any bankruptcy case, that make its bankruptcy case more difficult.

Under the Bankruptcy Code, if a bankruptcy case involves “single asset real estate” (often called “SARE”), the proceedings will tilt greatly in favor of the lender/creditor secured by that SARE. Intuitively, then, an SPE that holds a single real estate asset would seem automatically to hold “single asset real estate” under the Bankruptcy Code. It is not, however, that simple.

This article will examine why this is important to lenders and borrowers, give an overview of the SARE determination, and provide some practical strategies.

The legal significance of SARE status (or not) for lenders

The determination that a borrower/debtor holds “single asset real estate” has important consequences for its bankruptcy case. In a SARE case, the creditor/lender secured by the real estate asset will be entitled to relief from Bankruptcy Code’s automatic stay as a matter of right unless the debtor does one of two things within 90 days (subject to extension) of commencing its case.

Under Bankruptcy Code section 363(d)(3), to avoid relief from the automatic stay being granted to a secured creditor (if it seeks it) with “single asset real estate” collateral, the debtor that holds that collateral must, within that 90 days, either:

  1. File a plan of reorganization in its case that has a reasonable possibility of being confirmed within a reasonable time; or
  2. Commence making monthly, interest-only payments to the secured creditor at the then-applicable non-default contract rate of interest on the value of the creditor’s interest in the SARE.

These are often difficult to accomplish unless the real estate asset is really viable and cash is flowing. CONTINUE READING →

Published on:

5 March 2020

See how JMBM’s Global Hospitality Group® can help you.
Click here for the latest articles on the coronavirus and here for the latest on force majeure.

Note: If you are an individual consumer with coronavirus-related travel issues, please do NOT contact us! We do not represent individual consumers. We advise businesses on major contracts, investments and financing. 

Coronavirus issues are likely to affect every business and industry, and the hotel industry is looking at an immediate and out-sized impact. JMBM partner Mark Adams deals with these issues across all industries on an international basis, and he has a deep involvement and understanding of the hospitality industry’s unique contracts, issues, customs and practices. In the second of his series of articles regarding the coronavirus, Mark discusses the importance of jurisdiction and contract wording when considering force majeure as a defense.
Coronavirus COVID-19 force majeure:
Contract provisions and governing law are important
by
Mark Adams

Force majeure provides an excuse for a party’s non-performance of its contractual obligations as a result of an extraordinary event or circumstance beyond the control of the parties, such as act of God, war, strike, riot, etc.

What law governs the contract? Common law or civil law principles?

Unless there is an express provision in the contract, force majeure does not exist as a standalone defense in common law jurisdictions such as the U.S. and the U.K. In civil law jurisdictions, such as France and Germany, however, force majeure is implied into every contract, unless the parties agree otherwise. In order to minimize unintended consequences, contracting parties in both jurisdictions include force majeure provisions in their agreements.

In common law jurisdictions, the general rule is strict liability for the breach of a contract. This reflects the principle of pacta sunt servanda (preserving the sanctity of the contract). But there are exceptions. Common law jurisdictions excuse performance when it is not practical and could only be done at excessive and unreasonable cost. In the U.S., the Restatement (Second) of Contracts § 261 (1981), states:

“Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”

In the U.K., the similar doctrine of “frustration of purpose” is likewise a defense to non-performance. Frustration of purpose occurs when an unforeseen event undermines a party’s principal purpose for entering into a contract such that the performance of the contract is radically different from performance of the contract that was originally contemplated by both parties. Whether under an “impracticable” or “frustration” jurisdiction, the standard for relief is a high one, and is subjective. That subjectivity can only be definitively resolved by litigation and judicial intervention.

Specify conditions short of “impracticable”

To avoid the uncertainty of such subjective standards, contracting parties in common law jurisdictions typically include force majeure provisions to specify events or circumstances that will excuse performance of contractual obligations by a party. Such specified force majeure events might not rise to the level of “impracticable” or “frustration.” By negotiating force majeure provisions, the parties can better allocate the consequences of non-performance as between themselves. For example, in a supply contract for the purchase of medical grade masks, if the manufacturer/seller is suddenly unable to timely deliver the masks to the buyer because of a trucking strike, the manufacturer could suffer the consequences of the substantially increased costs of delivering the masks by a private carrier. So long as the delivery costs are not prohibitively higher, the manufacturer will be liable for breach of contract if the manufacturer does not perform.

The doctrines of “impracticable” or “frustration” are of no avail in these circumstances. And even if they might be available, the application of them would have to be litigated. But if a properly worded force majeure provision is in the contract it could excuse performance in the event of trucking strikes, and the manufacturer would be off the hook. CONTINUE READING →

Published on:

3 March 2020

See how JMBM’s Global Hospitality Group® can help you.
Click here for the latest articles on the coronavirus and here for the latest on force majeure.

Note: If you are an individual consumer with coronavirus-related travel issues, please do NOT contact us! We do not represent individual consumers. We advise businesses on major contracts, investments and financing. 

In the article below, JMBM partner Mark Adams discusses the coronavirus in relation to force majeure provisions in contracts. This legal concept goes back centuries, but has become increasingly relevant as COVID-19 may be advanced by many in the coming days as a defense to breach of contract. This article is one of a series which will discuss the principles of force majeure and the commercial implications of the coronavirus.

We start with a brief explanation of the concept and trace its roots.
COVID-19 coronavirus as a force majeure defense to contractual non-performance
by
Mark Adams

One often doesn’t know the extent of one’s insurance coverage until a calamity occurs. So it is with force majeure provisions in contracts.

Typically, force majeure provisions are included in contracts to excuse a party from contractual obligations if some unforeseen event beyond its control prevents performance of its contractual obligations.

As of March 2, 2020, there have been 88,948 confirmed cases of this strain of the coronavirus (COVID-19) in 64 countries with 3,043 confirmed deaths. The first reported case of COVID-19 was just over two months ago on December 31, 2019 from Wuhan, China. The effects of this coronavirus have already prevented or delayed performance in countless agreements in numerous industries causing widespread commercial loss and business interruption. It is likely that travel restrictions, worker shortages, immigration quarantines, supply-chain disruptions, and event cancellations will worsen before they begin to recover. And now, those affected are dusting off their agreements to examine their force majeure provisions and determine whether they might cover a coronavirus event.

The concept of force majeure (meaning superior force) originated in the Napoleonic Code of 1804. The breaching party to an agreement was condemned unless their non-performance or delay in performance resulted from a cause that could not be imputed to them, and by a cause of a superior force or of a fortuitous occurrence. Today, most tribunals, both in common law and civil law systems, recognize that contractual performance that becomes impossible or commercially impracticable under certain contexts may be excused. That said, the words in the parties’ force majeure provision controls, and that provision is deemed to be the parties’ negotiated allocation of who bears the risks of particular catastrophic events as between them. CONTINUE READING →

Published on:

07 January 2020

See how JMBM’s Global Hospitality Group® can help you.

Click here for the latest articles on Labor & Employment.
California hotel owners and independent operators must provide
human trafficking awareness training

California SB 970 went into effect January 1, 2020, requiring California hotel and motel employers to provide at least 20 minutes of prescribed training and education regarding human trafficking awareness to employees who are likely to interact or come into contact with victims of human trafficking.

JMBM’s labor and employment lawyers have represented the hospitality industry for decades and can provide effective training for employees, as well as develop policies and procedures that protect employers who are implementing programs in human trafficking awareness.

Marta Fernandez, a partner in JMBM’s Labor and Employment department and a senior member of JMBM’s Global Hospitality Group®, alerted hotel owners and independent operators of the new law shortly after it was signed by the governor in 2018.

CONTINUE READING →

Published on:

24 July 2019

Click here for the latest articles on Resort Fee Litigation.

Note: If you are a consumer with a Resort Fee issue, please do NOT contact us! We do not represent consumers with complaints against hotels. We advise hotel industry clients on litigation, compliance and risk mitigation strategies. We have provided counsel on Attorney General investigations. We understand the best defenses to consumer and government agency claims that Resort Fee practices constitute violations of state consumer protection actions, the Federal Trade Commission Act and other causes of action based on misrepresentation, consumer fraud, and unfair business practices.

Another state Attorney General joins in the Resort Fee litigation – this time suing Hilton

On July 23, 2019, Attorney General Doug Patterson filed a lawsuit against Hilton, alleging that it has engaged in deceptive and misleading pricing practices and failure to disclose fees in violation of Nebraska’s consumer protection laws. The complaint seeks injunctive relief to force Hilton to advertise the true prices of its hotel rooms, provide damages for Nebraska consumers, statutory civil penalties of $2,000 for each violation, and costs for investigation and legal action. Click here to see the Nebraska complaint against Hilton.

This new lawsuit is particularly significant because it was filed just two weeks after the District of Columbia filed a similar suit against Marriott.

A new template for other Attorneys General and plaintiff’s class action lawyers?

Many industry observers believe that the two recent lawsuits against Marriott and Hilton provide a virtual “template” for other AGs and class action lawyers to mark up and file – potentially against all hotel franchise companies, hotel operators, and hotel owners involved with any hotel that has used Resort Fees or other mandatory fees or charges imposed on all hotel guests which are not included in the initially quoted room rate.

The conduct complained of in the DC and Nebraska lawsuits traces the pattern outlined by the January 2017 FTC Report as deceptive and misleading under the FTC Act and most state consumer protection laws (that are based on the FTC Act). Although these first two suits are against big hotel companies, they are just at the top of the pyramid and provide high-profile examples of targets for plaintiffs. Similar actions would likely exist against every other brand, operator or owner of a hotel using undisclosed Resort Fees in their advertised room rates. CONTINUE READING →

Published on:

09 July 2019

Click here for the latest articles on Resort Fee Litigation.

Note: If you are a consumer with a Resort Fee issue, please do NOT contact us! We do not represent consumers with complaints against hotels. We are part of the fabric of the hotel industry and are committed to informing, educating and assisting players in the hotel industry.

Hotel Lawyer: We hate to say “we told you so” on Resort Fee litigation

We have been watching the Resort Fee issue for several years. We have advised clients on litigation, compliance and risk mitigation strategies. We have provided counsel on Attorney General investigations. We understand the best defenses to consumer and government agency claims that Resort Fee practices constitute violations of state consumer protection actions, the Federal Trade Commission Act and other cause of action based on misrepresentation, consumer fraud, and unfair business practices.

We have cautioned that consumer frustration over this issue is very high, and government agencies have periodically shown significant interest in jumping on a populist bandwagon. But today, it looks like the situation may have finally reached a turning point.

Hotel Resort Fees litigation back in the news

On July 9, 2019, the Attorney General for the District of Columbia sued Marriott International in Superior Court for the District of Columbia over its policies and practices regarding “Resort Fees” and “drip pricing.” The lawsuit says that Marriott’s use of Resort Fee pricing misrepresents material facts (and tends to mislead consumers), and is an unlawful trade practice that violates the District’s Consumer Protection Act.

Resort Fees is a shorthand expression for all mandatory fees and charges imposed by a hotel on its guests which are not included in the quoted room rate. They may have a variety of names such as resort fees, service fees, amenity fees, destination fees, surcharges or otherwise. But the common feature is that they are non-optional charges to the guest which are not included in the initially quoted room rate.

Copy of the complaint in DC vs. Marriott

Click here to view a copy of the complaint.

Potential importance of this Resort Fee case

Resort Fees have been around since at least 1997, but by 2017 they were estimated to have grown to more than $2.7 billion. They seem to be gaining greater popularity with hoteliers and continue to be a top annoyance for hotel guest. The practices the new lawsuit complains of are widely used throughout the industry by a large number of hotel brands and operators.

While some hotel companies may seek to distinguish their practices from those of Marriott in this case, we believe that most Resort Fee cases will present similar liabilities, challenges and compliance problems that Marriott will face.

CONTINUE READING →

Published on:

28 May 2019

It’s hard to believe that another Meet the Money® is in the rear view mirror, and that we have our 30th year on the horizon in 2020! This year’s conference was another few days of energetic deal-making, networking and discussions about the current state of the industry.

Our focus at Meet the Money has always been financing and deals – connecting providers and consumers for profitable partnerships. It’s one of our goals as hotel lawyers, too; find out more about how the Global Hospitality Group® can help you.

Hotel Business has posted a video sharing some of my thoughts on hotel financing in the current market. I think this is a good time in the industry, with the potential for good deals and smooth sailing for the next couple of years. Watch the video below for the rest of my comments, and a quick look at this year’s conference.

CONTINUE READING →

Published on:

Chinese-Photo-1-2

Recently, a Chinese government delegation visited Jeffer Mangels Butler & Mitchell LLP.  The delegation included some of the highest-ranking officials from a top Chinese government agency – “China State Administration of Foreign Exchange” – an agency that directly oversees the investment of $3 trillion of China’s foreign reserve. CONTINUE READING →

Published on:

6 December 2018

Hotel Lawyers developing hotels

Los Angeles—The Global Hospitality Group® of Jeffer Mangels Butler & Mitchell LLP is pleased to announce its client Ari Pearl’s development of the Diplomat Golf & Tennis Club in Florida into the SLS Resort Residence & Marina Hallandale Beach. The $220 million mixed-use project will include 240 hotel rooms, a 50-unit condo hotel, 250 branded apartments, a Katsuya restaurant and S Bar, and an 18-hole championship golf course.

JMBM Partner David Sudeck led the Global Hospitality Group team, which included Robert E. Braun and Associate Caleb Gilbert. JMBM attorneys represented Pearl’s company, PPG Development, in connection with residential and hotel-related management and licensing agreements.

“This is an exciting project for PPG Development,” said Sudeck. “We look forward to supporting its future success.”

Hotel Lawyer insights on hotel development transactions
The hotel lawyers of JMBM’s Global Hospitality Group® provide unsurpassed experience and resources to hotel owners, developers and capital providers — developing, buying, selling, financing and branding hotels. Based on the Group’s experience with more than $87 billion of hotel transactions and more than 3,900 hotels, these resources are valuable for veteran dealmakers and first-time hotel buyers and sellers. Look at some of the materials available on HotelLawyer.com and see how this experience can help you:

Contact Information