The strategies deployed by Aloft Miami Brickell Hotel to recover from operational hiccups during the pandemic and fend off an aggressive lender seeking to foreclose on the property can bring value to all hotel owners and operators facing similar situations. Specifically, Aloft used bankruptcy to effectively force its secured lender to collaborate and find a path forward when negotiations seemed to be going nowhere.
Contributed by Joe Pack and Jessey Krehl, Pack Law, Miami, Florida
First, some background: Aloft is a Marriott International branded hotel in Miami that is owned and operated by Mary Brickell Village Hotel, LLC. The hotel opened its doors in summer 2013 and faced a (seemingly) insurmountable challenge as the COVID-19 pandemic resulted in travel and government restrictions, destroying cash flow. Facing these struggles and the associated decline in revenue that came with them, the hotel eventually found itself behind on its mortgage payments, with a lender unwilling to negotiate (even while holding months’ worth of payment reserves) and facing an eventual foreclosure action.
The greatest hurdles facing the hotel in the foreclosure case were neither unique nor easy to overcome. Namely, the accelerated debt meant that payment really was all-or-nothing (and if nothing, lose the hotel). In a similar vein, however, the loan document contained an arduous (but nevertheless uncommon) prepayment penalty. While the applicability of prepayment penalties in the discretionary default context under Florida is seriously in question, a protracted litigation over some US$2.5 million prepayment fee demanded by the lender on top of the US$17 million principal would only serve to further distract the hotel from its primary goal: recovering from the pandemic and effectively operating a hotel.
Faced with these challenges after months and months of pre-foreclosure negotiation difficulties, the hotel began to look for creative ways to resolve its two problems (acceleration and potential prepayment penalties). It found its answer in a potentially surprising place: bankruptcy court.
The bankruptcy case: in re Mary Brickell Village Hotel, LLC
Mary Brickell Village Hotel, LLC filed for chapter 11 bankruptcy on July 21, 2021, in the United States Bankruptcy Court for the Southern District of Florida, which immediately turned the tables. As a threshold matter, section 362 of the Bankruptcy Code imposes an automatic stay to all collection efforts the moment the bankruptcy petition is filed.
Due to this automatic stay, the foreclosure action was immediately put on hold and the bankruptcy case became the center not only of the hotel’s dispute with its lender, but the whole operation of the hotel itself. The beauty of chapter 11 is that management stays in place and operations continue in the ordinary course. Employees sometimes don’t even realize the bankruptcy proceeding is occurring but for the mandatory notices received in the mail.
While in bankruptcy, a business must pay its debts as they come due, and to continue to use any cash that is subject to a lender’s security interest, it must make so-called “adequate protection payments” to the secured lender to protect the lender against any loss as a result of the use of that cash. In this case, that meant returning to making the interest payments as if default had not occurred on the secured loan. Armed with much needed time, liquidity and (most importantly) tools available only in the Bankruptcy Code, the hotel began to execute its efforts to circumvent its two big problems and get back to operating as well as its principals knew it could.
Section 1124 of the Bankruptcy Code provides that, notwithstanding an acceleration clause in a loan agreement, a creditor’s claim is not impaired under a proposed plan of reorganization if, pursuant to the plan, the debtor (1) cures any defaults under the loan agreement, (2) reinstates the loan’s original maturities, (3) compensates the creditor for any damages incurred as a result of “reasonable reliance” on the acceleration clause, and (4) does not otherwise alter the creditor’s rights. See 11 U.S.C. § 1124(2).
Where loans have not yet reached their original maturity date, courts have held that a borrower is legally entitled to “deaccelerate” those maturities under section 1124(2), effectively returning them to their pre-default status quo. E.g., In re Liberty Warehouse Assoc. Ltd., 220 B.R. 546, 549 (Bankr. S.D.N.Y. 1998); In re Ace-Texas, Inc., 217 B.R. 719, 727 (Bankr. D. Del. 1998).
Deacceleration through section 1124 was a key aspect of the hotel’s bankruptcy case, as this deacceleration and reinstatement renders a claim “unimpaired” under the Bankruptcy Code. When a claim is unimpaired under a bankruptcy plan, the claimholder is conclusively deemed to accept the plan of reorganization and is not afforded a chance to vote. 11 U.S.C. § 1126(f).
This is particularly advantageous in cases where a hotel is able to pay all of its other debts in full. Where the debtor-borrower’s plan contemplates fully paying all of its remaining non-loan debts (or separately settle them), it may be able to propose a full “unimpairment plan,” whereby it deacclerates any accelerated loans, pays all other claims in full, and proceeds to confirming its plan without the need to solicit votes on its plan at all. This was the case in the Aloft Miami Brickell Hotel bankruptcy, where the hotel proposed a full unimpairment plan after less than a month in bankruptcy.
With its plan on file and with its legal entitlement to deaccelerate its loan, the payment of the prepayment fee was off the proverbial table (as the bankruptcy court preliminarily put it to the lender at a hearing on August 18, 2021, arguing that a prepayment fee should apply to a loan that would be deaccelerated and reinstated instead of prepaid was likely to be a “losing argument”).
Because the plan was a total unimpairment plan, the hotel was able to completely avoid the costly (and sometimes uncertain) process of mailing out ballots and soliciting votes on its plan—it was ready to confirm, the only question was the amount it would have to pay to the lender to cure its prior defaults.
In layman’s terms, this meant that, so long as the defaults could be “paid up,” the borrower could force reinstatement of the loan under the bankruptcy code as it existed before default and acceleration.
The hotel and its lender ultimately resolved to attend a mediation to answer the question of what that “cure amount” would be. It is worth noting however, that the hotel could have put forward its plan with some maximum cure amount in escrow so it could go to confirmation even without this consensual agreement.
In the end, the Aloft Miami Brickell Hotel bankruptcy can serve as a blueprint for operationally successful hotels that are struggling to get out ahead of their debts stemming from prior operational hiccups. The trade vendors were paid in full, the hotel’s owners and management structure were able to stay in place, and the mortgage was deaccelerated and reinstated on its original, manageable terms.
In a world where far too many hotels are primed for success if they could just overcome the aftermath of their pandemic woes, it is possible that bankruptcy can be a surprising, creative solution to a whole host of financial problems that seem to have no answer.