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This action was before the court on a motion for a temporary restraining order (TRO) to enjoin the consummation of a proposed restructuring of a mortgage loan secured by certain resorts properties in Mexico and the Bahamas. Holders of more senior participations claim that the proposed transaction unfairly benefited the junior holder at the expense of the more senior holders in direct contravention of the terms of the agreements controlling the debt. The senior holders further claimed that if the proposed transaction was allowed to close, they would suffer irreparable harm through the loss of certain rights and guaranties under the new terms of the loan. The court concluded that the senior holders have stated colorable claims and made a sufficient showing that they would suffer imminent harm if the proposed transaction were allowed to close. Further, the court found that this potential irreparable harm outweighed the harm that would result to the junior holders by delaying the closing for a few weeks until a preliminary injunction could be heard. Accordingly, the court granted the TRO.Receive FREE Daily Opinion Summaries by Email
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
TRILOGY PORTFOLIO COMPANY, LLC, CANYON
VALUE REALIZATION FUND, L.P., THE CANYON
VALUE REALIZATION MASTER FUND, L.P., and
CANYON BALANCED MASTER FUND, LTD.,
: C.A. No. 7161-VCP
BROOKFIELD REAL ESTATE FINANCIAL PARTNERS, :
LLC, BREF ONE, LLC, WELLS FARGO BANK,
NATIONAL ASSOCIATION, solely in its capacity as
Master Servicer and Special Servicer under the Servicing
and Intercreditor Agreement, dated October 24, 2006, and
Submitted: January 11, 2012
Decided: January 13, 2012
Joel Friedlander, Esq., Jamie L. Brown, Esq., BOUCHARD MARGULES &
FRIEDLANDER, P.A., Wilmington, Delaware; Robert Stark, Esq., Sigmund S. WissnerGross, Esq., BROWN RUDNICK LLP, New York, New York; Attorneys for Plaintiffs.
Donald J. Wolfe, Jr., Esq., Brian C. Ralston, Esq., POTTER ANDERSON & CORROON
LLP, Wilmington, Delaware; Philip M. Abelson, Esq., DEWEY & LEBOEUF LLP, New
York, New York; Attorneys for Defendants BREF ONE, LLC and Brookfield Real Estate
P. Clarkson Collins, Jr., Esq., Corinne Elise Amato, Esq., Bryan J. Townsend, Esq.,
MORRIS JAMES LLP, Wilmington, Delaware; Mitchell S. Kaplan, Esq., James S. Yu,
Esq., Alexander M. Jeffrey, Jr., Esq., SEYFARTH SHAW LLP, New York, New York;
Attorneys for Defendants Wells Fargo Bank, National Association.
Danielle Gibbs, Esq., C. Barr Flinn, Esq., Tammy L. Mercer, Esq., YOUNG
CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Attorneys for
PARSONS, Vice Chancellor.
This action is before the Court on a motion for a temporary restraining order
(“TRO”) to enjoin the consummation of a proposed restructuring of a mortgage loan
secured by certain resort properties in Mexico and the Bahamas. Under the terms of the
proposed restructuring, the holder of the junior-most securitized debt participation of an
issuer will forgive its share of the principal in exchange for a 100% equity interest in the
issuer. Holders of more senior participations claim that the proposed transaction unfairly
benefits the junior holder at the expense of more senior holders in direct contravention of
the terms of the agreements controlling the debt. The senior holders further claim that if
the proposed transaction is allowed to close, they will suffer irreparable harm through the
loss of certain rights and guaranties under the new terms of the loan.
In determining whether a TRO should issue to enjoin the proposed transaction, I
must determine whether the senior holders have asserted colorable claims that the
proposed transaction will violate their contractual and fiduciary rights under the terms of
the relevant agreements. If so, I must consider whether the threatened harms to the senior
holders if I deny the TRO would be irreparable.
Finally, I must consider the
consequences of awarding injunctive relief and determine whether the balance of the
equities lies in favor of the senior or the junior holders.
For the reasons stated in this Memorandum Opinion, I conclude that the senior
holders have stated colorable claims and made a sufficient showing that they would
suffer imminent irreparable harm if the proposed transaction were allowed to close.
Furthermore, I find that this potential irreparable harm outweighs the harm that would
result to the junior holders by delaying the closing for a few weeks until a preliminary
injunction motion can be heard. Therefore, I grant the motion for a TRO.
Plaintiffs, Trilogy Portfolio Company, LLC, Canyon Value Realization Fund,
L.P., the Canyon Value Realization Master Fund, L.P., and Canyon Balanced Master
Fund, Ltd. (collectively, “Trilogy”) are holders of the third-most junior participation in a
$2.78 billion loan securitization backed by certain properties in the Caribbean and
Mexico, including the Atlantis Resort and Casino in the Bahamas (the “Loan”).
Defendant Brookfield Real Estate Financial Partners, LLC (“BREF Partners”) is a
wholly-owned subsidiary of Brookfield Asset Management. BREF Partners is the direct
parent of Defendant BREF One, LLC (“BREF One” and, together with BREF Partners,
the “Brookfield Defendants”), which holds the junior-most participation under the Loan.
Defendant Wells Fargo Bank (“Wells Fargo”) is a national banking association.
Wells Fargo was the Master Servicer of the Loan at all times relevant to this litigation
and has been the Special Servicer since December 8, 2011.1
Defendant Pacific Coast Capital Partners, LLC (“PCCP”) holds the second-most
junior participation under the Loan.
Capitalized terms not otherwise defined are given the meanings ascribed to them
under the Participation and Servicing Agreement and the Servicing and
Intercreditor Agreement (together, the “Agreements”).
This case concerns the restructuring of a $2.78 billion mortgage loan2 secured by
the Atlantis Resort and Casino in the Bahamas (the “Atlantis”). The Atlantis is owned
and operated by various subsidiaries of Kerzner International Limited (“Kerzner” or the
“Borrower”),3 a luxury hotel development and management company run by Solomon
In 2006, Kerzner decided to expand the Atlantis through a $3.8 billion LBO. As
part of that transaction, the Loan was originated. At or around the time of origination, a
portion of the Loan was securitized by its lenders and sold into a real estate mortgage
investment conduit, or “REMIC,” which is an investment vehicle that holds mortgages
and other securities backed by residential and commercial mortgages in trust and issues
securities to investors in the secondary market in the form of certificates representing
beneficial interests in these trusts.
As part of the securitization, the loan was broken up into two promissory notes
(the “A-Notes”), as well as several B-Note participation interests (the “B-Note
Participations”). The A-Notes are senior in priority to the B-Note Participations and
equal in priority to each other. The B-Note Participations, on the other hand, are broken
up into seven junior participations (the “Participations”) that have descending priority.
Currently, the Loan has approximately $2.5 billion in principal outstanding.
Kerzner controls Paradise Island Holdings Limited, Atlantis Holdings (Bahamas)
Limited, and Ocean Club Holdings Limited, the entities which comprise the
Borrower obligated under the Loan. For the purposes of this Opinion, I refer to
the “Borrower” or “Kerzner” interchangeably.
The priority of the Participations is governed by the Participation and Servicing
Agreement (the “Participation Agreement”). Under the Participation Agreement, the
holder of the junior-most Participation is entitled to act as the Controlling Holder, which
empowers it to appoint and remove the Special Servicer at its discretion.
The duty to service and manage the Loan is assigned to a “Master Servicer,”
which at all times relevant to this action has been Defendant Wells Fargo. If a “Special
Servicing Period” arises, however, such as upon the occurrence of an Event of Default
under the Loan, a Special Servicer may be appointed by the Controlling Holder to service
the Loan and undertake such actions necessary to deal with the default. For example,
during a Special Servicing Period, the Master and Special Servicers can, with the consent
of the Controlling Holder, agree to waive a default or extend the maturity date of the
Loan. BREF One appointed BREF Partners as the Special Servicer on or about May
2011, but Defendants deny that a Special Servicing Period existed at that time. BREF
Partners held that position until it transferred it to Wells Fargo on December 8, 2011.
BREF One has been the Controlling Holder at all times relevant to this litigation.4
Plaintiffs dispute whether BREF One‟s Participation was “in the money” when it
was acting as the Controlling Holder. If it was not, then BREF One would not
have been entitled to act as Controlling Holder; instead, that position would have
belonged to PCCP, which holds the second-most junior Participation. To the
extent Plaintiffs are correct, that would strengthen their request for a TRO. The
facts, however, have not yet been developed in any detail. Thus, for the purposes
of Plaintiffs‟ motion for a TRO, I assume that BREF One‟s Participation was “in
the money,” but recognize that the Court would benefit from a more developed
Outside of a Special Servicing Period, the Master and Special Servicer are
prohibited from unilaterally making material modifications to the Loan without Lender
and Participant consent. Material modifications include, among other things, changes to
(1) the amount and timing of loan payments, (2) the release of collateral or guarantees,
and (3) the modification of management contracts. During a Special Servicing Period,
however, the Special Servicer is empowered to make such modifications that it
determines in good faith are “reasonably likely to produce a greater recovery” to all
Participants “than would a foreclosure or other liquidation.”
To make such
modifications, however, the Special Servicer must receive the consent of the Controlling
The severe economic downturn of 2007-08 undermined the success of the Atlantis
expansion and Kerzner quickly found itself at risk of defaulting on its obligations under
the Loan. The Loan was initially due on September 9, 2008, but Kerzner exercised its
unilateral right to extend the maturity date for three consecutive one-year extensions,
making its final maturity date September 9, 2011. Even with these extensions, however,
Kerzner was unable to repay the Loan by the final maturity date. As a result, the final
maturity of the Loan was pushed back to December 30, 2011.5
While it is not entirely clear from the record before me, it appears that Wells
Fargo, as Master Servicer, and BREF Partners, as Special Servicer, extended the
maturity date of the Loan with the consent of BREF One, as Controlling Holder.
By late November, it became apparent that Kerzner would not be able to refinance
the Loan or negotiate another extension of its maturity. To avoid an outright default,
Kerzner agreed to enter into a deal in which it would transfer 100% of its equity interest
in the Borrower to BREF One in exchange for the elimination of the principal amount
held by BREF One, along with other modifications to the Loan (the “Proposed
A term sheet for the Proposed Transaction was circulated to the Plaintiffs on
November 29, 2011. On December 7, Plaintiffs sent Wells Fargo, BREF Partners, and
BREF One a letter explaining why they believed the Proposed Transaction to be unfair
and improper. Undeterred, Defendants continued to move toward closing the Proposed
Transaction, perhaps, as early as January 6, 2012.
As a result, Plaintiffs filed the
Complaint in this action on January 4, 2012, and requested a TRO.
The Proposed Transaction
Under the terms of the Proposed Transaction, BREF One, the junior-most creditor
on the Loan, will forgive the outstanding principal owed to it, approximately $175
million, in exchange for 100% of the equity in the Borrower, as well as interests in
certain joint ventures in Mexico and the Bahamas. In addition, Kerzner will be released
as guarantor from various obligations owed by the Borrower to the Participants under the
Loan. Although most of these guaranties will remain in place, BREF One will be
substituted for Kerzner as guarantor.
As guarantor, BREF One will be required to guarantee, among other things: (1)
losses incurred by the Participants as a result of certain bad faith or fraudulent actions of
the Borrower; (2) losses arising from the voluntary commencement of any bankruptcy or
insolvency proceeding; and (3) losses resulting from the potentially substantial transfer
taxes due and payable to the Bahamian government in the event of a foreclosure or other
disposition of the Atlantis. Unlike Kerzner, however, BREF One will not be required to
maintain a minimum net worth of $500 million at all times and, in fact, there will be
nothing to prevent BREF One from liquidating its assets at any time. Finally, as it relates
to guarantees, the parent of Kerzner International, Kerzner Holdings Ltd., as well as some
of its equity sponsors, also will be released from certain guarantees of damages to the
Property resulting from certain windstorms.
Although it will no longer own the equity of the Borrower, Kerzner will be
retained as manager of the Atlantis under new contracts, which Plaintiffs allege provide
for substantial fee increases to Kerzner. The Borrower also will be liable to pay all the
Bahamian transfer taxes on the Proposed Transaction in exchange for an agreement from
Kerzner to reimburse the Borrower for those payments over a multi-year period. Finally,
material modifications will be made to the Loan, including an extension of its maturity
date until September 9, 2013, and a reduction in the protection offered by the interest rate
cap provided for under the Loan.
On January 4, 2012, Plaintiffs filed the Verified Complaint in this action, along
with their motions for a TRO and expedited proceedings. Defendants Wells Fargo,
PCCP, and the Brookfield Defendants each responded separately on January 9. Only the
Brookfield Defendants opposed Plaintiffs‟ motion for a TRO. Plaintiffs submitted their
Reply on January 10 and the Court heard argument on the motion on January 11, 2012.
Plaintiffs argue that the terms of the Proposed Transaction are unfair to the rest of
the Participants and that BREF One abused its position as Controlling Holder by
negotiating a deal that will provide it with a potentially valuable equity interest in the
Borrower while transferring substantial risk to the rest of the Participants. Plaintiffs
further claim that the Proposed Transaction will violate their contractual rights under the
Participation and Servicing Agreements and will also result in various breaches of
fiduciary duties owed to it by the Special Servicer, which is currently Wells Fargo.
Although Defendants Wells Fargo and PCCP generally support the Proposed
Transaction, they have not opposed the motion for a TRO.6
A TRO is a special remedy of short duration designed primarily to prevent
imminent irreparable injury pending a preliminary injunction or final resolution of a
“To obtain such an order, a party must demonstrate three things: „(i) the
Wells Fargo has requested that, if a TRO is granted, it include provisions enabling
Wells Fargo to continue ongoing work with respect to the Proposed Transaction
short of consummation or closing, including, but not limited to, due diligence,
supplemental consent requests, and analysis of the Proposed Transaction.
Arkema Inc. v. Dow Chem. Co., 2010 WL 2334386, at *3 (Del. Ch. May 25, 2010)
(quoting CBOT Hldgs., Inc. v. Chicago Bd. Options Exch., Inc., 2007 WL
2296356, at *3 (Del. Ch. Aug. 3, 2007)).
existence of a colorable claim, (ii) the [existence of] irreparable harm . . . if relief is not
granted, and (iii) a balancing of hardships favoring the moving party.‟”8 When deciding
whether to issue a TRO, the Court‟s focus is less upon the merits of the plaintiff‟s legal
claim than on the relative harm to the various parties if the remedy is or is not granted. 9
Indeed, if imminent irreparable harm exists, “the remedy ought ordinarily to issue” unless
the claim is frivolous, granting the remedy would cause greater harm than denying it, or
the plaintiff has contributed in some way to the emergency nature of the need for relief.10
This “less exacting merits-based scrutiny”11 derives from a realistic appreciation
of the short-term duration of the remedy and the limited factual record generally available
at such an early stage in the proceeding.12 Where, however, the factual record is more
fully developed, “the traditional temporary restraining order standard does [not fully]
apply,” and the Court considers whether there is a probability of success on the merits.13
Id. (quoting CBOT Hldgs., Inc., 2007 WL 2296356, at *3); see also Newman v.
Warren, 684 A.2d 1239, 1244 (Del. Ch. 1996).
Cottle v. Carr, 1988 WL 10415, at *2 (Del. Ch. Feb. 9, 1988).
Id. at *3 (footnote omitted).
CBOT Hldgs., Inc., 2007 WL 2296356, at *3.
Cottle, 1988 WL 10415, at *2.
CBOT Hldgs., Inc., 2007 WL 2296356, at *3 (citing Insituform Techs., Inc. v.
Insitu, Inc., 1999 WL 240347, at *7 (Del. Ch. Apr. 19, 1999) and Cochran v.
Supinski, 794 A.2d 1239, 1247 (Del. Ch. 2001)).
The Existence of a Colorable Claim
At this juncture, Defendants do not challenge the existence of a colorable claim for
the purposes of this motion and instead have reserved their rights to challenge the relative
merits of Plaintiffs‟ claims at the preliminary injunction stage of these proceedings.
Therefore, I discuss only briefly why I find that Plaintiffs have alleged colorable claims.
In their Verified Complaint, Plaintiffs assert various claims for breach of contract
under the Agreements against all Defendants, as well as breach of fiduciary duties against
Wells Fargo, and a claim for aiding and abetting breach of fiduciary duties against PCCP
and the Brookfield Defendants. Plaintiffs also seek declaratory judgments as to each of
their breach of contract claims.
As to their breach of contract claims, Plaintiffs assert that the Proposed
Transaction will violate their rights under the Agreements by, among other things: (1)
granting the Brookfield Defendants equity interests in the Borrower ahead of more senior
creditors;14 (2) releasing collateral securing the loan prior to a determination by the
Special Servicer of how that will affect the Borrower‟s ability to repay the Loan;15 (3)
authorizing a conversion of property that is not for the benefit of all Participants;16 (4)
subordinating the payment of the Loan to the payment of certain management fees to
Participation Agreement §§ 3, 6.
Servicing Agreement § 2.20(b)(iv).
Servicing Agreement § 2.7.
Kerzner;17 and (5) changing the amount or timing of payments due to a junior holder
without such junior holder‟s consent by extending the Loan maturity date until September
As to Wells Fargo, Plaintiffs allege that, by consenting to the Proposed
Transaction, Wells Fargo breached its contractual obligations to Plaintiffs because the
terms of the Proposed Transaction violate the Accepted Servicing Practices that §§ 2.1
and 7.2(b) of the Servicing Agreement require Wells Fargo to follow.19
Plaintiffs also assert breaches of fiduciary duties against Wells Fargo in its
capacity as Master and Special Servicer because § 2.1 of the Servicing Agreement
allegedly establishes an agency relationship between the Master and Special Servicers
and the Participants.
Plaintiffs claim that Wells Fargo breached those duties by
consenting to the Proposed Transaction because the Proposed Transaction benefits the
other Defendants at the expense or to the exclusion of Plaintiffs and other senior
Sections 2 and 5 of certain documents entitled Assignment of Management
Agreement and Subordination of Management Fees.
Participation Agreement § 4.6(a).
Specifically, Plaintiffs claim that Wells Fargo will breach Accepted Servicing
Practices by: (1) failing to administer the Loan in the interests of all Lenders and
Participants; (2) disregarding the subordinate nature of BREF One‟s claims; (3)
failing to use “good faith and reasonable judgment” in balancing the Participants‟
interests; and (4) causing Events of Default to occur under the Agreements.
Plaintiffs also claim that Wells Fargo was not properly appointed as Special
Servicer because when BREF One appointed Wells Fargo to that position on
December 8, 2011, BREF One was an affiliate of the Borrower and therefore
prohibited from acting as Directing Holder under § 19(a) of the Participation
Participants. Plaintiffs also claim that, by participating in the Proposed Transaction, the
Brookfield Defendants and PCCP are aiding and abetting Wells Fargo‟s breach of
Determining whether Plaintiffs have alleged a colorable claim requires this Court
to examine closely and interpret a number of specific provisions of the Agreements
governing the Loan. Having considered those provisions, I cannot say that Plaintiffs‟
interpretations of the disputed contractual provisions are frivolous or so lacking in merit
as to make it impossible for Plaintiffs to prevail on their claims at a later stage.
For example, Plaintiffs contend that the Proposed Transaction would violate §§ 3
and 5 of the Participation Agreement by subordinating the senior Participants‟ right to
payment to BREF One in that it would enable the transfer of equity interests in the
Borrower to BREF One before those interests were applied to the payment of senior
creditors. Under § 3 of the Participation Agreement, senior Participants are entitled to
receive payments of “interest, principal, and other amounts” prior to more junior
Participants.20 The term “other amounts,” however, is not defined. Therefore, I am
unable to conclude, at this preliminary stage, that the transfer of equity interests to BREF
One in exchange for the extinguishment of BREF One‟s Participation cannot conceivably
constitute the payment of “other amounts” that would be due first to more senior
Participants and, therefore, violate the priority scheme outlined under § 3.
Participation Agreement § 3 (emphasis added).
The resolution of this claim and others like it asserted by Plaintiffs would benefit
from further development of the factual and legal record. Therefore, I find that Plaintiffs
have stated sufficiently colorable claims to support a TRO, assuming they meet the other
requirements for such an order.
Preliminary injunctive relief in the form of a TRO or otherwise is an extraordinary
remedy that should not be issued in the absence of a clear showing of imminent
irreparable harm to the moving party.21 To make such a showing, a plaintiff must
demonstrate harm for which she has no adequate remedy at law and that refusal to issue
an injunction would be a denial of justice.22 The alleged harm must be imminent and
genuine, as opposed to speculative.23 This Court has found a threat of irreparable harm,
for example, “in cases where an after-the-fact attempt to quantify damages would
„involve [a] costly exercise[ ] in imprecision‟ and would not provide full, fair, and
complete relief for the alleged wrong.”24 Potential harm that may occur in the future,
however, does not constitute imminent and irreparable injury for the purposes of a TRO
or preliminary injunction.25
See Baxter Pharm. Prods., Inc. v. ESI Lederle Inc., 1999 WL 160148, at *4 (Del.
Ch. Mar. 11, 1999) (noting that a preliminary injunction should be issued only
with the full conviction on the part of the court of its urgent necessity).
See Aquila, Inc. v. Quanta Servs., Inc., 805 A.2d 196, 208 (Del. Ch. 2002).
N.K.S. Distribs., Inc. v. Tigani, 2010 WL 2367669, at *5 (Del. Ch. June 7, 2010).
Am. Gen. Corp. v. Unitrin, Inc., 1994 WL 512537, at *4 (Del. Ch. Aug. 26, 1994).
Plaintiffs allege that the Proposed Transaction will irreparably harm their interests
by modifying key, contractually-negotiated protections and guarantees under the
Agreements, thereby affording them less security and decreasing the probability that they
will be paid back in full on their investment. Moreover, Plaintiffs aver that if the
Proposed Transaction is allowed to close, they will be deprived forever of “their
distinctive rights to receive distributions and payments according to a priority scheme,
prior to junior Participants . . . and to have decisions made by the Special Servicer for the
benefit of all Participants.” 26 Because the Proposed Transaction allegedly violates these
and other rights, Plaintiffs claim they would suffer immediate and irreparable harm if the
Proposed Transaction were permitted to close before they had an opportunity to take any
discovery and be heard on a preliminary injunction motion.
In opposition, Defendants characterize the alleged harm to Plaintiffs from the
Proposed Transaction as solely an increased risk that the Borrower will be unable to meet
its obligations to Plaintiffs under the Loan at some point in the future. According to
Defendants, this alleged “harm” is speculative and, to the extent it ever materializes,
could be remedied by an award of post-closing damages. “At bottom,” Defendants
assert, “Plaintiffs‟ argument is nothing more than speculation that, as a result of the
Transaction, their investment will face greater risk, and that the risk itself constitutes
irreparable injury.”27 Relying on this Court‟s decisions in Angelo, Gordon & Co., L.P. v.
Pls.‟ Reply Br. 11-12.
Defs.‟ Ans. Br. 11.
Allied Riser Communications Corp.,28 and Roseton OL, LLC v. Dynegy Holdings, Inc.,29
Defendants claim the mere increase in the enterprise risk of an entity following a
legitimate business transaction that makes it more likely that the entity will be
unprofitable and unable to pay damages in the future is, at best, a speculative harm.
Hence, they deny that it constitutes a threat of imminent irreparable harm. Finally,
Defendants make the conclusory assertion that the Proposed Transaction will benefit all
Participants, including Plaintiffs, and avoid the undesirable result of foreclosure on the
Property, which would leave all parties worse off.
Having considered the parties‟ respective arguments and the limited record before
me, I find that Plaintiffs have made a sufficient showing of a threat of irreparable harm.
Although I agree with Defendants that Angelo, Gordon and Dynegy support the
proposition that increased business risk resulting from a legitimate business transaction,
standing alone, will not suffice to show irreparable harm, the irreparable harm claimed
here is distinguishable from those cases. Although Plaintiffs do allege that the Proposed
Transaction may damage their ability to receive future payments, as was the case in
Angelo, Gordon,30 or seek monetary damages, as was the case in Dynegy, those harms are
805 A.2d 221 (Del. Ch. 2002).
2011 WL 3275965 (Del. Ch. July 29, 2011).
In Angelo, Gordon, Vice Chancellor Lamb held that the mere possibility that a
proposed merger would “not prove to be a profitable enterprise” and result in the
inability of the defendants to pay money damages in the future did not constitute
irreparable harm. 805 A.2d at 231. In denying a motion for a preliminary
injunction, the Vice Chancellor stated that he could not “conclude that this
possibility alone justifies the entry of an injunction against the Merger because the
secondary to the underlying threat that the Proposed Transaction will invert the
bargained-for priority of the Loan Agreement and significantly advantage BREF One, the
junior-most Participant, at the expense of more senior Participants.
Thus, if the Proposed Transaction is allowed to close, Plaintiffs stand to lose the
benefit of contractually-negotiated rights related to their priority relative to other
Participants, as well as contractual rights related to their relationship with the Borrower.
These rights are valuable to Plaintiffs not only because they increase the likelihood that
Plaintiffs will be repaid the principal and interest owed to them under the Loan, but also
because they provide a certain degree of leverage relative to other Participants and the
Borrower in situations where, as here, modifications to the Loan are being negotiated. As
a result, the risk to Plaintiffs from the Proposed Transaction is not simply that their
investment may be less secure, but also that Plaintiffs will be deprived of the opportunity
to assert these rights as leverage against the other Participants and the Borrower in
modifying the Loan and reshaping the commercial relationship between the Participants
and the Borrower.
In that respect, I find the situation here to be analogous to Telcom-SNI Investors,
L.L.C. v. Sorrento Networks, Inc.31 In that case, this Court held that a defendant‟s
disregard of its preferred shareholders contractually-bargained for protective rights in
attempting to incur additional debt and issue additional shares in contravention of the
injury it contemplates is both speculative and will not result from the Merger itself
but will only be felt, if at all, with the passage of time after the Merger.” Id.
2011 WL 1117505 (Del. Ch. Sept. 7, 2001), aff'd, 790 A.2d 477 (Del. 2002).
company‟s certificate of incorporation threatened irreparable harm because such rights
were “designed to provide, not only protection for [the plaintiffs‟] investment, but also
leverage in negotiations regarding the future of [the defendant-company].”32 The Court
went on to find that “[t]he denial of the leverage which [the plaintiffs] reasonably
believed they had secured through their bargain restructures the commercial relationship
between [the plaintiffs] and [the defendant-company] and constitutes a harm that cannot
be measured by money damages.”33
Similarly, in Boesky v. CX Partners, L.P.,34 in granting an injunction against a
partial liquidation of a partnership as to some partners, but not others, this Court held that
a provision in the partnership agreement requiring that “[n]o limited partner shall have
the right to . . . receive . . . priority over any other limited partner, in return of his capital
or in respect of any other distribution” created a right “not to a return of capital but rather
. . . a right in each partner to be treated pari passu with others as to distributions.”35 The
Court further held that the right to pari passu treatment provided the partners with the
“distinctive right” of leverage, the loss of which could not adequately be compensated by
Id. at *10.
1988 WL 42250 (Del. Ch. Apr. 28, 1988).
Id. at *13.
Plaintiffs assert they are entitled to be treated with due regard to their priority
under the Loan and that the Proposed Transaction would disregard that priority by
providing unique benefits to BREF One, the junior-most Participant, at the expense of
other, more senior Participants.
Specifically, Plaintiffs claim that the Proposed
Transaction negotiated between Kerzner and BREF One substantially alters the
commercial relationship between the Participants and the Borrower in a way that benefits
BREF One and gives it valuable leverage relative to the other Participants by providing it
with exclusive control over the disposition of the Borrower.
For example, Plaintiffs assert that if the deal is allowed to close, Kerzner will be
released from all of its major guaranty obligations to Plaintiffs and replaced by BREF
One. Unlike Kerzner, however, BREF One will not be required to maintain a net worth
of at least $500 million and apparently would be permitted to liquidate its assets at any
time. In fact, Plaintiffs allege that BREF One currently is in the process of winding down
and expects to complete the liquidation of its assets by 2014. Because Plaintiffs have not
yet had any discovery, the Court is in no position to assess the accuracy of that allegation.
Consequently, I cannot rely on Defendants‟ conclusory denial of Plaintiffs claim that,
regardless of whether BREF One currently has a greater ability to guaranty the
obligations of the Borrower, the Proposed Transaction provides no assurance that BREF
One‟s ability to cover the Borrower‟s obligations will persist and that, indeed, all of
BREF One‟s guarantees may soon be worthless.
Similar uncertainties exist as to
Plaintiffs‟ further claims, which Defendants apparently dispute, that the Proposed
Transaction will eliminate certain guarantees owed to Plaintiffs under the current terms of
the Loan, including the guarantee of any losses or damages resulting from: (1) the
payment of Bahamian transfer taxes on the Property in the event of a foreclosure, which
could be substantial;37 (2) a windstorm or hurricane; and (3) the initiation bankruptcy
The overall effect of the new terms of the Proposed Transaction, Plaintiffs argue,
would be to make it easier for BREF One, as the 100% equity owner of the Borrower, to
force the Borrower into a voluntary bankruptcy so that BREF One could use its position
as the equity owner of the Borrower to “cram down or otherwise impair the interests of
the Lenders and Participants in the Loan to the benefit of the Brookfield Defendants.”39
Thus, Plaintiffs assert that the Proposed Transaction threatens to “restructure the
commercial relationship” between BREF One and the other Participants in a way that
was neither contemplated nor bargained-for under the Agreements.40
Finally, although Defendants trumpet the merits of the Proposed Transaction over
a foreclosure on the Property, their position is not very persuasive because the total range
The Brookfield Defendants assert in their briefs that a foreclosure on the Property
valued at $2.5 billion could result in a stamp tax at the statutory rate of 12%. At
that rate, the stamp tax for a foreclosure could be as high as $300 million.
Defendants allege that BREF One will be required to guarantee damages to
Plaintiffs arising from bankruptcy proceedings up to a cap of 20% of the
outstanding value of the Loan. Defendants failed to cite to anything in support of
this assertion, however.
Pls.‟ Opening Br. 13.
For example, § 2.1 of the Servicing Agreement requires the Master and Special
Servicers to administer the Loan on behalf of all Participants as a “collective
whole, giving due regard to the subordinate nature of the related Junior
Participation Interest and any related Subordinate Companion Loans . . . .”
of restructuring outcomes in this situation is not binary. Thus far, Defendants have failed
to identify any contractual provision or legal principal that would explain why they alone
should enjoy the opportunity to assume control of the Borrower as part of the proposed
restructuring of the Loan. As Plaintiffs‟ fervent opposition to the Proposed Transaction
illustrates, the opportunity to benefit from the upside potential of the Borrower may be a
uniquely valuable asset in which the more senior Participants may have a legitimate
claim to participate. Indeed, by entering into a Participation other than the most junior
participation held by BREF One, each senior Participant presumably thought it was
acquiring the opportunity described in the Agreements to receive the benefits of the Loan
in order of their priority. If the Proposed Transaction is allowed to close, the Participants
senior to BREF One permanently may be deprived of their opportunity to receive the
Borrower‟s equity and participate in the management and upside potential of the
Borrower, which may prove lucrative in the future.
For all of these reasons, I find that Plaintiffs have shown that they are likely to
suffer imminent irreparable harm if a TRO along the lines they have requested is not
Balance of the Equities
In considering the balance of the equities regarding this motion, I find that the
balance weighs heavily in favor of Plaintiffs. As discussed supra, the closing of the
Proposed Transaction threatens to irreparably harm Plaintiffs, whereas Defendants have
advanced nothing but conclusory allegations that a TRO would undermine the
Borrower‟s continuing ability to meet its obligations under the Loan. Defendants have
made no showing as to why delaying the closing for a few weeks would be detrimental to
their interests. In fact, the Brookfield Defendants are alone in their opposition to the
TRO. Defendant Wells Fargo does not oppose the motion and Defendant PCCP took no
position on it, stating in a letter to the Court only that it will “move promptly to dismiss
the complaint or for summary judgment on the ground that it is not properly a party to
this litigation.”41 In addition, I note that the Loan maturity date repeatedly has been
pushed back since September 9, 2011 and that Wells Fargo stated in its letter to the Court
that analyses and review of the Proposed Transaction are still ongoing. Therefore, I find
that the threat of irreparable harm to Plaintiffs if the Proposed Transaction is allowed to
close outweighs any harm Defendants might suffer from a brief delay of a few weeks
until a preliminary injunction hearing can be held.
In summary, I find that Plaintiffs have demonstrated that all these elements for a
TRO exist in this case.
Accordingly, I hereby grant their motion for a temporary
Posting of a Bond
Finally, as Defendants correctly point out, Court of Chancery Rule 65(c) states
that “no restraining order . . . shall issue except upon the giving of security by the
applicant, in such sum as the Court deems proper, for the payment of such costs and
damages as may be incurred or suffered by any party who is found to have been
wrongfully enjoined or restrained.”
“[F]or a substantial bond to be required” as
Letter from Danielle Gibbs, Esq. to V.C. Parsons, Docket Item No. 19 (Jan. 9,
Defendants seek, however, “it should be supported either by facts of record or by some
realistic as opposed to a yet-unproven legal theory from which damages could flow to the
Here, Defendants have not submitted any factual evidence to support their
contention that the bond should be set at an amount equivalent to the costs associated
with a foreclosure on the Property. Moreover, because there is no evidence that the risk
and cost of delaying the closing of the Proposed Transaction until sometime between
January 17 and February 10, 2012, as the Court has proposed for a preliminary injunction
hearing, would be substantial, I reject Defendant‟s bald contention that bond should be
set at $230 million. Instead, I find that a relatively modest bond of $100,000 secured
should be required in the circumstances of this case, which include Defendants‟
complaints that Plaintiffs seek plainly unreasonable and unduly burdensome discovery
and otherwise will subject Defendants to potential losses, if the TRO is providently
For the reasons stated in this Memorandum Opinion, I grant Plaintiffs‟ motion for
a temporary restraining order enjoining the closing of the Proposed Transaction until after
a hearing for a preliminary injunction can be held. The hearing will be held at 10:00 a.m.
on January 27, 2012 unless the parties agree to a later date convenient to the Court.
Plaintiffs shall post a secured bond in the amount of $100,000 in connection with the
Petty v. Pennytech Papers, Inc., 1975 WL 7481 (Del. Ch. Sept. 24, 1975).
TRO. The TRO is effective immediately. Counsel for Plaintiffs shall submit on notice
within two business days a proposed form of TRO in accordance with this Memorandum
IT IS SO ORDERED.
The proposed Order should incorporate the exceptions referred to in the Wells
Fargo Answering Statement.