MSR Resort Golf Course LLC and MS Resorts Liquidating Trustee, LLC as Liquidating

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AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

Chapter 11
IN RE:

Case No. 11-10372 (SHL)
MSR RESORT GOLF COURSE, LLC,
et al,

. New York, New York
Debtors. . Thursday, August 16, 2010
4:20 p.m.

SUPPLEMENTAL BENCH RULING REGARDING DEBTORS’ MOTION FOR AN
ORDER ESTIMATING THE DAMAGES FROM REJECTION OF HILTON’S
MANAGEMENT AGREEMENTS
BEFORE THE HONORABLE SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE

APPEARANCES:

For the Debtors: Eric F. Leon, Esq.
KIRKLAND & ELLIS, LLP
601 Lexington Avenue
New York, New York 10022

For Midland Loan
Services, Inc.: Steven Z. Szanzer, Esq.
MILBANK, TWEED, HADLEY
& MCCLOY, LLP
One Chase Manhattan Plaza
New York, New York 10005

(Appearances Continued)

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Proceedings recorded by electronic sound recording,
transcript produced by certified transcription service.

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APPEARANCES: (Continued)
VIA TELEPHONE:
For the Debtors: Paul Basta, Esq.
KIRKLAND & ELLIS, LLP
601 Lexington Avenue
New York, New York 10022
For Waldorf=Astoria
Management, LLC: David M. Neff, Esq.
Brian Audette, Esq.
PERKINS COIE, LLP
131 S. Dearborn Street, Suite 1700
Chicago, Illinois 60603
For the Official Committee
of Unsecured Creditors: Craig E. Freeman, Esq.
ALSTON & BIRD, LLP
90 Park Avenue
New York, New York 10016
GIC RE: Brian E. Greer, Esq.
DECHERT, LLP
1095 Avenue of the Americas
New York, New York 10036
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Before the Court is a request of the parties for
clarification of the Court's bench ruling of July 31, 2012,
on the motion of debtors for entry of an order estimating the
damages that would result from rejection of Hilton’s
Management Agreements relating to three properties: The
Grand Wailea, the Arizona Biltmore, and the La Quinta Resort.
There was a transcript made of that ruling, and
after review and amendment by the Court, the bench ruling was
placed on the docket at Docket No. 1397.
The parties then subsequently filed letters seeking
clarification on two issues discussed in the bench ruling.
The debtors’ letter was docketed at Docket No. 1384, and
Hilton's letter was docketed at 1389.
The two letters address the same two issues.
First, the letters addressed the question of the
appropriate discount rate for the Court's determination on
damages for lost profits relating to Hilton’s three
management agreements. The bench ruling held that Hilton was
entitled to certain lost profits. The Court found these
profits were subject to a discount rate of 11.6 for the
Arizona Biltmore and La Quinta Resort, and a discount rate of
12.6 for the Grand Wailea.
The parties dispute in their letters whether the
damage award should also be subject to an additional
discount, based on the expert report of Roger Cline, who was
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one of Hilton's witnesses. Mr. Cline suggested that a
discount rate of eight percent generally should be used, but
that there should be a reduction based on the likelihood that
Hilton will be terminated in the final ten-year term of the
agreements.
Debtors urge that the Court factor in Mr. Cline's
reduction for this possibility of termination in the final
ten years into the damages as an additional calculation.
Hilton argues that the Court should not, and that the Court
has already taken all of the issues regarding the discount
rate into consideration in making its ruling and arriving at
the 11.6 and 12.6 percentages.
In looking at my ruling, I understand it could be
read to be unclear on this issue, so I think that this issue
actually is an appropriate one for clarification. I conclude
that Mr. Cline's likelihood of termination in the final ten
years should not be a separate factor for reduction of the
award of damages.
As I stated in my ruling, I rejected the discount
rate proposed by both parties in favor of my own rate, based
on the evidence at trial. That rate started with Hilton's
weighted average cost of capital and then factored in
specific risks identified during the evidence at trial. It
was my intention that the discount rate I arrived at in the
bench ruling, 11.6 for two properties, and 12.6 for the
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third, be inclusive of all of the risks that were identified
at trial.
Relatedly, I note that Mr. Cline identified this
risk of probability of termination in the context of urging
the Court to otherwise apply a discount rate of eight
percent. I rejected his approach of eight percent and,
again, came up with my own approach that was intended to
identify the discount rate for the management agreements as a
whole. So on this first issue, I will use Hilton's
calculation that does not factor in this additional
reduction.
The second issue identified in the letters is the
amount of group services expense that should be awarded. In
the bench ruling, the Court denied in part Hilton's request
for group services expense, to the extent it sought so-called
"key money," a claim that was calculated by Hilton to be
approximately $21 million of a total of $38 million that was
requested by Hilton for group services expense. Both the $38
million and the $21 million were figures that were provided
to the Court by Hilton.
While the Court denied the request as to key money,
the Court granted the request for group services expense that
was consistent with the terms of the agreement, as capped at
two percent of resort revenue for a five-year period,
consistent with Hilton's obligation to mitigate damages.
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Hilton placed a figure at trial on this part of group
services expense at $17 million.
In my bench ruling, I wondered whether the $17
million figure was correct in light of my decision to use a
higher discount rate than had been proposed by Hilton's
expert Mr. Cline. I asked the parties to reach an appropriate
calculation of the group services expense damage figure, in
light of my ruling on the discount rate. I asked for this
figure so that I could include it in an order to be entered
on the motion. As a higher discount rate will result in a
lower figure, I presumed at the time of my bench ruling that
the damage figure of $17 million would either decrease or
remain the same.
The parties now dispute the amount of group services
expense that should be awarded. Hilton now seeks group
services expense in the amount of $33.6 million, a figure
essentially double what had been previously sought. The
debtors object, arguing that the number of $17 million should
now go down to $11.39 million.
Based on my review of the papers and the trial
evidence – particularly, the reports and testimony of Mr.
Cline, as well as the presentations of counsel – it appears
that the basis for Hilton's new figure is to correct a
miscalculation made by Mr. Cline. That miscalculation
appears to be that Mr. Cline took the base amount of group
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services expense and applied the appropriate discount rate to
reach a figure, but then subsequently applied the discount
rate again to that figure. Essentially, the error that
appears to have occurred is that the damages number appears
to have been subject to the discount rate twice, which would
reduce the figure, not surprisingly, by half.
Unlike my first ruling, I don't think this second
issue calls for a clarification on the bench ruling.
Instead, I view Hilton’s $33 million figure to be based on a
new argument about the evidence at trial and how that
evidence should be understood. Therefore, I conclude that
Hilton is really requesting that the Court amend its bench
ruling, a request that is governed by Rule 60(b) of the
Federal Rules of Civil Procedure. That rule, 60(b), is made
applicable to bankruptcy proceedings by virtue of Bankruptcy
Rule 9024.
In setting out the standard generally, I rely on a
Southern District case from New York, Williams v. New York
City Department of Corrections, 219 F.R.D. 78 (S.D.N.Y.
2003), which has an extensive discussion of the standard for
a Rule 60(b) motion.
As noted in the Williams decision, Rule 60(b) allows
the Court to revisit an order or judgment and provides relief
based on any of six criteria. The first criteria addresses
mistake, inadvertent surprise, or excusable neglect. The
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second criteria includes newly discovered evidence; the third
includes fraud, misrepresentation, or other misconduct. The
other criteria list a number of other factors that do not
apply to this proceeding.
To prevail on a Rule 60(b) motion, the moving party
must demonstrate that one of the criteria outlined in the
rule applies. "A motion under Rule 60(b) is addressed at the
sound discretion of the Court." Velez v. Vasallo, 203 F.Supp.
2d 312, 333 (S.D.N.Y. 2002)(citing Mendell In Behalf of
Viacom, Inc. v. Gollust, 909 F.2d 724, 731 (2d Cir. 1990)).
"Rule 60(b) provides an opportunity for courts to balance
fairness considerations present in a particular case against
the policy favoring the finality of judgments." Broadway v.
City of New York, 2003 WL 21209635, at *3 (S.D.N.Y., May 21,
2003). "Rule 60(b) motions, however, are generally granted
only upon a showing of exceptional circumstances." Mendell,
909 F.2d at 731.
The Second Circuit has imposed a three-pronged test
in order for a Rule 60(b) motion to be granted:
First, there must be highly convincing evidence
supporting the motion. Second, the moving party must show
good cause for failing to act sooner. And third, the moving
party must show that granting the motion will not impose an
undue hardship on the other party.
And that is taken from another case from the
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Southern District, 2003 WL 21209635.
"The burden of demonstrating the motion is justified
rests on the moving party." State Street Bank and
Trust Co. v. Iversiones, 246 F.Supp 2d 231, 248
(S.D.N.Y. 2002).
Hilton has not met the standard for Rule 60(b) here.
The $17 million figure that the Court adopted in its bench
ruling was a figure advocated by Hilton in every part of this
proceeding until Hilton raised this issue for the first time
in its letter after the trial. In fact, Mr. Cline's expert
report consistently uses the figure of $38.9 million to
describe group services expense as a whole, including the $21
million of key money. These numbers are included in his
expert report. Hilton's pretrial brief uses that number, as
well.
During trial, the opening statement of Hilton is
found at the transcript of the hearing from June 27th, at
Page 31 and states that:
"-- foregone payments of group services expense.
Those Mr. Cline has calculated at about $38 million."
During Mr. Cline's cross, there is extensive
testimony explaining how that $38 million is broken out. I
reference Mr. Cline's cross-examination at transcript of
hearing on July 3rd, at 925. From Lines 8 through Line 20 of
that page, the colloquy goes as follows:
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"Question: Okay. Just so I'm clear, the total
damages you attribute to group services is 38.9 million,
correct?
"Answer: Correct.
"Question: And of that, 21.7 million is for the key
money that we'll get to, correct?
"Answer: Correct.
"Question: So the lost future payments you valued
at about 17 million. Is that right?
"Answer: (Witness reviews exhibit). For the five
years leading up to the payment of the key money, yes."
This is also confirmed by cross-examination on July
3rd, Page 933, Lines 10 through 16.
Similarly, post-trial briefing presented the same
numbers. Hilton's post-trial brief at Paragraph 109
references that Hilton will fund, out of pocket, the amount
of group services expense that the Hilton resorts would have
otherwise contributed, which Cline estimates have a net
present value of $17 million. The post trial brief
references Hilton’s trial exhibit 24 on Pages 49 and 50.
Similarly, Hilton's post-trial brief further breaks
it out on Paragraph 109, talking about key money constituting
$21 million of a total of $38 million; and Paragraph 110
again breaking out group services expense of $17 million,
plus $21 million in key money.
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Hilton has not shown good cause for not acting
earlier to correct a calculation that was entirely within its
power and was a number advocated by Hilton to this Court.
There is clear prejudice to the other side in the form of a
proposed increase in damages of some $17 million, an increase
which might have affected debtors' litigation strategy if it
had been discussed during discovery. It might have affected
what issues were pursued in discovery. It also might have
affected what questions were asked at trial.
Thus, I conclude that the evidence in support of the
motion is not the kind of highly convincing evidence that is
required to grant a Rule 60(b) motion, and Hilton has not
shown good cause for its failure to act sooner. I also find
there has been a showing of undue hardship to be imposed on
other parties, that is, granting the proposed relief would
impose hardship on the debtors here.
Moreover, I note that it is well settled in this
circuit that three situations warrant reconsideration of
previous court decisions:
One, an intervening change in controlling law; Two,
the availability of new evidence; And three, the need to
correct clear error or prevent manifest injustice. Palaimo v.
Lutz, 837 F.Supp. 55 (N.D.N.Y. 1993).
I note that other courts have commented upon the
fact that ignorance or carelessness on the part of a litigant
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or an attorney will not provide grounds for Rule 60(b)
relief. See Bershad v. McDonough, 469 F.2d 1333, 1337 (7th
Cir. 1972); see also Hoffman, Farmers Co-operative Elevator
Association v. Strand, 382 F.2d 224, 232 (8th Cir.), cert.
denied, 389 U.S. 1014 (1967).
For all those reasons, I side with Hilton on the
first issue; namely, that the damages award should not be
further reduced for risk of termination identified by Mr.
Cline. But I side with the debtors on the second issue;
namely that the $17 million, having been repeatedly advocated
to this Court by Hilton as the proper damages amount, cannot
now be changed after the trial has been concluded and the
Court has issued its ruling.
So again, I conclude that the appropriate way to
approach the damages figure for group services expense is to
take the $17 million; and, to the extent an eight percent
calculation of a discount rate has been applied to reach that
figure, that an appropriate discount rate of 11.6 or 12.6, as
the case may be, should be applied, so that the number
appropriately reflects my ruling on the discount rate.
So I would ask that all this be reflected in the
order to be provided on the motion, and that the parties
order a copy of this transcript, which I will review and put
on the docket as a supplement to my earlier bench ruling.
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KKKKK

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CERTIFICATION
I certify that the foregoing is a correct transcript
from the electronic sound recording of the proceedings in the
above-entitled matter.
August 17, 2012
Coleen Rand, AAERT Cert. No. 341
Certified Court Transcriptionist
AudioEdge Transcription, LLC
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