ALT Hotel, LLC v. DiamondRock Allerton Owner, LLC (In re ALT Hotel, LLC)
479 B.R. 781
Bankr. N.D. Ill.2012Background
- ALT Hotel adversary: debtor ALT Hotel, LLC and Alt Hotel Mezz, LLC securitized the 69M mortgage loan on the Allerton Hotel; Mezz was allegedly the debtor’s parent and part of a securitization structure.
- Mezzanine loan of 10M to Alt Hotel Mezz secured by Mezz’s membership interest; DiamondRock later acquired the loan and the mortgage loan was divided into Tranches A and B, with Wells Fargo and Key Bank involved as servicer and issuer.
- Defaults occurred around 2009–2010; Wells Fargo allegedly used non-monetary defaults (DSCR miscalculation, protective advance) to declare default and commence foreclosure; a deed in lieu was contemplated.
- Wells Fargo transferred the mortgage loan to DiamondRock in 2010 for $61M; DiamondRock allegedly gained additional consideration and benefits from Wells Fargo’s relationships.
- June 2010: Hotel Allerton Mezz foreclosed on the mezzanine loan and acquired the debtor’s membership interest; alter ego allegations were raised to claim Hotel Allerton Mezz was a creditor of the debtor.
- Hotel Allerton Mezz adversary: claims arise from intercreditor agreement (ICA) and pledge/security agreement (PSA) governing mortgage and mezzanine loans; Hotel Allerton Mezz sought to consolidate with ALT Hotel proceeding and asserted six state-law counts; questions about jurisdiction and consolidation were raised.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Count I states a pre-petition breach of contract. | Debtor allege Wells Fargo breached mortgage loan agreement by denying a DSCR-based extension. | DiamondRock argues materiality not required and breach would be cured by other actions. | Count I survives; breach alleged is actionable. |
| Whether Count II states an independent breach of the implied covenant. | Count II premised on breaches of contract and seeks extra damages. | Implied covenant claim duplicative of Count I. | Count II dismissed with prejudice. |
| Whether Count III states an unjust enrichment claim. | DiamondRock’s discount purchase allegedly enriched it at debtor’s expense. | Unjust enrichment requires a transfer of value from plaintiff to defendant. | Count III dismissed with leave to amend. |
| Whether Count IV states a post-petition breach duplicative of Count I. | Post-petition default interest claims mirror Count I. | Duplicative theory; meriting dismissal. | Count IV stricken as duplicative of Count I. |
| Whether Count V supports equitable subordination and Hotel Allerton Mezz has standing. | Alter ego theory makes Mezz a creditor; seeks subordination for harm to creditors. | Delaware veil-piercing limits; no harm shown; standing lacking. | Count V dismissed; Mezz as plaintiff dismissed; equitable subordination claim dismissed; remand for jurisdiction remains separate. |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading must show plausible claim, not mere possibility)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility standard for pleading is required)
- Harris v. Provident Life & Accident Ins. Co., 310 F.3d 73 (2d Cir. 2002) (implied covenant claims duplicative if based on same facts as contract breach)
- Ari & Co. v. Regent Intl. Corp., 273 F. Supp. 2d 518 (S.D.N.Y. 2003) (implied duty claims must be separate from breach of contract)
- In re 80 Nassau Assocs., 169 B.R. 832 (Bankr. S.D.N.Y. 1994) (jurisdictional and related-to concepts in bankruptcy context)
- In re Kreisler, 546 F.3d 863 (7th Cir. 2008) (equitable subordination requires harm to creditors; not merely misconduct)
- Pacor, Inc. v. Home Beneficial Life Ins. Co., 743 F.2d 984 (3d Cir. 1984) (related-to jurisdiction requires potential impact on estate or distribution)