And we at Zero Hedge thought we were hard on pro-cyclical, bull market, momo, value destroying private equity shops. In a case filed in the Supreme Court of New York, mezzanine lenders for recently bankrupt Extended Stay Motels, Line Trust Corporation and Deuce Proeprties, go to town against not just the two PE firms, but everyone's favorite Bank Of America, recently defunct Wachovia and U.S. National Bank Association (as successor for Bear Stearns), accusing them of one of the oddest collusive arrangements we have ever witnessed.
In essence, as part of Extended Stay's bankruptcy, David Lichtenstein who is guarantor under all the securitized obligations, became a recourse obligor once the filing entities ceased being Special Purpose Entities (i.e., bankruptcy remote) the second the $3.5 million Borrowers' Operating Expenses owed was not paid. The problem with this is that David personally became liable for the total debt amount of $7.4 billion. However, and this is what the lawsuit is about, plaintiffs claim that the PE firms and the abovementioned banks had been working collusively for many months prior to the bankruptcy, agreeing to provide a $100 million indemnity for Lichtenstein, as well as fund a $5 million litigation defense war chest to fight claims by junior lenders.
From the filing:
The Senior Lender Defendants' Machiavellian scheme worked, and as a result of the protections and promises offered by the Senior Lender Defendants to the Guarantor Defendants, Lichtenstein caused all the Borrowers and various affiliated entities, none of which is a defendant herein, to file chapter 11 bankruptcy cases on June 13, 2009. [This was] part of a comprehensive scheme designed to induce Lichtenstein to do that which the senior lender defendants themselves promised all other lenders, under the express terms of the intercreditor agreement, they would never do -- cause the borrowers to file for bankruptcy protection.
The reason why junior lenders are pissed, is that as a result of the allegedly collusive term sheet worked out independently between Lichtenstein and the defendants, the bankruptcy remote entities would become not-so-bankruptcy-remote, junior lenders would be stripped of all claims, David would end up getting a privately arranged equity stake in the pro forma company, and the secured lenders and Cerberus and Centerbridge would end up purchasing the entire portfolio at basically over a 50% discount. More on the two PE firms from the lawsuit:
We learned that hedge funds Cerberus and Centerbridge offered Lichtenstein immense protections and inducements to file bankruptcy.
Of course, if proven, this kind of extensive collusion between numerous "fiduciaries" to strip other creditors of their rights while providing benefits to the junior-most entity in the capital structure, Lichtenstein, is criminal beyond reproach. Additionally, just the lawsuit should scare the living daylights out of any potential co-investor who may even have even a fleeting desire of working pari or under Cerberus (as if Chrysler and GMAC weren't t enough to prove just what deal acumen the Dan Quayle-advised former distressed demi-gods really possess) and Centerbridge. Just like Leon Black and his virtually defunct Apollo outfit showed their true colors once the economy turned, now it is the hedge funds' turn to go dog-eat-dog on other investors who previously they were all buddy-buddy with, hobnobbing in the Hamptons, until the Lehman collapse.
hat tip Todd Weidlich