💥New Chapter 11 Bankruptcy - Lodging Enterprises LLC💥
Dispute with lenders leads to hotel/restaurant operator in bankruptcy.
On June 26, 2024, Lodging Enterprises LLC (the “debtor”) filed a chapter 11 bankruptcy case in the District of Kansas (Topeka)(Judge Somers). The debtor owns and operates 44 Wyndham-branded hotels and 27 restaurants (collectively, the "portfolio") located in 23 states across the country. The portfolio generally accommodates employees within the transportation, railroad, construction, and resource sectors who encounter extended hours on the road. The debtor is operated by Avantic Lodging Enterprises Inc. (“Avantic”), a non-debtor affiliate management services company.
The debtor has approximately $127.6mm of funded secured indebtedness relating back to the $215.5mm purchase of the portfolio back in ‘19. UBS Commercial Mortgage Trust 2019-C18, Commercial Mortgage Pass-Through Certificates, Series 2019-C18 (“UBS”) is the lender, Wilmington Trust NA is the master servicer, and Rialto Capital Advisors LLC (“Rialto”) is the special servicer of the debt (together, the “prepetition secured parties”).
Fund flows, including the service of debt payments to the pre-petition secured parties, obviously runs through the debtor’s cash management system. We’ll spare you all of the gory details but apparently this system is a bit of a dumpster fire 🔥; there are some holes with respect to timing of inflows and outflows that create some operating deficits. Per the debtor:
When the Debtor's actual operating expenses vary from budgeted expenses the Debtor has no formal mechanism for reconciling that variance, on a monthly or quarterly basis, to obtain the necessary funds necessary to sustain operations without a shortfall. This issue is exacerbated during the high season when actual operating expenses often exceed budgeted amounts, which strains the Debtor's liquidity.
In the past, the Prepetition Secured Parties, previously acknowledged this issue and permitted the Debtor to substantiate differences between amounts budgeted and actually expended to prevent needed funds from remaining in the Excess Cash Subaccount, rather than released to the Debtor. The Prepetition Secured Parties have ceased cooperating with the Debtor in this respect.
But that’s not all. There’s more drama surrounding the cash management system.
On April 24, 2024, Rialto sent the debtor a notice of default premised upon allegations that the debtor had misappropriated and circumvented the cash management system to the tune of over $13mm. UBS sent a subsequent reservation of rights regarding the alleged default (but also funded $4.4mm of op-ex under an approved budget). The debtor disputed the alleged default for a bunch of reasons too boring to get into here — the foremost of which is their argument that, to date, it has repaid over $17mm of principal and never missed a coupon payment. Defensiveness aside, it wanted to coordinate with UBS/Rialto to solve the outstanding issues.
Rialto be like…
