Madison 92nd examiner recommends hybrid auction sale if no buyout deal

By Caroline Salls

Pittsburgh, Dec. 12 - Madison 92nd Street Associates, LLC's examiner recommended Monday that the company's two factions should "combine their approaches through a hybrid auction sale of the hotel asset of and the debtor's equity" if they cannot reach a buyout agreement, according to the examiner's report filed with the U.S. Bankruptcy Court for the Southern District of New York.

As previously reported, the court ordered appointment of examiner Thomas R. Slome in September in response to a motion filed by co-managing member Robert Gladstone and three of Madison 92nd's members.

According to the motion, co-managing members 92nd St. Hotel Associates LLC, which is controlled by Louis Taic, and JKNY, LLC, which is owned by Jeffrey Kosow, filed the bankruptcy case without corporate authority in direct contravention of the provisions of the debtor's operating agreement.

The movants said these co-managing members knowingly violated the operating agreement because Hotel Associates reneged on its commitment to sign a fully negotiated $86 million stalking horse sale contract under which creditors would have been paid in full and equity would have received a significant return.

Gladstone and the three members said Hotel Associates reneged in an attempt to squeeze them to sell their membership interests at a steep discount.

In addition, the movants said the co-managing members secretly signed a financing term sheet that attempts to remove them entirely from ownership of Madison 92nd Street's sole asset and wanted to complete an illegal hostile takeover of the company.

The examiner was charged with investigating the best reorganization strategy for the company, with a recommendation as to whether Madison 92nd's refinancing, sale or some other option is in the overall best interests of the company, its estate, its creditors and its equity holders.

If the two factions do not accept his recommendation for a hybrid auction sale, Slome said "they would be best served by getting squarely behind the sale approach." If they reject both approaches, the examiner said a Chapter 11 trustee should be appointed.

The examiner said a plan of reorganization based on the recommended hybrid sale should provide full payment to secured and unsecured creditors and cash to the Gladstone Group, while permitting the possibility of a refinancing of the hotel through a bid by the Taic Group for Madison 92nd Street's equity.

Slome said a sale of just the hotel asset would eliminate the Taic group class of buyers, which believes that a hotel sale would yield a low price because the asset would be sold in a distressed sale.

Refi issues

Meanwhile, the trustee said "the refi approach alone is simply too problematic."

"I have not seen a concrete plan for a refinancing of this hotel and any such plan appears to me to be far from moving forward," the examiner said in his report.

"Further, it appears to me that such a refinance plan done by the Taic Group would require an upfront deal with Marriott in order to line up required equity and/or credit financing, which means that pursuing it alone would not maximize the debtor's leverage against Marriott.

"It would, more likely, serve only to compromise that leverage."

According to the report, Slome was able to bridge an $11 million gap between the parties to zero in his efforts to facilitate a settlement, and the parties agreed in principle in November for one faction to buy out the other.

However, the examiner said "the negotiations ran into certain snags," and the parties are still trying to resolve a disagreement over some non-monetary terms of a buyout agreement.

Madison 92nd Street is a New York-based hotel owner. The company filed for bankruptcy on Aug. 16, and the Chapter 11 case number is 11-13917.

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