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2025-01-13 Debtors' Reply to Objection (Doc 300, received 2025-01-23)Case 24-11647-MFW Doc 300 Filed 01/13/25 Page 1 of 8 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: SilverRock Development Company, et al., Debtors. I Chapter 11 Case No. 24-11647 (MFW) (Jointly Administered) Re: D.I. Nos. 246 and 293 DEBTORS' REPLY TO POPPY BANK'S OBJECTION AND IN SUPPORT OF MOTION OF DEBTORS PURSUANT TO SECTIONS 105, 361, 362, 363, 364, AND 507 OF THE BANKRUPTCY CODE, BANKRUPTCY RULE 4001, AND LOCAL RULE 4001-2, FOR AN ORDER (I) AUTHORIZING DEBTORS TO OBTAIN POSTPETITION FINANCING; (II) GRANTING DIP LENDER PRIMING LIENS AND SUPER -PRIORITY CLAIMS; AND (III) GRANTING RELATED RELIEF The Debtors hereby submit this reply (the "Reply") to the objection of Poppy Bank [D.I. 293] (the "Objection") and in support of the Debtors ' Motion, Pursuant to Sections 105, 361, 362, 364, and 507 of the Bankruptcy Code, Bankruptcy Rule 4001, and Local Rule 4001- 2, for an Order (i) Authorizing Debtors To Obtain Postpetition Financing; (ii) Granting DIP Lender Priming Liens and Super -Priority Claims, and; (iii) Granting Related Relief(D.I.246) (the "DIP Motion"): I. Introduction 1. Poppy Bank ("Poppy"), the only party to oppose the DIP Motion, does not dispute that the Debtors are in dire need of DIP financing, which is the only financing available to the Debtors to avoid immediate and irreparable harm to the Debtors and their estates. In 'The Debtors in these chapter 11 cases, along with the last four digits of each Debtor's federal tax identification number, as applicable, are: SilverRock Development Company, LLC (5730), RGC PA 789, LLC (5996), SilverRock Lifestyle Residences, LLC (0721), SilverRock Lodging, LLC, (4493), SilverRock Luxury Residences, LLC (6598) and SilverRock Phase 1, LLC (2247). The location of the Debtors' principal place of business and the Debtors' mailing address is 343 Fourth Avenue, San Diego, CA 92101. 1 Case 24-11647-MFW Doc 300 Filed 01/13/25 Page 2 of 8 fact, in the Objection, Poppy "recognizes the Debtors' need for DIP financing and does not take issue with the terms that have been offered by the City." See Objection, Par 1. Further, "Poppy agrees that the terms offered by the City are likely better than those that could have obtained from any other lender." Id. Despite these admissions, Poppy asks the Court to deny the Motion, preventing the Debtors from accessing the financing necessary to maintain and preserve the value of the Debtors' real estate and the Project Opportunity, run a robust, value - maximizing marketing and sale process to achieve the highest and best value for the Debtors' assets, and pay administrative claims associated therewith and propose a plan that maximizes value for all of the Debtors' stakeholders. Importantly, each of the other secured creditors, including all of the other Major Constituents, have consented to the relief requested in the DIP Motion.2 2. Poppy's sole argument in support of the Objection is that there is an insufficient equity cushion in the Poppy Collateral3 to adequately protect Poppy's secured interest under Bankruptcy Code Section 364(d)(1)(B). Tellingly, Poppy offers no evidence in support of this position and merely accuses the Debtors of failing to demonstrate, in the Motion, that Poppy is adequately protected.4 As discussed further below, the Debtors believe that Poppy is adequately protected by an equity cushion with respect to the Poppy Collateral and will 2 Secured creditors Construction Loan Services II, LLC (dba Builders' Capital), RAF Pacifica Loan Opportunity Fund I, LLC (dba Keilor Capital), and Cypress Point Holdings, LLC directly consented to the terms of the DIP Facility, while the remaining secured creditors, including all those asserting mechanics lien claims against the estates, did not object to the Motion, thereby consenting to the terms of the DIP Facility. 3 Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Motion or Objection. The Objection also makes the unsupported assertion that the Debtors need to make a showing of adequate protection in their "moving papers." See Objection, Par 15. Poppy offers no supporting statutory or case authority demonstrating that this requirement exists. As the Debtors indicated in the Motion and in this Reply, they will present evidence showing there is adequate protection the Poppy Collateral either prior to or at the hearing on this Motion. 2 Case 24-11647-MFW Doc 300 Filed 01/13/25 Page 3 of 8 present evidence so demonstrating.5 The evidence will show that even using very conservative assumptions, there is more than a sufficient equity cushion in the Poppy Collateral to adequately protect Poppy under Section 364. 3. The evidence will also support the Debtors' consistent position that creditor recoveries will be maximized through a court -supervised sale process of the Project Opportunity as an integrated whole to a developer capable of completing the Project and using the resulting proceeds to confirm a Chapter 11 plan. Should the Court deny the Motion, as Poppy requests, the Debtors will lack sufficient funding to continue and may be forced to convert these cases to Chapter 7, to the detriment of Debtors' stakeholders, including junior secured creditors, unsecured creditors6, the City of La Quintal, and other stakeholders to the estates, who may receive little to no return in the event of a Chapter 7 liquidation. As a result, the Court should overrule the Objection and allow the Debtors to obtain the funding necessary to conduct a robust and efficient sale process that will maximize value for all constituencies of the estates. 5 The Debtors intend to file a declaration of Edward T. Gavin, Managing Director of Gavin/Solmonese LLC in advance of the hearing and will present his testimony (by declaration or live) in support of the relief requested in the DIP Motion. 6 As there is no unsecured creditors committee in this case, the Debtors -in -Possession are the only parties actively representing the interest of the unsecured creditors, who, in all likelihood, can only be paid through a Plan connected with the sale of the Project opportunity, not a piecewise liquidation of the Project parcels. Sustaining Poppy's Objection has the likely outcome of wiping out the interests of the unsecured creditors. As the City has repeatedly represented, it is in their interest, and in the interest of their voting constituency, to see the Project move toward completion, not to coerce a piecemeal sale of the Project that benefits only senior lienholders like Poppy. As the City has repeatedly represented, it is in their interest, and in the interest of their voting constituency, to see the Project move toward completion, not to coerce a piecewise sale of the Project that benefits only senior lienholders like Poppy. 3 Case 24-11647-MFW Doc 300 Filed 01/13/25 Page 4 of 8 II. Argument A. The Value of the Poppy Collateral Must Be Considered in the Context of a Sale of the Entire Project Opportunity 4. In the Objection, Poppy fails to recognize the value created by a sale of the Project Opportunity as a whole in a 363 sale process rather than a piecemeal liquidation of the Poppy Collateral outside of these chapter 11 cases. It is in the context of a sale of the entire Project Opportunity where value is maximized for Poppy and all stakeholders. Indeed, Poppy admitted in its motion to classify SilverRock Development Company, LLC as a single -asset real estate entity8 that the "Project is contemplated to be a single, unified development under agreements between SilverRock Development and the City" [See D.I. 122, Par 3] and that "the parcels are operated as a single development project with all parcels falling within the `Project' contemplated by the PSDA and Development Agreement."9 Id. at Par 34. 5. Bankruptcy Code Section 506(a) provides that the value of collateral "shall be determined in light of the purpose of the valuation and proposed disposition or use of such property." In First S. Nat'l Bank v. Sunnyslope Hous. Ltd. (In re Sunnyslope Hous. Ltd.), 859 F.3d 637 (9th Cir. 2017) (en banc), the Ninth Circuit held that under Section 506(a), it is appropriate to value collateral assuming its continued use based on the intended use of the collateral by the debtor(s), and not the liquidation value more appropriate for a failed business incapable of reorganization. Id. at 640. Consistent with this principle, the Poppy Collateral, 8 While the Debtors agree their property constitutes an integrated, real estate development Project Opportunity, they expressly disagree with the legal conclusion reached in Poppy's SARE Motion (Docket No. 122), since withdrawn, that the Project Opportunity or any component thereof meets the Bankruptcy Code's definition of "single asset real estate." 9 The property description in the PSDA and Development Agreement includes all real property owned by Debtors SilverRock Development Company, LCC and RGC Pa 789, LLC. 4 Case 24-11647-MFW Doc 300 Filed 01/13/25 Page 5 of 8 for adequate protection purposes, should be evaluated in the context of a sale of the entire Project Opportunity. Here, the Debtors have always intended to sell their real estate as a single, integrated Project Opportunity, meaning the Project Opportunity as a whole, and not just the Poppy Collateral. The Debtors believe this will maximize value and recovery for all creditors, including the secured creditors. As a result, it is appropriate to consider that the Poppy Collateral will be sold as part of the Project Opportunity in these chapter 11 cases when determining whether Poppy is adequately protected. 6. Bankruptcy Code Section 361, which provides a non -exhaustive list of examples of adequate protection, reflects "the parties and the courts flexibility by allowing such other relief as will result in the realization by the [prepetition lienholder] of the value of its interest in the property involved." House Report No. 95-595, 95th Cong., 1st Sess. (1978), reprinted in 1978 U.S. Code Cong. Admin. News 5787, 6296. Consistent with this flexible arrangement, adequate protection is not restricted to a narrow analysis of the lienholder's specific prepetition collateral but rather should achieve the goal of preventing a prepetition lienholder "from diminution in the value of its interest during the Chapter 11 reorganization." In re 495 Cent. Park Ave. Corp., 136 B.R. 626, 631 (Bankr. S.D.N.Y. 1992) citing Bank of New England v. BWL, Inc., 121 B.R. 413, 418 (D.Me. 1990); In re Beker Indus. Corp., 58 B.R. 725, 736 (Bankr.S.D.N.Y. 1986). Here, the sale of the Project Opportunity as an integrated development opportunity provides additional adequate protection to Poppy. 5 Case 24-11647-MFW Doc 300 Filed 01/13/25 Page 6 of 8 Consistent with this intended process,10 for adequate protection purposes, the Poppy Collateral should be valued as part of the integrated, unified Project Opportunity. B. Poppy is Adequately Protected even if Debtors can only Consider the Value of the Poppy Collateral 7. Even if, as Poppy asserts, the Debtors may only consider the value of the Poppy Collateral without reference to its intended use in the integrated Project Opportunity in determining whether Poppy is adequately protected under Section 364, a sufficient equity cushion exists to create such adequate protection. See In re May, 169 B.R. 462 (Bankr. S.D. Ga. 1994) (equity cushion in property may provide creditor with adequate protection); In re Southwest Associates, 140 B.R. 360 (Bankr. S.D.N.Y. 1992) (same). Through the evidence presented at the hearing, the Debtors will establish that the value of the Poppy Collateral far exceeds the amount loaned by Poppy to Debtors' prepetition, including interest (the "Poppy Loan"), and any valid mechanics liens11 that might be senior to Poppy's secured interest in the Poppy Collateral. 8. The undisputed facts regarding the Poppy Loan and Poppy Collateral provide clear and compelling support for Debtors' position that this equity cushion alone affords Poppy adequate protection. The amount of the Poppy Loan as of December 17, 2024, including interest at the default rate, and without conceding that such rate is anything but an unenforceable penalty, but not including attorney fees, is approximately $34,756,745.81. 10 The Debtors have held weekly meetings with Poppy and the other Major Constituents since the early stages of these Chapter 11 Cases, and no creditor has voiced an opposition of the proposed path to sell the Project as an integrated opportunity or valuing it as an integrated opportunity. 11 The Debtors believe there is approximately $20 million in valid mechanics lien, held by R.D. Olson Construction, Inc. and Granite Construction Company. While other mechanics liens, totaling approximately $20-$25 million, are asserted, the Debtors dispute their validity, as the holders of these liens did not foreclose within the time required by California law and did not provide the Debtors with appropriate notice under Bankruptcy Code Section 546(b). 6 Case 24-11647-MFW Doc 300 Filed 01/13/25 Page 7 of 8 9. The Poppy Collateral consists of real property within the upscale community of City of La Quinta, California. The Poppy Collateral, a key component of the Project Opportunity, consists of parcels in the Montage Hotel Site, the Pendry Hotel Site, the Golf Clubhouse Site (the golf course itself while an integral part of the Project Opportunity, is and will remain owned by the City of La Quinta), the Conference and Shared Services Site, the Montage Residences Site consisting of 16 luxury home lots, the Pendry Residences Site consisting of 55 single family upscale residential lots and the Pendry Bungalow Site also consisting of 55 residential units. Attached hereto as Exhibit A is a site plan identifying the Poppy Collateral and how it physically relates to the Project Opportunity as a whole. 10. Mr. Gavin will testify that he has reviewed appraisals performed by two separate reputable appraisal firms, CBRE and HVS, of Debtors' property, including the Poppy Collateral. He also will testify that as an expert in restructuring and chapter 11 reorganization, he reviewed the appraisals, tested their assumptions, factored in additional considerations such as interest rate projections and other macro factors, and based on such review and analysis, he concluded that Poppy is adequately protected under section 364. III. Conclusion The Debtors have the burden of proof on the issue of adequate protection. The standard of proof is a preponderance of the evidence (See e.g. In re Packard Square LLC, 574 B.R. 107, 116 (Bankr. E.D. Mich. 2017)). The Debtors will show that Poppy is adequately protected. Accordingly, the Poppy Objection should be overruled, and the Court should grant the relief requested in the Motion and such other and further relief as is just and proper. 7 Case 24-11647-MFW Doc 300 Filed 01/13/25 Page 8 of 8 Respectfully submitted, Dated: January 13, 2025 Wilmington, Delaware ARMSTRONG TEASDALE LLP /s/Jonathan M. Stemerman Jonathan M. Stemerman (No. 4510) Eric M. Sutty (No. 4007) Denisse Guevara (No. 7206) 1007 North Market Street Third Floor Wilmington, Delaware 19801 Telephone: (302) 416-9670 jstemerman@attlp.com esutty@atllp.com dguevara@atllp.com -and- Victor A. Vilaplana (Approved Pro Hac Vice) 823 La Jolla Rancho Road La Jolla, CA 92037 Telephone: (619) 840-4130 vavilaplana@gmail.com -and- Benjamin M. Carson (Approved Pro Hac Vice) 5965 Village Way, STE E105 San Diego, CA 92130 Telephone: (858) 255-4529 ben@benjamincarsonlaw.com 8 Case 24-11647-MFW Doc 300-1 Filed 01/13/25 Page 1 of 2 EXHIBIT A .11647-MFW Doc 300-1 Filed 01/13/25 Page 2 of 2 Montage Hotel & Spa Santa Rosa Mountain Range �y. City Of La Quints Venue Site Conference Center & Shared Services Pendry Hotel Golf Clubhouse Pendry Residences Future Village Future Residential Future DeveloariiPi ,. Futuf e Development aai