2025-10-21 BK Hearing Transcript on SilverRock1
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IN RE:
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
. Chapter 11
. Case No. 24-11647 (MFW)
SILVERROCK DEVELOPMENT
COMPANY, et al., (Jointly Administered)
. Courtroom No. 4
. 824 North Market Street
. Wilmington, Delaware 19801
Debtors.
Tuesday, October 21, 2025
2.00 p.m.
TRANSCRIPT OF HEARING
BEFORE THE HONORABLE MARY F. WALRATH
UNITED STATES BANKRUPTCY JUDGE
APPEARANCES:
For the Debtors:
For Builders Capital:
Audio Operator:
Erin Fay, Esquire
Catherine Lyons, Esquire
WILSON SONSINI GOODRICH
& ROSATI, P.C.
222 Delaware Avenue
Suite 800
Wilmington, Delaware 19801
Shanti Mulpuru Katona, Esquire
POLSINELLI P.C.
222 Delaware Avenue
Suite 1101
Wilmington, Delaware 19801
Mandy Bartkowski, ECRO
Transcription Company: Reliable
The Nemours Building
1007 N. Orange Street, Suite 110
Wilmington, Delaware 19801
Telephone: (302)654-8080
Email: gmatthews@reliable-co.com
Proceedings recorded by electronic sound recording,
transcript produced by transcription service.
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INDEX
MOTIONS: PAGE
Agenda
Item 1: Debtors' Motion for Entry of an Order
(I) Approving the Sale of the
Purchased Assets to the Successful
Bidder Free and Clear of All Claims,
Liens, Interests, and Encumbrances;
(II) Approving the Consensual
Termination or Rejection of Ground
Leases, Effective as of the Closing
Date; (III) Approving Form of Grant
Deed; and (IV) Granting Related Relief
[Docket No. 621; filed 8/15/2025]
Agenda
Item 2: Debtors' Motion for Entry of an Order
(I) Authorizing the Debtors' Entry Into
Amendment to the DIP Credit Agreement;
(II) Authorizing the Debtors to Execute
and Deliver the Supplemental Deed of
Trust; and (III) Granting Related
Relief [Docket No. 653; filed 8/29/2025]
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Court's Ruling: 3
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(Proceedings commenced at 9:01 a.m.)
THE COURTROOM DEPUTY: All rise. You may be
seated.
THE COURT: Good afternoon. For the record, this
is Judge Walrath in the SilverRock hearing. This is the
continued hearing on the sale and thank you to the parties
for submitting the briefs on the ground lease issue.
Unless anybody wants to be heard, I'm ready to
render a ruling. No additional evidence, I'm sure.
MS. FAY: No additional evidence, Your Honor. We
were both prepared, I assume, for argument but we're also
happy to take a ruling.
THE COURT: I'm ready to rule. And I will rule on
the ground lease issue first.
First, based on the testimony, the buyer is not
assuming or taking assumption of any executory contract or
lease, would not have proceeded with this bid if the
purchased assets could not be transferred free and clear of
any such liabilities; any liabilities, claims, liens or other
interest or claims.
As part of the development plan, according to the
evidence, the debtor, Development Company, leased 29 lots to
the debtor, Luxury Residences, per a 99-year ground lease.
And then debtor, Luxury, granted Builders a first priority
security interest in its interest under the ground lease.
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Under the terms of that, both developer and debtor, Luxury,
agreed not to terminate the ground lease without Builders
consent. And developer gave Builders the right to continue
as tenant if debtor, Luxury's, interests were terminated.
However, I believe, based on the law cited and the
facts adduced, that the ground lease is not a true lease.
Therefore, Section 365 is not applicable. To determine
whether it's a financing agreement or a true lease court must
look at the circumstances and economic substance of the
agreement to discern the true nature of the instrument
regardless of what it is called.
California case law cited by the debtor generally
considers a ground lease as a financing device for developing
unimproved land and that is exactly the circumstances we have
here. And the Second Circuit has similarly found ground
leases were financing agreements, not true leases. The facts
of this case support this conclusion. The lease, itself,
says that it is essentially a financing device rather then a
traditional operating lease and that's Joint Exhibit 23 at
Paragraph 2 (b) .
The rent is not market by any means. It's a
dollar a year for 99 years regardless of what the market may
charge for such bare ground, regardless of what risks, costs,
expenses or revenues the property generates or may generate
during the entire 99-year period. It's a triple net lease
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where the lessee bears all the costs of the property but,
again, the landlord is getting nothing but a dollar a year.
Consequently, the Court has to conclude that it is not a true
lease but is a financing agreement. Therefore, again, 363 is
applicable and not any rights that a lessor or lessee may
have under 365(h).
With respect to the debtors request to sell all of
its property free and clear of liens, encumbrances, and
interest of the objecting parties under Section 363 I make
the following findings of fact:
First, the sale process was not tainted. The
debtor exercised its fiduciary duty and business judgment
rule to proceed with a sale process. It was originally
approved by the Court. The debtor exercised business
judgment in extending bid deadlines to encourage additional
bidders, switch to a live auction from sealed bids when only
two bidders materialized and were ready to proceed.
The parties may disagree with those specific
decisions but under the terms of the bid procedures the Court
gave the debtor that discretion and the Court finds that
based on all the testimony I have heard that the debtor
properly exercised that discretion.
I further find that the City did not exercise
inappropriate control over the process or use its veto power
inappropriately. The reality is that the City had the power
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-- had some power in this situation because the contracts,
and entitlements, and regulations all impacted the ability to
develop this project. In fact, the Court concludes that the
City went out of its way to try to assure that there was an
open process where bidders would be able to bid knowing that
the City had been involved and reviewed their plans and would
not deny them the appropriate entitlements and other terms
including the ability to exercise the option that the City
had given the debtor that it would not preclude them from
using that to fully develop the project.
All of these issues and power, if you will, of the
City over the development of the project were all known to
the secured creditors, to all bidders, and to all parties.
They were well communicated and they were not a surprise. I
specifically credit the following testimony regarding the
fairness of the process and that is the testimony of the
independent manager, Mr. Sontchi, who confirmed that the
decision was always made by him after consulting with his
advisors and the interested parties in the case, including
the objectors and the City, with respect to the conduct of
the sale process, the qualification of bidders, the pivot to
a live auction and ultimately the determination of the
winning bidder. While those decisions by the independent
manager were informed by the preferences of the City, they
were not controlled by it.
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Further, I credit the testimony of the City's
representative, Mr. McMillen, as credible. He has been
involved in this project for many, many years from its
inception and fully understood the interplay between the
City's rights as regulator, as a party to the option, and the
other agreements between the debtors and the City's, and
understood the needs of the City with respect to any
development of the project; from taxing, regulatory, land use
planning, utility needs, and the issuance and process for
issuing permits.
He testified that the City was willing to consider
all bids and that the City answered inquiries from buyers
where appropriate and referred them to the debtors where
appropriate. That the City accelerated its approval process
so that the bidders could be assured, again, that they were
not buying into a project that would not ultimately be
approved by the City. All of those actions, I find, helped
maximize the value of the debtors property. It did not
impede or diminish the value of the property.
Even when the City disagreed with the debtors
evaluation of the two bidders, it didn't simply veto that
decision but it came up with true value to the estate in
order to convince the debtor to choose its preferred bidder
over the other bidder. There has been no complaint from the
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other bidder or from any bidders who participated in this
process that the process was not fair.
I also accept, as credible, the testimony of Mr.
Gazano (phonetic), the buyer's representative, and conclude
that there is no evidence of any collusion or improper
activity by the buyer. No preference was given to it by the
debtor or the City. They made Turnbridge go through the
process and made their evaluations based on what it had to
offer.
Its decision not to bid if it could not have
talked with the City about the ability to get entitlements,
that is permits and other approvals to get the project back
on track, was not improper; in fact, it was fully expected of
anybody who would want to bid on a project of this
complexity, subject so much to the approval of the City in
ultimately agreeing to allow the debtor to sell not just its
interest in the property but also the option that would
require the debtor -- excuse me, would require the City to
basically honor that option to a new entity.
I think I mentioned during the hearing, I cannot
imagine that anybody would have bid without the City having
been fully involved in the process. So, I believe that the
buyer did act appropriately and complied with all the
requirements of the bid procedures that it negotiated in good
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faith with the debtor and with the City and is entitled to a
363(m) finding.
While the objectors assert that they have proposed
a far better result for them and all stakeholders in this
case, the Court cannot agree. Its proposal is not in
compliance with the sale procedures that the Court approved.
It is untimely, not compliant with the procedures in that it
has no committed financing, is not an unconditional offer and
has no development plan acceptable to the City. And I agree
with the decision of the independent manager that a pivot to
the Cypress proposal would be too risky and lose the
proverbial bird in the hand.
Under these circumstances the Court is reluctant
to upset the expectations of all parties to the sale process
including the winning bidder, all of whom put substantial
effort into doing due diligence, qualifying its bidders,
negotiating with the City, and preparing to close promptly.
Based on all of that, I believe that I can make a finding of
fact that the bid procedures were appropriately followed and
modified in the fiduciary duty of the debtor and that
Turnbridge is the highest and best bidder who was -- who
resulted from that process.
Let me turn to the objections regarding whether or
not the sale can be free and clear of interest. 363(f)
allows a trustee to sell property under Subsection (b) free
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and clear of any interest in such property of an entity other
then the estate, only under certain circumstances. (f)(3)
consent of the entity -- excuse me, (f)(2) consent of the
entity is not applicable because, obviously, we have
objectors here. (3) is also not applicable because the
interest, although the interest is a lien, the price at which
the property is being sold is clearly not enough in aggregate
value to pay all the liens on that property but the debtor
does rely on (f) (1) and (f) (5) and (f) (4) .
Let me take (f) (1) and (f) (5) together, and they
deal with whether or not applicable non -bankruptcy law
permits sale of such property free and clear of such interest
or such entity could be compelled in a legal or equitable
proceeding to accept a money satisfaction of such interest.
The debtor argues that the debtor can step into
the shoes of any entity that could under non -applicable law
sell the property free and clear of liens. The objectors
disagree, but I conclude that I agree with Judge Owens'
reasoning in Southland, who said that (f)(1) has to include
the debtor because otherwise it would add language to that
section that would state that applicable non -bankruptcy law
permits sale of such property by the debtor free and clear of
liens. There's no "by the debtor" language in (f)(1) and,
therefore, it can't be read into the statute, but I think I
stated I agree with Judge Owens for another reason. If
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(f)(1) only gave the debtor the power to do something that
the debtor already had under non -bankruptcy law, it would be
superfluous because nothing in the Code eliminates rights the
debtor would have to sell free and clear of liens. And this
reasoning applies equally to (f)(5).
And I find that the debtor has presented evidence
that there is non -applicable bankruptcy law -- excuse me,
non -bankruptcy applicable law that allows the debtor to sell
its property free and clear of liens. It has cited to
numerous statutes and case law in California that does permit
an entity to sell free and clear of a senior creditor's lien,
a junior creditor's lien, the various statutes include
receiverships, foreclosure actions, refer to actions or liens
by taxing authorities against other secured creditors, and
mechanic's lienors who also can force a sale free and clear
of the rights of other secured creditors, and there are in
fact actions by mechanic's lienors regarding asserting their
priority.
Again, I find that (f) (1) and (f) (5) allow the
debtor to step in the shoes of such an entity, and,
therefore, I conclude (f) (1) and (f) (5) allow the debtor to
sell free and clear of the senior and junior secured
creditors with liens on this property.
I also find there is evidence in the record to
support the use of (f)(4) with respect to Builders and EB-5.
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Although the objectors assert that the debtors have listed
them as secured in their schedules and did not state that
their claim was disputed, un-liquidated, or contingent, the
evidence presented is sufficient to show that there is a
contest.
With respect to Builders' interest in the ground
lease, the debtors contend that the ground lease is avoidable
as a fraudulent transfer because no reasonably equivalent
value was provided and it occurred while the debtors were
insolvent, and there is some evidence because the reasonably -
equivalent value would refer to the amount of the rent being
paid and, again, that's one dollar a year. There is a
dispute about it, of course, but that creates a bona fide
dispute as to the validity of that lien on the property.
I also find that the existence of the mechanic's
lienor complaints does raise a dispute. The objectors assert
that the only dispute in that is the priority of the secured
liens, but I believe that priority is a bona fide dispute,
and that the language of (f)(4) is not limited to a bona fide
dispute as to the validity of the claim, and this is
particularly so because Section 363(p) mentions priority and
validity as items for which the creditors bear the burden of
proof to oppose sales free and clear under 363(b).
With respect to EB-5, the debtors assert that the
Keillor subordination agreement raises a bona fide dispute,
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again, as to priority, and the Court again finds that a
dispute over priority is sufficient to meet the standards of
(b) (4).
So, with all that, I believe the debtor has met
its burden of proof to sell the debtors' property and all of
its contingent rights free and clear of liens under 363(f) to
Turnbridge.
Any questions?
MS. FAY: No questions, Your Honor. We do have
the form of order that we had filed last week. There were a
few tweaks to address --
THE COURT: What was the docket number of it? I
pulled it up last time, but not this time.
MS. FAY: It was Docket Item 729.
THE COURT: 729.
MS. FAY: There would be some slight adjustments
to it to account for additional evidence and the like, and we
would likely need to consider Your Honor's ruling with
respect to the leases and the language of the particular
provision for that, but otherwise we would not expect any
meaningful changes to that form of order.
THE COURT: All right.
MS. KATONA: Your Honor, if I may be heard?
THE COURT: You may be heard.
MS. KATONA: Your Honor, subject to being able to
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take a look at the order, I think the only question we had
was with respect to the debtors' request in the order for
6004 relief, a waiver of 6004(h). I don't believe that that
was addressed in any of the briefing, and I don't believe it
was addressed at closing.
Your Honor, since there's no urgency to close
based on a lot of the conditions that still need to be met in
accordance with what was presented throughout the hearing,
Your Honor, we would request that 6004(h) remain in place and
it not be waived.
Thank you.
MS. FAY: Your Honor, we have an urgent need to
move these cases forward and, to do that, we need to have an
order that is in place and to the extent the objectors are
going to appeal it that they go ahead and do that within the
14 days that the Code provides. There is not a significant
period between now and the potential closing of the sale,
which I believe is on the 12th, and to the extent that things
happen in the meantime that we need to react to, we need time
to do that.
We've seen a number of twists and turns in these
cases, but we have title insurance companies that we need to
deal with, which is not insignificant, and there are many
pieces that need to be put in place for closing to occur and
for that to happen we need an order that is entered and
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final.
THE COURT: Yeah, I think that I will waive the 14
days under the rule and make it go final now. I don't see
any urgency or any need to rush back in to me for a motion
for stay pending appeal, but if that changes, I'm here, even
though we're shut down.
MS. FAY: Thank you, Your Honor.
THE COURT: All right.
MS. FAY: We will circulate the order to the other
side and then file it, I suppose with the blackline just for
the record, and have it uploaded.
THE COURT: That would be helpful, under
certification of counsel, yes --
MS. FAY: Thank you, Your Honor.
THE COURT: -- with a blackline.
MS. FAY: That leaves the DIP motion that we
pushed over to today, and my colleague Ms. Lyons is going to
address that.
MS. LYONS: Good afternoon, Your Honor, Catherine
Lyons, Wilson Sonsini Goodrich & Rosati, on behalf of the
debtors.
**2 The debtors seek entry of an order approving the
amendment to the DIP credit facility that was previously
approved by the Court on January 24th, 2025. At that time,
the debtors entered into the DIP credit agreement with the
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city as DIP lender. As Your Honor is aware, that DIP
facility authorized the debtor to obtain $11 million in
senior secured post -petition financing, granted the DIP
lender liens on all of the DIP collateral, and granted the
DIP lender allowed superpriority administrative expense
claims in the Chapter 11 cases for the DIP credit facility
and the DIP obligations. That order also includes in Exhibit
3 both to the final DIP order and the amended final DIP order
caps on priming of the DIP liens with respect to specified
collateral.
During the cases, the debtors have used the funds
provided under the DIP order and the DIP credit agreement on
the terms set forth therein to run, among other things, the
sale process. In connection with the sale process, the city
agreed to certain additional terms and limited modifications
of the DIP credit agreement and, as a result, we filed the
DIP amendment at Docket Number 653.
At a high level, the DIP amendment does two
things: It provides up to $2 million in excess of the
current $11 million DIP facility, which we call the wind -down
expense contribution, to provide for the wind -down of these
cases, that's being lent on a subordinated basis, and is
specifically subordinated to repayment of other allowed and
unpaid admin and priority expenses of the estates. And it's
very clear in the DIP amendment that the liens and
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administrative expense claims arising under the wind -down
expense contribution will not prime other valid debt secured
by unavoidable liens in the debtors' real property that's
sold to the buyer or proceeds of the same. And we're going
to draw the wind -down expense contribution as we've drawn the
other draws under the DIP facility.
In addition, there's an extension of milestones
under the DIP credit facility and the DIP amendment, and most
importantly there is a credit of $2.25 million of the DIP
facility with respect to the city's existing liens in the
debtors' real property and the proceeds. The DIP facility
and the DIP amendment are subject to and conditioned on the
satisfaction of certain covenants, one of which was entry of
the sale order.
The debtors believe that the relief requested by
the DIP amendment motion is warranted under the circumstances
and applicable bankruptcy law, specifically Section 364 of
the Bankruptcy Code, which grants debtors considerable
deference in acting in accordance with their business
judgment to obtain post -petition secured credit. Here, the
debtors believe the DIP amendment is a reasonable exercise of
their business judgment. The debtors require access to
additional financing to successfully and consensually resolve
these cases and, as Your Honor heard during the sale hearing,
the city's agreement to provide the city consideration was an
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important part of the debtors' determination to select
Turnbridge as the successful bidder, and represents
independent value to the estates.
The debtors believe that the credit of the DIP
facility will inure to the benefit of all parties in these
cases, in particular secured creditors because the priming
caps, which I mentioned previously, are being radically
reduced through the DIP amendment.
Builders Capital filed a limited objection and
reservation of rights with respect to the DIP amendment
motion on two grounds really, the first being that because
the sale had not been approved, approval of the DIP amendment
was premature and illusory. The debtors disagree,
particularly in light of the ruling. The debtors believe
that the DIP amendment sets forth in detail the terms of the
city consideration, which will inure to the benefit of all
constituencies, including Builders Capital.
Builders also objected to the terms of the credit
because it didn't account for the allocation proposed by the
debtors. This was based on an exhibit that we filed in
August in support of the exclusivity extension motion, and we
would submit that the reduction in priming caps is clearly
set out in section 2(g) of the DIP amendment. And, for the
record, caps that were previously one million are being
reduced to $112,000 -- $812,500, caps that were previously
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four million are being reduced to 3.25 million, and caps that
were previously seven million are being reduced to 687.5
million.
So, unless Your Honor has any questions, we would
request that the Builders Capital objection be overruled and
that the relief requested by the DIP amendment motion be
granted.
THE COURT: Any response?
MS. KATONA: Good afternoon, Your Honor, Shanti
Katona on behalf of Builders. Your Honor, in light of the
ruling that was just made with respect to the sale itself, I
don't believe that there's any basis for Builders to continue
its limited objection and we would have no concerns with the
Court entering that order.
Thank you.
THE COURT: All right, thank you.
Do you want to present it after you present the
sale order, or do you want me to enter it before?
MS. LYONS: I believe it's been uploaded, but we
will confer and make sure.
**R2 THE COURT: All right. Just alert Ms. Capp if you
want me to file it as it has been filed. I'll enter the
order now. All right?
MS. FAY: Nothing further from the debtors, Your
Honor. We thank you and your staff and chambers for
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accommodating us throughout the trial and everyone's
attention.
THE COURT: Thank you for getting me the briefing
timely, it was helpful.
All right, we'll stand adjourned.
COUNSEL: Thank you, Your Honor.
(Proceedings concluded at 2:29 p.m.)
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CERTIFICATION
We certify that the foregoing is a correct
transcript from the electronic sound recording of the
proceedings in the above -entitled matter to the best of our
knowledge and ability.
/s/ William J. Garling October 21, 2025
William J. Garling, CET-543
Certified Court Transcriptionist
For Reliable
/s/ Tracey J. Williams October 21, 2025
Tracey J. Williams, CET-914
Certified Court Transcriptionist
For Reliable