A bankruptcy court hearing set for this week could go a long way toward resolving issues that have stalled 20 California housing developments by Irvine-based SunCal Cos.
A Thursday hearing in Santa Ana is expected to address whether creditors soon can vote on a pair of competing exit plans for the bankrupt developments. Among the developments is San Clemente’s 247-acre Marblehead Coastal project.
The projects, once valued at nearly $4 billion, went into bankruptcy last November. They were backed by SunCal’s onetime largest financial partner, New York-based Lehman Brothers Holdings Inc., which filed for Chapter 11 protection last October.
SunCal itself hasn’t filed for bankruptcy.
Lehman’s bankruptcy and those of the projects have become interrelated, adding complexity to a case that’s already generated millions in legal fees but made little progress in the past year.
The lack of movement is a sticking point for some cities where the projects remain unattended and only partially built.
SunCal plans housing and retail developments and then sells land to homebuilders and developers to finish the projects.
In San Clemente, where more than 300 upscale homes and an outlet mall are planned, city officials say they are owed several millions of dollars in unpaid fees on Marblehead Coastal.
And the California Coastal Commission said in court filings that fines of nearly $4 million could be levied against Marblehead for various non-compliance issues.
In Oakland, officials have expressed concern that a lack of oversight and maintenance at a Navy hospital redevelopment has led to dangerous conditions there. That prompted a nearby neighborhood association to file a $115 million lawsuit against Lehman.
SunCal officials argue a quick sale that generates real money is in the best interest of creditors and the projects themselves.
Such a plan would allow development to restart in the quickest way possible, said Frank Faye, SunCal’s chief operating officer.
SunCal is pushing a plan that would see New York-based financier D.E. Shaw & Co. make an initial bid to acquire eight of the company’s prime development sites for about $150 million.
Under the plan, Lehman would lose its secured claims on the properties and its liens would be voided to pave the way for a sale.
D.E. Shaw has been SunCal’s second-largest financial backer behind Lehman. It’s the main backer of SunCal’s largest project, on 57,000 acres in New Mexico.
The D.E. Shaw bid previously was for nine projects at $195 million.
It was reduced after Denmark’s Danske Bank AS agreed to take over a 2.4-acre site in Century City where a condominium tower had been planned, according to court filings.
Danske Bank’s proposed bid hasn’t been confirmed by the court.
Assuming a deal goes through, Faye said SunCal “absolutely” would want to remain involved in the Century City project in some sort of a management capacity. No deal has been struck with the bank as of yet, he said.
If D.E. Shaw prevails in its bid, SunCal presumably would continue to run the projects, including Marblehead.
“We’re a land developer. We hope to finish what we started,” Faye said.
Any financial stake SunCal would have in the developments is unclear.
Lehman’s lawyers oppose SunCal’s plan with D.E. Shaw.
Last week, a New York judge gave the go-ahead for Lehman to spend money on its own reorganization plan for the SunCal projects.
The plan would give SunCal the short end of the stick. It calls for paying no more than $15 million to cover claims related to the projects, including from SunCal.
Lehman then would bid for the projects using hundreds of millions of dollars it is owed by SunCal in what’s called a “credit bid.”
Lawyers for Lehman argue that the SunCal plan sells off the projects at a “fire sale” price. They put the value of the projects at $450 million, or three times what D.E. Shaw is initially offering.
Debt Concerns
They also argue the real reason SunCal is advocating its plan is because it would benefit the developer’s chief executive, Bruce Elieff.
Elieff and his wife personally have guaranteed close to $230 million of bond debt, which would be wiped away with the D.E. Shaw bid, Lehman asserts in court filings.
SunCal alleges that Lehman acted in bad faith and “stiffed” the developer and other creditors in the months leading up to the bankruptcy filings.
The bad faith assertion is key to SunCal’s attempt to get Lehman’s liens voided by way of an equitable subordination lawsuit, which seeks to recover about $300 million in damages for creditors.
Lehman sold seven loans related to SunCal projects—including $258 million tied to Marblehead—to Fenway Capital LLC, part of New York-based private equity firm Hudson Capital Group LLC earlier this year.
At the same time, Lehman maintained to the court that it could act as the creditor for those loans.
An Oct. 2 decision by bankruptcy judge Erith A. Smith in Santa Ana said Lehman misrepresented itself and couldn’t legally file proof of claims as a creditor in the case.
This week’s hearing is expected to clarify Lehman’s role.
There’s also a chance the judge could delay any sale of the eight properties that D.E. Shaw wants to bid on. A court-appointed trustee has argued for a delay.
That could push back any sale of Marblehead and other projects for another six months or so, according to lawyers.
