U.S. Bankruptcy Judge K. Rodney May dismissed a proposed settlement between longtime Colony Beach & Tennis Resort owner Dr. Murray “Murf” Klauber and the Colony Beach & Tennis Association and converted the case to a Chapter 7 liquidation Feb. 26 — a decision that could dramatically change the handling of the resort’s assets and redevelopment of the resort.
Frustrated by the lack of progress toward a settlement with Colony unit owner and developer Andy Adams and the lack of money available to settle issues, May said the case’s time in Chapter 11 reorganization had run its course. The case spent more than two years in May’s hands, and many Chapter 11 cases take three months to settle.
It was the eighth day of hearings May held since October, shortly after Klauber and the association proposed a settlement that would have given Klauber $3 million over five years through a consulting agreement and distributed $2.3 million to a U.S. bankruptcy Chapter 11 trustee to pay creditors. The settlement also would have absolved the association of a $25 million judgment for damages Klauber won in a bankruptcy appeals court last year.
Colony Lender LLC, the largest affected creditor in the case, had opposed the settlement because it isn’t included in the agreement.
In dismissing the proposed bankruptcy reorganization plan and settlement, May said, “The justifications are plentiful, but insufficient to overcome approval of a settlement.”
As part of his ruling, May will also allow Colony Lender LLC — the case’s largest affected creditor — to auction off resort assets in Sarasota at a date yet to be determined.
The ruling stalled Klauber’s ability to reach a monetary agreement with Colony parties over his interest at this time.
“We don’t believe the judge’s decision was in the best interest of the majority of the Colony’s creditors, the unit owners and certainly our family, as well as the town of Longboat Key,” said longtime Colony General Manager Katie Klauber Moulton. “Our attorneys have discussed several other alternatives and options we can pursue though over the next few weeks that may lessen the impact and be more positive and productive for all of the parties.”
The ruling keeps the $25 million judgment Klauber won in an appeals court against the association intact, making it the property of Chapter 7 trustee William Maloney. Maloney, the trustee of Klauber’s Chapter 7 interests from a previous bankruptcy case, could now sell the judgment and the legal and financial risks that go along with it, to a developer or another interested party.
If a developer, for instance, buys the rights to the $25 million judgment and Colony Lender’s assets, the unit owners could be exposed to a $25 million liability that would be assessed at a cost of more than $100,000 per unit owner.
The association, though, has more than $10 million in counter-claims it can utilize against Klauber’s Chapter 7 estate.
The judgment and counter claims, according to association President Jay Yablon, are good incentives for the association and Maloney to work out a “clean deal” that could result in a project free of claims.
May made it known at last week’s hearing he was frustrated with the lack of one settlement party.
Adams, who owns approximately 60 units at the Colony, still hadn’t signed the settlement before the hearing, even though May was told in January signatures from Adams and his Breakpointe LLC entity were forthcoming.
May, though, also had issues with money being distributed to Klauber while no money was offered to Colony Lender, which is owed $14 million from past due Klauber bank loans it purchased.
“I can’t approve this,” May said.
Association attorney Jeff Warren asked for two more weeks to present an amended settlement.
“There’s no harm in giving us more time,” Warren said.
The comments made Colony Lender attorney Michael Assaf rise to the podium.
“This is the third plan filed and denied confirmation,” Assaf said. “To ask for more time to shock the dead body is ridiculous. There’s no life left for these debtors in Chapter 11. It’s time to pull the sheet over it.”
May quickly decided to convert the case to Chapter 7 after the arguments.
Colony Lender principal David Siegal told the Longboat Observer the conversion to Chapter 7 “will make things happen immediately.”
“Now that the court has gotten out of the way, you will see developers come in with checkbooks and resolve the issues and buy us all out,” Siegal said.
One of those developers, Siegal said, is Orlando-based Unicorp National Development Inc. managing member Charles Whittall.
Yablon said “the court ruling means that we will get to a redevelopment along a different road than the one we had planned, but we will still get there.”
Mayor Jim Brown called the decision “a little shocking,” but “maybe a good thing if it forces everyone to put the whole property on the market and buy everyone out.”
“Somebody has to come forward now and make a deal,” Brown said.
Contact Kurt Schultheis at [email protected]