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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In re:
NNN 123 NORTH WACKER, LLC, et al.,1
Debtors.

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Chapter 11
Case No. 13-39210 (JBS)
(Jointly Administered)

DEBTORS OMNIBUS REPLY IN SUPPORT OF THEIR MOTION FOR ORDER

APPROVING ENTRY INTO (A) POST-PETITION RESTRUCTURING SUPPORT
AGREEMENT, (B) CONSENT AND PARTICIPATION AGREEMENT WITH
CO-OWNERS OF PROPERTY AND (C) CERTAIN RELATED RELIEF
NNN 123 North Wacker, LLC (TIC 0) and NNN 123 North Wacker Member, LLC
(TIC Member), debtors-in-possession herein (collectively, the Debtors), hereby submit this
reply (this Reply) to the two objections (the Objections)2 filed in response to the Debtors
motion (the Motion)3 [Docket No. 104] for authority to enter into the RSA, the TIC Consent
and the Initial Release (collectively, the RSA Documents). For the reasons stated herein, the
Debtors request that the Court overrule the Objections in their entirety and grant the Motion.
PRELIMINARY STATEMENT
1.

For the 33 tenants in common or TICs that own fee title to the Property (the

largest of which is Debtor TIC 0), the facts are clear, uncontroverted and stark:

the $135 million mortgage loan is in default and needs to be restructured;

The Debtors, along with the last four digits of each Debtors federal tax identification number, are: NNN 123
North Wacker, LLC (4336) and NNN 123 North Wacker Member, LLC (7290).

Specifically, reference is made to: (i) the objection of the Non-Debtor TICs [Docket No. 134] (the TIC
Objection), and (ii) the response of Troy Thomas (Thomas, and, with the Non-Debtor TICs, the Objectors)
[Docket No. 135] (the Thomas Objection, and, with the TIC Objection, the Objections).

Capitalized terms not defined herein have the meaning ascribed to such terms in the Motion.

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the TICs interests in the Property are substantially underwater and have no value;

the TICs are jointly and severally liable for the full mortgage debt;

the current occupancy rate, 68%, is too low to support the Property and needs to
increase, which is going to require a new manager, an intense leasing effort, and a
substantial investment to fund capital improvements and leasing commissions;4

but for the Debtors bankruptcy cases, the lender could initiate a foreclosure, which
would have significant adverse tax consequences for the Non-Debtor TICs.5
Faced with this dilemma, the Debtors filed for bankruptcy protection, and, over

the last several months, have negotiated with the secured lender and two proposed equity
investors, ND Investment and Sovereign, to develop a restructuring scenario that will provide
meaningful benefits to the Debtors estates, the Property and the Non-Debtor TICs.
3.

The Non-Debtor TICs had ample opportunity to develop their own restructuring

plan; in fact, they reportedly engaged the lender in discussions for a year prior to these cases,6
and discussions continued in the first six months of these cases. Their efforts did not result in an
agreement. The RSA was signed on February 21, 2014. A week later, the Non-Debtor TICs
filed a last-ditch term sheet proposal. [Docket No. 109] The proposal would have required the
secured lender to modify its loan on terms that the lender deemed less favorable than those in the
RSA. The lender rejected the proposal and determined to move forward under the RSA.
4.

With no consensual deal with the lender, the only way for the Non-Debtor TICs to

Under the RSA, ND Investments and Sovereign would invest at least $12-15 million in the Property. Under the
Non-Debtor TICs proposal, discussed infra, the capital investor was allegedly going to invest $20 million.

Continuing their tax deferrals is of tantamount importance to Non-Debtor TICs. See TIC Obj. at 4
([M]aintaining those tax benefits is extremely important and valuable to [Non-Debtor TICs]); at 40
(Retention of such tax benefits is extremely important to avoid significant damage to [Non-Debtor TICs]).

See January 27, 2014 Hearing Transcript, 12:13-15 (attached hereto as Exhibit A) (Counsel for the Non-Debtor
TICs: We actually were negotiating a year in advance with the same lenders[.])

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pursue their proposal would be to try and confirm a cram up plan over the lenders objection.7
Under the circumstances, where equity is clearly out of the money, pursuit of that option would
have a low probability of success. The Non-Debtor TICs have cited to no cases in which a
tenant in common owner, whose equity is underwater, successfully confirmed a plan of
reorganization over the secured lenders objection, nor are the Debtors aware of any such cases.
5.

At the initial hearing on the Motion, the Court asked the parties if there were any

fatal flaws -- in the Courts words, a silver bullet -- that might preclude approval of the RSA.
The Objectors failed to articulate any fatal flaws at the hearing, nor are there any magic silver
bullets anywhere in the Objections. The Objectors resort, instead, to inflammatory rhetoric,
replete with unfounded allegations of insider conspiracies, self-dealing and asset hijacking
-- all based on distortions, and, in some cases, fundamental misstatements, of the facts.
6.

There is no basis to delay the RSA any further and risk losing a consensual plan

that restructures the existing mortgage on terms approved by the lender, pumps in $12-15 million
of new equity, and removes the Property from its onerous tenancy in common structure.8
SUMMARY OF RSA TREATMENT9
7.

Lost in the Objectors myriad arguments is the fact that the equity has no value

and, thus, the Objectors are not entitled to recover anything on behalf of their interests. In spite
7

Counsel for the Non-Debtor TICs represented at the initial hearing on the Motion that this was an option they
were considering. See Tr. of 2/28/14 Hrg. at 21:23 - 22:4 (attached hereto as Exhibit B).

To be clear, the Motion is not seeking a determination, today, that the plan of reorganization contemplated by
the RSA should be confirmed under section 1129 of the Bankruptcy Code. The narrow issue presented in the
Motion is whether the Debtors should be allowed to embark on the restructuring path outlined in the RSA.

As proposed, the RSA would provide valuable consideration to parties such as the Non-Debtor TICs and the
Debtors equity holders, none of whom are entitled to recover anything on account of their interests. However,
the parties to the RSA are incurring substantial costs in this litigation, and the delay is affecting the Property,
which may render the economics supporting the RSA unworkable. If that happens, the parties may need to
amend the RSA to revise or even remove the consideration proposed to flow to the Non-Debtor TICs or the
Debtors equity holders, and, thus, the Debtors reserve the right to amend the RSA pursuant to its terms.

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of that fact, the RSA would give consenting Non-Debtor TICs limited interests in the Parent,
intended to allow them to continue their tax deferrals and share in the upside if the Property
recovers. The Non-Debtor TICs would further benefit from a covenant not to sue that releases
them and their principals from claims based on the defaulted loan arising prior to the closing.
8.

The other Objector, Thomas, is a broker who invested $25,000 to acquire a small

equity stake, 0.345%, in TIC Member. TIC Member owns TIC 0, and TIC 0s only asset is its
13.917% interest in the Property; thus, Thomas owns, indirectly, a 0.048% interest in the
Property. As is the case with the TICs, Thomas equity has no value and he is not entitled to a
recovery. The Debtors could simply cancel the equity; however, the RSA currently proposes to
allow the equity to survive bankruptcy. TIC 0 would be treated as a consenting TIC -- TIC 0
would exchange its interest for a pro rata share of limited interests in the Parent. Consequently,
if the transactions contemplated by the RSA are consummated, Thomas and the other equity
holders of TIC Member would own, indirectly, reorganized TIC 0s allocation of limited
interests in the Parent, and share in the potential upside with the consenting TICs.
DEBTORS REPLY
I.

The Debtors Should be Authorized to Enter into the RSA Documents

Applicable Legal Standard -- 363(b)
9.

The Debtors are seeking authority to enter into the RSA Documents pursuant to

section 363(b) of the Bankruptcy Code. The traditional test is whether the Debtors entry into
the transaction was based on a sound business purpose. See Mot. at 33-35. In the case of a
transaction benefiting insiders, courts may apply heightened scrutiny.10 Here, Sovereign is not,

10

In the Firstmark case cited in the Motion, the Seventh Circuit cited with approval the District Courts comment
that sale of a debtor's property to an insider is subject to close scrutiny. However, it is not bad faith per se and
only constitutes bad faith if there is a breach of the duty of full disclosure. See In re Firstmark Corp., 46 F.3d
653, 656 (7th Cir. 1995). That reasoning was adopted in a subsequent case, Hower v. Molding Sys. Eng'g

(continued...)
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as the Objectors allege, an insider of the Debtors within the meaning of section 101(31)(B) of
the Bankruptcy Code. See infra at 21. Nonetheless, under either test, the business judgment
test or the heightened scrutiny applied to insider transactions, the Debtors easily satisfy the
requirements, and the Objectors offer no evidence, only wild allegations, to support their claim
that entry into the RSA Documents would be improper.
The RSA is the Best Option Available to the Debtors
10.

There is no dispute that the mortgage loan is in default and the Debtors and Non-

Debtor TICs have no equity in the Property. At the time that the Debtors filed these bankruptcy
cases, the mortgage loan had gone into monetary default and was about to be transferred to
special servicing. As a result, the Debtors were sufficiently concerned about the direction of the
Property and the possibility that the lender could initiate foreclosure proceedings.
11.

Nor is there any dispute that the mortgage lender is a necessary party to any

restructuring of the Property, and that the lender has no interest in pursuing the alternative
proposal put forward by the Non-Debtor TICs (I can tell you categorically we would not
consent to that term sheet. I can also tell you, although I am always careful about referring to
negotiations, that we have indicated consistently, my business representative, that type of
proposal is unacceptable...). See February 28, 2014 Hearing Transcript, 14:7-14.11

Corp., 445 F.3d 935, 938-939 (7th Cir. 2006), where the Seventh Circuit, relying on Firstmark, affirmed the
sale of a debtors assets to insiders, the former president and shareholder. In so holding, the Seventh Circuit
stated that in order to encourage debtors to continue operating and generating revenue for creditors, bankruptcy
law permits a debtor to sell assets to former officers or shareholders so long as the insider involvement is
adequately disclosed. Sovereign is not an insider of the Debtors (see infra at 21); however, even it if were, the
RSA would clearly satisfy the standard set forth in Hower -- Sovereigns participation in these bankruptcy
cases, and in the RSA, has been fully disclosed. Also, in Hower, the Seventh Circuit found it significant that
the secured creditors in that case strongly supported the proposed sale. Obviously, here, the RSA has the
secured lenders full support. Moreover, like in Hower, the Objectors allegations of bad faith and self-dealing
are not supported by documents, testimony, personal knowledge or anything other than accusations.
11

A true and correct copy of the relevant section of the transcript is attached hereto as Exhibit C.

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With those facts in mind, the Objectors criticisms of the RSA make little sense.

They argue that the RSA is unnecessary and that the Debtors should proceed directly to a plan
and disclosure statement. (TIC Obj. at 21; Thomas Obj. at p.12). However, to the contrary, the
RSA provides substantial benefits to the Debtors estates. First and foremost, the RSA binds the
lender to support the restructuring and, if the Proposed Purchaser acquires the Property, to
reinstate the existing mortgage loan as modified in the manner negotiated by the parties to the
RSA. Second, the RSA commits the proposed investors, ND Investment and Sovereign, to
contribute new equity of $12-15 million if the Proposed Purchaser acquires the Property.
13.

The alternatives to the restructuring outlined in the RSA are limited at best. The

Debtors are aware of no cases in this District or elsewhere where a tenant in common whose
interests are underwater successfully confirmed a cram up plan over the lenders objection. It
is more likely that contested litigation with the lender would trigger a parade of horribles -fights over the use of cash collateral that could disrupt operations; potential requests by the
lender to modify the automatic stay or dismiss or convert these cases, and possible foreclosure
proceedings outside of these cases that would have adverse consequences on the Property.
14.

Without a substantial investment of new money in the near term, the Property will

continue to decline in value. That money will fund capital improvements that are long overdue
and finance efforts to sign new leases, including payment of leasing commissions and costs.
Further delay will make it more difficult to sign new leases, as prospective tenants are generally
averse to leasing space in distressed building that require significant investment.
The RSA Reflects a Set of Integrated Compromises
15.

The parties to the RSA have agreed to a transaction that, if consummated, permits

consideration to flow to junior classes of debt and equity and the Non-Debtor TICs. The

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summary below underscores the arms length nature of the negotiations and the potential upside
for Non-Debtor TICs, whose interests have no value and are not entitled to a recovery.
Non-Debtor TICs
Concessions
Loss of direct tenant in common ownership
interest in the Property.

Benefits
Right to invest its pro rata portion of $1.5
million in the Property alongside the proposed
equity investors (and to receive a 15% rate of
return on the investment).

Provide the Noteholder with a Final Release

(and in the case of the Debtors, an Initial
Release and a Final Release).

Receipt of limited membership interest in the

Parent of the Proposed Purchaser, with
potential to participate in the upside if the
Property is sold or refinanced (after required
payments to the Noteholder (which may be less
than the full debt) and payment of the $12-15
million of equity plus the 15% rate of return).
Continued deferral of built in gains on its TIC
interest and prior real estate investments.
The Non-Debtor TICs and their principals will
be beneficiaries of a covenant not to sue from
the Noteholder with respect to the original
defaulted Loan and personal guaranties for the
period prior to the closing of the transaction.

Equity Owners of TIC Member

Concessions

Benefits
Retention of existing membership interests.

None

TIC 0 will be treated as a Participating TIC

Non-Investor and receive a limited
membership interest in Parent. Members of
TIC Member will be entitled to a pro rata share
of any distribution with respect to such limited
membership interest.

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Noteholder
Concessions
Benefits
The Loan is being restructured to lower the
The Property is being infused with up to $15
current pay interest rates for 2 years and extend million of equity to support the Noteholders
the maturity date for 3 years.
collateral.
The Loan is being restructured to provide that,
upon a sale or refinancing of the Property
within 90 days of its maturity, the Proposed
Purchaser (including any Electing TICs) will
be repaid their investment plus a 10% rate of
return after $105 million (of a $135 million
principal loan) is repaid to the Noteholder (i.e.,
the Noteholder is subordinating payment on
$30 million of principal amount of the Loan).

The Property is no longer owned in a tenant in

common structure.

Noteholder is providing the TICs and their

principals with a covenant not to sue on their
existing guaranties of the Loan through the
closing date, in each case, to the extent such
TIC consents to the transaction.

Payment of certain fees and costs by the

Proposed Purchaser, including (i) $100,000 for
expenses incurred by the lender, which was
paid upon execution of the RSA, (ii) a
$750,000 restructuring fee payable to the loan
servicer, C-III Asset Management LLC, upon
closing, and (iii) an extension fee of $336,376
payable to the lender upon closing.

The Loan will be reinstated, as modified, and

in good standing, and the Noteholder will not
pursue its remedies based on the Loan
currently in default, including a possible sale
of the Property free and clear of the TICs.

Receipt of Initial Release and Final Release.

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ND Investment
Concessions
Invest $10.8- $13.5 million of new capital for,
among other things, capital improvements,
tenant improvement allowances, leasing
commissions and expenses of the modification
and assumption of the loan.

Benefits
The potential for a 15% internal rate of return
on the new equity investment in the Property.

Provide the Non-Debtor TICs, who are out of

the money, with the opportunity to own 10% of
the new equity in the Property.
Provide the TICs who participate (including
TIC 0) with a no-cost opportunity to own
limited membership interests in the Parent of
the Proposed Purchaser, which interests may
provide the TICs with (i) the right to continue
to defer built in gains from its TIC interest and
any applicable prior real estate transactions,
and (ii) a potential participation in upside if the
Property is sold or refinanced (after payment of
the required amounts to the Noteholder (which
may be less than the full debt)).
ND Investment to provide the Noteholder with
an Initial Release and Final Release.
Sovereign/SIMCO
Concessions
Backstop the $1.5 million new equity
commitment of the TICs so that if no TICs
elect to invest, Sovereign is required to invest
up to the full $1.5 million.

Benefits
After the amounts required to be paid to the
Noteholders are paid, and the $12-$15 million
investment of the Proposed Purchaser is paid in
full with a 15% return, if funds are available,
SIMCO is entitled to receive a $1 million
promote fee and a .35% disposition fee upon a
sale or refinancing of the Property.
SIMCO will become the Property manager.

Provide a new guaranty for the entire amount

of the Loan (with the financial wherewithal of
Sovereign having been reviewed and
underwritten by the Noteholder).

Sovereign and SIMCO to provide the

Noteholder with Initial and Final Release.

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Rather than viewing the RSA as a series of integrated compromises, the Objectors

pick and chose terms in an effort to characterize the restructuring as a set of transactions that
inure solely to the benefit of insiders and the mortgage lender. Thomas, for example, contends
that the RSA provides the mortgage lender with unusually favorable terms, citing a release to
be granted by the Debtors, the principal amount of debt maintained post-confirmation, and
because the tenancy in common structure is being transitioned into a multiple-member limited
liability company structure. See Thomas Obj. at pp. 10-11. Thomas glosses over the lenders
compromises, including: (i) a reduction of the A Note and B Note current pay interest rates
effective as of October 1, 2013 through October 1, 2015, (ii) a three-year extension of the
maturity date on the mortgage loan from October 1, 2015 to October 1, 2018, (iii) a modification
of the payment waterfall to provide a return of capital and a 10% rate of return to new equity
after payment of only $105 million of the principal amount of the loan upon a sale or refinance
within 90 days of the loans maturity date, and (iv) their agreement to provide a covenant not to
sue consenting Non-Debtor TICs and their owners based on defaults on the mortgage loan and
related personal guaranties that arise prior to closing of the transactions in the RSA.
17.

With respect to the Initial Release, the Debtors have investigated the mortgage

and related fixture filings and do not dispute that they are properly perfected security interests.
Based on the information available to them, the Debtors do not believe they have any colorable
claims against the lender, nor have the Objectors articulated any such potential claims.12
18.

12

Similarly, the Objectors criticism regarding Sovereigns involvement with the

The Non-Debtor TICs argue, mistakenly, that the Debtors do not disclose whether the Initial Release provided
in connection with the RSA purports to release claims that the Non-Debtor TICs may have against the lender.
(TIC Obj. at 18). The Non-Debtor TICs do not state what potential claims they think they may have against
the lender but, in any event, the Non-Debtor TICs are not parties to the Initial Release.

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RSA is unwarranted. These objections are premised on wholly inaccurate statements regarding
the relationships between the Debtors, Sovereign and their respective affiliates.13
19.

The Debtors will not respond in kind to the rhetoric in the Objections; however,

the Objectors mischaracterizations of an alleged relationship between NNN Realty Investors,

LLC (NNN Realty) and Sovereign must be corrected. Thomas asserts that Sovereign is
acting through its affiliate, NNN Realty [Investors, LLC] . . . [to] obtain an equity interest in the
New Borrower through its equity interest in 123 North Wacker Sovereign/TIC, LLC, apparently
without any requirement to invest any money . . . Thomas Obj. at pp.15-16. That is not correct.
20.

Sovereign is not an affiliate of NNN Realty (which is the manager of TIC

Member) or the Debtors because Sovereign does not directly own[], control[], or hold[] the
power to vote, 20 percent or more of the outstanding voting securities of the debtor. 11 U.S.C.
101(2)(A). In the event that Sovereign ultimately obtains an equity interest in the restructured
ownership vehicle, it will be in consideration of Sovereigns contributions to the restructuring in
the RSA, including its agreement to guaranty the full mortgage debt and backstop the $1.5
million of equity to be offered to investing TICs.
21.

Nor is Sovereign an insider of NNN Realty or the Debtors within the meaning

of section 101(31)(B) of the Bankruptcy Code. While Sovereign and NNN Realty share a
13

The Non-Debtor TICs accuse the Debtors of trying to cut out the TIC Members while keeping control of the
Property for the benefit of Daymark and its affiliates. See TIC Obj at 26. They make those accusations
without any basis in fact, and the accusations are simply untrue. If the restructuring is effectuated, the owners
of the Property will be ND Investment (90%) and those Non-Debtor TICs that elect to invest additional funds in
the Property (10%), with Sovereign committing to acquire any portion of the 10% equity not acquired by the
TICs. Daymark Realty Advisors, Inc. (Daymark) is an affiliate of NNN Realty. Daymark is not an affiliate
of Sovereign. Moreover, under the RSA, Daymark will have no involvement with the Property. Moreover, ND
Investment, the 90% investor, will have control over the Property if the transactions in the RSA are
consummated. This makes the Non-Debtor TICs obsession with Daymark all the more strange; in particular,
the out of context quote from the [unpublished] NNN Realty Parkway 400 26, in which the Court commented
on the fact that the debtors expert in that case failed to make an evidentiary showing as to the solvency of
Daymark because the expert merely reported that Daymark had a website and was involved in some litigation.
(TIC Obj. at 28) Daymark, and the proceedings in that case, have no relevance here.

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controlling officer, control by a common individual does not, in and of itself, confer insider
status. See 11 U.S.C. 101(31)(B) (an insider of the debtor is a director of the debtor, officer of
the debtor, person in control of the debtor, partnership in which the debtor is a general partner,
general partner of the debtor, relative of a general partner, director, officer, or person in control
of the debtor--none of which applies to Sovereign); see also In re Salience Assocs., Inc., 371
B.R. 578, 586 (Bankr. D. Mass. 2007) (whether commonly controlled entities are insiders of one
another is a question of fact and cannot be determined based upon common control alone).
22.

The Objectors also take issue with Sovereigns promote fees,14 and the selection

of SIMCO as the new property manager for the Property. Even if one were to conclude that
Sovereign exercises the required degree of control to qualify as an insider of NNN Realty and the
Debtors, the negotiation process surrounding the RSA was arms-length, hard fought, and
involved more than just Sovereign and the Debtors. To imply that Sovereign engaged in selfdealing and is getting a sweetheart deal (Thomas Obj. at pp. 15-16) would necessarily imply
that ND Investment and the Noteholder were somehow complicit in that alleged scheme. As set
forth in Hower, 445 F.3d at 938-39 (7th Cir. 2006). The Objectors must come forward with more
than just unfounded accusations.
23.

Substantively, the fees that may eventually be paid to Sovereign are commercially

reasonable and reflect the consideration that Sovereign is bringing to the proposed transaction.
Sovereign is a sophisticated asset manager that provided the framework and structure for the

14

The Non-Debtor TICs argue that the property management fees payable to the new property manager, SIMCO,
are not disclosed. See TIC Obj. at 17; see also TIC Obj. at 26 (arguing that SIMCO, as property manager,
will be paid undisclosed fees). That is not correct. The fees are set forth in a fully-negotiated property
management agreement that was provided to both Objectors and, in fact, Thomas discusses the precise property
management fees payable to SIMCO, which are market terms, in his Objection. (Thomas Obj. at p. 16)

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RSA transactions.15 Additionally, Sovereign is agreeing to provide a new guaranty for the entire
amount of the $135 million mortgage loan. The lender would not agree to the RSA transactions
but for the new guaranty provided by Sovereign.16 As further consideration, Sovereign has
agreed to backstop the TICs obligation to fund $1.5 million of new equity into the Property.
24.

In exchange for its contributions, Sovereign is being granted the potential upside

of a $1 million promote fee that is payable only upon a sale or refinancing of the Property that
results in consideration sufficient to (i) make the required payments to the mortgage lender and
(ii) return the $12-$15 million of new equity, plus a 15% return on such investment, to the
proposed equity investors. The $1 million promote fee will be junior to all existing creditors of
the Property as well as to all proposed equity providers.17
25.

An affiliate of Sovereign, SIMCO, was selected by the mortgage lender, the

Debtors and ND Investment to act as the new property manager for the Property. A change was
necessary in light of the Propertys current leasing condition and high vacancy rate. SIMCO is a
qualified property manager and currently manages 21 properties in 13 different markets,
including another Class A office building in the Chicago Loop that is similar to the Property.
SIMCOs fees were heavily negotiated with the mortgage lender and are consistent with those
charged by managers of Class A buildings in Chicago.

15

Thomas made his investment of $25,000 in 2005. Thomas holds himself out to the public as an attorney, a
broker-dealer in the tenant-in-common industry, and proprietor of a TIC Help website, http://tichelp.com/.

16

Notably, the Non-Debtor TICs that consent to the restructuring transaction will be granted the covenant not to
sue discussed above ( 9); in effect, Sovereign is providing direct credit support to the Non-Debtor TICs.

17

Sovereign is also entitled to a subordinated promote fee equal to 33.34% of the 75% of the funds that flow, if at
all, to the new equity investors after payment in full of the mortgage loan, the repayment of $12-15 million of
new equity (plus the 15% rate of return), and payment of the Sovereign $1 million promote fee. The other 25%
of such funds accrue to the benefit of the limited members of Parent (i.e., the TICs who participate in the
transaction but do not invest new equity). Accordingly, Sovereigns subordinated promote fee is pari passu
with the TICs, who are out of the money and are not providing additional consideration to this restructuring.

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The transaction fees charged by C-III and Sovereign are consistent with, and, in

some instances, significantly less than, the fees charged by the Investment Manager in the
Non-Debtor TICs proposal.18 The Non-Debtor TICs proposal included the following fees:

Asset Management Fee: A quarterly fee of 1% per annum of the gross collected
revenues of the Property. For comparisons sake, the RSA transactions do
not include an Asset Management Fee.

Loan Restructure Fee: A fee of 1% of the restructured A-Piece, or $850,000,

payable at closing of the proposed transaction. By contrast, Sovereigns $1
million promote fee is paid on a future disposition or refinance of the
Property, and is subordinated to the required payment to the lender and
return of the $12-15 million of capital with the 15% return.

Disposition Fee: 1% of the net sale proceeds of the Property. By contrast,

Sovereigns fee is only 0.35% on a future disposition of the Property, and is
subordinated to amounts payable to the lender.
Property Management Fees: Undisclosed in the Non-Debtor TIC proposal.
Under the RSA, SIMCO would be paid a property management fee equal to
2% of gross revenues, 3% of tenant improvement or capital improvement
projects performed by a non-affiliate, and 1% of tenant improvement
projects performed by a tenant.19

Loan Restructure Fee. There is no such fee for the lender in the Non-Debtor TIC
proposal. Under the RSA, C-III Asset Management LLC will receive a
$750,000 restructure fee, as servicer of the mortgage loan, which fee was
earned in connection with months of work to modify the loan. In addition,
at closing, the Noteholder will receive a loan extension fee of $336,376.

18

Unlike the Non-Debtor TICs Investment Manager, Sovereign has expended significant resources and time to
negotiate and document the transactions provided for in the RSA Documents. Other than a non-binding term
sheet proposal, it is unclear what value, if any, the Investment Manager would bring to the table.

19

Thomas alleges that the property management fees are expected to amount to at least $3 million per year.
(See Thomas Obj. at p. 16, para. 3(d)) Thomas offers nothing to support that conclusion, and his estimate is far
in excess of the project management fees projected for SIMCO. By way of example, per the most recent cash
collateral budget, the projected gross receipts for the Property for February 2014 were $1,207,000/mo. See
Agreed Order Authorizing Use of Cash Collateral, entered on January 29, 2014 [Docket No. 98]. Under the
property management fee arrangement proposed for SIMCO, the property management fee of 2% would equal
$24,140/mo. or, on an annualized basis, only $289,680/yr. This pales in comparison to Thomas estimate of
property management fees of $3 million, which was overstated by a magnitude of as much as 10x.

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Based on the foregoing considerations, under either the business judgment test

or the heightened scrutiny applied to insider transactions, the Debtors have provided ample
evidence of their considered judgment in determining to enter into the RSA Documents.
II.

Objections Premised on Alleged Breach of Fiduciary

Duties or Alleged Lack of Authority are Without Merit
28.

The Non-Debtor TICs have alleged repeatedly that the Debtors are in breach of

their fiduciary duties, and Thomas, joining the refrain, contends that the Debtors chapter 11
cases, filed six months ago, were not properly authorized by all required corporate acts. These
arguments are inconsistent with the operative facts, and do not stand as a matter of law.
Debtors Have Fulfilled Their Fiduciary Obligations20
29.

Thomas alleges that the Debtors breached fiduciary duties owed to him as an

equity holder because Sovereign may be entitled to certain fees and because, allegedly, the
transaction leads to nothing for the Debtors members. (Thomas Obj. at pp.12-15)21
30.

A debtor in possession owes fiduciary duties to the Debtors estate as a whole.

See In re Schipper, 933 F.2d 513, 515 (7th Cir. 1991). A debtor has a duty to use reasonable
care in making decisions, but once those decisions are made, a debtor is protected by the
business judgment rule. See In re Schipper, 109 B.R. 832, 836 (Bankr. N.D. Ill. 1989) (holding
that there must be some business justification for debtor's actions in bankruptcy). Courts have
found that [o]fficers and directors [of a debtor] should have broad latitude to balance competing
20

Thomas also asserts, in summary fashion, that the Debtors have not acted in good faith. See Thomas Objection,
p. 14-15. This conclusory allegation has no legal or factual support and should be dismissed.

21

The Non-Debtor TICs argue that the Debtors owe them fiduciary duties. (TIC Obj. at p. 23). That is not the
law. As support for their contention, they cite to a single case for the non-controversial proposition that a
debtor owes fiduciary duties to all creditors and equity holders. (TIC Obj. at p. 23). The Non-Debtor TICs are
not creditors or equity holders of the Debtors, nor did they file proofs of claims in these cases. Rather, they are
simply co-owners of the Property along with one of the Debtors, TIC 0. Moreover, the operative document, the
TIC Agreement, sets forth the TICs respective rights and obligations, and nowhere does it provide that the
TICs owe any fiduciary obligations to one another. (See TIC Agreement, attached hereto as Exhibit D).

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interests in a bankruptcy case in order to make decisions that are in the best interests of the
estate. LaSalle Natl Bank v. Perelman, 82 F. Supp. 279, 293 (D. Del. 2000).
31.

There is no dispute that the lender is substantially undersecured,22 and the Non-

Debtor TICs and the Debtors equity holders, such as Thomas, are out of the money.
32.

At one point, Thomas alleges that the projected sales price of the Property is

$165 million. See Thomas Obj. at p. 6 ([T]he projected sales price of the Property is $165
million[.]). Thomas offers nothing to support that projection and the statement is misleading
in a number of respects. First, as clear from contradictory statements later in his brief,23 Thomas
is not arguing that the current value is $165 million. Second, Thomas does not say how far off in
the future the projected sale would need to take place,24 or what his underlying assumptions
are, or on what basis he made them (e.g., how much the occupancy rate would need to increase
to achieve that price, and how much money would have to be invested to fund the capital
improvements and leasing costs required to achieve that price).
33.

Both Objections argue that the limited interests consenting TICs would receive in

the restructuring outlined in the RSA will be of no value. See, e.g., TIC Obj. at 27 (NonDebtor TICs get no recovery whatsoever after all senior fees and expenses are paid). That
reflects a fundamental misunderstanding on the Objectors part of the economics in the RSA.

22

See Non-Debtor TICs Motion to Dismiss Bankruptcy Case [Docket No. 25] (conceding that the mortgage loan
is undersecured ( 3), the lender has a substantial unsecured deficiency claim ( 3), and, in the Non-Debtor
TICs estimation, there is no possibility of recovery by anyone other than the lender ( 8)).

23

For example, Thomas alleges, in conclusory fashion, that the Propertys value is depressed as a result of
decreased cash flow because the Property is in the low point of its leasing cycle. (Thomas Obj. at p. 11).
Elsewhere, he argues that the Debtors hard-fought fiduciary out is illusory because the Debtor can only
terminate the RSA to pursue another transaction that would pay the mortgage loan in full, and that if that were
possible, this bankruptcy case and the RSA would be entirely unnecessary. (Thomas Obj. at p. 13)

24

Later in the brief, Thomas alleges, in conclusory fashion, that it will take at least five years for the Property to
fully stablilize and recover lost value, so perhaps this is his projected timeframe. (See Thomas Obj. at p. 11).

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The RSA contemplates that the Debtors priority and unsecured creditors will be

satisfied in accordance with applicable law and that the membership interests of the 159 equity
owners of TIC Member will remain in place. See Approved Plan Terms, Exhibit A to the RSA.
The Non-Debtor TICs will have the option to participate in 10% of the new equity of the
Property and own a limited membership interest in the Parent. Even if a TIC chooses not to
invest new money in the transaction, all TICs that consent to the transaction will receive a
limited membership interest in Parent. In addition, TIC 0 would receive a limited membership
interest in the Parent, which is the same treatment afforded to all consenting TICs. TIC 0 would
hold that interest for the ultimate benefit of TIC Members 159 owners, including Thomas.
35.

The Debtors managers fulfilled their fiduciary obligations in connection with the

RSA. They properly considered the interests of the Debtors estates and all restructuring options
available. After months of negotiations, and substantial give and take (including an ongoing
dialogue with the Non-Debtor TICs representatives to keep them advised of developments and
solicit input on issues that may affect the TICs), it was determined that the Debtors estates, as
well as the Property, were best served by entry into the RSA. At this juncture, the Debtors have
no duty to shop the RSA any further.25
36.

The Objectors remaining criticisms of the RSA are easily dismissed. The RSA

does not serve as a bar to consideration of alternative proposals. (Thomas Obj. at p. 9). First,

25

See, e.g., In re PWS Holding Corp., 228 F.3d 224, 24748 (3d Cir. 2000) (holding that a debtor has no duty to
market a plan); In re Crusader Energy Grp., Inc., No. 09-31797 (Bankr. N.D. Tex. Oct. 7, 2009) (plan process
is not required to be run as auction and that plan process itself allows parties with economic interest in debtors
bankruptcy to be heard); In re Marshall, 298 B.R. 670, 676 (Bankr. C.D. Cal. 2003) (debtor need not consider
every feasible alternative form of plan, so long as proposed plan meets requirements of 1129(a)); see also, In re
Global Crossing Ltd., 295 B.R. 726, 744-45 S.D.N.Y. 2003) (In the absence of failures to comply with the key
dutiesthe requisite care, disinterestedness and good faith[case law does] not authorize bankruptcy courts to
dictate the means to achieve that objective, nor, in particular, [does it] provide authority for a court to substitute
its business judgment as to the appropriate means for that of a board.) (emphasis in original).

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the RSA preserves optionality for the Non-Debtor TICs. The Bid/Sale Procedures contemplated
in the RSA provide for a TIC Auction for those TICs who determine not to consent to the
restructuring set forth in the RSA. In the TIC Auction, the non-consenting TICs will have the
opportunity to bid for the Property in accordance with their rights under section 363(i) of the
Bankruptcy Code. That mechanism will provide a market check if TICs believe that the Property
is being undervalued and want to submit their own bid or partner with a third party investor.
37.

Second, the RSA contains a fiduciary out. See RSA 5(d)(iii). The RSAs

fiduciary out authorizes the Debtors to trigger a termination if the Debtors determine, reasonably
and in good faith, in consultation with counsel, that the taking or not taking of any action
required in connection with the RSA would be inconsistent with their fiduciary duties under
applicable law. If the lender disputes an election in good faith within three business days of such
election, the parties will submit the dispute to the Court. The provision essentially permits the
Debtors to pursue an alternative transaction if it would satisfy the lenders existing mortgage
loan in full and that alternative transaction has a sufficient likelihood of closing.26
The Debtors Have All Required Approvals
to Sell Their TIC Interest in the Property
38.

Thomas argues that the Debtors lack authority to propose the RSA because the

manager of TIC Member, NNN Realty, is not the duly authorized manager. (See Thomas Obj. at
p. 8). That is not correct. Thomas concedes that, when he invested, Triple Net Properties, LLC
(Triple Net) was the duly authorized manager of TIC Member; however, he argues that the
26

The RSAs fiduciary out is readily distinguishable from the one that the Court found fault with in In re
Innkeepers USA Trust, 442 B.R. 227 (Bankr. S.D.N.Y. 2010). The operative distinction is that in Innkeepers,
the Debtors entered into a lock-up with a creditor that had claims in only 20 of 92 debtors cases. Id. at 235.
The Innkeepers court found that the fiduciary out was improper because it prevent[ed] the Debtors from
electing to fully exercise their fiduciary duties to maximize the value of each of the Debtors estates. Id.
(emphasis added). Here, no value can matriculate to other classes of claims or interests unless and until the
mortgage loan is satisfied in full. The RSAs fiduciary election does not alter that dynamic.

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consent of the other members was required to change the manager and, since there was never a
vote, NNN Realty cannot be the duly authorized replacement to Triple Net. (See Thomas Obj. at
p. 8). On that basis alone, Thomas leaps to the incorrect conclusion that the transactions in the
RSA are utterly defective (Thomas Obj. at p. 1) and that NNN Realty and Sovereign have
hijacked the Debtors to reap the benefits of this unauthorized control (Thomas Obj. at p. 8).
39.

The foregoing is an example of the depths to which the Objectors will reach in an

effort to derail the RSA. In 2008, Triple Net changed its name to Grubb & Ellis Realty
Investors, LLC. In 2011, the name was changed again from Grubb & Ellis Realty Investors,
LLC to NNN Realty Investors, LLC. The identity of the property manager has not changed; its
name changed.27 Thus, NNN Realty remains the duly authorized manager of TIC Member.
40.

Thomas further alleges that his vote, as an equity holder, is required to authorize a

sale of TIC 0s interest in the Property, notwithstanding the pendancy of the Debtors bankruptcy
cases. (Thomas Obj. at pp.5, 9) That is not the law.28 In the analogous context of a corporation
proposing to sell substantially all of its assets in bankruptcy, it is axiomatic that the debtor in
possession has the authority to sell estate property out of the ordinary course of business
without shareholder approval. In re Entz, 44 B.R. 483, 484 (Bankr. D. Ariz. 1984).29

27

Attached hereto as Exhibit E and Exhibit F are true and correct copies of the name change certificates.

28

The two cases relied on by Thomas are readily distinguishable and of little relevance. The first, Saxon Indus.
Inc. v. NKFW Partners, 488 A.2d 1298 (Del. 1985), concerns the election of a debtors board of directors. The
second, In re Am. Media Distributors, LLC, 216 B.R. 486 (Bankr. E.D.N.Y. 1998), concerns the right of a
debtor to initiate arbitration proceeding to assert governance rights under its operating agreement.

29

Although not a requirement, the Debtors did contact the vast majority of members of TIC Member to solicit
their input on the treatment of equity holders in the proposed restructuring. The overwhelming response to date
is positive. So far, members of TIC Member holding roughly 70% of such interests, or over $5 million of the
total invested of roughly [$7.2 million], support a restructuring on the terms outlined in the RSA. Thomas, the
lone equity owner to file an objection to the RSA, invested $25,000 and holds a 0.345% equity stake.

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The Debtors Had All Required Approvals to File These Cases

41.

These cases were filed on October 4, 2013. On October 28, 2013, the Non-Debtor

TICs filed a motion to dismiss [Docket No. 25] alleging that the Debtors lacked authority to file
these cases. The Non-Debtor TICs withdrew that motion on January 23, 2014 [Docket No. 93].
Now, six months later, Thomas is raising similar allegations in a dispute over the Debtors entry
into the RSA. The Debtors do not believe this issue is properly addressed in this context;
however, in any event, the Debtors took all the proper steps to file these chapter 11 cases.
42.

As a threshold issue, Thomas argument is premised on an unsigned operating

agreement for TIC 0 that was attached to the Thomas Declaration as Exhibit 1-B. It is unclear
where Thomas document came from; however, he contends that it was included with the Private
Placement Memorandum (PPM) that Grubb & Ellis used to solicit investors when it originally
structured the acquisition of the Property as a tenancy in common structure in 2005.
43.

Thomas argument rests on Section 18.3 of his draft of the LLC agreement, which

he argues requires the consent of all members for TIC 0 to file bankruptcy. Notably, however,
there is no such provision in the signed version of the operative agreements of TIC 0 (the TIC 0
Operating Agreement) or TIC Member (the TIC Member Operating Agreement). True and
correct copies of those agreements are attached hereto as Exhibit G and Exhibit H.
44.

Thomas appears to be a sophisticated investor. He is an attorney, and a broker-

dealer who, upon information and belief, solicited investors when the deal was syndicated in
2005. Thus, any reliance on Thomas part on an unsigned draft is misplaced. The PPM even
contains an express disclosure that the draft LLC operating agreement attached thereto was
subject to revision and approval. See PPM, page 62. As a result, Thomas argument, which is

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based entirely upon language found only in an unsigned draft, is of no consequence.30

45.

A review of the final, executed versions of the TIC 0 Operating Agreement and

TIC Member Operating Agreement establishes that the Debtors followed the proper procedures
and acted with appropriate corporate authority. With respect to TIC 0, the TIC 0 Operating
Agreement provides that a bankruptcy case may be filed upon approval of TIC 0s Independent
Manager and the vote of its member. See TIC 0 Op Agt, Section 2.01(b). Prior to filing these
cases, TIC 0s Independent Manager and TIC 0s sole member, TIC Member, executed the Joint
Written Consent Of the Sole Member and the Independent Manager of NNN 123 North Wacker,
LLC, dated as of October 3, 2013 (the TIC 0 Consent), authorizing the filing of these cases.31
Similarly, the only consent required for a TIC Member bankruptcy was procured when NNN
Realty (f/k/a Triple Net) executed the Written Consent of the Sole Manager of NNN 123 North
Wacker Member, LLC (the TIC Member Consent), authorizing the filing of these cases.32
III.

Miscellaneous Objections Premised on Approval of Sale Procedures

Contract Rejection or Ultimate Confirmation of a Plan are Premature
The Sale-Related Objections Are Premature
46.

The Non-Debtor TICs argue that the RSA cannot go forward because the Property

30

The operating agreements provide that the parent, TIC Member, is a multi-member limited liability company,
which is owned by the 159 members of TIC Member, including Thomas. TIC 0 is a single-member limited
liability company owned by TIC Member. In February, in connection with the Debtors review of proofs of
claim filed in these cases, it was observed that a number of the members of TIC Member had attached
subscription agreements and membership certificates purportedly signed by TIC 0. At this point in the Debtors
review, it is unclear whether certificates were in fact issued in contravention of the clear terms of the governing
operating agreements or whether there is another explanation. Either way, this appears to be a distinction
without a difference. The provision, Section 18.3, in the draft agreement relied on by Thomas is not found in
the signed agreements, and the signed agreements control, so the Debtors took all appropriate steps to file these
cases. Further, the Debtors have one principal asset, the 13.917% stake in the Property, and so whether the
equity holders own that asset directly or indirectly is of no consequence. Most importantly, regardless of where
the equity holders reside, the equity of both Debtors is hopelessly underwater and has no value.

31

The TIC 0 Consent was attached to the TIC 0 bankruptcy petition and is also attached as Exhibit I hereto.

32

The TIC Member Consent was attached to the TIC Member petition and is also attached as Exhibit J hereto.

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cannot be sold free and clear of their interests. (See TIC Obj. at pp. 11-13 37-46). To the
contrary, that is exactly what is contemplated by the express language of section 363(h) of the
Bankruptcy Code, and the Debtors have filed an adversary complaint, as required pursuant to
Bankruptcy Rule 7001(3), to compel the sale free and clear of non-consenting TIC interests.
47.

If the Non-Debtor TICs dispute the sale, it is more appropriate in the context of

the newly-filed adversary proceeding. They will also have opportunities to raise those arguments
at the disclosure statement and plan confirmation stages. For purposes of the RSA, the Debtors
have made a sufficient showing of their ability to satisfy section 363(h) to move forward.
48.

The Non-Debtor TICs argue that they have claims against TIC 0 under the TIC

Agreement. (TIC Obj. at p. 3, 10). That argument is belied by the fact that the general bar date
was January 3, 2014, and, as far as the Debtors can tell, no Non-Debtor TICs filed claims.
The TIC Agreement is Not Implicated
49.

In addition, the Non-Debtor TICs argue that the TIC agreement is an executory

contract that was effectively rejected by the Debtors, giving them a substantial rejection
damages claim. (TIC Obj. at sec. 10, 34-36). They argue that the Debtors rejected the TIC
Agreement by failing to comply with a call mechanism in Section 10 of the TIC Agreement that
would have required TIC 0 to offer its interest in the Property to the other TICs for essentially no
consideration upon the filing of its bankruptcy case. That provision is an unenforceable ipso
facto clause. See In re Strata Title, LLC, Case No. 12-24242, 20132 WL 1773619 (Bankr. D.
Ariz. April. 25, 2013) (a purchase right triggered solely by the filing of a bankruptcy petition is
an unenforceable ipso facto clause); Sheehan v. Warner (In re Warner), 480 B.R. 641 (Bankr.
N.D. W. Va. 2012) (The Bankruptcy Code disapproves of statutory and contractual provisions
which are triggered by the commencement of a bankruptcy case.).

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The Non-Debtor TICs argue further that the Debtors rejected the TIC Agreement

by proposing a sale transaction. This does not give rise to any de facto rejection of the TIC
Agreement, and the Non-Debtor TICs have offered no authority to support their position.
51.

The Debtors have not determined if the TIC Agreement is executory or not, nor

are they required to make that determination at this stage. Moreover, the Debtors dispute the
Non-Debtor TICs contention that upon a rejection of the TIC Agreement they would have a
substantial rejection damages claim. First, it is not clear whether a rejection by the Debtors
would be a rejection of the entire TIC Agreement or whether the TIC Agreement would remain
in force and effect as to all parties other than the Debtors. Second, the Non-Debtor TICs have
conceded that their interests in the Property have no value, so they will have suffered no
damages if the Property is sold free and clear of their interests. The Non-Debtor TICs argue that
the RSA is fatally flawed because it fails to provide how the debtors intend to pay their
substantial rejection damages claim. Any such claim would be contingent, unliquidated,
disputed and certainly not substantial. That is not a basis to decline to approve the RSA.
Non-Debtor TICs Concerns about Tax Treatment are Unavailing
52.

The Non-Debtor TICs attack the RSA on the basis that it does not indicate how it

will allow the TICs to continue their tax deferrals; they even make the incredible argument that
Debtors counsel should be required to issue an opinion letter on that subject to the Non-Debtor
TICs. (TIC Obj. at 40). The Debtors have designed the structure with the intent to enable the
Non-Debtor TICs to continue their tax deferrals; however, every Non-Debtor TICs tax situation
is unique and, as is the case with any plan of reorganization, they will need to consult with their
own advisors on personal taxes. Debtors counsel does not represent the Non-Debtor TICs and
the law does not require delivery of an opinion on their tax treatment.

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Objections Relating to Viability of Proposed Investors Have No Merit

53.

The Non-Debtor TICs argue that the Debtors have provided no information about

ND Investments or Sovereigns financial wherewithal to fund the new equity of $12-15 million.
(TIC Obj. at p. 8, 28).33 This makes no sense. The Debtors are satisfied with ND Investments
ability to fund its 90% of the $12-15 million, and if there are questions about ND Investments
viability, they can be addressed at confirmation. The other investor, Sovereign, is limited to a
maximum investment of 10%, or up to $1.5 million, and Sovereign will only invest if those TICs
who consent to the deal elect not to invest the $1.5 million themselves. The Debtors are satisfied
that Sovereign has the financial ability to fund up to $1.5 million, and if there is a bona fide
dispute about Sovereigns viability, it, too, can be addressed at the plan confirmation stage.
The TIC Consent Should Be Approved
54.

The Non-Debtor TICs argue that the TIC Consent is draconian. See TIC Obj. at

47-48. Its terms are certainly not draconian. Moreover, it provides the means by which TICs
may consent to the transaction, and receive the valuable consideration offered to them that they
would not otherwise be entitled to given that their interests have no value. The Non-Debtor TICs
do not have to consent to the transactions in the RSA. If they would prefer, they can continue to
oppose the restructuring reflected in the RSA, and they will have multiple opportunities to be
heard, including in the adversary proceeding commenced by the Debtors to compel the sale of
the Property free and clear of tenant in common interests, at the hearing on approval of the
disclosure statement, which has not yet been filed, and at the plan confirmation stage.

33

In the same paragraph, the Non-Debtor TICs argue [c]ertainly [ND Investment and Sovereign] will unlikely to
be able [sic] to call upon Daymark for assistance. (TIC Obj. at pp. 8-9, 28). Daymark has no affiliation with
ND Investment or Sovereign and will have no involvement with the Property under the RSA. See infra n .13.

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Plan Releases are a Confirmation Issue

55.

Finally, the Non-Debtor TICs argue that the plan releases and exculpations

outlined in the RSA are improper. See TIC Obj. at 49-50. Those proposed releases and
exculpations comply with the law of this District. In any event, it is premature to address an
issue like this that is more appropriately raised, if at all, at the plan confirmation stage.
Waiver of Rule 6004 is Appropriate
56.

If the Court approves the RSA Documents, there should be no need for further

delay. The parties to the RSA should have the right to move forward with the restructuring. The
objecting parties will have ample opportunities to object to the ultimate relief, including at the
hearings on approval of the disclosure statement and confirmation of the plan.

WHEREFORE, the Debtors respectfully request that this Court overrule the Objections
and grant the relief requested in the Motion approving the RSA Documents.

Dated: March 24, 2014

Chicago, Illinois

Respectfully submitted,
NNN 123 NORTH WACKER, LLC AND
NNN 123 NORTH WACKER MEMBER, LLC
KAYE SCHOLER LLP

By: /s/ D. Tyler Nurnberg

D. Tyler Nurnberg
Anthony G. Stamato
Daniel J. Hartnett
Seth J. Kleinman
70 West Madison Street, Suite 4200
Chicago, IL 60602
Telephone: (312) 583-2300
Facsimile: (312) 583-2360
Attorneys for the Debtors

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