Judge Mark H. Epstein, Case 22SMCV01852 2023-03-27 Tentative Ruling

Judge: Mark H. Epstein, Case: 22SMCV01852, Date: 2023-03-27 Tentative Ruling

Case Number: 22SMCV01852 Hearing Date: March 27, 2023 Dept: R

This is primarily a hearing on the motion for a preliminary injunction. The hearing date had been earlier set, then continued on the court’s own motion due to a conflict in the court’s calendar, and then restored to today’s date. Because there is a potential significant transfer tax that could apply to any transfer of the property effective April 1, 2023, the preliminary injunction determination really needs to be made today, even if a more formal order follows later.

The court has reviewed the rather extensive briefing from the February hearing. The court also appreciates the parties’ joint submission of excerpts of key documents, which fit into a single notebook. The court has also reviewed the supplemental papers filed on March 20, 2023, which included the evidence from the New York hearing including the declarations and the transcript of the cross examinations. The court views those materials as evidence. They are statements made under oath in a related case in which the parties present here had a full and fair opportunity to cross-examine. The court has also reviewed the New York court’s ruling. This court agrees that the New York decision is not precedential in the res judicata or collateral estoppel sense. While the court cannot recall whether New York follows the California rule or the federal rule for finality for purposes of collateral estoppel (that is, whether a judgment need be final in the trial court only or must also be no longer subject to direct appeal), the court agrees that a New York Supreme Court ruling on a preliminary injunction is not a final judgment whether or not it is affirmed by the Appellate Division (or even the Court of Appeals). By definition, a preliminary injunction is just that: preliminary. It is subject to being dissolved on the merits following a trial. Accordingly, under both New York and California law, the New York decision is not binding on this court. That does not make it irrelevant, though. It is certainly relevant for its jural effect—it is an order of the New York court, after all. Further, the court is certainly aware that the New York justice had the benefit of live testimony and the ability to see and hear the witnesses and observe their demeanor. And to the extent that the Justice explained his reasoning, it might have some persuasive effect. At day’s end, however, this court must reach its own conclusion based on the evidence it sees.

It is probably worth a brief recitation of the facts as the court understands them. This is a shorthand recitation. The actual facts are complicated and detailed. Therefore, the court is not attempting a comprehensive statement of facts, and the court will use shorthand terms to make things easier even if technically it would be more proper not to do so. However, if there is a material error, the court invites the parties to bring it to the court’s attention.

This case involves the iconic Century Plaza Hotel. That hotel, once the place where people stayed to see and be seen, fell on hard times. In its heyday, it was located across from what was then the Shubert Theater, the Plitt multiplex theater, the ABC Entertainment Center, and the Century City mall. It was also centrally located near Santa Monica, Hollywood, Beverly Hills, and other Los Angeles destinations. It was very large and boasted one of the largest conference centers and ballrooms in the City. Yet as other luxury hotels were built, the Century Plaza started to show its age. The ABC Entertainment Center faded (even though the IM Pei building was built and CAA’s headquarters were housed there) and the mall was closed for a long time (or essentially closed) while it was being upgraded and renovated. Another Century City hotel opened. The long and short of it is that the Century Plaza was eventually boarded up. (The foregoing is not in the record, but it is probably well enough known to be just about judicially noticeable, and, as a native Angeleno, the court has actual memories of that history. Having said that, the foregoing is introductory only and has no bearing on the decision.)

In 2016, the loans now at issue were entered into for the purpose of renovating the hotel, building a retail podium, and building residential luxury housing units that would be sold to third parties. (The court is not sure whether these were meant primarily to be residences in the nature of a traditional condominium project or more of a condotel project, but it does not really matter.) The human largely behind the development was Michael Rosenfeld. Along with some other investors, he formed two entities that together owned CP Group, LLC. It owned CPMB, LLC. CPMB owned NCMB, LLC. NCMB, LLC owned NCPMB, LLC. NCPMB, LLC owned Next Century Partners, which owned the property. Next Century was managed by NCP Management.

Not surprisingly, this project was not expected to be cheap. Rather, it required debt of over $1 billion. As is not unusual, the debt was “stacked.” The senior loan was made to Next Century and was secured by a Deed of Trust on the property itself. The original lender was JPMorgan and the loan was for $446.4 million. That was followed by two levels of Mezzanine Debt (which the court will refer to as Mezz 1 and Mezz 2). The Mezz 1 loan was for $120 million and it was secured by equity in NCPMB, which was the Mezz 1 borrower. The Mezz 1 lender was CDCF (which the court will refer to as Colony). The Mezz 2 loan was junior to the Mezz 1 loan. It was for $450 million and was secured by equity of CPMB, which was the Mezz 2 borrower. Plaintiff CMB was the lender. Thus, the total loan was just over $1 billion. Also not surprisingly, the loans were heavily papered. There were the actual loan agreements, made between each lender and each borrower. There was also an intercreditor agreement between the various lenders. The loans were to mature in July 2020. The court believes (although it is not positive) that the plan was for the project to be completed by that time, or at least a lot of it. (It could be that it was anticipated that the project would be completed in phases, and there are extension provisions in the loan documents that would track such a plan, allowing the loans to be extended upon meeting certain benchmarks. However, that is not really pertinent for today’s hearing.) The court assumes that the ultimate goal was that after the project was completed, the various loans would be repaid through a long term structure of equity and debt.

The ICA gave the junior lenders certain rights in the event of a problem. As it relates to CMB, CMB had the right to buy Colony’s Mezz 1 position in the event of a default of the Mezz 1 loan. It had to buy the Mezz 1 loan in whole and not in part, however. And, similarly (though indirectly), it could buy out the senior lender in whole but not in part if a default was declared. This is an important right, but a limited one. It allows the junior lender to protect its interest, which would otherwise be potentially wiped out in the event of a foreclosure. To do so, however, the junior lender has to (essentially) pay off the senior lender or lenders. (It might be that there were other situations where the default was more minor, but as will be seen below, the default here was a failure to pay off the debt at maturity, so curing the default is all or nothing.)

However, disaster struck. In 2020, COVID-19 hit and the pandemic had an effect on the project as well as the rest of the country. The senior lender, JPMorgan, declared the loan to be out of balance, which allowed it to stop making construction advances. To bring the loan back into balance, a new infusion of money was needed. CMB claims that it attempted to infuse that money by essentially “leapfrogging” the Mezz 1 lender in terms of seniority (at least to the extent of the new money). But to do that, CMB needed Colony’s approval, and Colony’s approval was not forthcoming in that it did not want its investment to become junior to CMB’s investment. (At some point during this process, the maturity date was extended to July 2021.) While new money was being sought, Colony made “Protective Advances” to protect the project. A “Protective Advance,” as the court understands it, is a voluntary advance that the lender need not make. It is made anyway, however, to protect the project. For example, it could be that the project’s shell is open to the elements and the rainy season is coming and rain would harm the building. To protect the building, the shell must be covered. A Protective Advance might be made to do so. Similarly, a project like this must be insured against risk. A Protective Advance might be made to keep the coverage in force. Protective Advances are subject to a higher interest rate than a normal advance.

And that is where defendants come in. Defendant Reuban Brothers was willing to invest in the project to the tune of $275 million. Although not completed in one fell swoop, eventually the structure was that RB’s interest would be part of an “upsized” Mezz 1 loan (which would then be about $400 million in total). The RB portion would be Tranche A and the Colony portion would be Tranche B. However, to accomplish that aim, the parties needed CMB’s consent. That consent was obtained through the fourth amendment to the ICA (4ICA). As part of the package of documents circulated in this transaction, completed in September 2020, there were 30 various agreements. However, there was at least one agreement—a Participation Agreement between Colony and RB—that was not disclosed.

CMB contends that it consented to RB’s involvement in the Mezz 1 loan because it believed that the entire $275 million would be available to complete the project. RB disputes that there was any such representation. In any case, it is plain (and the parties do not dispute) that less than half the money was actually made available as regular advances to pay for “hard costs” of construction. $75 million was used to pay down the senior debt and the remainder was used to pay various fees or to pay interest or the like. CMB claims that the maturity date of July 2021 was known to all to be a mere placeholder and that everyone understood that the loan would have to be extended. RB states that it believed that the project would be completed by the maturity date. RB also states that the uses of the $275 were known to all (or should have been) and that it did nothing improper.

CMB also complains that it was defrauded because it was not told of the PA at the time it signed the 4ICA. The PA is an agreement between RB and Colony. RB characterizes it as merely an agreement on the waterfall—that is, how money is to be distributed as between Tranche A and Tranche B. According to RB, nothing in the PA modifies anything in the 4ICA, nor could it. The 4ICA could not (of course) be modified without CMB’s consent. CMB, though, says that the PA does more than just that. It makes RB’s agent, Motcomb, the Mezz 1 Agent, meaning that Motcomb gets to make Mezz 1 decisions. (Prior to the PA, Colony’s entity was the Mezz 1 Agent.) Further, the PA stated that Colony could not sell any or all of its interest in Tranche B without RB’s consent. Prior to that time, CMB contends that it could buy the Mezz 1 interest, or part of it, without the need for anyone’s consent but the seller. (What it actually says is that CMB does not need the senior lender’s consent nor its own consent to make such a purchase.) RB contends, therefore, that CMB’s rights were unaffected by this provision in the PA. And, of course, CMB never had the “right” to buy the Mezz 1 loan except in full and then only upon the occurrence of certain events.

At some point thereafter, RB bought out JPM and became the senior lender as well as the holder of the Tranche A interest in the Mezz 1 loan. It therefore has two capacities. The instant case technically involves its capacity as the senior lender; the New York case involves its role as a Mezz 1 lender.

As it turns out, the loan was not paid by the July 2021 maturity date. CMB contends that any reasonable lender would extend the maturity date. After all, the project was largely done and there were no huge construction glitches. Even so, according to CMB, RB refused to extend the maturity date for either the senior loan or the Mezz 1 loan.

That led to three actions. Two are in New York, and this is the third. The first was an action by Colony against RB. Colony contended that RB breached its contractual duties by the way it handled the default on the Mezz 1 loan. To put a little bit of flesh on those bones, Colony asserted that it wanted RB to bring targeted enforcement actions that would allow parts of the project that were completed to be sold. The money raised by such a sale would allow the remainder of the debt to be salvaged, presumably by reducing it to the point where some other investor would be able to come in, or something similar. Colony contended that instead, RB insisted on strict foreclosure, which was not a way to maximize value for the various lenders and equity holders, but rather a way for RB to gain control of the entire project. RB denied any impropriety. That case settled via a confidential agreement. The court does not know the terms of that settlement.

The second New York case is brought by CMB against RB relating to its actions as the Mezz 1 agent and holder of Tranche A of the Mezz 1 loan. CMB alleged that it was defrauded into signing the 4ICA because the PA was not disclosed. CMB also alleges that the Protective Advance interest and the default interest charged are so crushing that what might very well have been a salvageable financial stack is now under water. CMB sought to have the New York court appoint a receiver and, at a minimum, to enjoin any foreclosure on the security for the Mezz 1 loan. According to CMB, if RB is allowed to foreclose, it will have the effect of wiping out CMB’s security and any chance at recovering its investment. The New York court has denied the appointment of a receiver, but has issued the preliminary injunction after an evidentiary hearing. The New York Justice concluded that CMB had made out a viable case for fraud and that it would be irreparably injured should the foreclosure go forward. The court also concluded that the asset was not wasting. The court found that the project was likely to have a positive cash flow in the near term. The court ordered CMB to post a bond of $5 million—far less than RB sought. RB has appealed the trial court’s ruling and it is pending in the Appellate Division.

The instant case is similar to the second New York case. CMB asserts the same fraud and the same improper practices of overcharging interest. CMB also asserts, as it did in New York, that it was misled because it believed that the full $275 million would be available for hard project costs when in fact the majority was used for other purposes, including $75 million to pay down the senior debt, which RB later acquired. The difference is that the instant case is being brought to stop a foreclosure on the property itself. RB, in the instant case, is enforcing its rights as the senior lender, who holds a deed of trust on the property itself. According to CMB, RB’s intent is to hold an auction for the property and make a credit bid, which, given the amount of interest and fees that are encrusted on the debt, will likely be the winning bid. Having done so, RB will wipe out all of the junior debt and the equity holders, leaving it the owner of the project free and clear.

The other plaintiff here is Three Bobs (T3B). It holds some of the profit/loss participation in the equity of the project. It is neither a borrower nor a lender, nor is it actually in the chain of ownership as depicted in Exhibit 7 of the parties’ excerpt of key documents.

Which brings the court to an initial point. Normally in a case like this, the property owner would be the plaintiff and, more likely, would be in Bankruptcy Court. The property owner is in a much stronger position to seek injunctive relief, as its injury is not just financial, as is the case with CMB. And if the property owner were in the Bankruptcy Court, everything would be stayed automatically. The Bankruptcy Court would then, in an orderly fashion, sort this whole thing out, maximizing the money that could be realized by the project for the benefit of secured creditors (in order of seniority), then unsecured creditors, and then equity. Why was that not done? The answer, as it turns out, is not complicated. Rosenfeld (among others) had guaranteed the loan. However, the guarantee was non-recourse, meaning that the lender could not go after the guarantor beyond the security and collateral for the loan. But there was what is commonly referred to as a “bad boy” provision. If Rosenfeld did certain things, then the guarantee would become non-recourse, meaning that Rosenfeld would be personally liable for the whole of the debt. One of those things was to cause one of the entities (like the property owner) to file for bankruptcy or to seek a receiver. For that reason, the borrower here is held in check. It cannot seek bankruptcy protection or seek to enjoin the foreclosure without Rosenfeld agreeing, and if Rosenfeld agrees, he will personally be liable for the $1 billion or so of debt. As a result, none of these entities is seeing the inside of a bankruptcy court any time soon.

Which leaves us here. CMB and T3B are the plaintiffs bringing the suit and seeking the injunction.

At an earlier hearing, the court granted a TRO. In doing so, the court was largely considering how to maintain the status quo ante. The court also wanted to allow the New York court proceeding to go forward. The court requested further briefing, but set today’s hearing to allow the foreclosure sale to go forward if the motion is denied. The court expressly allowed defendants to take the actions needed to allow such a sale with the understanding that doing so would allow them to sell the property if they prevail today, but still allow the sale to be forestalled if plaintiffs prevail.

With that, the court turns to the merits. The test for a preliminary injunction is well settled. The court looks to the likelihood that the plaintiffs will prevail on the merits. The court also looks to the relative harms to the parties if the injunction does or does not issue. The stronger plaintiffs’ showing on one, the weaker it needs to be on the other. However, the weakness never reduces to zero. No matter how much harm the plaintiffs will suffer, if they have no chance of prevailing, it is an abuse of discretion to issue even a preliminary injunction. Similarly, if plaintiffs cannot articulate at least some irreparable injury, an injunction will not issue no matter how strong plaintiffs’ case is on the merits. In addition to the foregoing, the court considers the status quo ante. While less critical than in the TRO context, the court is still interested in maintaining the status quo in an effort to be able to provide full relief at trial.

The court looks first at the merits. The court understands CMB’s argument that it lost the ability to buy the Colony debt due to the PA. That was explained by CMB’s witness in the New York case both in declaration and on examination. Mr. Hogan testified that had he seen the PA, he never would have consented to the 4ICA and never would have consented to RB becoming a lender. While testimony going to the notion that the PA would have shown RB’s “true colors” is not all that helpful, he went beyond that. He stated that prior to the PA, he could have bought all or some of Colony’s debt (or the Mezz 1 debt) if Colony had agreed to sell it. But after the 4ICA and the PA, CMB could not buy anything without RB’s consent. RB argues that this is not so. Even under the original ICA the Mezz 1 agent’s consent was needed before CMB could buy any Mezz 1 debt unless it exercised its limited right to buy the whole debt under certain circumstances. That is because the ICA stated that consent of the senior lender (or CMB, for that matter) was required if the Mezz 1 agent wanted to sell debt. By that, RB reasons that the Mezz 1 agent’s consent was always required. But it is not quite that simple.

By the third iteration of the ICA, what that meant as a practical matter was that Colony’s consent was needed before Colony would sell part of the Mezz 1 debt. Which is, of course, a tautology. The seller always has to agree to the sale in a voluntary transaction. But, as a result of the PA and only as a result of the PA, it was not just the seller that needed to agree. Rather, the Mezz 1 agent—RB—had to agree as well even though RB’s tranche was not being sold. And, prior to the PA, Colony controlled the Mezz 1 debt as it was the Mezz 1 agent. But after the PA, RB’s agent (Motcomb) became the Mezz 1 agent. According to CMB, it tried to buy the Colony debt, but RB refused to give consent. RB disputes that, and the evidence is sort of sketchy on it. Colony’s witness hardly gave a ringing endorsement to CMB’s version of events. And RB’s witness stated that he never refused consent but rather asked for information that CMB never provided. RB also contended, and it does not seem to be disputed, that when a default was declared, CMB had the right—without RB’s consent—to buy the whole of the Mezz 1 debt and further that at the time the right matured, RB had made no Protective Advances under the Mezz 1 loan agreement. (They came later.) Yet CMB did not exercise that right.

What the court needs to understand, though, is the relation between that alleged fraud and this case. In other words, the court needs CMB to explain how it would be better off in this case—involving the senior lender foreclosing on the property—had it been able to buy all or some of the Colony position. In other words, it might well be that if CMB held Tranche B of the Mezz 1 debt it would have rights with regard to the New York case that it does not have here. For example, it might be able to sue to force Motcomb, as the Mezz 1 agent, to act in the best interest of both Tranche A and Tranche B to maximize the recovery and not just act in what appears to be RB’s best interest. (Essentially, CMB could have picked up where Colony’s suit left off.) But even assuming that is the case, the court needs to better understand just how that would have an effect on the senior lender’s rights under the senior loan agreement. The court is not holding that there is no connection; the court just needs it better articulated.

CMB also contends that both the senior lender and the Mezz 1 lender (that is, RB) have caused the interest rates to skyrocket beyond anything reasonable, or, in the word (out of this particular context) of one of CMB’s witnesses, beyond “decency.” The size of the debt has ballooned beyond recognition. The senior loan—which was never upsized—now stands at $965 million—more than twice the original maximum amount. And that is largely due to the huge interest rates set forth in the contracts for non-routine interest. With interest growing exponentially, CMB contends that this has changed from a construction loan to build the project into a “loan to own” scheme by RB to snatch the project and wipe out all those with substantial investments unnecessarily. And the numbers do speak volumes. RB’s major defense is that this is not a case involving some unsophisticated investor who was hoodwinked by another party with slick lawyers into signing a bum deal. This was a contract that was heavily negotiated by sophisticated parties with great counsel on all sides. The parties here, including CMB, knew how to bargain for rights; they knew the risks they were taking; they knew what the other parties’ rights were; and they knew what their remedies and protections were. RB contends that CMB ought not be heard now to complain that it did not build in enough protections when it negotiated and signed the contracts at issue. Frankly, that position has some merit. This was a heavily negotiated deal. Both in 2016 and (the court must presume) in 2020. And where sophisticated parties sign sophisticated contracts, they are generally bound to the contracts they signed. Here, CMB knew that the loans matured in July 2021 when it signed the September 2020 documents. If CMB was sure that the loans would have to be extended, one would normally assume it would have dealt with that issue in the documents. And the court notes that the documents do contain provisions to extend the loan maturity tied to certain benchmarks, although the court assumes that those benchmarks were not met, potentially because those benchmarks were tied to phases of the project. The court is also concerned with the integration clause. That clause states that no party is relying on a representation not contained in the contract. Under California law, that provision is not very air tight. One can assert fraud even in the teeth of such a representation. Other jurisdictions are different, though. Some enforce those clauses strictly, at least with regard to sophisticated parties. No one has really briefed New York law on that point, and New York law will govern, one would think.

On the other hand, the court is aware that, while things in 2021 were looking up for a while, Omicron came into play. The court does not have any real evidence on whether there is some commercially reasonableness requirement on this sort of extension. And the court is not sure what, if any, additional restraints were put on Rosenfeld in 2020 that might have hobbled his ability to utilize the normal protections that the law allows in the event of a predatory lending practice. (The court is not finding such a practice here one way or the other; but the court notes that CMB’s position is that such is the case.) Further, when one zooms out using a wide-angle lens, the facts do look less favorable to RB. The fact is that RB came in with $275 million—hardly a trivial sum. It bought the senior debt (the court is not sure what the price was). And it is on the verge of owning 100% of a project that is worth well over a billion dollars (or so it would seem) free and clear. The bulk of the problem seems to stem more from sky high interest rates than true problems with the project or unforeseen construction costs. There is an unsavory flavor here of a wolf in sheep’s clothing, buying in as a lender and then doing what it can to freeze out the other players to obtain ownership at a discount. Among other things, putting the new tax to one side, there seems to be no effort to maximize the property’s value for the benefit of all or sell some of the project’s assets to fund the remainder or find a third party buyer who might be interested in this landmark project. It could be that such efforts were made, but none are in this record. And there is still the question whether, had the full $275 million in RB money been available for the project’s hard costs, whether the property might not have been in a condition in which a new lender could have been found to pay off the old debt or restructure the debt in a way beneficial for all.

As set forth above, the court needs to see CMB’s best effort at a direct tie between what it claims is some hidden right of which it was not, but at least arguably should have been, aware. The answer to that question will determine how likely CMB might be to prevail on the merits. (The court has spent less time on T3B because the court is having more trouble figuring out its viable theory. At this point, suffice it to say that if CMB cannot carry the day, it is less likely that T3B will be able to do so.)

The other side of the sliding scale is relative harm. Here, RB makes a strong point that CMB’s harm is monetary only. Such harm is generally not irreparable and does not support injunctive relief. That is where the “bad boy” provision has bite. Were the borrower the plaintiff, the irreparable harm would be patent. While the adage goes that all property is unique, the Century Plaza really is. The borrower could make a very strong case that there is no other property like it for sale, and that a foreclosure cannot be undone. But the borrower is not the plaintiff. CMB is the plaintiff, and it is a lender. Its loss is not the property; it never owned the property. Its loss is its $425 million loan. That is (according to CMB) the single biggest investment in the property, but it is still “only” money. (Hard to think of sums like that preceded by the word “only.”) CMB’s only response to what would otherwise be a silver bullet is that RB is a foreign entity and good luck collecting. RB responds in two ways. One is that it is still only money. But the court agrees with CMB that turning a secured debt into an unsecured judgment against a non-US entity where there is no guarantee of collection can be irreparable. Damages cannot make one whole if they cannot be collected. RB has voluntarily agreed to mitigate the problem somewhat. They have agreed that if there is a sale and they are the successful bidder, they will give 45 days’ notice before they sell the property to another party. The point is that if they own the $1 billion Century Plaza project free and clear, there ought to be plenty of equity available to pay off any judgment CMB ultimately obtains. By promising to give the 45 days’ notice, the theory is that CMB will be able to seek to forestall the sale to protect the equity and, if they can then make out their case, they will be successful. That actually does go a long way, though not quite far enough. The point would be that having an asset here in Los Angeles that cannot be moved (the land and what’s on it aren’t going anywhere), there is a pocket plenty deep to satisfy any judgment that might be rendered in this court. The problem is making sure that the equity stays free and clear. The offer would be a lot stronger if RB was agreeing that it would not sell, encumber, or hypothecate the property in any way pending further order of the court and further if there were some way the court could be sure that RB actually is the buyer or that the buyer actually pays fair market value for the property.

RB also notes, properly, that the harm to it stemming from an injunction must be considered. It lists three harms. One is the growing interest that is accruing. A second is the fees that will be incurred in this litigation. The third is the new transfer tax. The court addresses each in turn.

The growing interest is something that will increase if the injunction issues. It can be dealt with through a bond, perhaps. But the more fundamental issue is whether it is a harm at all. As to the lender (as opposed to the borrower), the interest is money that it is entitled to receive, not that it owes. And if it puts in a credit bid, by definition it will receive all the interest it is seeking. That might be somewhat problematic were the property truly under water. But it does not appear that this property is under water, at least with regard to the senior loan. If interest continues to accrue, it will be paid either through the credit bid or a third party bid. But it is not the very high interest rate that is an actual harm to RB. Fees are not a harm at all for these purposes. While relevant to the bond inquiry, RB will have to incur fees unless CMB dismisses the suit. That is not a harm that the injunction causes.

That brings us to the new tax. In an effort to address the very critical housing problem in Los Angeles, the electorate has enacted a transfer tax of 5.5% on real estate transfers in excess of $10 million. That is a hefty sum here—about $55 million if one simply rounds the transaction to $1 billion. RB argues that it can avoid this cost if the foreclosure sale occurs before April 1, 2023, but not thereafter. The court looks at this a bit closer.

First, there is a question whether the tax is constitutional. That issue is pending elsewhere, and this court will not so much as dip a toe into that murky water. That said, the issue is in doubt on a number of grounds. As such, there is at least some realistic potential that the tax will be declared unconstitutional, and the harm will never come to pass. Second, even if the tax is constitutional, there is a question whether it applies to the gross or net value. In other words, the current transfer tax applies to the price less any liens. If that is the case here, then the tax will be zero. RB would be making a credit bid, meaning that the net amount would be the price less the debt, or zero. On the other hand, there is some language in the initiative ordinance that suggests that the netting would not apply. Again, the court’s toes are staying dry on that one. But the question is out there and unresolved. Accordingly, there is a significant question whether the transfer tax will actually be at issue in this case at all.

If it is at issue, though, it is not insignificant. Yet, like CMB’s harm, it is only money. The court has no reason to know whether CMB will be able to pay any such damage should the injunction issue and should RB prevail. However, the court believes that dealing with that harm is what the bond is for. If there is a bond, then it could well be that the harm is fully mitigated. Or, even if there is no bond, if CMB is good for the money the harm is not insurmountable, and is in any event less than chasing RB to a foreign country.

On balance, it seems that plaintiff has the better of it, at least absent some assurance. There is no guarantee plaintiff will be able to recover anything if the asset changes hands or is encumbered or hypothecated. And the court does not see RB rushing to post a bond.

The court also has to consider the public interest. This is a private transaction between sophisticated parties. As such, it would generally not affect the public weal one way or another. The fact that it involves an iconic hotel changes things a little bit, but not materially. There is no reason, on this record, for the court to believe that the local landmark will be affected one way or the other by the sale. It is plainly worth more as an operating concern than as a derelict piece of property. Whether Rosenfeld continues to hold the equity or the equity flows to RB, the project will likely go on.

Finally, the court considers the status quo. That, too is mixed. Normally, the status quo would be to have the ownership stay as it is. Here, however, the status quo may change due to the new tax. However, the new tax is beyond the court’s control; the status quo favors plaintiffs.

On balance, the court will therefore need to inquire as to: (1) the specific nature of the fraud and how it would or could have affected plaintiffs’ rights in the context of a foreclosure by the senior lender; the strength of the misuse of money argument and its relationship to specific promises or representations as to the use of the $275 million; what assurances the court has that RB will be able to stand in damages for a half billion should CMB prevail; what assurances the court has that RB will be made whole for the $55 million in additional taxes should the sale be enjoined, RB prevail, and the tax become effective including as against liens. The answers to those questions will determine the way that the balances tilt. If the injunction issues, this will also inform the amount of the bond.