The historic Lodge on the Desert will remain under control of a receiver appointed by a state court, at least until continuation of the hotelβs Chapter 11 bankruptcy case is decided in January, a federal bankruptcy judge ruled Thursday.
In late November, hotel owner Lodge Partners filed its second Chapter 11 bankruptcy in three years, saying it had arranged a short-term loan and longer-term financing to successfully reorganize the business.
The company had defaulted on payments required under a Chapter 11 bankruptcy case filed in 2013 and closed last year.
The hotelβs major secured creditor, Palatine Tucson LLC, filed a foreclosure action and prompted a state court to appoint a receiver for the hotel in early November. A foreclosure sale of the hotel at 306 N. Alvernon Way was scheduled for Jan. 5.
Palatine has asked the bankruptcy judge to dismiss Lodgeβs most recent bankruptcy case, contending it was filed in bad faith to avoid foreclosure and that the debtorβs second attempt at bankruptcy reorganization will likely fail.
Meanwhile, Lodge Partners had asked the judge to force the hotelβs receiver to relinquish control, citing bankruptcy case law commonly requiring such βturnoverβ except in narrow circumstances generally involving mismanagement or fraud.
But U.S. Bankruptcy Judge Brenda Moody Whinery agreed to allow the receiver, San Diego-based Trigild Inc., to maintain control on an interim basis until she decides the motion to dismiss the case. A hearing on that motion is set for Jan. 12.
Whinery reasoned that keeping the receiver in place would cause the least disruption to the 80-year-old, 103-room boutique hotelβs operation during the critical holiday season.
She noted that hotel operations already were disrupted in November, when Trigild took control and fired and rehired most employees of Lodge Partnerβs management company, Coastal Hotel Group.
Whinery also ordered Trigild to follow the orders of the court and submit regular financial reports on the hotel.
Palatine became Lodgeβs biggest secured creditor in April, when it acquired the hotelβs roughly $12 million in mortgage debt from Wells Fargo for an undisclosed sum.
During arguments Thursday, Palatine attorney David Engelman acknowledged that bankruptcy law generally favors forcing receivers to turn over property once a Chapter 11 bankruptcy case has been filed. Under Chapter 11, debtors are protected from legal actions while they work out plans to repay creditors.
But Engelman said the law allows a judge to deny turnover of control in certain cases, including when a debtor has insufficient income to reorganize or is mismanaged.
Engelman said there are no allegations of wrongdoing, but records show the hotel is thin on cash and has been losing money the past few years, raising doubts about a successful reorganization and the abilities of management.
He said Trigild has responded to Lodge Partnersβ requests for information, allowing the debtor to file its bankruptcy schedules, and that shifting control back to Coastal would cause further disruption if the creditor wins its bid to dismiss Lodgeβs bankruptcy case.
Jeff Coe, an attorney for Lodge Partners, blamed Trigild for disrupting the hotelβs business and said the owners have lined up short and long-term financing and management to successfully reorganize.
βAll of the disruption has been caused by the receiver,β Coe said, contending that neither his client nor Coastal Hotels, which has managed the Lodge for about 10 years, have done anything to warrant keeping a receiver.
He noted that cases where turnover of control was denied by bankruptcy courts involved dire situations, for example where no one was left to properly manage the business or the debtor lost its corporate charter.
Coe said Lodge Partners has enlisted John Rutherford, a longtime businessman in the retail and logistics industries, to oversee the hotelβs turnaround. Rutherford is now a managing member of Lodge Partners as well as a member of Lodge Tucson LLC, which is offering to finance the hotelβs reorganization.
Engelman acknowledged βthere were some hiccupsβ when Trigild took over but the receiver is now cooperating and will take orders from the bankruptcy court.
When Trigild took over, Engelman said, taxes and vendors werenβt being paid in a timely manner and utilities threatened shutoffs for unpaid bills, adding that Palatine contributed $143,500 to finance operations before the bankruptcy was filed.
βWe wonder what has changed so there will be success in the reorganization process in case No. 2,β he said.
He also questioned Rutherfordβs credentials, calling them impressive overall but lacking any experience in the hotel industry. Trigild has retained the Lodge on the Desertβs previous general manager.
Also on Thursday, Judge Whinery put off until the January considering motions by Lodge to use cash to continue operations, approve debtor financing and pay employees going forward. The judge approved an interim order authorizing wage payments during a hearing last week.
In documents filed Tuesday, Lodge Partners reported total assets of about $4.9 million and liabilities of $13 million, including $12.4 million in secured debt. The hotel had gross revenues of about $3.2 million this year through when it filed for bankruptcy protection in late November, after posting revenues of $3.6 million in 2015.
Lodge Partners said the hotel employed 74 workers at the time of the bankruptcy filing, and documents filed by Palatine in late November show the receiver rehired 67 former Coastal Hotel workers.
Bill Hoffman, CEO of Trigild Inc., said his company rehired all but a few former workers at the Lodge who had previously put in their notices.
The hotel is operating normally, has fulfilled pending bookings and is honoring all reservations, Hoffman said, adding that it has been running at a profit recently.
Any guests or prospective guests with questions may call the hotel and speak with a manager, he added.
