The U.S. has a $331 million problem with the sale of a group of
luxury resorts to the government of Singapore.
Preet Bharara, U.S. Attorney for the Southern District of New
York, said in court papers that MSR Resort Golf Course LLC's plan
to sell its resorts to the real-estate arm of Singapore's sovereign
wealth fund creates $331 million in tax liabilities that should be
owed to the Internal Revenue Service but can't be collected.
Mr. Bharara added in the Wednesday bankruptcy-court filing that
the resort group didn't notify the IRS about the tax issue before a
key "disclosure statement" hearing, even though the resort group
told a judge otherwise.
"Debtors' counsel reached out to the Department of Justice on or
around the day after the Disclosure Statement hearing," Mr. Bharara
said in his filing. The U.S. is the second entity to go after the
tax issue.
Mr. Bharara's argument is that MSR's $1.5 billion sale of four
resorts to the Singapore fund, GIC RE, creates $331 million in
taxable gains that should be automatically owed to the IRS. The
problem, though, is that the documentation surrounding the purchase
agreement contains wording that would stop the IRS from collecting
on the taxes.
"Seeking such an injunction purporting to limit the IRS's
ability to pursue any liabilities stemming from the Purchase
Agreement is particularly disingenuous given that, at the same
time, Debtors concede that "the law is unclear'" when multiple
taxpayers are involved, Mr. Bharara said. The sale document also
concedes the IRS could win if it goes after the money. Mr. Bharara
argues that a bankruptcy judge does not have the authority to
decide on tax liabilities for any party other than the one in
bankruptcy.
Mr. Bharara's filing comes on the heels of a similar objection
by investment firm Five Mile Capital Partners LLC, a key adversary
of MSR throughout the bankruptcy case. Five Mile, a junior lender
that stands to recover none of its money in the case, said the
liability could "infect" the entire bankruptcy.
A spokesman for the resort group, controlled by hedge-fund
manager John Paulson, declined to comment.
In his filing, Mr. Bharara asked Judge Sean H. Lane to postpone
a Jan. 15 hearing at which he will consider signing off on the
resorts' bankruptcy plan. The U.S. attorney adds that MSR's
attorneys declined a similar request of adjourning that
hearing.
In December, no one bid against Singapore at a scheduled auction
of the resort group's properties: Maui's Grand Wailea Resort Hotel
& Spa, the La Quinta Resort & Club in La Quinta, Calif.;
the Arizona Biltmore in Phoenix; and the Claremont in Berkeley,
Calif.
The deal also includes the Great White Course, a Greg
Norman-designed golf course adjacent to the Doral Golf Resort &
Spa in Miami. A company controlled by Donald Trump in June bought
the Doral from Paulson for $150 million.
The $1.5 billion deal includes a $1.1 billion cash payment for
the properties and $360 million in debt forgiveness. The resort
owner will pay 100% of the claims of Hilton Worldwide and Marriott
International Inc. (MAR), which have managed several of the
resorts. The owners of some of the resorts' so-called "mezzanine"
debt will get 100% of their money back, while another tier of those
lenders will get between 8% and 68%. Five Mile stands to get
nothing for its junior mezzanine loan.
The resorts' trip through bankruptcy began in February 2011,
when Paulson teamed with Michael Ashner's Winthrop Realty Trust
(FUR) to seize the properties through a foreclosure proceeding.
Days later, the group put the resorts into Chapter 11 to avoid
paying more than $1.5 billion in senior debt.
Since the filing, the company has made several structural
changes, reshaping contracts with property managers Hilton and
Marriott, before preparing its resorts for the sale so it can repay
creditors.
Write to Joseph Checkler at joseph.checkler@dowjones.com
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