shl Doc 39 Filed 03/05/12 Entered 03/05/12 16:49:41 Main Document Pg 1 of 21. ) Jointly Administered

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1 Pg 1 of 21 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ) In re: ) Chapter 11 ) MSR RESORT GOLF COURSE LLC, et al., 1 ) Case No (SHL) ) Jointly Administered Debtors. ) ) ) MSR RESORT GOLF COURSE LLC, et al., ) Adversary Proceeding No ) (SHL) Plaintiffs, ) vs. ) ) Waldorf=Astoria Management LLC, ) ) Defendant. ) ) DEBTORS MEMORANDUM OF LAW IN OPPOSITION TO WALDORF=ASTORIA MANAGEMENT LLC S MOTION FOR SUMMARY JUDGMENT 1 The debtors in these chapter 11 cases, along with the last four digits of each debtor s federal tax identification number include: MSR Resort Golf Course LLC (7388); MSR Biltmore Resort, LP (5736); MSR Claremont Resort, LP (5787); MSR Desert Resort, LP (5850); MSR Grand Wailea Resort, LP (5708); MSR Resort Ancillary Tenant, LLC (9698); MSR Resort Biltmore Real Estate, Inc. (8464); MSR Resort Desert Real Estate, Inc. (9265); MSR Resort Hotel, LP (5558); MSR Resort Intermediate Mezz GP, LLC (3864); MSR Resort Intermediate Mezz LLC (7342); MSR Resort Intermediate Mezz, LP (3865); MSR Resort Intermediate MREP, LLC (9703); MSR Resort Lodging Tenant, LLC (9699); MSR Resort REP, LLC (9708); MSR Resort Senior Mezz GP, LLC (9969); MSR Resort Senior Mezz LLC (7348); MSR Resort Senior Mezz, LP (9971); MSR Resort Senior MREP, LLC (9707); MSR Resort Silver Properties, LP (5674); MSR Resort SPE GP II LLC (5611); MSR Resort SPE GP LLC (7349); MSR Resort Sub Intermediate Mezz GP, LLC (1186); MSR Resort Sub Intermediate Mezz LLC (7341); MSR Resort Sub Intermediate Mezz, LP (1187); MSR Resort Sub Intermediate MREP, LLC (9701); MSR Resort Sub Senior Mezz GP, LLC (9966); MSR Resort Sub Senior Mezz LLC (7347); MSR Resort Sub Senior Mezz, LP (9968); and MSR Resort Sub Senior MREP, LLC (9705). The location of the debtors service address is: c/o CNL-AB LLC, 1251 Avenue of the Americas, New York, New York

2 Pg 2 of 21 TABLE OF CONTENTS PRELIMINARY STATEMENT...1 ARGUMENT...2 I. HILTON KNEW THE TRUE FACTS AND CANNOT EXCUSE ITS MISREPRESENTATIONS BY CLAIMING NEGLIGENCE....3 II. III. IV. HILTON INTENDED THAT OTHERS WOULD RELY ON THE HILTON ESTOPPELS....4 THE DEBTORS WERE JUSTIFIABLY IGNORANT OF THE TRUE FACTS....7 THE DEBTORS RELIED ON THE HILTON ESTOPPELS TO THEIR DETRIMENT CONCLUSION...18 i

3 Pg 3 of 21 TABLE OF AUTHORITIES CASES Aristocrat Leisure Limited v. Deutsche Bank Trust Co. Americas, No. 04 Civ , 2009 WL (S.D.N.Y. Sept. 28, 2009) City of Hollister v. Monterey Ins. Co., 81 Cal. Rptr. 3d 72 (Cal. Ct. App. 2008) Common Wealth Ins. Sys. v. Kersten, 115 Cal. Rptr. 653 (Cal. Ct. App. 1974)... 4 Enodis Corp. v. Employers Ins. Co. of Wausau, No. CV , 2007 WL (C.D. Cal. Mar. 12, 2007)... 5 Estate of Amaro v. City of Oakland, 653 F.3d 808 (9th Cir. 2011)... 2, 5 Flying Diamond Airpark, LLC v. Meienberg, 156 P.3d 1149 (Ariz. Ct. App. 2007)... 8, 16 Hampton v. Paramount Picture Corp., 279 F.2d 100 (9th Cir. 1960) In re AppliedTheory Corp., 312 B.R. 225 (Bankr. S.D.N.Y. 2004) Kidder, Peabody & Co., Inc. v. IAG Intern. Acceptance Group, N.V., 14 F. Supp. 2d 391 (S.D.N.Y. 1998) Matsuo Yoshida v. Liberty Mutual Ins. Co., 240 F.2d 824 (9th Cir. 1957)... 5 Pueblo Santa Fe Townhomes Owners' Assoc., Inc. v. Transcontinental Ins. Co., 178 P.3d 485 (Ariz. Ct. App. 2008)... 4 Roniger v. McCall, No. 97 Civ. 8009, 2000 WL (S.D.N.Y. Aug. 22, 2000) Ware Supply Co. v. Sacramento Savs. & Loan Ass n., 54 Cal. Rptr. 674 (Ct. App. 1966)... 7, 16 Yee v. Weiss, 877 P.2d 510 (Nev. 1994)... 4 Zane v. Liberty Mut. Fire Ins. Co., 165 P.3d 961 (Haw. 2007)... 8, 16 STATUTES 365(h) of the Bankruptcy Code ii

4 Pg 4 of 21 Plaintiffs MSR Resort Golf Course LLC, et al., debtors and debtors in possession (the Debtors ) in the above-captioned bankruptcy cases, by its counsel Kirkland & Ellis LLP, submit this memorandum of law in opposition to Waldorf=Astoria Management, LLC s ( Hilton ) motion for summary judgment. 1 PRELIMINARY STATEMENT 1. Hilton s position on summary judgment effectively boils down to this: It was not Hilton s burden to tell the truth; rather, it was the Debtors burden to uncover the truth. Hilton s position turns the law of equitable estoppel on its head. The whole purpose of an estoppel certificate is to bind the certifying party to a particular state of facts and thereby estop that party from later asserting that a different set of facts existed. Yet, that is precisely what Hilton is trying to do here. It is undisputed that on April 11, 2007, Hilton issued three estoppel certificates that failed to disclose the existence of NDAs for any of the Biltmore, the Grand Wailea or the La Quinta resorts. And now, some five years later, Hilton is attempting to disavow its representations in the Hilton Estoppels and bring a claim for rejection damages against the Fee Owners pursuant to the NDAs that Hilton previously said did not exist. 2. In its summary judgment papers, Hilton cobbles together a hodgepodge of excuses as to why it should not be held to the representations in the Hilton Estoppels, most of which are some variation on the theme that, in Hilton s view, the Debtors should have been able to surmise the existence of the NDAs. But the question is not whether, in hindsight, the Debtors could have somehow discovered the NDAs by piecing together a series of Da Vinci Code type clues. Instead, the question is whether the Debtors reasonably relied on the Hilton Estoppels. And where a sophisticated party like Hilton issues three estoppel certificates as part of a multi- 1 Capitalized terms not defined herein shall have the meaning ascribed to them in the Debtors Motion for Summary Judgment. 1

5 Pg 5 of 21 billion dollar transaction, it is hard to see how Hilton can argue that MSREF and the Debtors were unreasonable in relying upon those certificates to be truthful and accurate as of the date they were issued. If Hilton were right, it would mean that estoppel certificates, which are supposed to bind the signatory, are actually of no force and effect whatsoever. But Hilton is not right. ARGUMENT 3. In its summary judgment brief, Hilton purports to acknowledge the straightforward requirements for applying the doctrine of equitable estoppel (see Hilton Br. at 7), namely, (1) knowledge of the true facts by the party to be estopped, (2) intent to induce reliance or actions giving rise to a belief in that intent, (3) ignorance of the true facts by the relying party, and (4) detrimental reliance. Estate of Amaro v. City of Oakland, 653 F.3d 808, 813 (9th Cir. 2011). But after paying lip service to these requirements, Hilton proceeds to layer on a whole slew of additional requirements that have nothing to do with the equitable estoppel analysis. Hilton, for example, argues that the Debtors are not parties to the Hilton Estoppels and, therefore, do not have standing to invoke the doctrine of equitable estoppel. But neither privity nor standing is a requirement for the application of equitable estoppel. Hilton seems to believe that the Debtors are bringing some type of breach of contract claim to enforce the terms of the Hilton Estoppels. They are not. Instead, the Debtors are bringing a declaratory judgment claim to prevent Hilton from enforcing the NDAs against the Fee Owners based on principles of equitable estoppel. As such, the Debtors do not have to show that they were a party to the Hilton Estoppels or that they are successors-in-interest to the Hilton Estoppels. All the Debtors have to show is that they justifiably relied on the Hilton Estoppels to their detriment. And that is certainly the case. 2

6 Pg 6 of 21 I. HILTON KNEW THE TRUE FACTS AND CANNOT EXCUSE ITS MISREPRESENTATIONS BY CLAIMING NEGLIGENCE. 4. There is no question in this case that the party to be estopped, Hilton, had knowledge of the true facts, that is, the existence of the NDAs. Not only is Hilton a party to the NDAs, but the very same Hilton representative who executed the NDAs, Ted Middleton, also executed the Hilton Estoppels. (See Debtors Br. at p. 14.) And Hilton s own counsel concedes that the NDAs should have been disclosed in the Hilton Estoppels as an outstanding agreement between Hilton or its affiliates and the Tenant Entities or their affiliates. (See Debtors SUF 26; Ex. R, Lee Dep. 102:21-104:13; 106:4-107:9.) 5. Nevertheless, Hilton argues that [i]f anything, the failure to mention the NDAs in the Estoppels was an innocent mistake by CNL, Hilton and MSREF that should not give rise to equitable estoppel. (Hilton Br. at 9.) To begin with, the failure to mention the NDAs in the Hilton Estoppels was not a mistake by anyone except Hilton; neither CNL nor MSREF made any certifications in the Hilton Estoppels. As such, Hilton cannot excuse its misrepresentations by pointing to the fact that CNL did not reference the NDA s in the Estoppels as agreements between Hilton and CNL. (Id. at 9.) It was Hilton, not CNL, that was required to disclose in the Estoppels any outstanding agreements between Hilton or its affiliates and Owner or its affiliates with respect to the Resorts. (See Debtors SUF 21-23; Morettini Decl. Ex. L, Biltmore Estoppel 5; Ex. M, Grand Wailea Estoppel 5; Ex. N, La Quinta Estoppel 5.) And it was Hilton, not CNL, that failed to disclose the NDAs. 6. Moreover, Hilton s contention that it did not intend to mislead anyone when it failed to disclose the NDAs in the Hilton Estoppels is of no import. Courts will apply the doctrine of equitable estoppel to bind a party to its representations even where that party made the representations negligently, and not intentionally. See Common Wealth Ins. Sys. v. Kersten, 3

7 Pg 7 of Cal. Rptr. 653, 662 (Cal. Ct. App. 1974) ( An estoppel may be found even though the person estopped did not actually intend to mislead or to defraud the other person. ); Pueblo Santa Fe Townhomes Owners' Assoc., Inc. v. Transcontinental Ins. Co., 178 P.3d 485, 494 (Ariz. Ct. App. 2008) ( [e]quitable estoppel applies if the party to be estopped intentionally or negligently induces another to believe certain material facts ) (emphasis added). Indeed, a party is entitled to rely on an estoppel certificate, even when the certifying party did not read the certificate and did not realize what it was certifying. Yee v. Weiss, 877 P.2d 510, (Nev. 1994). II. HILTON INTENDED THAT OTHERS WOULD RELY ON THE HILTON ESTOPPELS. 7. As set forth in the Debtors opening brief, the evidence is undisputed that the Hilton Estoppels did in fact induce reliance by each of the Fee Owners who purchased the Resorts after CNL. In 2007, MSREF relied on the Hilton Estoppels in consummating its acquisition of the Resorts (and other properties), and in 2011, the Debtors relied on those same Estoppels in consummating the Foreclosure and implementing their value-maximizing strategy for the estates, the basic premise of which was that any claim by Hilton for rejection damages would run only to the Tenant Entities, and not the Fee Owners. Faced with this evidence, Hilton is forced to argue that such reliance was unreasonable because, according to Hilton, it never intended for MSREF or the Debtors to rely on the Hilton Estoppels. According to Hilton, it only intended to induce reliance by the specific entities to which the Estoppels were directed, namely, the Tenant Entities and a Morgan Stanley holding company. (See Hilton Br. at 8.) Hilton s argument is misplaced. 8. As a threshold matter, whether or not Hilton subjectively intended to induce reliance by the Debtors, or any other particular party, is irrelevant in the equitable estoppel 4

8 Pg 8 of 21 analysis. The law is clear that equitable estoppel is grounded not on subjective intent but rather on the objective impression created by the actor s conduct. Enodis Corp. v. Employers Ins. Co. of Wausau, No. CV , 2007 WL , at *7 (C.D. Cal. Mar. 12, 2007) (quoting Matsuo Yoshida v. Liberty Mutual Ins. Co., 240 F.2d 824, (9th Cir. 1957)). Unlike waiver, which emphasizes the mental attitude of the actor in relinquishing a known right, estoppel is any conduct, express or implied, which reasonably misleads another to his prejudice so that a repudiation of such conduct would be unjust in the eyes of the law. Id. Thus, for purposes of equitable estoppel, the only issue is Hilton s intent to induce reliance or actions giving rise to a belief in that intent. Estate of Amaro v. City of Oakland, 653 F.3d at Here, there is no question that Hilton intended to induce reliance by issuing the Hilton Estoppels. That is exactly what the Management Agreements state. As previously noted, Section 15.9 of each one of the Management Agreements expressly provides that Hilton s statements in estoppel certificates are intended to be relied upon by others with whom the Party requesting such certificate may be dealing. (Debtors SUF 18; Ex. C, Biltmore Mgmt. Agm t 15.9; Ex. D, Grand Wailea Mgmt. Agm t 15.9; Ex. E, La Quinta Mgmt. Agm t 15.9.) Hilton admits that the Hilton Estoppels were requested by, and issued to, the Tenant Entities, each of which is a Party under the Management Agreements. (See Hilton Br. at p. 2; Debtors SUF 18; Ex. C, Biltmore Mgmt. Agm t; Ex. D, Grand Wailea Mgmt. Agm t; Ex. E, La Quinta Mgmt. Agm t.) And there is no question that the Tenant Entities were dealing with, and would continue to deal with, the Fee Owners, as the Tenant Entities lease the Resorts from the Fee Owners. Thus, by the terms of the Management Agreements, the Fee Owners fall squarely within the category of parties that Hilton intended to rely on the Hilton Estoppels. 10. Even putting aside the language of the Management Agreements, the fact remains 5

9 Pg 9 of 21 that the Hilton Estoppels create the objective impression that Hilton intended for others to rely on them. As Hilton concedes, estoppel certificates are the type of documents on which important investment decisions are based. (See Debtors SUF 17; Ex. P, Feldman Dep. 26:5-27:16; see also Ex. J, Middleton Dep. 80:13-81:14.) Hilton itself solicits estoppel certificates when acquiring an asset in order to make sure that there are no outstanding liabilities to lessors, that the contracts are in full force and effect, and to ascertain if any entities have a claim against the property being acquired. (See Debtors SUF 17; Ex. J, Middleton Dep. 77:4-78:3.) And the Hilton Estoppels at issue here specifically provide that they were being issued in connection with a multi-billion dollar transaction and, as such, there would be all the more reason for a third party to rely on the Estoppels to be truthful and accurate as of the date they were issued. (See Debtors SUF 31; Ex. R, Lee Dep. 65:24-67:14.) 11. Nevertheless, Hilton now attempts to limit the universe of parties that could rely on the Hilton Estoppels to only the Tenant Entities and a Morgan Stanley holding company, pointing to language in the Estoppels that they shall inure to the benefit of Owner [Tenant Entities] and Parent [MS Resort Holding LLC]. Hilton never explains what it means for estoppel certificates to inure to the benefit of a particular party, but whatever this phrase means, it certainly cannot stand for the idea that only the Owner and Parent can justifiably rely on the Hilton Estoppels. If that were the case, it would lead to the illogical conclusion that Hilton s failure to list the NDAs in the Hilton Estoppels never did, and never would, have any impact on Hilton s ability to enforce the NDAs against the Fee Owners. That is because the Fee Owners are neither the Owner nor Parent referenced in the Hilton Estoppels. Thus, by Hilton s logic, the Fee Owners could never have reasonably relied on the Estoppels. In other words, despite Hilton s failure to disclose the NDAs in the Hilton Estoppels, Hilton nevertheless could 6

10 Pg 10 of 21 have enforced those NDAs against the Fee Owners the day after the MSREF Transaction closed. Needless to say, such a result would frustrate the basic purpose of estoppel certificates. 12. Hilton cannot escape the consequences of the inaccurate and misleading Hilton Estoppels by the mere expedient of arguing that it subjectively intended for only some parties, but not others, to rely on those Estoppels. Indeed, Hilton s subjective intent does not matter. All that matters is the objective impression created by Hilton s conduct, and here, that conduct deceived MSREF and the Debtors into believing that there were no NDAs for the Resorts. III. THE DEBTORS WERE JUSTIFIABLY IGNORANT OF THE TRUE FACTS. 13. The record here is undisputed that the Debtors were ignorant of the true facts, that is, the existence of the NDAs, at any time prior to May That is not surprising. There is absolutely nothing in the Hilton Estoppels that suggests that NDAs existed with respect to any of the Resorts. (See Debtors SUF 24; Ex. P, Feldman Dep. 33:4-9; 35:17-20; Ex. O, Hudspeth Dep. 45:4-47:14.) While the Hilton Estoppels disclosed both the Management Agreements and the Guaranties for the Resorts, they made no mention whatsoever of the NDAs. 14. Hilton, however, argues that the Debtors ignorance was not justifiable because, in Hilton s view, the Debtors should have been able to guess that the NDAs existed, notwithstanding the language of the Hilton Estoppels. As a threshold matter, the law of equitable estoppel does not, as Hilton suggests, require the Debtors to demonstrate that they had no reasonable means to learn of the existence of the NDAs. (Hilton Br. at 10.) Instead, as discussed in the Debtors moving brief, the law is clear that reliance is reasonable so long as the party relying exercised reasonable diligence under the circumstances. See Ware Supply Co. v. 2 Notably, the Debtors did not disclose the existence of the NDAs on the Schedules of Assets and Liabilities that they filed for each of the Tenant Entities and the Fee Owners 45 days after filing for Bankruptcy on March 18, (Case No (SHL), Dkt. Entries, 146, 150, 152, 154, and 170.) 7

11 Pg 11 of 21 Sacramento Sav. & Loan Ass n., 54 Cal. Rptr. 674, 680 (Cal. Ct. App. 1966) (California law); Zane v. Liberty Mut. Fire Ins. Co., 165 P.3d 961, 971 n.12 (Haw. 2007) (Hawaii law); Flying Diamond Airpark, LLC v. Meienberg, 156 P.3d 1149, 1155 (Ariz. Ct. App. 2007) (Arizona law). 15. Here, there is no question that the Debtors exercised reasonable diligence in an effort to learn if there were any NDAs. The Debtors first asked MSREF to disclose any and all contracts relating to the management or operation of the Resorts. MSREF disclosed the Hilton Estoppels, but did not disclose the NDAs. To confirm that there were no NDAs, the Debtors asked MSREF for an express contractual representation that, to MSREF s knowledge, there were no other agreements relating to the management or operation of the Resorts. MSREF agreed. Under the circumstances, the Debtors diligence was more than reasonable. 16. Nevertheless, Hilton points to a series of clues from which it argues that the Debtors should have been able to deduce the existence of the NDAs, regardless of what Hilton said in the Estoppels. Specifically, Hilton points to (1) the fact that Barry Bloom, a member of CNL, the Fee Owners former equity holder, knew the NDAs existed; (2) the references to nondisturbance agreements in the Management Agreements, (3) the fact that Hilton made a substantial investment in the Resorts, coupled with the general industry practice of property managers receiving NDAs; and (4) the existence of SNDAs, which likewise were not disclosed in the Hilton Estoppels. 17. The problem with Hilton s argument is that it leads to the untenable conclusion that no one could reasonably have relied upon the Hilton Estoppels at any time, for any reason. That is because each one of the factors that Hilton cites in support of its argument that the Debtors reliance was unreasonable was already present before Hilton signed and certified the Hilton Estoppels. That is to say, as of April 11, 2007, when Hilton issued the Estoppels, Mr. 8

12 Pg 12 of 21 Bloom already knew about the NDAs; the Management Agreements already included references to non-disturbance agreements; Hilton already had made a substantial investment in the Resorts; and the SNDAs already existed. Thus, by Hilton s logic, by the time it issued the Hilton Estoppels, it already was unreasonable for anyone to rely upon the truth of Hilton s representations. 18. Not only is such logic absurd, it is directly contradicted by Hilton s own expert, Mr. Feldman, who conceded that, at a minimum, parties could reasonably rely upon the Hilton Estoppels when they were issued in April 2007: Q. How long could MS Resort Holdings LLC reasonably rely upon the estoppel to be truthful and accurate as of April 11, 2007? MR. NEFF: Objection; asked and answered. A. I think you rely upon it as of the date of that transaction. (Supplemental Declaration of Ryan Morettini ( Morettini Supp. Decl. ), Ex. A, Feldman Dep. 74:8-15; see also Debtors SUF 32.) 19. As Hilton s expert admits, at least some parties could reasonably have relied upon the truth of the Hilton Estoppels as of the time they were issued. But Hilton now argues exactly the opposite. According to Hilton, reliance upon the Hilton Estoppels is rendered unreasonable by a series of factors, all of which pre-dated April 2007, and thus no one could ever have reasonably relied upon the Estoppels. This logical defect dooms Hilton s position. 20. Putting aside this overarching flaw in Hilton s logic, the fact remains that not a single one of these factors cited by Hilton even remotely suggests the existence of NDAs by which the Resorts Fee Owners agreed to be liable for any obligations of the Tenant Entities. First, the fact that the NDAs were known to Barry Bloom in January 2006 is wholly irrelevant. Mr. Bloom was a member of CNL, the equity owner of the Resorts prior to the MSREF 9

13 Pg 13 of 21 Transaction. Neither Mr. Bloom nor anyone else at CNL ever disclosed the existence of the NDAs to MSREF when it acquired equity ownership of the Resorts in Instead, CNL placed the burden squarely on Hilton to disclose any outstanding agreements, other than the Management Agreements, between Hilton or its affiliates and Owner or its affiliates with respect to the Resorts. And the only agreement Hilton disclosed was as follows: Guaranty dated as of January 31, 2006 given by Hilton and Hilton Hotels Corporation ( Hilton Parent ) in favor of Owner and CNL Resort Biltmore Real Estate, Inc. (the Guaranty ). (See Debtors SUF 21; Ex. N, La Quinta Estoppel 5.) While CNL may have had knowledge of the existence of the NDAs in 2006, it is undisputed that CNL never imparted that knowledge to MSREF, let alone the Debtors. 21. Second, the fact that Section 9.3 of the Management Agreements specifically require[d] the execution of NDA s by the ground lessors (i.e., the Fee Owners), does not, as Hilton contends, mean that a reasonably prudent person would inquire further about the existence of NDA s. (Hilton Br. at 11.) Hilton s argument is based upon a selective and misleading excerpt from the Management Agreements. When those Agreements are read in full, it is eminently clear that the NDAs referenced in Section 9.3 are not the type of NDAs that would render the Fee Owners liable for the obligations of the Tenant Entities. As noted in the Debtors moving brief, the purpose of the non-disturbance agreements referenced in Section 9.3 is, in pertinent part, to preclude the conveyance or leasing of the hotel, whether on foreclosure, deed in lieu thereof or otherwise, to any person to which owner could not assign this agreement without manager s consent, pursuant to article 8. (Morettini Decl., Ex. C, Biltmore Mgmt. Agm t 9.3; Ex. D, Grand Wailea Mgmt. Agm t 9.3; Ex. E, La Quinta Mgmt. Agm t 9.3.) Such NDAs would not possibly alert the Fee Owners to the existence of other non-disturbance agreements subjecting them to liability for the obligations of the Tenant Entities. (See Morettini 10

14 Pg 14 of 21 Decl., Ex. P, Feldman Dep. 52:16-53:18.) 22. Third, the fact that Hilton committed itself to make substantial investments in the Resorts actually undermines, rather than supports, Hilton s contention that the Debtors could not reasonably rely upon the Hilton Estoppels. As Hilton notes, each one of the three Hilton Estoppels reflects the amount of Hilton s investments in the Resorts. (See Hilton Br. pp ; see also Morettini Decl., Ex. L, Biltmore Estoppel; Ex. M, Grand Wailea Estoppel; Ex. N, La Quinta Estoppel.) Given the magnitude of these investments, it stands to reason that Hilton would have been laser-focused on ensuring the accuracy of the Hilton Estoppels. In particular, a third party would reasonably have assumed that Hilton eagerly would have disclosed any agreements, such as the NDAs, that operated to protect to Hilton s significant investment in the Resorts. Thus, the fact that Hilton did not disclose the NDAs in the Hilton Estoppels made it all the more reasonable for MSREF and the Debtors to conclude that such NDAs did not exist. 23. Nor can Hilton find support for its position through its expert, Mr. Feldman, who opined that NDAs were commonplace in 2006 and, therefore, it would have been obvious to a reasonable person that NDAs existed for the Resorts. (Hilton Br. at ) As an initial matter, Mr. Feldman s opinions as to the reasonableness of the Debtors conduct should be disregarded as outside the bounds of expert testimony. As the courts within this Circuit regularly note, the overwhelming weight of Second Circuit authority precludes expert testimony regarding the reasonableness of a party s conduct. Kidder, Peabody & Co., Inc. v. IAG Intern. Acceptance Group, N.V., 14 F. Supp. 2d 391, 404 (S.D.N.Y. 1998); see also Aristocrat Leisure Limited v. Deutsche Bank Trust Co. Americas, No. 04 Civ , 2009 WL , at *17 (S.D.N.Y. Sept. 28, 2009) (precluding expert testimony on the ultimate issue of whether conduct by bondholders was reasonable ); Roniger v. McCall, No. 97 Civ. 8009, 2000 WL , at *4-11

15 Pg 15 of 21 5 (S.D.N.Y. Aug. 22, 2000) (precluding expert testimony that plaintiff s due diligence efforts to mitigate losses from employment discrimination were unreasonable). 24. But putting aside the issue of admissibility, Mr. Feldman s opinions only serve to further undermine Hilton s claim of unreasonable reliance. If it was common for property managers such as Hilton to obtain NDAs in 2006, then presumably it was just as common for those property managers to disclose the NDAs when called upon to issue estoppel certificates. Thus, the fact that Hilton never mentioned NDAs in three different estoppel certificates would only reinforce the conclusion that no such NDAs existed for the Resorts. 25. Fourth, the existence of SNDAs dated January 31, 2006, would not in any way put the Debtors on notice about the existence of the NDAs. Hilton argues that, because the SNDAs are not listed in the Hilton Estoppels, but the Debtors eventually discovered their existence, the Debtors likewise should have discovered the NDAs, which also were not listed in the Hilton Estoppels. In other words, Hilton s position is this because the Debtors learned that Hilton had concealed some agreements, the Debtors should have assumed that Hilton had concealed a host of other agreements. If that were all it took to avoid equitable estoppel, it would give rise to truly perverse incentives. Indeed, parties issuing estoppel certificates would have every incentive to misrepresent the true facts and conceal information so as to preclude anyone from ever asserting estoppel based on those certificates. That is not how equitable estoppel works. 26. Moreover, while Hilton conceivably could argue that the Debtors could not reasonably rely on the Hilton Estoppels insofar as they failed to disclose the SNDAs, no such argument exists with respect to the NDAs. That is because, as noted above, there is a very significant difference between the SNDAs and the NDAs the SNDAs are referenced in the 12

16 Pg 16 of 21 Management Agreements, while the NDAs are not. As noted, Section 9.3 of the Management Agreement, contained within Article 9 ( Mortgages ), calls for non-disturbance agreements to preclude the conveyance and leasing of the Resorts in certain circumstances. (See Morettini Decl., Ex. C, Biltmore Mgmt. Agm t 9.3; Ex. D, Grand Wailea Mgmt. Agm t 9.3; Ex. E, La Quinta Mgmt. Agm t 9.3.) The SNDAs fit this description, as they relate to the conveyance of the hotel to the lender in the event of foreclosure. 3 (Morettini Supp. Decl., Ex. B, SNDAs.) Thus, Hilton might be able to argue that the Debtors should have been on notice of the SNDAs. But there is absolutely no language in the Management Agreements (or any other document) that even arguably put the Debtors on notice of the NDAs. 27. The fact that the Debtors may have discovered one inaccuracy in the Hilton Estoppels does not mean that the Debtors are thereby precluded from relying on every other representation in the Estoppels. At some point, parties such as the Debtors have to be allowed to reasonably rely upon sworn certifications from sophisticated entities such as Hilton. 28. With no valid basis to support their contention that the Debtors did not reasonably rely upon the Hilton Estoppels, Hilton is forced to resort to blatant mischaracterizations of the factual record. There is no better example of this tactic than Hilton s misleading reference to the testimony of Eastern Property Fund I SPE (MS REF) LLC ( Eastern ), a former preferred equity holder of the Debtors. According to Hilton s characterization, Eastern was aware of the NDA s when it acquired a preferred equity position in July 2008 and, therefore, the Debtors likewise 3 Hilton s reliance on Hampton v. Paramount Picture Corp., 279 F.2d 100, 104 (9th Cir. 1960) is misplaced. In Hampton, the court rejected the theater owner s defense of equitable estoppel as against the film owner specifically because the theater owner was on notice of the film owner s copyright. As the Court stated: The real cause of [the owner s] trouble was not his lack of knowledge of Paramount's interest. Rather, it was his unwarranted reliance on the assertion of a third party and his failure to use the means at hand to ascertain the extent of the interest asserted. Id. at (citation omitted). This case could not be more different. Here, there was absolutely nothing that would have put the Debtors on notice of the NDAs. In sharp contrast with the copyrighted film at issue in Hampton, the Hilton Estoppels do not in any way suggest the existence of NDAs such that further inquiry by the Debtors should have been required. 13

17 Pg 17 of 21 could have discovered the existence of the NDAs. (Hilton Br. at ) But Hilton s argument rests upon an obvious misrepresentation of the testimony of Eastern. 29. While the Eastern Representative, Mr. Raymond Murphy, initially testified that he was aware of NDAs in July 2008, subsequent testimony demonstrates that the witness was referring to the SNDAs, and not the NDAs. The basis for the confusion stems from the fact that, during the deposition, Hilton s counsel never defined the term NDAs and, perhaps more egregiously, never showed a copy of the NDAs to the witness. Upon questioning by the Debtors counsel, who promptly provided the witness with copies of the NDAs, Mr. Murphy testified that he did not know whether the NDAs were the documents he reviewed in July 2008: Q: Mr. Murphy, take a look at Eastern 4. Are these the NDAs that you were referring to; do you recall? A: I don t know. (Morettini Supp. Decl., Ex. C, Murphy Dep. 22:20-23:4.) Upon further questioning, Mr. Murphy testified that the Amended and Restated Limited Liability Company Agreement (the Operating Agreement ) that Eastern signed in July 2008 to acquire its preferred equity interest disclosed all of the agreements that Eastern reviewed as part of their diligence. (See Morettini Supp. Decl., Ex. C, Murphy Dep. 23:5-24:5) Critically, that Operating Agreement disclosed the SNDAs, but did not disclose the NDAs. (Morettini Supp. Decl., Ex. D, Operating Agreement at Schedule 3, p. 4.) As such, based on Mr. Murphy s testimony that the Operating Agreement disclosed all of the documents that were available to [Eastern] for review, there is absolutely no basis for Hilton s conclusion that Mr. Murphy reviewed the NDAs as part of his diligence in July (See Morettini Supp. Decl., Ex. C, Murphy Dep. 23:17-18.) Instead, because the Operating Agreements disclosed the SNDAs, the only plausible conclusion is that Mr. Murphy reviewed the SNDAs, not the NDAs. 14

18 Pg 18 of In a last-ditch effort to muster some support for its position, Hilton argues that the Debtors reliance on the Hilton Estoppels was unreasonable because the Debtors failed to contact anyone at Hilton to inquire of any of these parties or obtain updated estoppels from Hilton at the time of the Foreclosure. (Hilton Br. at 12.) This argument is a red herring. The Debtors were not relying on the Hilton Estoppels to disclose accurately all of Hilton s agreements pertaining to the Resorts as of the time of the Foreclosure. Instead, the Debtors were relying on the Hilton Estoppels to disclose accurately all such agreements as of the date the Estoppels were issued, that is, April 11, The Debtors did not need updated estoppels from Hilton because the Debtors already had an express contractual representation from MSREF that, to the best of its knowledge, it had disclosed all agreements relating to the operation or management of the Resorts. The combination of the Hilton Estoppels (which covered the period up to April 11, 2007) and MSREF s contractual representation (which covered the period from April 12, 2007 through the Foreclosure) gave the Debtors confidence that there were no NDAs for the Resorts. There is no reason why the Debtors would have believed it necessary, in 2011, to go back and ask Hilton to certify the exact same information that it already had certified in April Contrary to what Hilton seems to believe, the truth is not something that ever goes stale. On April 11, 2007, Hilton certified that there were no outstanding agreements between Hilton or its affiliates and the Tenant Entities or its affiliates other than the Management Agreements and Guaranties. The Debtors relied on Hilton s representations to be true and 4 Ironically, Hilton says that the truth could have been discovered if only the Debtors asked Mr. Middleton, Mr. Lee, or Hilton s other counsel listed in the Management Agreements. (Hilton Br. at ) But Hilton s proposed solution to learning of the existence of the NDAs making an inquiry of Hilton is exactly what was done in Indeed, Mr. Lee and Mr. Middleton are the exact same people who provided the Hilton Estoppels in 2007 and failed to disclose the existence of the NDAs despite the reference in the Management Agreement to non-disturbance agreements, the supposed importance of the Management Agreements to Hilton in light of its investments in the Resorts, the supposed industry standard of NDAs in the REIT industry, and the existence of the SNDAs. 15

19 Pg 19 of 21 accurate as of the date they were made, and nothing in Hilton s brief undermines the reasonableness of the Debtors reliance. IV. THE DEBTORS RELIED ON THE HILTON ESTOPPELS TO THEIR DETRIMENT. 32. The last element of equitable estoppel, detrimental reliance, is beyond all reasonable dispute. The fundamental principle of detrimental reliance is that the party to be estopped induced the party asserting estoppel to conduct himself in a manner that unfairly exposes him to the argument, claim, or defense against which the estoppel is sought. City of Hollister v. Monterey Ins. Co., 81 Cal. Rptr. 3d 72, 97 (Cal. Ct. App. 2008). Here, there is no doubt that the Debtors and the Debtors stakeholders to whom the Debtors owe fiduciary duties will have relied on the Hilton Estoppels to their severe detriment if Hilton is now allowed to renege on its representations As discussed in the Debtors opening brief, based on the belief that there were no NDAs for the Resorts, CNL-AB, members of which ultimately became the Debtors management, agreed with other Corporate Mezzanine Lenders to structure the Foreclosure as voluntary rather than involuntary. (Debtors SUF 44, Ex. V, Kamensky Dep. 34:22-37:6.) This decision alone meant that CNL-AB forfeited $75 million in guaranteed cash flows. (Debtors SUF 44, Ex. V, Kamensky Dep. 34:22-37:6.) Members of CNL-AB then negotiated a complicated restructuring as part of the Foreclosure whereby certain members agreed to take a higher ownership interest in the Debtors in exchange for a lower ownership interest in nondebtor entities that owned different assets. (Debtors SUF 45, Ex. V, Kamensky Dep. 50:14-5 Hilton wrongly asserts that the Debtors must show damages to recover. But damages are not an element of an equitable estoppel claim. See Ware Supply Co. v. Sacramento Sav. & Loan Ass n., 54 Cal. Rptr. 674, 680 (Cal. Ct. App. 1966) (setting forth the requirements for showing equitable estoppel in California); Zane v. Liberty Mut. Fire Ins. Co., 165 P.3d 961, 971 n.12 (Haw. 2007) (Hawaii); Flying Diamond Airpark, LLC v. Meienberg, 156 P.3d 1149, 1155 (Ariz. Ct. App. 2007) (Arizona). 16

20 Pg 20 of 21 52:19.) 6 And subsequent to the Foreclosure, when members of CNL-AB became management of the Debtors, the Debtors filed for bankruptcy protection, received a $30 million debtor-inpossession financing loan, negotiated extensive consensual cash collateral orders with other stakeholders, and announced to the Court that they were embarking on a major value enhancing restructuring initiative with respect to the Hilton Management Agreements, all in reliance on the representations in the Hilton Estoppels. (See Debtors SUF 50; Ex. V, Kamensky Dep. 79:15-22; see also Ex. W, Puntus Dep 9:4-21; Ex. X, Murphy Dep. 20:18-21:24.) 34. If Hilton were now allowed to enforce the NDAs against the Fee Owners, notwithstanding the representations in the Hilton Estoppels, the Fee Owners would be subject to a claim for millions of dollars in rejection damages that Hilton previously indicated did not exist. (Debtors SUF 53.) 7 By any standard, that is a detriment. And the only way the Debtors could avoid this claim for rejection damages would be to maintain the Hilton Management 6 Hilton s statement that there is no evidence that MSREF relied on the Hilton Estoppels misstates the testimony. MSREF s 30(b)(6) witness, Mr. Hudspeth, testified that it was important for MSREF to know what agreements existed before it closed on the MSREF Transaction so that it could understand which entities were liable under the Management Agreements for the Resorts. (See Debtors SUF 16; Ex. O, Hudspeth Dep. 42:1-43:6.) Such knowledge factored directly into MSREF s determination of the value of the MSREF Transaction itself. (See Debtors SUF 16; Ex. O, Hudspeth Dep. 43:16-44:4.) Hilton s argument that this lack of knowledge had no impact on value because MSREF did not receive the Hilton Estoppels until after it determined the value of the transaction is misplaced. As made clear by the Merger Agreement and the Company Letter, the value ascribed to the transaction was based on the disclosures in the Company Letter that only the Management Agreements and the Guaranties existed. (See Morettini Decl. Ex. T, Company Letter.) As such, the Hilton Estoppels confirmed the representations made by CNL. Accordingly, there is no dispute that the value of the transaction was based upon the belief that there were no NDAs, a belief premised on the Hilton Estoppels. (See Morettini Decl. Ex. O, Hudspeth Dep. 43:16-44:4.) 7 Hilton is incorrect that only the Fee Owners will be harmed should Hilton be allowed to use the NDAs to assert a claim against the Debtors for hundreds of millions of dollars in rejection damages. The Tenant Entities, which are parties to both the Hilton Estoppels and the NDAs, face a claim from the Fee Owner entities for over $300 million due to the Tenant Entities failure to perform under the Operating Leases. (Case No , Dkt. No. 439, 36.) The Operating Leases are therefore highly unfavorable to the Tenant Entities, and the Tenant Entities and their creditors have no interest in retaining the Operating Leases or exercising their right under 365(h) of the Bankruptcy Code. (Id.) Doing so would exasperate a mounting administrative claim and create an enormous payable both in and out of bankruptcy. (Id.) Therefore, the Tenant Entities will also benefit if the Debtors are able to reject the Management Agreements without facing an enormous damages claim at the Fee Owner level. 17

21 Pg 21 of 21 Agreements, thereby allowing Hilton to continue to drain value from the estates. Thus, under any circumstances, allowing Hilton to enforce the previously undisclosed NDAs would severely and negatively impact the potential recoveries of other stakeholders, including unsecured creditors and equity holders. 8 CONCLUSION For the reasons set forth herein, and in the Debtors opening brief, the Debtors respectfully request that the Court deny Hilton s motion for summary judgment, enter summary judgment in favor of the Debtors, and declare that Hilton is equitably estopped from enforcing the terms of the NDAs. Dated: March 5, 2012 New York, New York /s/ Paul M. Basta James H.M. Sprayregen, P.C. Paul M. Basta Eric F. Leon Edward O. Sassower Ryan M. Morettini Chad J. Husnick KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York Telephone: (212) Facsimile: (212) Counsel to the Debtors and Debtors in Possession 8 Hilton emphasizes that it paid more for the Management Agreements than Paulson, Winthrop and Capital Trust, the current owners of the Debtors. (See Hilton Br. at p. 22.) But the difference in value paid by Hilton versus the Debtors does not afford Hilton an excuse for enforcing agreements it kept hidden for years. Moreover, the Debtors Complaint is not an attempt to pay equity, but rather is part of Debtors effort to reorganize and restructure the Management Agreements and reject onerous contracts, a fundamental purpose of bankruptcy. (See Debtors SUF 50, Ex. V, Kamesnky Dep. 79:15-22; see also In re AppliedTheory Corp., 312 B.R. 225, (Bankr. S.D.N.Y. 2004) (explaining the valuable right of debtors to reject burdensome post-petition obligations).) 18