Hedge Fund’s Real Estate Unit Placed into Bankruptcy to Avoid Litigation

Hedge Fund’s Real Estate Unit Placed into Bankruptcy to Avoid Litigation

Hedge fund billionaire John Paulson has placed the real estate unit of his hedge fund into bankruptcy to avoid litigation, including a costly lawsuit brought against it by a lender.

Five Mile Capital Partners recently brought a suit against executives of Paulson’s MSR Hotels & Resorts Inc. – the real estate arm of Paulson & Co. – claiming that it is owed tens of millions of dollars relating to the 2011 asset sales of four bankrupt resorts. The resorts in question are Arizona Biltmore Resort & Spa in Phoenix; the La Quinta Resort & Club PGA West in La Quinta, California; the Grand Wailea Resort Hotel & Spa in Maui, Hawaii, and the Claremont Resort & Spa in Berkeley, California. They were sold to the Government of Singapore Investment Corp. for a total of $1.5 billion.

The lender, which lent MSR $50 million, alleges that the Paulson executives failed to get the best price for trademarks, logos and other intellectual property, according to Reuters. Five Mile’s lawsuit sought damages for breach of fiduciary duty, gross negligence, and corporate waste, the news source added.

In response, MSR is seeking bankruptcy law protection under Chapter 11 of the Bankruptcy Code in a Manhattan courtroom, a move that is intended to prevent litigation against a debtor from going forward. The real estate unit also said it plans to use Chapter 11 proceedings to sell intellectual property relating to the Biltmore, La Quinta, and Grand Wailea resorts, Reuters explained.

Daniel Kamensky, MSR Hotels’ treasurer and partner at a Paulson affiliate, said Five Mile began a “scorched earth assault” on the MSR directors and created complications in what would have otherwise been an “orderly sale and wind-down process,” according to Bloomberg.

“The REIT now seeks to end Five Mile’s continued terrorization of directors that the court has previously found acted in good faith,” said Kamensky.