Court rules in Colony Case

Judge appoints trustee to run Colony, allows time for negotiations.

STEVE REID
Editor & Publisher
sreid@lbknews.com

After a ruling on Friday by U.S. Bankruptcy Court Judge K. Rodney May, a court appointed trustee will take control of The Colony Beach & Tennis Resort and be responsible for its operations and fiduciary duties.

The judge stopped short of moving the case from Chapter 11 reorganization to Chapter 7 liquidation, but he said that The Colony’s current reorganization plan was not viable and would not be able to raise or restore the monies necessary to maintain the property and meet creditor’s demands.

The judge said the current operation serves more the interests of Klauber by keeping the place going while he seeks to work out a financial arrangement. The appointment of a trustee means the resort and its restaurant and services will remain open and allows time for the possibility of a deal to be struck.

Judge May concluded that there is a continuing financial loss at The Colony. Even though there were positive numbers through April, he said there was no clear method to pay off the added expenses. The judge used General Manager Katie Moulton’s assertion that the Colony needed $10 to $20 million in new capital as substantiating that the current restructuring plan was not viable and could not achieve the stated needs.

The judge did not use testimony in evidence that mold and termite damage would continue and worsen if the property was not converted to a Chapter 7. The judge said that evidence and testimony was “sketchy” and that “he could not find reason in the mold and termite issue to convert the case to a Chapter 7.”

Judge May did say there was “gross mismanagement — not in the way the hotel is run — but in conflicts of interest. And I’m not questioning anyone’s motives.”

He then went on to say he found Klauber’s stepping up as the lender to The Colony to keep it afloat to “be fairly self serving.”

“The conclusion is inescapable that current operations cannot raise cash to pay claims. I’m looking at the testimony of Miss Moulton that the debtor needs $10 to $20 million. There may be an administrative insolvency right now,” Judge May said.

“The effort here is to keep the embers glowing until Dr. Klauber cuts a deal to his own benefit.”

Judge May said the true nature and effect of the operations and the finances cannot be ascertained while the current management is in place. He added the fact that The Colony’s books have not been closed for the past two years is “an insufficient and self-serving excuse.”

Judge May said he did find cause to convert the case to Chapter 7, including gross mismanagement and conflicts of interest as well as continual loss and diminution of estate. But he opted rather than immediate conversion to Chapter 7 to instead establish a Chapter 11 trustee, to be vetted by the U.S. Trustees Office to “disinterestingly manage the interests and negotiate the interest of the estate.”

The judge said by appointing such a trustee it would allow a deal to be worked out in the interim, in part referring to David Siegal’s and Randy Langley’s (collectively Colony Lender LLC, which bought Klauber’s loan from Bank of America) proposal.

“If Mr. Siegal is for real, then this will keep the operation in play for a business deal.”

The judge pointed out that Siegal did not express any commitment to buy the partner, but Siegal propounded three options.

Option A is where Colony unit owners amend the controlling documents so that unit owners would form a time-share trust.

Option B, but less desired by Siegal and Langley, is to undertake a building by building conversion and form a gradual and ever growing time-share.

The third option is what Siegal has referred to as “Building a Colony within The Colony” wherein Siegal and Langley would bypass the condominium owner units and build a hotel adjacent to the facilities.

Siegal said after the proceedings that after the court’s decision of Chapter 11 or 7, he thinks his proposal when all said and done will meet the objectives of the unit owners and the goals of all those who want to see a revitalized and fully operating Colony resort.

Next in the saga, the trustee will be appointed next week to manage the Colony. The trustee will advise May on what is in the best interest of the parties after evaluating the operation and situation.