Skift Take

We're not fans of lawsuits at Skift, but Paulson's crew's escape into bankruptcy to avoid responsibility is just the type of chicken behavior we frown on. And the slimy behavior doesn't tend to be the type long-term investors are attracted to either.

Billionaire investor John Paulson has put a real estate unit of his hedge fund into bankruptcy to thwart a lawsuit by a lender that claims it is owed tens of millions of dollars related to the recent sale of several luxury resorts.

According to filings late Wednesday in Manhattan bankruptcy court, MSR Hotels & Resorts Inc. sought Chapter 11 protection from creditors to sell its remaining assets and wind down.

A bankruptcy filing often halts litigation against a debtor.

Daniel Kamensky, MSR’s treasurer and a partner at a Paulson & Co. affiliate, said in an affidavit that protection was necessary because of the “baseless” lawsuit filed last month by Five Mile Capital Partners against MSR’s directors, which he said reflects the lender’s “scorched-earth” tactics.

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

MSR in February won court approval to sell four resorts to the Government of Singapore Investment Corp. sovereign wealth fund for $1.5 billion, including assumed debt, court papers show.

The resorts included the 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.

But Five Mile, which said it lent $50 million to an MSR affiliate, accused MSR directors of having conflicts of interest that prevented them from getting the best prices for trademarks, logos and other intellectual property.

Its lawsuit seeks $58.7 million representing sums owed, including interest and costs, plus at least $100 million for breach of fiduciary duty, gross negligence and corporate waste.

David Friedman, a lawyer for Five Mile, called the bankruptcy case a “cheap litigation tactic” designed to shield directors from liability, and destined to fail.

“For someone from Paulson to accuse someone of terrorism, when all we’re doing is litigating a commercial dispute, should offend anyone who understands the meaning of the word,” he said in a telephone interview with Reuters.

Five Mile is evaluating its options, Friedman added.

A spokesman for Paulson declined to comment.

MSR said it intends to use Chapter 11 to sell intellectual property for the Biltmore, La Quinta and Grand Wailea resorts.

On Wednesday, MSR urged a federal district judge to dismiss the Five Mile lawsuit. It said the lawsuit was designed to get around earlier court rulings that Five Mile did not like, and said MSR directors had met their obligation to maximize value.

The other MSR directors sued by Five Mile were Michael Barr and Jonathan Shumaker, who are both also partners of a Paulson & Co. affiliate, and Mohsin Meghji.

MSR said it had about $785,000 of assets and $59.2 million of liabilities as of March 30.

Paulson rose to fame when he made $15 billion by betting against subprime mortgages ahead of the U.S. housing collapse.

But his assets under management have fallen to about $18 billion from $38 billion in early 2011 because of lagging performance and investor redemptions. His gold fund has fallen about 47 percent this year, according to performance data provided by a person familiar with the fund.

The case is In re: MSR Hotels & Resorts Inc., U.S. Bankruptcy Court, Southern District of New York, No. 13-11512. The earlier bankruptcy case is In re: MSR Resort Golf Course LLC et al in the same court, No. 11-10372. The Five Mile lawsuit is Five Mile Capital SPE B LLC v. MSR Hotels & Resorts Inc. et al, U.S. District Court, Southern District of New York, No. 13-02920.


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Photo credit: The exterior of the Frank Lloyd Wright-designed Arizona Biltmore Resort & Spa. Arizona Biltmore Resort & Spa

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