SC SJ Holdings LLC & FMT SJ LLC

THE DEBTORS & THEIR BUSINESS

• SC SJ Holdings LLC
• FMT SJ LLC

SC SJ Holdings LLC (“SC”) is the owner of the property formerly operating as the Fairmont San Jose hotel. Prior to bankruptcy, it was the landlord renting the property to FMT SJ LLC (“FMT”). The lease agreement was terminated by agreement prior to bankruptcy in order to save costs. Together, SC and FMT contracted with Fairmont Hotels & Resorts (U.S.) Inc., which is now known as Accor Management US Inc., to operate the hotel. Under the contract with Fairmont, the hotel was operated and branded by Fairmont.

The Fairmont San Jose is an iconic, luxury 4.5-star hotel in San Jose, California. Before the onset of COVID-19, the Fairmont San Jose was profitable. It is primarily an event and conference center located in the heart of Silicon Valley, and that is how it made its money. While all hotels have been stricken by the pandemic-driven lack of travel, the Fairmont San Jose was especially impacted because of the cancellation of all conventions scheduled to be held there from March 2020 through December 2021. Since the government-mandated shutdowns began, the Fairmont has averaged just 7.7% occupancy.

DEBTORS WERE FORCED TO DRASTIC ACTION

According to the Debtors’ filings to date, they were forced to take drastic action by the operator of the hotel, Fairmont. The Debtors felt they had no choice but to shutter the hotel on March 5th while it still had guests, including the Vegas Golden Knights NHL hockey team, which was in town to face the San Jose Sharks, after Fairmont refused to implement an orderly wind-down of operations. The guests were relocated to other hotels.

The Debtors’ dispute with Fairmont allegedly began in early 2021, after at least nine consecutive months of losses reaching $2 million per month. The Debtors had already stopped paying rent entirely, solicited and received over $18 million from equity holders, and tried reaching out to potential buyers. While the Debtors found some interested hotel brands, Fairmont refused to acknowledge the Debtors’ termination of the Fairmont management agreement. After months of trying, the Debtors came to the decision to file for bankruptcy so they could officially terminate Fairmont’s management agreement, conduct a robust marketing process, and be able to reopen the hotel under a new name.

Fairmont has filed a reservation of rights, insisting on its right to arbitrate any dispute, but has not yet taken a substantive position in the case.

THE HOTEL WILL BE REBRANDED

Given the Debtors’ untenable cash position, they have filed for bankruptcy, taking advantage of bankruptcy laws that allow them to put off paying their debts for a period of time while they regroup. Certain bankruptcy laws also allow them to terminate their deal with Fairmont and enter into a new one faster and cheaper than they could have done outside of bankruptcy. The Debtors intend to take full advantage of these provisions.

Among their initial filings, the Debtors disclosed their plan to seek bids from other hotel operators. They believe that J.W. Marriott, Hilton Signia, and Grand Hyatt are interested potential buyers for the Hotel Management Rights. Even more promising is the Debtors’ representation that they reached out to these brands before filing for bankruptcy and believe that they are all interested in potentially operating the Hotel. In order to qualify, the Debtors are requiring hotel operators to bring money to the table to ensure that the hotel can reopen and survive the balance of the pandemic and its effects, which some experts have opined may last for two years.

The Debtors estimate that they owe $175 million in secured debt, $10 million in trade debt, and $4.8 million in equity debt. These are large numbers, but the Debtors also assert that the hotel is valued no lower than $261 million, meaning that they can take on additional debt to a new operator without being completely underwater. Hopefully, this will lead to a positive outcome for all creditors.

Debtors hope to have bids submitted no later than May 7, 2021. They have indicated that they intend to work with a Committee of Unsecured Creditors, if one is appointed, in choosing a successful buyer. Unsecured creditors would be wise to take advantage of this opportunity to get a seat at the table and bargain for repayment!