US judge denies injunction to freeze funds of ex-EHT directors, may refer case to federal prosecutors

AN APPLICATION by a unit of Eagle Hospitality Trust (EHT) to freeze some of the funds of former directors Howard Wu and Taylor Woods has been turned down.

The Business Times (BT) understands, however, that Christopher Sontchi, a bankruptcy judge in the District of Delaware, is mulling the referral of the matter to federal prosecutors for further investigation.

Urban Commons Queensway (UCQ), one of the debtor companies within the EHT stable and the owner of The Queen Mary in Long Beach, had filed a motion for a preliminary injunction to freeze sufficient funds of Mr Wu and Mr Woods to recover US$2.4 million. (The Queen Mary is a floating hotel docked in Long Beach, California.)

Mr Wu and Mr Woods are also co-founders of Urban Commons, the sponsor of EHT. They stepped down from the board of EHT in May last year, but remain on the board of Urban Commons.

Court documents filed on behalf of UCQ in the US on May 24 alleged that Mr Wu and Mr Woods applied for and obtained a US$2.4 million loan last year on behalf of UCQ under the US Cares Act's Paycheck Protection Programme (PPP).

The PPP is a United States government programme designed to encourage small businesses to keep their workers on payroll, providing them with funds to pay up to eight weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.

UCQ alleged that not only did Mr Wu and Mr Woods lack the authority to take out this loan, they also planned in advance to have the loan proceeds "immediately transferred away from UCQ's bank account the moment the loan was funded".

The pair had also submitted PPP loan applications for a number of Urban Commons properties totalling at least US$17.5 million in proceeds. By June 5, 2020, they had reportedly spent all but approximately US$2.3 million of these funds.

When approached for comment, they told BT via e-mail that the PPP loan for UCQ was divided into two separate loans by both the lender and the US Small Business Administration based on where the employees sat in the company. This had caused the "unexpected error".

They also claimed to have notified the US Small Business Association about reassigning this loan from the lessor entity to the lessee entity when the error was discovered, and said there was never any intention by any party to do "anything inappropriate".

"The proceeds that were received at that time were included with other company funds at the parent company level and payments made therefrom may create some confusion, but in no way was there any inappropriate or improper intention toward any party," they added.

Separately, in a statement released on Wednesday, Long Beach City Auditor Laura Doud said she has found "clear proof" that Urban Commons "intentionally and explicitly misrepresented" financial information.

She commenced an investigation in December 2019 to verify how Urban Commons spent US$23 million approved by the City Council to fix critical and urgent repairs of the Queen Mary.

Ms Doud said there was a "lack of cooperation" from Urban Commons during the investigation, including not providing transaction evidence such as the electronic cheque register, bank statements and cancelled cheques.

Urban Commons had also purportedly submitted invoices for reimbursement for work that was performed by the vendors that they hired. These invoices were stamped "Paid", but not independently confirmed.

Upon investigation, 87 of 89 invoices that were stamped were not paid at the time of submissions. Urban Commons on average also invoiced the City 51 days prior to paying the vendor.

"This misrepresentation of the truth and unwillingness of Urban Commons to provide the basic and required financial records is very troubling, and we will continue to pursue this investigation," said Ms Doud.

A separate court document filed on May 26 explained why a bid received from Constellation Hospitality Group (CHG) was "unviable". According to CHG's bid materials, the entity is owned in part by Mr Wu and Mr Woods, as well as other undisclosed investors.

Although the debtor companies claimed to have worked with CHG to resolve certain issues with the bid, there were allegedly unaddressed issues that made the bid inferior to the sale transactions that are currently before the court.

For a start, the deposit in CHG's bid constituted less than 10 per cent of the proposed purchase price, which is a requirement under the bidding procedures. The bid also did not state the terms of the deposit, including the conditions upon which this deposit would be released to the debtor companies.

The bid also did not provide binding financing commitments, and is currently still unable to provide any certainty that any financing commitments will ever materialise. The supposed funding sources for the CHG bid, in contrast, were allegedly "uncertain and non-binding". For instance, CHG had presented a non-binding term sheet from a proposed senior lender that was five months old.

CHG had also failed to provide a stock purchase agreement that is required by bidding procedures. This reportedly made it difficult to properly evaluate how CHG intends to structure its proposed transaction, as well as the legal commitments that CHG intended to provide.

READ MORE:

Five EHT Chapter 11 assets receive qualified bids, boosting consideration by US$24.8m

Eagle Hospitality Trust units get court nod to investigate Urban Commons founders

Investors concerned about DBS Trustee's decisions on EHT

EHT confirms Chapter 11 filing, to start marketing process to sell some hotels