Developer Lauth’s bankrupt units win round in court

Developer Lauth Group Inc. in recent weeks has won critical courtroom victories that likely will allow company principals
to retain control of three subsidiaries in Chapter 11 bankruptcy.

Judge Basil H. Lorch in late August approved
a request for the company to pay up to $150,000 for an outside real estate firm to look over its books and evaluate a financing
offer that could keep Lauth afloat.

The company’s largest creditor, Chicago-based Inland American Real
Estate Trust Inc., blasted the financing proposal, saying the deal’s terms are much worse than an earlier proposal in
which Lauth insiders would provide their own so-called debtor-in-possession financing.

Inland attorney Catherine
L. Steege said in court that Lauth only brought up the alternate proposal in a bid to push the judge to go with the offer
from company insiders.

That offer calls for a $15 million loan at 15-percent interest; the insiders also would
get warrants to acquire up to 25 percent of the company’s remaining equity, go to the front of line to be repaid, and
earn reimbursements for expenses and legal fees.

The insiders said in court filings they are offering the proposal
because the company doesn’t have enough hard assets to serve as a “borrowing base” for a more traditional
loan.

Steege said CEO Robert L. Lauth Jr. and other insiders are recruiting outside investors to participate
in their financing offer rather than seeking the best deal for existing Lauth creditors.

Lauth

The judge earlier
in August had offered interim approval of the insider financing proposal after the parties—including Lauth principals
and their spouses—agreed to drop a proposed $500,000 breakup fee they wanted to pay themselves if the deal fell through.
A final hearing on that matter is slated for Sept. 25.

“There’s really no independent third party,”
said Steege, a partner with Chicago-based Jenner & Block LLP. “This just smells really, really bad.”

Earlier, Inland had complained that Lauth hadn’t offered a third-party proposal to provide funding in bankruptcy,
pointed out attorney Ross M. Kwasteniet, a partner in Chicago-based Kirkland & Ellis LLP who represents Lauth.

Kwasteniet said the company offering to invest—a hedge-fund-affiliated firm he would not name—is interested
in “kicking the tires and making a proposal” and asked for a “modest” work fee.

The judge
sided with Lauth, but also ordered the company to inform Inland of any other financing offers and to allow a third-party review
of any such offers. During the same hearing, the judge denied a motion by Inland to dismiss the case because Lauth did not
have the authority to put the entities into bankruptcy.

That motion had been pending since shortly after Lauth
filed for Chapter 11 bankruptcy protection for three subsidiary companies in May. Lauth has said it filed in part to block
a move by Inland to take control of more than 40 office, industrial and retail properties after it defaulted on a loan from
Inland.

Inland maintains that Lauth lacked authority to file for bankruptcy protection for Lauth Investment
Properties LLC, LIP Development LLC and LIP Investment LLC since Lauth was no longer in control of the subsidiary above the
entities that filed, LIP Holdings LLC.

The three Inland representatives on the five-member LIP Holdings board
had voted to declare a default after Lauth failed to make two consecutive interest payments related to a $250 million Inland
investment. Inland says that April 27 vote gives it control of LIP Holdings and all the associated properties.

But Lauth pointed to a section of the original agreement with Inland that requires approval from at least one Lauth representative
and one Inland representative for major company decisions, including a change in control. The judge agreed with the company’s
interpretation.

“Under the plain language of its own LLC agreement, LIP H may not take over LIP I or take
any other action constituting material discretion under the Mezzanine Loan without the approval of at least one Lauth manager,”
the judge wrote.

Inland also is suing Lauth principals Robert Lauth, Michael S. Curless, Gregory Gurnik, Lawrence
Palmer and Thomas Peck in a separate case that alleges fraud, conspiracy and racketeering.

The company accuses
the Lauth executives of diverting more than $18 million of the Inland investment for unauthorized purposes and of secretly
rewriting contracts to let themselves off the hook for personal guarantees of $310 million on dozens of now-struggling real
estate projects.

Another lender, San Francisco-based Wells Fargo Bank, also has sued Lauth principals over attempts
to move around assets and leave creditors holding the bag after the company’s failure.

Lauth has denied
the allegations in both cases.•