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PORTLAND-Avalon Hotel developer Paul Brenneke saw a victory in Multnomah County Circuit Court trumped last week when the California-based majority partner in the luxury John’s Landing property broke a promise to a Multnomah County Circuit Judge and filed for bankruptcy the same day it was court ordered to hand Brenneke and his investor partners the deed to the hotel.

The Ch. 11 bankruptcy filing was made by the majority partner on behalf of Avalon Hotel Partners LLC, the entity that owns the hotel, and it was made in direct defiance of Multnomah County Circuit Judge Jean Kerr Maurer, who made the majority partner assure her that it would not file for bankruptcy before ownership of the property had been transferred to the Brenneke-led minority partnership, which outbid them for the hotel at a court-ordered auction between the partners.

The deed was indeed recorded in the name of Avalon Hotel Developer LLC, the Brenneke-led minority partnership, but the bankruptcy filing puts that transfer of ownership in limbo, at least for now. The attorney for Brenneke’s group has filed a motion to dismiss the bankruptcy. That motion will be heard Oct. 2.

Meantime, the filing imposes an automatic stay prohibiting any action against the debtor or the debtor’s property, which the majority partnership is hoping means the recorded deed is null and void. If it does not, the majority partnership has not only lost the property, but also could face contempt of court proceedings for its defiance of Judge Maurer.

Avalon Hotel Partners is 67% controlled by an affiliated group of LPs whose general partner is Los Altos, CA-based Pacific Western Realty & Development. Catharine Travis, the investors’ bankruptcy attorney, declined to explain to GlobeSt.com her clients’ decision to break their written promise to Judge Maurer that they would not file for bankruptcy. “I wasn’t representing them at the time,” she tells GlobeSt.com.

Regardless, Travis says bankruptcy provisions are such that no agreement can take away an entity’s right to file for bankruptcy, not even one with a judge. She says the filing was necessary because her clients feel the court-ordered auction that Brenneke’s group won was “seriously flawed.” When asked for an example, Travis said it was flawed in part because the property is worth more than the Brenneke group’s $10.6-million winning bid. Her clients bid $10.5 million.

The dispute began in January, when the investors in Avalon Hotel Partners LLC voted to remove Brenneke as its managing member. “I said fine, because they weren’t making their cash calls and I don’t want to be responsible for an entity not paying its bills,” Brenneke tells GlobeSt.com. Brenneke is Avalon Hotel Partners’ largest unsecured creditor, having loaned the partnership about $2 million.

In June, Chicago-based Corus Bank, the primary lender on the project, initiated foreclosure proceedings against Avalon Hotel Partners, saying the partnership had failed to make several hundred thousand in loan payments since July 2002.

When the investors missed the second mortgage payment, Brenneke, who is the guarantor on all debt associated with the property, says he told the investors he wanted out of the partnership, which should have initiated an internal buy-sell provision in their partnership agreement. “They ignored us,” says Brenneke. “So we show up in court and they show up having retroactively amended out the buy-sell provision in the partnership agreement.”

Judge Maurer held up the provision, however, and ordered an auction among the partners. “They did everything possible to delay the auction,” says Brenneke. “They didn’t show up to the first one and were an hour late to the second one.”

Sadly, this is not unfamiliar territory for Brenneke. He recently went through a similar process up in Washington with the same investors, whom he had partnered with to develop another luxury hotel at Second Avenue and Pine Street in Downtown Seattle.

At the same time the investors removed Brenneke as managing partner of the Portland investment, they did so for the Seattle project as well, says Brenneke. And just like in Portland, the investors didn’t make loan payments. “We counter sued them for taking the property away and ultimately it was settled out of court,” says Brenneke.

The upshot is that Brenneke was granted full ownership of the property and then, in order to afford to buy it out of foreclosure, agreed to sell it, at least temporarily, to University Village developers Stuart Sloan and Matt Griffin for $9.62 million. As part of the sale agreement, Brenneke has an option to purchase the property back from the duo by January 2004 for what they paid plus interest. “I fully expect to do that,” says Brenneke.

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