ASPEN - The city of Aspen claims the owner of the Hotel Jerome undertook a "fraudulent conveyance" of the property as part of a broader scheme to avoid paying a hefty real estate transfer tax bill.
The city government contends hotel owner Jerome Property LLC took the unusual step of foreclosing against a company that is its wholly-owned subsidiary, Jerome Ventures LLC, after the city determined the sale of the Hotel Jerome wasn't exempt from its 1.5 percent Real Estate Transfer Tax (RETT). The two limited liability companies contend that the foreclosure "extinguished" any lien for a RETT the city may have held.
A tax bill of at least $405,000 is at stake in the dispute.
The dispute over the RETT is the latest saga in the historic hotel's convoluted recent history. The most recent chapters include the collapse of one of the largest investment banks in the country and a head-scratching foreclosure fight between the current and former owners.
Documents filed in Pitkin County District Court as part of the lawsuit between the city and owner lay out the recent history. A company called LCP-Elysian Aspen Owner LLC borrowed $48 million from Morgan Stanley Mortgage Capital Inc. in May 2007 to buy the Hotel Jerome. LCP-Elysian secured the loan by putting up the deed of trust on the hotel.
Lehman Brothers ended up with the mortgage, then the investment bank crumbled in the recession and went bankrupt. Jerome Property acquired the note and deed of trust from Lehman Brothers and later contended that LCP-Elysian defaulted on the loan.
LCP-Elysian disputed it was in default and initially fought foreclosure. However, a foreclosure sale was approved by a judge and as the process was under way, the company came to an agreement with Jerome Ventures, a subsidiary of Jerome Property. LCP-Elysian agreed to convey a deed in lieu of foreclosure "in exchange for the Jerome Property's agreement not to sue the borrower or guarantors."
Ownership of the hotel was turned over to Jerome Ventures on Dec. 9, 2009. Jerome Ventures applied for an exemption to the RETT to the city of Aspen finance department based on acquiring the deed in lieu of foreclosure. The finance department granted the exemption.
In March 2010, the city had a change of heart. It sent Jerome Property a letter inquiring about the transaction and "suggesting that the sale in December may have been taxable," the city's brief says.
After receiving that letter, Jerome Property foreclosed on its subsidiary and in August 2010 the parent company and subsidiary filed a lawsuit asking a judge to rule they didn't have to pay the city's RETT.
The hotel owners claimed in a March 14, 2011 motion for summary judgment that the deed in lieu of foreclosure was exempt from the tax. If the court finds there wasn't a valid exemption, the hotel owners want an alternative finding that the foreclosure extinguished any tax obligation.
The city's answer, filed this week, questioned the validity of the transfer of ownership through a deed in lieu of foreclosure. It was actually a "deed in lieu of litigation," the city claimed. LCP-Elysian denied it defaulted on the loan and was fighting the foreclosure. By handing over the deed, it was released from obligations to pay the remaining $36 million on the loan and the threat of litigation, the city contended.
Even if the court finds the deed in lieu of foreclosure was valid, it doesn't exempt the Hotel Jerome owners from paying the RETT, the city claimed. Exemptions for those types of transactions aren't automatic, the city said.
On the foreclosure issue, the city contends the lien for the RETT payment wasn't snuffed when Jerome Property foreclosed on Jerome Ventures.
"Further, [the city of Aspen] asserts that this foreclosure by a parent against its wholly owned subsidiary, which leaves the subsidiary judgment proof, is nothing more than a fraudulent conveyance," the city's brief said.
The city didn't directly address how much Jerome Property and Jerome Ventures should be ordered to pay in RETT fees, in part because the amount of the hotel conveyance is difficult to determine.
The city said Jerome Property acquired the note for the hotel for roughly $27 million. The 1.5 percent RETT on that amount would come to $405,000.
The outstanding loan amount was $36 million, the brief noted. The RETT on that amount would be $540,000.
No hearing date is scheduled yet on the dispute.