SilverRock Development Company, LLC and its affiliated debtors have filed a supplemental legal brief arguing that a disputed 99-year ground lease with $1 annual rent should not prevent their bankruptcy asset sale, characterizing the arrangement as "an admitted 'financing device'" rather than a true lease that would give a junior creditor occupancy rights.
The 34-page supplemental brief, filed October 20, 2025, in the United States Bankruptcy Court for the District of Delaware, responds to objections raised by Construction Loan Services II, LLC d/b/a Builders Capital during the closing arguments of a three-day sale hearing. The document represents the latest salvo in a dispute that could determine whether the debtors can complete their proposed sale to TBE Acquisition Co II LLC (Turnbridge) free and clear of all interests.
The Disputed Lease and Sale
At the heart of the controversy is what the debtors call the "Luxury Lease"—a triple-net ground lease executed October 22, 2021, between two SilverRock entities: SilverRock Development Company, LLC as landlord and SilverRock Luxury Residences, LLC as tenant. The lease covers 29 lots in La Quinta, California, some containing partially constructed, weather-beaten homes that are out of warranty.
The lease's unusual terms have become central to the legal dispute. With a 99-year term and annual rent of just $1.00 (totaling $99 over the lease's life), the arrangement lacks typical ground lease provisions such as pre-term rent, construction period rent, minimum rent adjustments, percentage rent based on revenues, or fair market rent adjustments.
Most significantly, paragraph 2(b) of the Luxury Lease contains what the debtors describe as a striking admission: "The parties acknowledge that this Lease is essentially a financing device rather than a traditional operating lease and that therefore all rent is payable under this Lease on a 'triple-net' basis."
Builders Capital's Objection
Builders Capital, a lender to SilverRock Luxury Residences, raised objections for the first time during closing arguments at the sale hearing held October 14, 16, and 17, 2025. The company claims rights under Exhibit B to the Luxury Lease that would allow it to step into the tenant's position if the lease is rejected in bankruptcy.
According to the supplemental brief, Builders Capital argues that its rights under the lease would survive any sale or rejection, potentially giving it occupancy rights to the property. The debtors characterize this late-stage objection as "nothing more than a stall tactic or attempt at attaining undue negotiating leverage—all at the expense of every other creditor in these cases."
The debtors note that Builders Capital admitted on the record that it did not raise these arguments in its written objection to the sale, which was filed September 5, 2025. "This should have been the end of the issue," the brief states.
Five-Pronged Legal Argument
The debtors advance five principal arguments for why Builders Capital's objection should be overruled:
1. Not a True Lease: The debtors contend that despite its title, the Luxury Lease is not actually a lease but rather a financing arrangement that can be sold free and clear under Bankruptcy Code section 363(f). They cite federal and California law holding that courts must look beyond labels to examine the economic substance of an arrangement.
The brief points to several cases with similar facts, including In re Spanish Peaks Holdings II, LLC, where the Ninth Circuit approved a sale free and clear of a 99-year lease with $1,000 annual rent that was signed by the same person for both lessor and lessee. The debtors argue their situation is even more clear-cut because the Luxury Lease explicitly acknowledges being a financing device.
2. Section 363(f) Overrides Section 365(h): Even if the Luxury Lease is deemed a true lease, the debtors argue that several circuit courts have held that the broad sale powers of section 363(f) are not limited by the tenant protection provisions of section 365(h). They cite the Seventh Circuit's decision in Precision Industries v. Qualitech Steel and the Ninth Circuit's decision in Spanish Peaks as supporting this interpretation.
The brief contends that the Third Circuit's decision in In re Revel AC, Inc., which Builders Capital mentioned during the hearing, is distinguishable and actually "implicitly agrees that an appropriate ground under section 363(f) could be sufficient to remove a tenant's rights."
3. Ipso Facto Clauses: The debtors argue that the provisions giving Builders Capital step-in rights are unenforceable "ipso facto" clauses that improperly condition rights on bankruptcy filing. They point to paragraph 6 of Exhibit B, which gives Builders Capital automatic continuation rights "in the event of a termination of the Lease as to the Tenant by reason of the bankruptcy of Tenant."
Such provisions, the debtors argue, violate section 363(l) of the Bankruptcy Code, which allows trustees to sell property "notwithstanding any provision in a contract...that is conditioned...on the commencement of a [bankruptcy case]" and that effects "a forfeiture, modification, or termination of the debtor's interest in such property."
4. Practical Impossibility: The debtors contend that Builders Capital cannot realistically exercise its claimed rights because doing so would require curing numerous defaults under the Luxury Lease, including delinquent property taxes, property disrepair, uncured mechanic's liens, and lapsed insurance requirements.
Even if these curable defaults were addressed, the brief argues, incurable defaults would remain, including an "Abandonment Default" requiring permits from the City of La Quinta and a "PSDA Default" related to development rights. The debtors note that the Planned Specific Development Agreement (PSDA) with the City is no longer in effect, and Builders Capital "is not a developer and there are no current development rights available."
The brief emphasizes that Builders Capital "is not a real estate developer nor a construction firm," has never submitted a bid in the sale process, and never sought to credit bid its alleged debt. The company's purported desire to occupy property consisting of landlocked lots with partially constructed homes, without permits or approved development plans, "strains credulity," according to the filing.
5. Waiver: Finally, the debtors argue that Builders Capital waived these arguments by not raising them in its written objection. They cite case law holding that arguments raised for the first time at oral argument are deemed waived, noting the irony that Builders Capital had filed pleadings just days earlier alleging that the debtors had exceeded the bounds of their motion by raising new theories.
The Property's Troubled Condition
The supplemental brief paints a bleak picture of the property subject to the Luxury Lease. The 29 lots include some with "out-of-warranty, weather-beaten, and partially constructed homes." The property is "entirely landlocked" and "encumbered by a morass of mechanic's liens."
The City of La Quinta holds superpriority priming DIP (debtor-in-possession) liens of $1 million and non-priming DIP liens of $10 million against the property. Poppy Bank has senior liens on 16 of the lots. The debtors describe the property as "a tenancy of real property upon which nothing may be built given the lack of present entitlements."
Site photographs referenced in the brief show property in significant disrepair, failing to meet the Luxury Lease's requirement that premises be "clean and in good condition free of accumulations of rubbish" befitting "a first-class Project."
Fraudulent Conveyance Claims
The debtors also suggest that the Luxury Lease itself may be avoidable as a constructively fraudulent transfer under California's Uniform Voidable Transactions Act. They argue that the lease transferred a valuable leasehold estate for only $99 at a time when SilverRock Development Company should have known it would incur debts beyond its ability to pay.
The brief references the "First Day Declaration" filed when the bankruptcy petitions were filed, which explained that the debtors' financial troubles began in 2020 with the onset of COVID-19, when funding was discontinued and the company had to obtain bridge financing from Poppy Bank in October 2021—the same month the Luxury Lease was executed.
Consent of Actual Parties
Notably, the debtors emphasize that both parties to the Luxury Lease—the landlord (SRDC) and the tenant (SR Luxury)—consent to the sale free and clear of the lease. "Builders Capital is not the lessee and has no present consent rights with regard to the Luxury Lease," the brief states.
The debtors argue this satisfies section 363(f)(2) of the Bankruptcy Code, which permits sales free and clear of interests when "such entity consents." They contend that Builders Capital, as merely a lender with contingent step-in rights, cannot assert the rights of the actual tenant, particularly when that tenant is itself a debtor protected by the automatic stay.
Case Background
The SilverRock bankruptcy cases were filed in 2024 (case number 24-11647) and involve a troubled luxury resort development project in La Quinta, California. According to the First Day Declaration referenced in the brief, the debtors' financial condition deteriorated beginning in 2020 due to the COVID-19 pandemic, when their primary investor discontinued funding.
Over the subsequent years, the debtors faced "steep interest rate hikes, severe construction cost escalations, extremely high insurance premiums, and utility and labor cost increases in the hospitality industry" that contributed to delays in obtaining new financing for the project.
After an eight-month sale process overseen by the bankruptcy court, Turnbridge emerged as the winning bidder. However, a principal for Turnbridge testified at the hearing that the company "will not close the sale if the Luxury Lease remains in place," according to the brief.
The debtors argue that had Builders Capital asserted its step-in rights earlier in the process, "bids for the Purchased Assets would have come in at greatly reduced purchase prices" or there might have been no bids at all. They note that all bidders who submitted purchase and sale agreements requested that title be "free and clear" of the ground leases.
Next Steps
The brief concludes by requesting that the court overrule Builders Capital's objection and approve the relief requested in the debtors' sale motion, including authorization to sell the assets to Turnbridge free and clear of all interests, including the Luxury Lease.
The case illustrates the complex interplay between different provisions of the Bankruptcy Code when a debtor seeks to sell property encumbered by leases between affiliated entities, particularly when junior creditors claim derivative rights under those leases. The outcome could have significant implications for how bankruptcy courts handle similar situations involving what parties characterize as financing arrangements structured as long-term ground leases.
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