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Date of Issue: November 16, 2006

GSR, Bon Eau negotiate compromise, seek absolution

The controversial bankruptcy of GSR Development LLC just got a little more controversial - and complicated.

In a court-ordered mediation agreement between GSR and Bon Eau Enterprises LLC that was supposed to include the unsecured creditors committee of GSR - but didn't - GSR and Bon Eau claim they've patched up their differences and are asking Federal Bankruptcy Court Judge K. Rodney May to forgive any possible wrong-doing and hold them harmless.

The two parties reached the compromise last week on a "controversy" between them and asked May to find that "there is no fraud, usury, theft, disguised financing, fraudulent transfer or other wrongdoing" in the financial agreement between the two parties signed in August 2005 regarding GSR's Villa Rosa property in Anna Maria. The creditors committee refused to go along with the mediation agreement.

Attorney John Anthony, representing the unsecured creditors committee, claimed in his objection to the mediation agreement that the $6.5 million Bon Eau gave GSR for the Villa Rosa property was a disguised loan, usurious under Florida law and a "criminal" action. The deal does nothing more than give Bon Eau a $12 million property for $6.5 million, he alleged.

The GSR-Bon Eau mediation agreement also asks May to approve an auction sale of the lots at Villa Rosa that would reduce the total asking price of all the lots combined from $11.5 million to $7.6 million, exclusive of Lot 14, which will be auctioned separately. Villa Rosa's model home, which is not yet ready for occupancy and needs an additional $500,000 to $800,000 of work to complete, is on Lot 14.

GSR has proposed to auction of Lot 14 at a minimum price of $1.5 million, despite a contract with NBA player Theo Ratliff of the Boston Celtics to buy the house and land for $2.5 million.

GSR has claimed that any monies remaining after all Villa Rosa lots are sold and all liens and mortgages are satisfied, including Bon Eau, should go to the company as operating capital and not be distributed among the unsecured creditors.

Not so fast, said Anthony. The committee doesn't agree to the compromise and Bon Eau doesn't deserve a penny.

In addition, selling all the Villa Rosa lots at the bargain basement prices in the new mediation agreement will only net $7.68 million, leaving $3.8 million in uncollected equity, money that could be used for the benefit of the unsecured creditors. And the $7.68 million is just about what Bon Eau claims GSR owes in principal and interest under the August 2005 agreement.

Anthony reiterated the committee's claim that the "choice of documentation" in the Bon Eau-GSR financial transaction "is consistent with deliberately concealing the usurious nature of the loan," and is "criminal" by its action.

"The committee cannot support the compromise," he said.

Doing so would compound the already "improper conduct" that has already taken place in the Bon Eau-GSR arrangement by forgiving Bon Eau's usurious actions and requiring GSR to pay the original terms of the transaction. Bon Eau should not be excused from "liability for having received a fraudulent transfer." Bon Eau is "liable to the estate and should not be released or paid any money."

The creditors would be far better off if the court required GSR to sell the properties and retain the proceeds for distribution under a confirmed plan of reorganization, he claimed.

GSR listed approximately $33 million in debts when it filed for bankruptcy in July. Of that, about $6 million is in unsecured claims, primarily owed to private individuals, including several Island residents.

Among a host of other objectives, the unsecured creditors committee wants all GSR properties to be sold at auction to the highest bidder, not just the Villa Rosa properties.

May heard the compromise motion along with the committee's objections on Nov. 8, but had not made a ruling by Nov. 12.


Extension requested

Faced with a Nov. 13 deadline to provide the federal bankruptcy court with a reorganization plan along with a full financial disclosure statement, GSR filed for an extension of the deadline last week to Jan. 9, 2007.

GSR attorney Richard Prosser said in his motion that although newly hired chief restructuring manager William Maloney has made "significant progress" in preparing the documents, he needs "additional time to analyze the facts and circumstances" of this case.

Judge K. Rodney May had not made a ruling in the motion by press deadline.