Howard Hughes’s heirs are seeking the last payout from his estate, 34 years after the reclusive mogul’s death, in a conflict between a loose federation of relatives and bankrupt mall owner General Growth Properties Inc.
The two sides are set to square off in a courtroom in lower Manhattan today over what steps to take to pay the heirs. The outcome will help determine how much the heirs receive and how quickly Chicago-based General Growth can complete its 15-month- old restructuring. With the resolution, the last vestiges of the Hughes organization will finally dissolve.
“My guess is there will be some last-minute clean-up that will keep us in place for months -- some tax reporting -- then it will all be over,” said David Elkins, who, along with two relatives, represents a group that now numbers about 475, including hundreds of people unrelated to Hughes as well as trusts, partnerships and charities. “It’s none too soon.”
The roots of the Hughes battle date back to 1976, when the billionaire aviator, industrialist and filmmaker died at the age of 70, childless and without a will. Following a dispute over his fortune -- a handwritten will Hughes supposedly gave to a gas-station owner was rejected as a forgery by a Nevada court -- the holdings were distributed among cousins and other relatives, as well as attorneys who had been hired by family members on a contingent basis.
$520 Million Sale
Rouse Co., a mall owner based in Columbia, Maryland, bought the remaining Hughes assets, including about 22,500 acres of Nevada land, in 1996 for $520 million in cash, stock and debt. The heirs were to receive a portion of profits from future land sales under the agreement.
General Growth bought Rouse in 2004 for $11.3 billion, assuming the obligation to the Hughes heirs. Debt from the acquisition helped push General Growth into bankruptcy protection in April 2009.
The Hughes heirs have received semiannual payments from the sale of land near Las Vegas, which has been developed as the Summerlin master-planned community, under a contingent stock agreement that was part of the Rouse purchase. That deal called for any land remaining by the end of 2009 to be appraised and the Hughes heirs paid. The dispute with General Growth involves how that payment should be resolved.
General Growth is pushing for U.S. Bankruptcy Judge Allan Gropper in New York to determine what the land is worth and how much the Hughes group will recover. The heirs want an appraisal panel to decide the value of the land and say any disputes should go to arbitration, as mandated when Rouse bought Hughes Corp.
Having a Say
“From the heirs’ standpoint they’re going to want to have as much say in who’s making these determinations as possible and the arbitration clause gives them the opportunity to do that,” said Victor Milione, a bankruptcy lawyer at Nixon Peabody LLP in Boston who isn’t involved in the General Growth case.
The largest amount due to the Hughes group is about one half of the value of the unsold land in the Summerlin development as of Dec. 31, 2009, the heirs said in court papers.
The heirs have hired an appraiser to determine the value of the land, which totals about 9,000 acres. For tax purposes, the land has been valued at $430 million by General Growth and its appraisers, according to an evaluation of Clark County, Nevada, records by Ropes & Gray LLP, the heirs’ law firm.
That would be an “absolutely bottom floor,” said Elkins, who gained his interest in the Hughes inheritance in the 1990s, when he was an attorney at Andrews Kurth LLP in Houston and was the lead partner in negotiating the Rouse transaction. He left the firm in 1997.
Las Vegas Prices
The land had a book value of more than $1.1 billion at the end of last year, according to General Growth consolidated financial statements. That value may not reflect a drop in Las Vegas-area real estate prices, Elkins said.
A valuation of "$1.1 billion, if we were to get that, would be an extremely good outcome from our perspective, given market conditions,” he said.
An appraisal and arbitration process could delay General Growth’s bankruptcy completion, the company said in court papers filed last month. Its current plan calls for an exit in October.
The financing General Growth needs to come out of bankruptcy -- investment commitments from Brookfield Asset Management Inc., Fairholme Capital Management Inc. and Pershing Square Capital Management LP -- “requires a resolution” of the Hughes claims, the company said in court papers.
General Growth wants to keep the issue in front of Gropper because it will be resolved faster, and the judge will weigh what’s in the best interest of the company and its creditors, Milione said. That’s not the role of arbitration.
“You’ve got a panel looking at the contract and not too concerned with all the other things going on in the bankruptcy case,” Milione said.
The heirs said in court filings that the appraisal process won’t slow down the bankruptcy process.
The Hughes group received $540.2 million between 1996 and General Growth’s bankruptcy filing in April 2009, in addition to the $520 million purchase of the Hughes Corp., General Growth said in court papers.
“As a result of the successful planning and execution of the community and rapidly escalating land values in what is now recognized as a huge ‘bubble’ in an overheated housing market, the Hughes heirs have received far more in earn-out payments than anyone ever contemplated,” General Growth said in court papers.
Given that General Growth is solvent, even though it’s in bankruptcy, there’s little reason to discard the arbitration clause that was part of the Rouse deal, said Steven T. Hoort, a lawyer for the heirs with Ropes & Gray in Boston.
“The right of arbitration has the normal force that it has outside bankruptcy,” Hoort said.
The case is In re General Growth Properties Inc., 09-11977, U.S. Bankruptcy Court, Southern District of New York (Manhattan).