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UNITED STATES BANKRUPTCY COURT


NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
-------------------------------------------------------- :
:
In re
: Chapter 11
:
NNN 123 North Wacker, LLC, et al.,
: Case No. 13-39210 (JBS)
:
Debtors.
: (Jointly Administered)
:
--------------------------------------------------------X
OBJECTION OF THE TIC MEMBERS TO DEBTORS
MOTION FOR ORDER APPROVING DEBTORS ENTRY INTO (A) POST-PETITION
RESTRUCTURING SUPPORT AGREEMENT, (B) CONSENT AND PARTICIPATION
AGREEMENT WITH CO-OWNERS OF THE PROPERTY,
AND (C) CERTAIN RELATED RELIEF
NNN 123 North Wacker 1, LLC and the other tenants in common listed on the last page
hereof (TIC Members) who own over 86% of the property that constitutes the only significant
asset of Debtor NNN 123 North Wacker, LLC (TIC 0) whose sole member is debtor NNN 123
North Wacker Member, LLC (TIC 0 Member and jointly with TIC 0, the Debtors), by and
through their undersigned counsel, in support of their objection to the Debtors Motion for Order
Approving Debtors Entry into (A) Post-Petition Restructuring Support Agreement, (B) Consent
and Participation Agreement with Co-Owners of the Property, and (C) Certain Related Relief
[ECF #104] (the Restructuring Motion), respectfully state as follows:
PRELIMINARY STATEMENT
1.

The Restructuring Motion, and indeed both of the bankruptcy cases filed by the

Debtors, are blatant attempts to have Daymark Properties Realty, Inc. (Daymark) or an affiliate
or related party seize control of the 30-story blue chip office building located at 123 N. Wacker
Drive, Chicago, Illinois (the Property). As set forth in more detail below, neither the

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Restructuring Motion nor Post-Petition Restructuring Support Agreement (RSA) and its
related documents can satisfy the strict scrutiny, good faith, or statutory requirements necessary
for their approval.
STATEMENT OF FACTS
2.

TIC 0 owns an undivided 13.917% interest in the Property (the Interest). TIC

0, along with the TIC Members (collectively, the TICs), collectively own the entire fee interest
in the Property as common law tenants in common.
3.

The Property was initially purchased in 2005 by the TICs or their predecessors for

approximately $175 million. The purchase of the Property was financed by the Loans advanced
by General Electric Capital Corporation (together with its successors and assigns, the Lenders)
and then securitized. The loans were evidenced by (i) a Promissory Note in the original principal
amount of $122,000,000 (the "A Note"), and (ii) a Promissory Note in the original principal
amount of $14,000,000 (the "B Note", together with the A Note, the "Notes"). The TICS are
jointly and severally liable for the Loans.
4.

The TIC Members or their principals obtained their interests in their TICs for tax

purposes as a result of 1031 tax exchanges. As a result, maintaining those tax benefits is
extremely important and valuable to them.
5.

Initially, Triple Net Properties Realty, Inc. (predecessor in name only to

Daymark) was a manager of the Property. As a result of mismanagement, Triple Net was
displaced and the management rights were transferred to Thompson National Properties, LLC
("TNP") effective October 27, 2011. TNP remains the manager of the Property.
6.

The Notes were restructured in September 2011 to permit interest only payments

through the date of maturity on October 1, 2015. The filing of a bankruptcy case by any of the

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TICs converts the Loans into recourse obligations of the TICs and has significant adverse tax
consequences for the TIC Members and any guarantors of the underlying loan. As of the date
the Debtors filed their bankruptcy petitions, the TICs were not in default under the Notes.
7.

On October 18, 2013, TIC 0 filed its Schedules [ECF # 17]. The Schedules

reflect one secured creditor, the Lender, and five unsecured creditors, consisting of the Lender
for the deficiency claim, two unsecured claims on account of promissory notes on which the TIC
Members are also obligated, a claim of TNP and a claim of NNN Realty Investors, LLC,
manager of the TIC 0 Member (NNN Realty). No dollar amount is assigned to any of these
claims.
8.

On October 23, 2013, TIC 0 Member filed its Schedules [ECF # 23]. The

Schedules reflect only one claim, that of its manager, NNN Realty. No dollar amount is assigned
to this claim.
9.

TIC 0 is wholly owned by TIC 0 Member. TIC 0 Member is managed by NNN

Realty, which in turn is wholly-owned by NNN Realty Advisors, Inc., which is wholly-owned by
Daymark Realty Advisors, Inc. (Daymark Realty). The President and Chief Executive Officer
of NNN Realty is also the principal and President of Sovereign Capital Management Group, Inc.
(Sovereign).
10.

The TICs are party to the Tenants In Common Agreement (the TIC

Agreement), an executory contract which sets forth the parties respective rights and obligations
pertaining to the Property and the loans thereon. A copy of the TIC Agreement is attached
hereto as Exhibit A. The TIC Members have claims against TIC 0 under the TIC Agreement
directly. In addition, the TIC Members also have rejection damages claims against the Debtors
due to the Debtors de facto rejection of the TIC Agreement. The Debtors do not address the

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TIC Members rejection damages in the Restructuring Motion or the attached related documents
and there is no financial provision for these damages anywhere in the Debtors filings.
11.

Prior to the Debtors bankruptcy filings, the TIC Members were negotiating with

the Lenders to rehabilitate the Property outside of bankruptcy with a $20 million capital infusion
that the TIC Members arranged; all without exposing the TIC Members to the substantial
liability occasioned by the bankruptcy filing.
12.

The TIC Members have now become exposed to this substantial liability as a

direct result of the Debtors filing of these cases, as evidenced by the demand letter dated
February 12, 2014 sent by C-III Asset Management (C-III), the servicer for the Lenders, which
declared a default under the loan documents due to the Debtors bankruptcy filing (the Demand
Letter). A true and correct copy of the Demand Letter is attached hereto as Exhibit B.
13.

As proposed, the Debtors intend to restructure the Lenders debt and sell the

Property privately as set forth in the RSA or, if so ordered by the Court, at auction according to
the Bidding Procedures.
14.

According to the RSA, the Proposed Purchaser need only deposit $100,0000 for

the purchase. This is less than 1/10th of 1 percent of the Purchase Price.
15.

The proposed terms include that C-III, the Lenders servicer who sent the

Demand Letter, shall receive a Restructure Fee of $750,000 if the Proposed Purchaser1 (which
is or will be wholly-owned by ND Investment or its affiliate) purchases the Property. There is
no evidence that the fee is compensation for actual pecuniary loss or how this benefits the
estates. In addition, on information and belief, C-III may earn an additional one percent (1%) fee
upon sale; or an additional $1,600,000 if the Property sells for $160,000,000.
1

Capitalized terms not defined herein shall have be as defined in the Restructuring
Motion and the attachments thereto.
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Additionally, it is proposed that Sovereign will be entitled to a fee of up to

$1,000,000 upon a future sale of the Property. This fee is wholly improper as Sovereign put no
money into the Project and caused the harm by filing the cases herein . This $1,000,000 should
instead be paid to the existing TIC Members.
17.

TNP will be replaced by Sovereigns affiliate, which will then receive an

undisclosed amount as management fees. These additional fees are not fully detailed or
quantified.
18.

As part of the restructuring, the Lenders are granted an initial release of all claims

against it which accrued prior to February 21, 2014. The release is not mutual. No reason is
given for this blanket release other than it is an integral part of the restructuring transaction.
Motion, page 11. No discussion is made of whether any claims have been or could be asserted
against the Lenders or whether it purports to release claims held by the TIC Members against the
Lenders.
19.

Among other items, the Bidding Procedures:


a)

provide for bidding only by TIC Members who do not elect to participate

in the Stalking Horse Transaction;


b)

require evidence of the financial ability to perform to the Debtors

satisfaction alone;
c)

allow the Debtors to withhold due diligence information from any bidder

the Debtors alone determine is not a Qualified Bidder;

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d)

require a Good Faith Deposit of $6,500,000 in certified funds;

e)

require an overbid of $2,000,000;

f)

forbid any bid which is conditioned on the assumption of the Loans; and

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require that the bid be substantially the same or better than the terms of the

Stalking Horse Bid, in the Debtors discretion alone.


20.

Among other items, in order for a consenting TIC Member to keep its rights to tax

deferrals, the TIC Consent:


a)

requires the consenting TIC to support the Approved Plan and the

Transaction without seeking any modification or amendments, directly or indirectly;


b)

requires the consenting TIC to give up any rights to support any course of

action other than the Approved Plan and the Sale Event;
c)

forbids the consenting TIC from submitting a bid for the Property;

d)

requires the consenting TIC to vote in favor of the Approved Plan without

e)

requires the consenting TIC to withdraw with prejudice any proof of claim

f)

require the consenting TIC to agree to remove TNP as the Property

limitation;

or interest; and

Manager.
LEGAL ANALYSIS AND ARGUMENT
A.

The Proposed Restructuring Is Unnecessary

21.

As an initial matter, the Restructuring Motion does not address why the RSA is

necessary. There are a very limited number of parties involved in the Debtors bankruptcy case.
The Debtors could simply propose a plan and attempt to confirm it. There is no need to tie down
one group of creditors while the Debtors negotiate with other groups. Instead, the RSA appears
structured to deny the TIC Members the opportunity to negotiate with the Lender.

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B.

The Proposed Restructuring Cannot Survive Strict Scrutiny

22.

11 U.S.C. Section 363(b)(1)2 authorizes a debtor-in-possession to sell property of

the estate other than in the ordinary course of business. Section 363(b)(1).
23.

However, the Debtors must consider their fiduciary duties to the TIC Members

before requesting a sale of their assets outside the ordinary course of business. See, In re Gulf
Coast Oil Corp., 404 B.R. 407, 422 (Bankr.S.D. Tex. 2009)[debtor in possession must consider
its fiduciary duties to all creditors and interest holders before seeking approval of a transaction
under Section 363(b)]. The Court must conclude, from the evidence, that the Debtors have
satisfied their fiduciary obligations and have established a valid business justification for the
sale. Id.
24.

When a bankruptcy court authorizes a sale of assets pursuant to Section 363(b)(1),

it is required to make a finding with respect to the good faith of the purchaser. In re Abbotts
Dairies, 788 F.2d 143, 149-150 (3rd Cir. 1986). This procedure mirrors the requirement of
Section 1129 that the Court independently scrutinize a debtors plan of reorganization and make
a good faith finding under Section 1129(a)(3) and ensures that Section 363(b)(1) is not used to
circumvent the protections of Chapter 11. Id., and see In re Braniff Airways, Inc., 700 F.2d 935,
940 (5th Cir. 1983) [debtor and Bankruptcy Court should not be able to short circuit the
requirements of Chapter 11 for confirmation of a reorganization plan by establishing the terms of
the plan sub rosa in connection with sale of assets].
25.

As acknowledged by the Debtors, business transactions between a debtor and an

insider are subject to close scrutiny by the Court. Motion, page 13, and See In re Firstmark

Unless otherwise stated, all references herein shall be to Title 11 of the United States
Code (the Bankruptcy Code).
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Corp., 46 F.3d 653, 656 (7th Cir. 1995)[relationship must be fully disclosed and the sale must
benefit the estate in debtors sale of property to an insider].
26.

The proposed transaction is a blatant effort by the Debtors, in violation of their

fiduciary duties, to cut out the TIC Members while keeping control of the Property for the
benefit of Daymark and its affiliates. The proposed restructuring involves numerous insiders.
Debtor TIC 0 is wholly owned by debtor TIC 0 Member. Debtor TIC 0 Member is managed by
NNN Realty, which in turn is wholly-owned by NNN Realty Advisors, Inc., which is whollyowned by Daymark Realty. Todd Mikles, the President and Chief Executive Officer of NNN
Realty, is also the principal and President of Sovereign, which is backstopping up to $1,500,000
of the TICs cash participation in the transaction. Mr. Mikles also signed both of the Debtors
bankruptcy petitions as the authorized agent of the Debtors. Sovereigns affiliate will be the new
manager of the Property and will be paid undisclosed fees. Only vague information has been
disclosed concerning the ownership or relationships of ND Investment.
27.

The proposed transaction is a sweetheart deal for these insiders. Funds from the

Lender to the Proposed Purchaser in a Lockbox Account and funds received under the loan
modification will be paid 90% to Manager, 10% to Sovereign/TIC until they each have received
a15% rate of return for their capital contributions. Sovereign then receives a promote of
$1,000,000. Following these payments, Manager, Sovereign and Sovereign/TIC receive 75%
and, finally, the TICs who agree to participate receive 25% of the funds. See, Section 3.F to the
Outline of Plan or Reorganization attached to the RSA. This will likely result in the TIC
Members getting no recovery whatsoever after all senior fees and expenses are paid.
28.

Additionally, no information has been provided concerning Sovereigns or ND

Investments ability to provide the funds promised. Certainly they will be unlikely to be able to

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call upon Daymark for assistance. Other courts who have recently considered the matter have
noted that Daymark has been involved in multiple pending actions and that at least one other
debtor TICs evidentiary showing regarding the strength of Daymarks guaranty was so thin as
to be almost non-existent. See, Memorandum of Decision Denying Confirmation of Chapter 11
Plan and Granting Relief from Stay, page 7, lines 25-28, filed in In re NNN Parkway 400 26,
LLC, pending before the United States Bankruptcy Court, Central District of California as Case
No. 8:12-bk-24593-TA and attached hereto as Exhibit C.
29.

Despite their blanket assertion that the transaction is in the best interests of the

estates, the Debtors have not provided evidence that they have satisfied, much less considered,
their fiduciary obligations to the TIC Members and have a valid business justification for the
transaction. Instead, the only beneficiaries to the transaction are the senior secured creditor, who
already enjoys substantial protections under the Bankruptcy Code, and Sovereign and its
affiliates.
C.

TIC 0 Is Obligated to Offer the Interest to the TIC Members

30.

TIC 0 is obligated to first offer to the TIC Members the right to purchase the

Interest in the Property in accordance with the TIC Agreement.


31.

In light of the unique commercial opportunity that the Property offers to TIC

Members, and to avoid the potential inequitable and adverse effect of a forced sale of the entire
Property out from under the TIC Members, the TIC Agreement establishes a mechanism by
which TIC 0 is required to offer to sell to the TIC Members its 13.917% Interest in the Property
upon TIC 0s bankruptcy filing. In particular, Section 10 of the TIC Agreement provides, in
relevant part, that [u]pon . . . the occurrence of an Event of Bankruptcy, in accordance with
Section 9, the Tenant in Common filing such action or the subject of the Event of Bankruptcy

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(hereinafter, Seller) shall first make a written offer (Offer) to sell its Interests to the other
Tenants in Common . . .
32.

Although TIC 0 has thus far failed to comply with its contractual obligations in

that respect, the TIC Members will seek to compel TIC 0 to do so should TIC 0 refuse to make
the Offer to the TIC Members.
33.

Once the Interest is sold to the TIC Members, there will be nothing further for the

Debtors to sell through a plan or otherwise.


D.

The TIC Agreement is an Executory Contract for which Rejection Damages

are Owed
34.

Section 365(a) allows a trustee, which definition includes a debtor-in-possession

to assume or reject any executory contract of the debtor subject to court approval. Section
365(a). It is generally accepted that the term executory contract refers to contracts under
which performance remains due to some extent on both sides. Countryman, Executory Contracts
in Bankruptcy, 57 Minn. L. Rev. 439, 446 (1973), see, In re Exide Techs., 607 F.3d 957, 962 (3rd
cir. 2010). As set forth above, the TIC Agreement provides for the mutual performance of
certain obligations, such as the Offer following a bankruptcy filing, owed by the TICs to each
other.
35.

Rejection of an executory contract constitutes a breach of that contract for which

the debtor owes rejection damages. Section 365(g).


36.

By failing to comply with the terms of the TIC Agreement and by proposing the

contemplated sale transaction, the Debtors have effectively rejected the TIC Agreement.
Nowhere in the Restructuring Motion or the attached agreements, however, do the Debtors
address how they are to pay the resulting substantial rejection damages to the TIC Members.

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The Benefit to the Estates from the Proposed Restructuring Does Not
Outweigh the Detriment to the TIC Members

37.

Section 363(h) authorizes a debtor to sell property which it owns as a tenant-in-

common if it can satisfy the certain conditions, including that the benefit to the estate of a sale
of such property free of the interests of co-owners outweighs the detriment, if any, to such coowners. Section 363(h)(3). The Debtors cannot to satisfy the requirements of Section 363(h).
38.

First, the Debtors have failed to articulate how this proposed sale benefits their

estates. The Property is over-encumbered. At least one court has held that the sale of the debtor's
and co-owner's interest in over-encumbered real estate would not provide the requisite benefit to
the estate where the only payment would be to the secured creditor, the only benefit the
elimination of the creditor's right to elect, under section 1111(b), to bifurcate its claim and
acquire an unsecured deficiency claim, and confirmation of a chapter 11 reorganization plan was
unlikely, because that right was relevant only in connection with a plan. In re Haley, 100 B.R.
13 (Bankr. N.D. Cal. 1989) . The court also held that the detriment to the co-owner would be
severe because the co-owner would lose its right to cure and reinstate the mortgage; if the
trustee's section 363(h) complaint were successful, the co-owner would have to purchase the
entire property. Id. at 16.
39.

Second, any benefit to the estates is greatly outweighed by the harm caused to the

TIC Members. As noted, the Loans became recourse to the TIC Members due to the bankruptcy
of TIC 0, thus causing great harm to the TIC Members. Further compounding this harm, the
Debtors have thus failed to comply with their obligations to sell the Interest to the TIC Members
and do not contemplate any such sale as a part of the proposed transaction.

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Further, the Debtors allege that the TIC Members will retain their tax benefits

originally resulting from their 1031 tax exchanges of property by entering into the TIC Consent.
The RSA and the related documents, however, do not provide for the issuance of an opinion
letter to the TIC Members from Debtors counsel assuring them that there will be no adverse tax
consequences and that they can rely upon the TIC Consent to preserve their tax benefits after the
proposed transaction if they consent to the sale. Retention of such tax benefits is extremely
important to avoid significant damage to TIC 0s co-owners in the Property. The actual and
potential harm to the TIC Members due to this sale greatly exceed any benefit to the estates to
restructuring the secured debt or paying it with a sale.
F.

The Proposed Restructuring Fails To Comply with Section 363(i)

41.

In pertinent part, Section 363(i) provides that before the consummation of a sale

of property to which subsection (g) or (h) of this section applies,a co-owner of such
propertymay purchase such property at the price at which such sale is to be consummated. As
such, both the proposed sale and the proposed Bidding Procedures are inappropriate and cannot
be authorized.
42.

The proposed sale to ND Investments must be offered to the TIC Members at the

same price and on the same terms as is contemplated to ND Investments. However, the proposed
sale does not offer the same terms to the TIC Members as is offered to ND Investments. Instead,
if they wish to buy the Property, the TIC Members are forced to proceed according to the
Bidding Procedures.
43.

Even the Bidding Procedures do not satisfy Section 363(i), in that, among other

things, they require a Good Faith Deposit of $6,500,000 in certified funds (not the $100,000
allowed to the Stalking Horse); require an initial overbid of $2,000,000 over the Stalking Horse

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Bid; forbid any bid which is conditioned on the assumption of the Loans (although the Stalking
Horse Bid is so conditioned); and require that the bid be substantially the same or better than the
terms of the Stalking Horse Bid.
44.

In the meantime, the Bidding Procedures are not available to all of the TIC

Members (only those who do not elect to participate in the Stalking Horse Transaction) and the
Debtors alone determine if the proposed bidders have the financial ability to be a bidder and can
withhold due diligence information from any bidder the Debtors alone determine is not a
Qualified Bidder.
45.

Furthermore, only TIC Members are allowed to bid on the Property under the

Bidding Procedures. The sale is not open to third parties. Offering the Property to third parties
as well could result in the highest and best price for it; thus obtaining in the greatest protection
for the secured lender and the TIC Members. If the Debtors were properly considering their
fiduciary duties, the sale would be so structured.
46.

The Debtors seek to transmute the TIC Members rights as co-owners under

Section 363(i) by denying them the opportunity to participate in the sale, and then force the TIC
Members to comply with the Bidding Procedures
G.

The TIC Consent Is Draconian

47.

The TIC Consent binds the TIC Members who may seek to try and preserve their

tax benefits to an overreaching set of requirements.


48.

Among other items, in order for a consenting TIC Member to keep its rights to

their tax benefits, they must support the Approved Plan and the Transaction without seeking any
modification or amendments, directly or indirectly or supporting any course of action other than
the Approved Plan and the Sale Event. The TIC Members, if they consent, cannot submit a bid

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for the Property and must vote in favor of the Approved Plan without limitation. Additionally,
they must withdraw with prejudice any proof of claim or interest. The TIC Consent is draconian
and goes far beyond what is appropriate to support a plan before a disclosure statement has been
approved.
H.

The Proposed Plan Contains Improper Third Party Exculpations and

Releases
49.

The proposed plan as outlined in the RSA requires that Lender, C-III, ND

Investment, the Proposed Purchaser and its owners and any agents, attorneys or advisors of the
foregoing be released and exculpated from any and all claims and obligations relating to these
cases. See, Section 3.G to the Outline of Plan or Reorganization attached to the RSA.
50.

These broad releases to third parties are unjustified and inappropriate. They

essentially rise to the level of a discharge to third party; which is prohibited by the Bankruptcy
Code. See, 11 U.S.C. Section 524.
I.

No Valid Reason is Given to Waive the Requirements of Rule 6004

51.

Federal Rule of Bankruptcy Procedure 6004(h) provides that, unless the court

orders otherwise, an order authorizing the use, sale or lease of property other than cash collateral
is stayed until 14 days after entry of the order.
52.

The Debtors have created an artificial urgency in establishing certain deadlines

under the RSA. However, the Federal Rules of Bankruptcy Procedure were drafted to protect
parties such as the TIC Members. Simply because the parties to the RSA desire to speed up the
process does not give rise to a valid reason to uphold artificial deadlines and deny appellate
rights to the affected parties.

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CONCLUSION
WHEREFORE, the TIC Members respectfully request that the Court deny the
Restructuring Motion and grant the TIC Members such other and further relief as the Court may
deem just and proper.
Dated: March 17, 2014

Respectfully submitted,
LOEB & LOEB LLP
By:
/s/ Emily Stone
Emily Stone
321 North Clarke Street
Chicago, Illinois 60654
(312) 464-3100
-and-

Bernard R. Given II
Loeb & Loeb LLP
10100 Santa Monica Blvd., Suite 2200
Los Angeles, California 90067
(310) 282-2200

Counsel for NNN 123 North Wacker 1, LLC, NNN 123


North Wacker 3, LLC, NNN 123 North Wacker 4, LLC,
NNN 123 North Wacker 5, LLC, NNN 123 North Wacker
6, LLC, NNN 123 North Wacker 7, LLC, NNN 123 North
Wacker 8, LLC, NNN 123 North Wacker 9, LLC, NNN
123 North Wacker 10, LLC, NNN 123 North Wacker 11,
LLC, NNN 123 North Wacker 13, LLC, NNN 123 North
Wacker 14, LLC, NNN 123 North Wacker 15, LLC, NNN
123 North Wacker 16, LLC, NNN 123 North Wacker 18,
LLC, NNN 123 North Wacker 19, LLC, NNN 123 North
Wacker 20, LLC, NNN 123 North Wacker 22, LLC, NNN
123 North Wacker 23, LLC, NNN 123 North Wacker 25,
LLC, NNN 123 North Wacker 26, LLC, NNN 123 North
Wacker 27, LLC, NNN 123 North Wacker 28, LLC, NNN
123 North Wacker 29, LLC, NNN 123 North Wacker 30,
LLC, NNN 123 North Wacker 31, LLC, NNN 123 North

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Wacker 33, LLC, NNN 123 North Wacker 34, LLC, NNN
123 North Wacker 37, LLC, NNN 123 North Wacker 38,
LLC, NNN 123 North Wacker 39, LLC, NNN 123 North
Wacker 40, LLC, NNN 123 North Wacker 41, LLC, NNN
123 North Wacker 42, LLC

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CERTIFICATE OF SERVICE
Emily Stone, an attorney, certifies that on March 20, 2014, she caused the foregoing
Objection of the TIC Members to the Debtors Motion for Order Approving Debtors Entry
into (A) Post-Petition Restructuring Support Agreement, (B) Consent and Participation
Agreement with Co-Owners of the Property, and (C) Certain Related Relief to be filed
electronically. Notice of this filing will be sent by operation of the Courts electronic filing
system to all the parties indicated on the electronic filing receipt. Parties may access this filing
through the Courts system.
By:

/s/ Emily Stone


Emily Stone

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