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Law360 (May 6, 2020, 10:01 PM EDT) -- Several hotel operators seeking assurances that they can participate in the Paycheck Protection Program without triggering defaults on their mortgages have reached deals to avert impending New York and Florida federal court battles.
The operators, which are affiliated special-purpose entities that own hotels in Florida, North Dakota and Wisconsin, filed notices of voluntary dismissal on Tuesday in their lawsuits against U.S. Bank NA and Wilmington Trust NA, which serve as trustees for the commercial mortgage-backed securities trusts that contain the operators' mortgages.
The suits aimed to clear the way for the hotel operators to accept coronavirus relief loans being offered through the PPP despite provisions in their mortgages that prohibit incurring additional debt. Given that PPP funds don't have to be repaid if they're used to keep and pay workers, the operators said the loans can function "like grants."
Tuesday's filings did not disclose any settlement, but an attorney for one of the plaintiffs told Law360 that the operators have gotten the consent they sought to participate in the PPP, which allows small businesses to take out forgivable loans of up to $10 million each to help avoid layoffs during the COVID-19 pandemic.
According to their court filings, the operators were facing a deadline to decide whether to accept loans that the program approved them for in April. To that end, the operators had bids pending for emergency court orders that would shield them from being placed in default if they chose to move forward with the PPP money.
Similarly, the underlying suits requested declaratory judgments holding that the indebtedness provisions from the operators' loan agreements "are null and void as against public policy" when it comes to the PPP.
The operators — Beechwood Plaza Hotel of Appleton LLC, University Hotel Development LLC, KNK-Plaza Hotel of Green Bay LLC and Beechwood Lakewood Hotel LLC — brought the suits last week, claiming the COVID-19 crisis has nearly wiped out their income and left them desperate for the PPP's stop-gap financing.
But the operators said the agreements on their CMBS loans feature provisions that could create an obstacle to accessing the relief program, as it provides aid structured as a loan. Yet according to the operators, their "numerous attempts" to get clarification on the issue didn't yield results from their servicers, Wells Fargo and Rialto Capital Advisors, which were not named as defendants in the litigation.
"The Borrowers have repeatedly asked the Defendant and its agent for its position on the Borrowers' participation in the PPP and/or waivers from the additional indebtedness and springing recourse provisions. For several weeks, the Defendant refused to respond or offer waivers from the additional indebtedness provision, despite the fact that the PPP funds may be fully forgivable," the complaint against Wilmington said, though the bank has stressed that the decision-making authority here belongs to the servicers.
In a statement to Law360, a Wilmington Trust spokesperson said, "We are pleased that this was resolved so quickly by the servicers in the case, to avoid a protracted and expensive litigation."
Although the operators purportedly now have the green-light they sought to participate in the coronavirus relief loan program, Mark Arnot of the Arnot Law Offices, counsel for the Beechwood entity that sued U.S. Bank, told Law360 that other CMBS borrowers "will not be so fortunate."
"There are many hundreds of borrowers who have been begging CMBS lenders and servicers for PPP consent or a modicum of flexibility so they can survive this temporary economic shutdown," Arnot said in an email. "Unfortunately, they are unlikely to find much help, as CMBS lenders and servicers are effectively unregulated — and the servicers are incentivized to earn more servicing fees."
Arnot said he hopes the case brings attention to the plight of these CMBS borrowers, many of which he said have applied for PPP loans without realizing they could get tripped up on indebtedness provisions or have been struggling to secure waivers in time to be able to participate in the program.
"It will be interesting to see whether CMBS lenders eventually begin placing borrowers in default for accepting PPP funds," Arnot said. "Even if servicers later provide consent, they will certainly want to extract their pound of flesh in return."
A U.S. Bank representative declined to comment. Counsel for the other plaintiffs did not immediately return a request for comment on the dismissals Wednesday.
Beechwood Lakewood Hotel LLC is represented by Mark Arnot of the Arnot Law Offices.
Beechwood Plaza Hotel of Appleton LLC, University Hotel Development LLC and KNK-Plaza Hotel of Green Bay LLC are represented by Joseph P. LaSala of McElroy Deutsch Mulvaney & Carpenter LLP and Christopher P. Katers of MahanyLaw LLC.
Counsel information for U.S. Bank and Wilmington was not immediately available.
The cases are Beechwood Lakeland Hotel LLC v. U.S. Bank NA, case number 8:20-cv-01022, in the U.S. District Court for the Middle District of Florida, and Beechwood Plaza Hotel of Appleton LLC et al. v. Wilmington Trust NA, case number 1:20-cv-03424, in the U.S. District Court for the Southern District of New York.
--Editing by Amy Rowe.
Update: This story has been updated with comment from Wilmington Trust.
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