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Law360 (January 8, 2021, 10:35 PM EST) -- The owner of a Hilton hotel franchise in Rochester, New York, filed suit in state court Thursday accusing Deutsche Bank and others of leveraging the coronavirus pandemic and subsequent revenue shortcomings experienced by the hospitality industry to try to "wrest control" of the hotel.
In a 25-page complaint, hotel owner AFP 108 Corp. accuses the bank and others of depriving it of necessary operating funds so that its contractual relationships would deteriorate, along with its ability to obtain credit for future services.
AFP 108 claims that Deutsche Bank, Rialto Mortgage Finance and others are failing to carry out their obligations under a 2014 loan agreement it has, to the detriment of the hotel's operations.
"Rather than meeting plaintiff half-way, or attempting to compromise, defendants, instead, have sought to turn crisis into opportunity, and to contort plaintiff's loan obligations into a stranglehold ultimately designed to wrest control of the hotel from plaintiff," the complaint says.
New York shut down a number of operations in March 2020 as the coronavirus swept across the country, including on-campus learning at higher education facilities. The pivot to virtual learning impacted income and occupancy rates of hotels at colleges — including the Rochester hotel owned by AFP 108.
AFP 108 is a borrower under a 2014 loan agreement between itself and Rialto Mortgage Finance, the original lender, on an $18 million securitized commercial mortgage loan. Rialto is believed to have assigned the loan to Deutsche Bank in 2014, according to the complaint.
In August 2020, counsel for Deutsche Bank said an event of default had transpired, and one month later the bank declared that the entire loan was due because the alleged default was not settled, according to the complaint.
Because of the alleged default event, a cash management procedure was activated, which ultimately resulted in a modified cash management agreement between the parties. Under the cash management procedure, Deutsche and Rialto retain the right to control cash generated by the hotel but are obligated to dispense operating funds to the hotel, the suit says.
Among the amendments to the agreement was a provision that would dispense funds under "waterfall provisions" on a monthly basis. But once the modified agreement was enacted, Deutsche and Rialto "seized control" of the hotel owner's operational income and allegedly withheld the operational funds, according the complaint.
As a result of the withheld funds, the hotel owner made late payments to its cleaning service, its face mask supplier and its waste management servicier.
Furthermore, between November and December, discussions were held on installing a receiver — an appointed third party that assumes control of a property from a borrower — of AFP 108's Rochester hotel and other hotel properties owned by its affiliates. But AFP 108 argues that appointing a receiver is not to protect any investment, but rather Deutsche and Rialto's attempt to "intentionally and maliciously" gain control of its property.
"The appointment of a receiver is wasteful and unnecessary, because the same operations by a receiver would not ameliorate the widespread, but temporary, economic shutdown caused by the Covid-19 pandemic," the complaint says.
The hotel owner alleges Deutsche and Rialto deliberately attempted to impede the hotel's business operations and its credit, which would help expedite their "improper attempts to gain control" of the property. The suit accuses Deutsche and Rialto of breaching the covenant of good faith and of interference with prospective business relations, and seeks at least $2 million in damages.
Representatives for Deutsche Bank declined to comment. Counsel for AFP 108 did not immediately respond to Law360's request for comment Friday.
AFP 108 Corp. is represented by Michael S. Gordon and David J. Richardson of BakerHostetler.
Counsel for Deutsche and Rialto could not be ascertained Friday.
The case is AFP 108 Corp. v. Deutsche Bank Trust Co. Americas et al., case number 650121/2021, in the Supreme Court of the State of New York, County of New York.
--Editing by Breda Lund.
For a reprint of this article, please contact reprints@law360.com.
