NEW YORK (Reuters) – Investors who bought debt that helped finance an $8 billion buyout of the now troubled Extended Stay hotel chain have sued banks that provided much of the financing, accusing them of scheming to seize the properties and wipe them out.
The case stems from Lakewood, New Jersey-based Lightstone Group LLC’s purchase of the roughly 76,000-room chain from private equity firm Blackstone Group LP (BX.N) in June 2007, shortly before global credit markets began a tightening from which they have yet to recover. Lightstone borrowed about $7.4 billion for the buyout.
In a lawsuit filed in New York state court in Manhattan, two investors that said they bought $214 million of so-called mezzanine debt accused lenders including Bank of America Corp (BAC.N) and Wells Fargo & Co (WFC.N) of colluding to hatch a “Machiavellian scheme” to take control of the properties after a default notice last month.
The plaintiffs, Line Trust Corp and Deuce Properties Ltd, said the defendants’ actions were “precisely timed to coincide with the summertime season,” when hotel cash flows often peak.
Mezzanine debt is often used to finance buyouts, and ranks holders ahead of equity investors in the event of bankruptcy.
According to the complaint, Wachovia Corp, acting as agent for some of the mezzanine lenders, on May 19 filed a notice of default for Extended Stay’s failure to pay just $3.53 million of costs.
Extended Stay has about 680 locations in 44 U.S. states and Canada. The recession has hit many hotel chains hard because leisure and business customers are traveling less or demanding lower rates.
Lightstone has said Wachovia provided much of the buyout financing, with help from Bear Stearns Cos, Bank of America and Merrill Lynch & Co. Wells Fargo has since bought Wachovia, and Bank of America bought Merrill. U.S. Bancorp (USB.N), acting as a trustee in the case, is also a defendant.
Wells Fargo spokeswoman Elise Wilkinson said the bank does not comment on legal matters. Bank of America spokeswoman Shirley Norton declined immediate comment, saying the bank had not reviewed the lawsuit. U.S. Bancorp spokesman Steve Dale declined to comment.
The case is Line Trust Corp et al vs. Wachovia Bank NA et al, New York State Supreme Court (Manhattan), No. 601713/2009.
By Jonathan Stempel
(Editing by Steve Orlofsky)