Five Mile files suit against MSR Hotels, directors to recover guaranty

By Caroline Salls

Pittsburgh, April 10 - Five Mile Capital SPE B, LLC filed a lawsuit against MSR Hotels & Resorts, Inc. and directors Michael Barr, Daniel Kamensky, Mohsin Meghji and Jonathan Shumaker on April 9 in the Supreme Court of the State of New York County of New York to recover $59 million allegedly owed under a recourse guaranty.

Five Mile said MSR Hotels is part of a corporate family organized as a real estate investment trust and is the owner of various subsidiaries that owned and operated the Arizona Biltmore Resort & Spa in Phoenix, the Grand Wailea Resort Hotel & Spa in Maui, Hawaii, and the La Quinta Resort & Club and PGA West in La Quinta, Calif.

MSR Hotels also separately owns intellectual property, including trademarks, logos and copyrights in the names of these resort hotels, Five Mile said. Because the resorts do not directly own the right to use their branded names, they must license them from MSR Hotels in order to continue operating under their brands.

Five Mile said it lent $50 million to an affiliate of MSR Hotels under a secured loan agreement, and MSR Hotels guaranteed repayment of the loan plus interest and fees under a guaranty of recourse obligations.

According to the lawsuit, the affiliate borrower entered bankruptcy without repaying any portion of the loan. MSR Hotels was not in bankruptcy, and Five Mile said it is liable under the guaranty.

Director conflict

In addition, Five Mile said the board of directors of MSR Hotels has a fiduciary duty to protect and maximize the value of the company's property, which must be properly maintained, marketed, deployed and protected from unauthorized use in order to preserve and monetize its value.

"Instead, all of the MSR Hotels directors also served as directors of the very subsidiary companies that owned and operated the resort hotels and were borrowers on the defaulted loans," the lawsuit said.

"In their conflicted capacity on behalf of the operating subsidiaries, the conflicted directors sought to pay as little as possible - and they paid nothing - to the company for the use of the IP assets."

After a number of MSR Hotels' affiliates filed for bankruptcy, Five Mile said the directors allowed the debtors to use the IP assets without paying anything for them, and, at the end of the debtors' two-year bankruptcy, they sold substantially all of the hotel assets to an unaffiliated purchaser, which the directors allowed to continue to use the assets without any compensation to the company.

Five Mile said the directors also consented to the sale of the resorts even though the transaction structure created a significant tax liability against MSR Hotels and rendered the company insolvent or more deeply insolvent.

Derivative claims

The lender said it is also bringing derivative claims on behalf of MSR Hotels against the directors "as a result of their abject failure to maximize the value of the company's assets and minimize its liabilities."

"As a direct result of the conflicted directors' gross dereliction of duty, the company has not received any royalties or other payments for the use of its IP assets over at least the past two years, its assets have been devalued, and its liabilities have increased substantially," the lawsuit said.

The lender said MSR Hotels is entitled to recover damages from the conflicted directors, and Five Mile is entitled to have a receiver appointed to take control of the assets in question.

MSR Resort Golf Course LLC owns and operates five resorts. The New York-based company emerged from bankruptcy on Feb. 28.

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