Nashville at law: Regions and hotel chain go to war

Lawsuit tied to massive Ponzi case that has led to criminal prosecutions [From our print edition featured in Monday's City Paper]

Email | Print By E. Thomas Wood

A $255 million alleged fraud scheme, a bank that found itself unhappily drawn into the hotel business, and a hotelier suspicious of the bank’s motives — such are the plotline elements of a dispute that has landed in Nashville’s U.S. District Court.

Regions Bank filed suit earlier this month against Wyndham Hotel Management Inc. over the fate of a suburban Chicago hotel formerly owned by WexTrust Capital LLC. A federal grand jury in New York last July indicted two top officials of Chicago-based WexTrust on charges of securities fraud, mail fraud, wire fraud and conspiracy, claiming their enterprise was a $255 million Ponzi scheme that mainly targeted Orthodox Jews.

Regions, based in Birmingham, filed the lawsuit in Nashville because its real estate loan administration group is located here. Exhibits to the filing show that John H. Rowland, with the Nashville office of Baker Donelson Bearman Caldwell & Berkowitz PC, represented the bank in correspondence with Wyndham preceding the litigation. David E. Lemke, Lea Carol Owen and Michael Harmon of Waller Lansden Dortch & Davis LLP are representing Regions in the lawsuit.

Parsippany, N.J.-based Wyndham managed the Drake Oak Brook Hotel on behalf of WexTrust, which had borrowed $16.7 million from Regions to buy the hotel, located west of Chicago. Earlier this year, a New York court dealing with WexTrust’s receivership ordered that the Drake be ceded to Regions because the debt on the property was greater than its value.

Since that point, Regions claims, it has fronted more than $500,000 to cover operational costs at the hotel. After a few months, the lawsuit says, “precipitous declines in revenue” made it “necessary to shut down the Drake Oak Brook Hotel.”

Regions asserts that it entered into an agreement with Wyndham under which the bank would provide further funding to cover the process of shutting down the place. In exchange, the bank says, Wyndham agreed to stop charging management fees and end the management agreement.

“Until October 5, 2009, Regions believed that Wyndham was proceeding to fulfill its obligations under the shutdown agreement,” the complaint states. “Then, on that date, Wyndham suddenly advised Regions that it considered Regions’ conduct to have violated Wyndham’s rights” under the pact.

After a series of increasingly sternly worded e-mails and letters back and forth last month, which have been filed as exhibits, Regions took legal action, accusing Wyndham of breach of contract and unjust enrichment. The bank asks the court to declare that its interpretation of the agreements with Wyndham is the right one, and it seeks unspecified compensatory damages.

Wyndham’s perspective on the dispute comes through clearly in an Oct. 29 letter from Lynn A. Feldman, its executive vice president and general counsel. Feldman stated that Wyndham had just learned of a January 2008 agreement under which the hotel’s former owner assigned its interest in the management agreement to Regions. She wrote:

It appears that Regions chose not to disclose the Assignment to Wyndham at any point during the 22 months that Wyndham has been managing the Drake Oak Brook Hotel. The correspondence and other communications reflect that Regions consistently portrayed itself simply as the “lender”… without revealing that it had also become the legal assignee of the owner’s obligations. Wyndham repeatedly asked for assistance from Regions in making payments due to employees, utilities, repair services, other vendors, and to Wyndham itself for overdue management fees. Despite what we now know to have been Regions’ obligations under the management agreement and the assignment, Regions concealed those duties, and left Wyndham to struggle with the financial burdens of operating the Wyndham Drake Oak Brook and caring for its guests.

Wyndham and other vendors have suffered substantial injury as a result of Regions’ breach of the management agreement. As our counsel explained to you earlier this week, Wyndham itself is due more than $1.9 million….

Feldman concluded by attacking Regions’ assertions, made in “multiple letters from its Nashville counsel,” that Wyndham’s acceptance of payments under the shutdown arrangement meant it waived the right to keep running the hotel, leaving the bank free to sell it to a competing hotel operator.

“We emphasize that Wyndham has a continuing future right to manage this hotel, using the Wyndham name and trademarks, and to be free of any disturbance of that right by Regions or any other entity,” Feldman wrote.

None of the parties to the case had any comment when contacted about it.