Pittsburgh Resort House owners Say Breach Helps Booting Ace

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By Matthew Santoni

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Law360 (July 12, 2021, 6:37 PM EDT) —
The owners of a historic Pittsburgh property and the lenders who supported its renovation made another effort to oust Ace Hotel Group, telling a Pennsylvania state court that the hip hotelier had long ago abandoned the property it sought to keep its name on and didn’t have any rights to make the court give it back.

Y Hotel LP, PNC Bank and two “community development entities” that had been conduits for tax-credit-backed loans to rehab the former YMCA in Pittsburgh’s East Liberty said while the owners had explored selling the property, such a sale wouldn’t have triggered the “subordination, nondisturbance and attornment agreement” Ace was suing under, and Ace had allegedly been in breach of its hotel management agreement even before the pandemic shut down the hospitality industry.

“Ace abandoned the business and terminated its relationship with the hotel at least as early as September of 2020,” wrote the building owners in a brief filed Friday as their closing arguments on Ace’s motion for an injunction. “As a result, all of its current claims that the actions of Y Hotel or the Master Tenant (or PNC or the lenders) will result in either actionable or irreparable harm ring hollow. Ace brought any harms upon itself and did so long ago.”

For its own closing brief, Ace argued that it hadn’t breached the management agreement, that warnings of defaults from the lenders were enough to trigger its rights under the SNDA, and that any abandonment of the property was due to the hotel owners’ refusal to keep the lights on and staff paid during the pandemic closure.

Further, Ace argued that a section of the SNDA the defendants kept pointing to was a “red herring,” and that Ace’s rights to keep managing and branding the hotel were supposed to be protected from more than just the foreclosures or transfers outlined in that one section.

“The SNDA does not provide that Ace loses the right to manage the hotel if section 3(a) has not been triggered. Rather, the HMA and the SNDA require defendants to protect Ace’s right to manage the hotel for the full term of the HMA — both before SNDA section 3(a) has been triggered and after it has been triggered,” Ace’s brief said. “Thus, defendants’ argument that their obligations under section 3(a) of the SNDA have not been triggered is a red herring and does not provide any basis to deny Ace’s motion.”

After opening in 2015 amid hopes that it would help catalyze and cash in on the redeveloping East Liberty neighborhood — the surrounding area now includes luxury apartments, the headquarters for Duolingo and an office high-rise that will include a new Whole Foods — the Ace Hotel shut down completely at the beginning of the pandemic and has remained closed ever since.

Ace had sued the hotel’s owner and “master tenant” company in February 2021, arguing that they were illegally trying to kick the company out and sell the hotel for another operator, despite Ace’s contracts. In court filings and testimony at a hearing June 22, Y Hotel founder Nate Cunningham said Ace had almost always failed to hit its revenue goals, making it hard for the hotel owners to pay off the debts that came with rehabbing the historic building.

Y Hotel said Friday that Ace’s failures at managing the hotel had put it in default of the management contract, and without that contract, the SNDA was moot.

“Ace’s position in good standing under the HMA was a precondition to any right it may have to operate the property,” the owners’ brief said. “While Ace contended in a brief submitted on the eve of the hearing that the defaults where ‘manufactured’ somehow, the testimony and documents presented at the hearing detailed the financial and operational failures that had placed Ace in default.”

Ace countered that the financial failures belonged to the owners for “over-leveraging” the property and said not even the hotel’s strong performance compared to its local competition could keep up with the property’s debt payments. Absent a court order, Ace said the owners could sell the property to satisfy their debts and walk away, with Ace’s brand being the one to suffer the damages.

The owners’ short-range plan to reopen the hotel by listing rooms through AirBnB would be “embarrassing” for the hotelier, Ace argued.

“Ace’s years of investment of its intellectual property in the hotel would be wasted. Ace put so much time and effort into making the hotel a well-known Pittsburgh destination because it understood that it would manage this hotel for at least 20 years,” Ace’s brief said. “Ace certainly did not expect defendants to attempt to terminate the HMA after only six years because the owner was unable to satisfy its loan obligations.”

The lenders, for their part, agreed with the owner in arguing that they hadn’t sought to repossess or force the sale of the property. The warnings and reservations of rights that PNC and the community development entities had sent were not enough to trigger the contract protecting Ace’s management of the property, and a straight sale of the property wouldn’t have either, they said.

Now that various tax credits for historic preservation and building in low-income areas had expired, the lenders said they were now seeking to transfer their interest in the loans to another entity and wanted out of the lawsuit. Both the management agreement and the SNDA would have had to be in effect for Ace to obtain the relief it sought, but the court could deny Ace’s motion for an injunction based on the SNDA alone, the lenders said.

“The CDEs and PNC Bank have no continuing economic interest in who manages the hotel going forward, or in whether or not Ace is in default under the HMA,” the lenders’ brief said. “The evidentiary record provides a clear basis for the court to deny Ace’s motion without getting into those issues, and the court should do so.”

Counsel for the parties did not immediately respond to requests for comment Monday.

Ace Group Pittsburgh LLC is represented by Gretchen E. Moore and Christopher J. Azzara of Strassburger McKenna Gutnick & Gefsky, and Robert Alpert and Douglas M. Hance of Morris Manning & Martin LLP.

Y Hotel LP and Y Master Tenant LLC are represented by J. Alexander Hershey, Danny P. Cerrone Jr. and Samuel A. Hornak of Clark Hill PLC.

The lenders are represented by Andrew J. Muha of Reed Smith LLP.

The case is Ace Group Pittsburgh v. Y Hotel LP et al., case number GD-21-001310, in the Court of Common Pleas of Allegheny County, Pennsylvania.

–Editing by Amy Rowe.

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