Istithmar files suit to challenge new owner’s Chapter 11 filing

Istithmar World, the former owner of the W New York Union Square hotel, filed suit yesterday to challenge a series of bankruptcy filings by a Philadelphia-based private equity fund that acquired the property in a December foreclosure auction.

The suit comes just one week after LEM Mezzanine threw the property ownership into Chapter 11 bankruptcy protection to block DekaBank, a senior mezzanine lender, from holding another foreclosure auction.

Isithmar asked a U.S. Bankruptcy Court judge in Delaware for an injunction that would prevent an affiliate of Philadelphia-based LEM from moving forward with a Chapter 11 bankruptcy it filed March 23.

“In the weeks leading up to March 23, 2010, the date of the filing of the petition, LEM, through one or more of the individual defendants, engaged in a series of failed attempts to extort money out of DekaBank and Istithmar, in exchange for LEM’s agreement not to cause the voluntary bankruptcy filings by the Mezz 2 borrower, the Mezz 1 borrower or the hotel owner,” lawyers for Istithmar wrote in the complaint.

Robert Richards, the Chicago-based attorney for DekaBank, was not immediately available for comment.

The March 23 foreclosure, like the original auction, would allow investors to bid on the property’s existing mezzanine loans and the winner would take ownership of the W hotel, and would assume any remaining debt at the hotel. Under mezzanine auctions, any investors holding subordinate debt, would be wiped out.

LEM officials said “the allegations are false and we will respond to them in court,” in a statement.

Court records show that while LEM was negotiating with DekaBank and Istithmar prior to the March 23 filing, Istithmar quietly paid $3.6 million to buy another $37 million mezzanine loan at the property from Sandelman Partners and planned to use that loan to try and buy back the property at the auction. LEM then filed a new Chapter 11 bankruptcy petition on March 25 to block the foreclosure on the Sandelman loan.

Istithmar originally bought the 270-room hotel in 2006 for $285 million, one of the biggest hotel deals in New York history.

Istithmar, the investment arm of Dubai World, the real estate conglomerate based in the United Arab Emirates, ran into major financial trouble in late 2009 and began selling off numerous assets, including the Knickerbocker Hotel in New York.

At the December auction, LEM, which owned one of the mezzanine loans at the hotel, acquired the property for $2 million, plus the assumption of debt, however Istithmar attempted to outbid LEM in a surprise move.
On March 1, LEM quietly filed a $75 million lawsuit against Istithmar, alleging the previous owners misappropriated $3.2 million from a reserve fund that was established to renovate the property and used the funds for its own personal uses.

Istithmar’s attornet Harvey Strickon, a partner at Paul, Hastings, Janofsky & Walker, was en route to a flight and not immediately available for comment.