After a two-day reprieve, the legal battle between Merchants Hospitality and former partner Adam Hochfelder is back on.
The dispute, first reported Monday by The Real Deal, centers on Merchants’ allegations that Hochfelder embezzled funds from one of the firm’s hotel projects in 2017 and was scheming on the side with his Merchants email account.
Hochfelder denies Merchants’ charges. He claims the disagreement traces back to his refusal to pay off debts on defaulted leases at several of Merchants’ restaurants where he was the guarantor and directed one of Merchants’ equity partners to withhold a $4 million payment.
Merchants initially levied its allegations in a complaint last week in New York Supreme Court, but on Monday the firm and Hochfelder voluntarily agreed to discontinue the suit.
“The case is settling,” wrote Justin Sher, a partner at Sher Tremonte who is representing Merchants, on Monday. But the settlement subsequently fell apart when Hochfelder demanded money and attempted blackmail, Sher later alleged.
Merchants and Hochfelder had been negotiating into the wee hours Monday morning to finalize the terms of the former business partners’ separation and resolve the litigation.
By Merchants’ account, the settlement they hammered out had two key elements: Hochfelder would agree to stop publicly mentioning his association with the Merchants brand, and would direct the equity partner, hotel magnate Robert Roche, to transfer the $4 million payment to Merchants.
In exchange for Hochfelder brokering the payment, Merchants offered to pay Hochfelder a $95,000 success fee, according to Sher.
After Hochfelder’s counsel sent an email Sunday night directing Roche to make the payment, Sher said he filed to withdraw the explosive suit.
The deal subsequently fell apart, however, because Hochfelder allegedly began demanding the $95,000 upfront, regardless of whether Roche transferred the $4 million, according to Sher. He also claimed that Hochfelder further threatened to file a damaging lawsuit of his own against Merchants unless it agreed to his terms.
“To my clients, it felt like blackmail,” said Sher. “Given all of this, we had no choice but to refile the complaint.”
On Wednesday, Merchants’ complaint reappeared in court records, unchanged from the initial one.
Hochfelder’s version of events differs. He claimed there was a third element to the settlement, namely that Merchants agreed to pay his family trust $8.5 million for debts it owed him.
He admitted to threatening to file his own lawsuit against Merchants during the talks, but said he did so only after Merchants “reneged” on its commitment to make the payment.
“They got nervous that we were going to keep demanding that and refiled their frivolous lawsuit,” said Hochfelder in an interview.
Hochfelder confirmed he was supposed to direct Roche to pay Merchants the $4 million, but denied demanding $95,000 from Merchants. He said the sum was never payable to him, but to a third party that was holding the $4 million in an escrow account and required a release fee. He contended that Merchants had agreed to pay the sum upfront but later changed its position.
Merchants called Hochfelder’s assertions “patently false.”
Hochfelder also claimed Merchants tried to insert a clause into the settlement agreement that would give it the right to continue working with him, which he opposed.
The clause, according to Sher, concerned a contract between Merchants and Hochfelder. He said his clients want the right to participate in Hochfelder’s future deals as a means of recouping the $1.4 million that judges have ordered Hochfelder to pay the firm.
The on-again suit reveals a notable break between the parties, who had worked together for eight years.
Merchants’ principals, Abraham Merchant and Richard Cohn, publicly defended Hochfelder through allegations against him of sexual harassment and mismanagement, and the unraveling of projects he worked on, such as Merchants’ ambitious resurrection of the now-defunct Playboy Club.
After refiling the suit against Hochfelder, Cohn called him “a brilliant man but a tortured soul,” and said that Merchants “must and will protect itself” from its former partner.
“It is unfortunate, but what I have learned in dealing with someone like Adam, the truth is of no consequence to him,” Cohn continued in a statement. “He will literally believe his own twisted version of the ‘truth’ and will try and convince anyone in his orbit that the sky is green when we are all staring up at a bright blue sky.”
Hochfelder responded that Cohn and Merchant “do not come to the negotiation table with clean hands.”
“It is unfortunate that Merchant and Richard Cohn have chosen to falsely disparage me,” he said in a statement.
Editor’s note: The lawsuit was discontinued shortly after publication of this story.