(Bloomberg) -- A JPMorgan Chase & Co. unit is being dragged into a legal fight over an unpaid $333 million loan backed by the Hilton Palmer House, one of downtown Chicago’s largest and oldest hotels.
Bondholders sued JPMorgan in federal court in New York last week, arguing the bank failed to tell investors key information about how the historic hotel is owned and operated. As bondholders would later learn, the hotel’s owner, New York-based Thor Equities, had split the rights to different parts of the hotel into separate parcels in the 2000s, complicating eventual efforts to take it over after it defaulted in 2020 amid the coronavirus pandemic.
The bondholders, represented by Wells Fargo acting as trustee, filed the New York suit after first filing a foreclosure action against Thor Equities in Illinois’ Cook County in 2020. Now the bondholders have turned to the New York court as a hedge against a possible defeat in Cook County.
“If, in the Cook County Litigation, the court interprets various agreements related to the Loan and governing the operation of the Hotel consistent with the arguments advanced by Borrower and its affiliates, then there were breaches of the representations and warranties” by JPMorgan, the lawsuit says.
The new legal actions put a focus on the sometimes difficult-to-understand details that govern how large buildings are operated on a daily basis. Amid of wave of distress coursing through the commercial mortgage bond market, it’s also a test of how much the banks that arrange such deals are required to tell investors.
JPMorgan declined to comment on the suit. Last month Wells also sued Thor Equities in New York, which didn’t respond to requests for comment.
At the center of the dispute is the 1,641-room Hilton Palmer House Hotel, which has been owned since 2005 by Thor Equities. It’s the longest continuously operating hotel in North America and has featured shows by singers like Judy Garland and Ella Fitzgerald, according to its website. In May President Joe Biden held a fundraiser there.
In 2018 JPMorgan gave a $333 million loan to a Thor entity called Thor Palmer Hotel & Shops, which pledged Palmer House as collateral to secure the loan. JPMorgan then packaged the loan into a commercial mortgage backed security, called JPMCC 2018-PHHH, which was purchased by dozens of investors including BlackRock Inc. and MetLife Inc., according to data compiled to Bloomberg.
But in 2020, as the Covid outbreak was decimating the hotel business, Thor defaulted on the loan and Wells Fargo, in its role as the trustee on behalf of the bondholders, filed suit in Cook County to foreclose on the hotel. That litigation is still underway but now, four years later, it’s looking like Cook County courts may well rule that bondholders can’t in fact repossess important portions of the hotel, the suit says.
The snag, the suit says, is that in the 2000s Thor Equities subdivided the Palmer House complex into three separate parcels and assigned ownership of two of the parcels to affiliates, and those affiliates have asserted a counterclaim to the two parcels. JPMorgan knew about the hotel’s subdivision into three parcels but, while arranging the financing in 2018, never informed investors — even though such information would be critical in the event of a default, the suit filed last week says.
©2024 Bloomberg L.P.