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If the Phoenix Tower Suites had remained student housing, as its creditors claim it should have, it would have been the most luxurious college digs in Georgia. The 15-story building at 450 Capitol Ave. in Atlanta is a block from Turner Field and minutes from the Capitol and Georgia State University. Its Web site trumpets its martini bar and deli, and the marble and granite bathrooms in its 416 rooms. It has workout rooms and high-speed Internet access. But for nearly two years, no students have lived in Phoenix Tower. In November 2000, Phoenix Tower Suites Inc. told the students to leave within a month. It then obtained a Ramada franchise, and converted the property into a luxury hotel. That constitutes a default on its $16.1 million refinancing loan, according to GE Capital. The building’s owners told the lender the building would continue as student housing, GE claims in a suit filed in U.S. Bankruptcy Court. General Electric Capital v. Phoenix Tower Suites and Capitol Hotel (U.S. Bankr., N.D. Ga. July 9, 2002). And now that Phoenix Tower Suites Inc. has filed for Chapter 11 bankruptcy protection, GE wants some assurances that it will be able to collect what it’s owed on the mortgage. In re: Phoenix Tower Suites, No. 02-67194 (U.S. Bankr. N.D. Ga. July 1, 2002). That includes the approximately $500,000 in revenue the hotel takes in monthly, and which GE claims constitutes cash collateral. And GE is asserting the first claim on all revenue. According to GE’s complaint, Phoenix Tower Suites deceived the lender into offering more-favorable loan rates by pretending the building would continue to operate as student housing, when, in fact, it had been planning all along to open a luxury hotel. And when Phoenix fell behind in the loan payments, it staved off foreclosure by filing for bankruptcy protection and shielded its revenue by leasing hotel operations to a company directed by the minority shareholder’s husband. PHOENIX ACCUSED OF DECEPTION In GE’s complaint, Greenberg Traurig’s James R. Sacca wrote that GE never would have loaned Phoenix the money for this project had it known that the building would become a hotel. The principals, Sacca wrote, “had substantial experience in multi-family priorities,” but “none in the hospitality industry.” “Debtor concealed its intent from GE in order to get the more favorable loan rate and terms offered for multi-family housing projects as opposed to hotels,” he wrote. “This constitutes fraud in the inducement.” Sacca and Phoenix’s counsel Frank B. Wilensky, of Macey Wilensky Cohen Wittner & Kessler declined to comment on the case, citing the ongoing litigation. But documents from the debtor dispute GE’s claim to any of the hotel’s revenue. Phoenix claims that Capitol Hotel Inc., the company operating the hotel and responsible for its finances, is a separate entity that is not in bankruptcy, and owes GE nothing. Phoenix also claims that the hotel was paying GE for other hotel-related purposes, including about $350,000 that the lender was holding in escrow for taxes, insurance and capital improvements, and that it should have applied that money against the outstanding loan balances. If GE would use the money properly, Phoenix has not defaulted on the loan, according to Phoenix’s answer. Further, it claimed, GE knew from the start that the building would not be used exclusively for student housing. According to Phoenix’s reply brief, it announced it intended to open a hotel before it closed on the loan, and GE raised the interest rate accordingly. “Historically the Property had been operated as a hotel and it was never represented that the Property would be used exclusively as student housing,” Wilensky wrote. OWNERSHIP CHANGED MANY TIMES The Phoenix Tower has passed through several investors and investment groups since it was built in 1973, as the surrounding neighborhood, part of the Summerhill District just south of downtown, has struggled with revitalization. Phoenix Tower Suites Inc. assumed ownership of the building in 2000, when its owner, Hamid Jahangard, sought to refinance it. At the time, it served mainly Georgia State students as a dorm. Jahangard owns 75 percent of the stock in Phoenix Tower Suites, and Elizabeth Bright, wife of Cobb developer Peter B. Bright, owns 25 percent. The connection is important because, according to corporate filings at the Georgia secretary of state’s office, Peter Bright is the sole corporate officer of The Phoenix Tower Suites Inc. and he is the registered agent for Capitol Hotel Inc., which manages the hotel. His wife is listed in the Secretary of State’s files as the sole corporate officer for Capitol Hotel Inc. Bright is perhaps best-known for his involvement with a planned 12-story office, retail and condominium development near the Marietta Square. The project drew furious opposition from preservationists, and was not built. Jahangard has been part of several real estate projects here and in Florida, including hotels and apartment complexes. Under the loan documents, the owners were to pay GE $122,000 a month in principal and interest, plus escrow $17,000 a month in insurance and taxes, and escrow an additional $13,870 monthly for future capital expenses. GE says these terms were based on the building being a student dorm with stable income, not the riskier venture of a hotel. Loans to hotels require higher reserves for maintenance, capital improvement and insurance premiums. The higher expenses restrict the income stream the loan underwrites, and reduces the amount a lender could offer a borrower. “GE did not discover the Property was being operated as a hotel until a rating agency hired to rate the securitization told GE it could not find student housing located at the address of the property, but only a Ramada hotel,” Sacca wrote. DEFAULT NOTICE ISSUED On May 17, shortly after GE discovered the building was a hotel, it sent a letter to Phoenix, notifying the company that it was in default under the terms of the loan, and that GE intended to foreclose on the property. Phoenix filed for bankruptcy protection on July 1. But before it filed, Phoenix executed a lease on May 31 with Capitol Hotel Inc., transferring management and financial responsibility for the hotel to Capitol, co-owner Peter Bright’s company. Because Capitol Hotel is not in bankruptcy, Phoenix claims in its reply, the revenue it takes in does not constitute cash collateral as GE claims. Therefore, GE has no right to it. But in the complaint Sacca calls the lease “mere fiction,” and notes that GE never consented to the transfer, never waived its lien on the hotel revenue, and didn’t even receive a copy of the lease agreement until July 2002. “The alleged transfer of operational and financial responsibility for the Property to Capitol under the May 31, 2002 Lease … was and continues to be a sham,” Sacca wrote. “These so called ‘operators’ are and were both affiliated with the debtor.” The lease between Capitol and Phoenix sets out a monthly rent of $185,000. But records filed with the court show that the operator, Capitol, was only paying $125,000 monthly through the first four months of the year, and still owed Phoenix $100,000. Capitol should have collected $740,000 under the lease terms, but had collected only $400,000, according to the complaint, which included copies of Capitol’s books. MANIPULATION CLAIMED Sacca wrote that Capitol’s inconsistent rent payment “makes it apparent that, to the extent any agreements ever existed, they are and were manipulated for the benefit of the defendants to the detriment of their creditors.” Moreover, he wrote, Capitol is an alter ego for Phoenix. GE has asked the court to consolidate Capitol with Phoenix for the case’s purposes, to demand an accounting from Phoenix about the revenue it collects and where it is spending it, and that the court bar the hotel or its manager from spending any of the revenue. U.S. Bankruptcy Judge Joyce Bihary entered an interim order Sept. 5, authorizing Phoenix and Capitol to use hotel revenue to ensure the hotel stays in operation. However, the defendants must provide full accounting for the expenditures to GE and allow GE auditors to examine their books. The court also acknowledged GE’s right to the revenue the hotel generates. However, some issues remain. “Nothing in this Order shall be construed as an admission by the Defendants that Debtor and Capitol should be substantively consolidated, nor shall anything herein be construed as an admission by GE that Debtor and Capitol should not be substantively consolidated or that it has waived any default, including on account of the change in the use of the Property,” Bihary wrote. The order lasts until Oct. 31 or until the court holds a hearing on the matter and rules on it.

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