Heyman Associates No. 5 L.P., et al. v. Felcor TRS Guarantor, L.P.: A lengthy, high-stakes legal battle between two hotel ownership groups is closer to resolution after a judge upheld a deed provision barring the opening of an upscale hotel in downtown Stamford.
For nearly 15 years, an ownership group led by the Sam Heyman, William Meyer and Richard Jabara families (BRS Realty Associates), who own other properties (including hotels) around the state, fought to prevent an upscale hotel from opening at 700 East Main St. in Stamford.
In April 1996, the group purchased a Ramada Hotel at the same address. They knew the hotel was in poor condition and had lost its affiliation with Ramada several months earlier. They intended to fix up the property and reopen as a Holiday Inn, explained their lawyer, Marc J. Kurzman, of Sandak, Hennessey & Greco in Stamford.
Kurzman said the group also owned a Marriott Hotel a couple blocks away and did not want two upscale hotels located so close to each other competing for business. As one of the owners, Jabara, testified to, they wanted to “put salesmen in the Holiday Inn and executives in the Stamford Marriott.”
“Their plan was to keep that segmentation between the hotels and put some money into the Ramada and make it a Holiday Inn,” said Kurzman.
After BRS Realty Associates moved forward with plans to apply for a Holiday Inn franchise, Holiday Inn ownership inquired about purchasing the property from BRS Realty. A deal was struck. But Kurzman said it was contingent on a restrictive covenant — a legal obligation imposed in a deed that requires the buyer to do or not to do something. The agreement prevented use of that property for the next 15 years as anything beyond a midscale hotel, like a Holiday Inn.
“The hotel gets converted into a Holiday Inn. Everything is fine and dandy,” said Kurzman. But then Holiday Inn’s corporate ownership changed a couple years later. Kurzman explained that a company named Felcor, a very large real estate investment trust that owns many hotels, came into ownership of the Stamford Holiday Inn and decided to turn around and sell it.
“They recognize it’s worth a lot more money if sold as a high-end hotel rather than a Holiday Inn,” said Kurzman. “They actually take some steps to try to essentially wipe out the restrictive covenant.”
Kurzman said Felcor entered into a deal with another ownership group to sell the property and convert it into a Hilton Hotel. Kurzman’s clients “got wind” of what was happening and, in 2006, filed a lawsuit seeking a declaratory action that the restrictive covenant was still good for the 15 years, regardless of the changed ownership. Felcor, meanwhile, countersued for tortious interference, alleging that BRS Realty had interfered with their sale. Felcor sought millions of dollars in damages.
Kurzman explained that when the new ownership group found out about the restrictive covenant, it scrapped its plans to change the hotel to a Hilton. Instead, it paid roughly $7 million less than Felcor’s initial asking price and continued to operate as a Holiday Inn until the 15-year covenant expired in July 2011.
The property was then converted into an upscale Sheraton Inn, which now stands on the property. Before the 15-year period expired, a Hilton Hotel opened in another part of downtown Stamford, near the train station.
“[The new ownership group] insisted on a reduction in the purchase price, a $7 million reduction, so Felcor said ‘You’ve got to pay us that. That’s our damages,’” said Kurzman.
Kurzman said settlement discussions hit a dead end and the case remained in the courts with years of briefing and depositions. Not until a recent bench trial before Judge Trial Referee Taggart D. Adams did the parties finally get some finality. The trial lasted four days in Stamford Superior Court; there were 10 expert witnesses who either testified or whose depositions were played at trial.
The lead lawyer for Felcor was John W. Bickel II, of Bickel & Brewer in Dallas, who did not return calls for comment last week. During the trial, he argued a very technical point that the parties to the initial restrictive covenant never intended to extend that portion of the agreement for 15 years. Nineteen days after the restrictive covenant was agreed upon, Bickel noted, the two sides had entered into a second agreement, called a ground lease assignment, which did not mention the 15-year prohibition on luxury hotels.
However, BRS Realty argued that its lawyers at the time did not feel it was necessary to include the covenant language in the separate document. “Everyone who testified said it was never the intent of my clients to eliminate the restrictive covenant after only 19 days,” said Kurzman.
In a written decision issued Nov. 9, Judge Trial Referee Adams sided with Kurzman’s clients, enforcing the 15-year restrictive covenant on the property. “There is no evidence of any event or change of heart occurring within the 19-day period… to provide a basis for the court to determine that the use restriction was intended by the parties to be undone…” wrote Adams.
Adams’ opinion upholding the restrictive covenant effectively eliminated the defendants’ tortious interference counterclaim, Kurzman explained. There’s no word yet whether there will be an appeal, but the two sides need to still battle over attorney fees and litigation costs that Kurzman’s clients say they are owed, under the original sale agreement.
Those attorney fees and litigation costs, according to Kurzman, are “in excess of a million dollars.”
Assisting Kurzman in the case were Peter M. Nolin and Brian A. Daley, also of Sandak, Hennessey & Greco.•