By Vince Sullivan

Law360 (January 13, 2021, 7:39 PM EST ) The bankrupt owner of a Washington, D.C., hotel received interim approval for its Chapter 11 loan on Wednesday in Delaware, but the case is primed for an existential challenge by Marriott Hotel Services Management, which operated the facility prior to a COVID-19-related shutdown last year.

During a virtual first-day hearing, Wardman Park Hotel attorney Maxim B. Litvak of Pachulski Stang Ziehl & Jones LLP said the debtor was in critical need of the $8 million in debtor-in-possession financing as the 1,000-room hotel still required maintenance services and staffing despite being shuttered in early 2020.

With only $60,000 in cash on hand, Wardman would not be able to cover the maintenance costs and risked harming the value of its only asset if the hotel were to fall into disrepair.

"The debtor does need these funds urgently in order to maintain the hotel property," Litvak told the court. "I do a lot of DIP loans. This is probably one of the most attractive DIP loans I've seen in a long while."

Asking for access to $3 million on an interim basis, Litvak said the facility is being provided by prepetition lender Pacific Life Insurance Company — already owed $130 million by the debtor — at a 5% interest rate.

The DIP is also being extended on a junior basis to the prepetition debt, he said.

Despite these favorable terms, the loan drew an objection from Marriott Hotel Services, which had its hotel management agreement terminated by the debtor just minutes ahead of the Chapter 11 filing. Marriott attorney Ori Katz of Sheppard Mullin said his client intends to seek the conversion of the case to a Chapter 7 or have it dismissed outright because they believe it was filed in bad faith.

"We don't have a melting ice cube. It's more like a concrete block," Katz argued. "The property has already been shut down. No liquidation analysis was done to see if a Chapter 7 was more appropriate."

After some changes were made to the interim DIP order, U.S. Bankruptcy Judge John T. Dorsey approved it, saying that many of Marriott's arguments would be dealt with when the court considers Wardman's motion to reject the hotel management agreement and Marriott's forthcoming motion to dismiss or convert.

Wardman Hotel filed for Chapter 11 this week, citing ongoing losses resulting from COVID-19 shutdowns and a series of losing battles among Marriott and the hotel's equity owners. In a first-day declaration, Wardman's independent manager said the hotel was permanently closed in December after a judge in Maryland's Montgomery County Circuit Court issued an injunction directing Wardman to meet Marriott capital calls that could climb to $90 million over the next two years. The ruling came despite pandemic-related losses of as much as $1.5 million per month.

The hotel, which has had multiple owners over the past century, had been operated by Marriott since 1998 and has seen revenues decline steeply in recent years. Between 2010 and 2018, operating income fell 80%, from $24.77 million to $5.02 million.

Prior to its closing, the Wardman offered 195,000 square feet of event space and 95,000 square feet of exhibit space. Although much of the original hotel has been replaced, an eight-story, 350-room annex built in 1928 still remains and is listed on the National Register of Historic Places.

Thayer Lodging Group sold the site to JBG Smith and CIM Group for $300 million in 2005, with part of the hotel grounds redeveloped in 2014 for apartments and condominiums.

Pacific Life acquired a controlling interest in 2018 and more recently acquired the remaining interest following a Delaware Chancery Court suit last year to dissolve the hotel business after a deadlock among owners blocked investment in improvements to the hotel.

Wardman Hotel Owners LLC is represented by Laura Davis Jones, Maxim B. Litvak, David M. Bertenthal and Timothy P. Cairns of Pachulski Stang Ziehl & Jones LLP.

Marriott is represented by Curtis S. Miller of Morris Nichols Arsht & Tunnell LLP, Ori Katz, Michael T. Driscoll and Jennifer L. Nassiri of Sheppard Mullin Richter & Hampton LLP, and Lindsay Harrison, Alex S. Trepp and Paul Rietema of Jenner & Block LLP.

The case is In re: Wardman Hotel Owners LLC, case number 1:21-bk-10023, in the U.S. Bankruptcy Court for the District of Delaware.

--Additional reporting by Jeff Montgomery. Editing by Steven Edelstone.

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