June 25 (Bloomberg) -- Cerberus Capital Management LP and Centerbridge Partners LP were accused in a suit of being part of a scheme to induce David Lichtenstein to put his Extended Stay Hotels in bankruptcy to push out junior loan holders and take over, with senior lenders, the chain’s 680 properties.

Two owners of the mezzanine debt made the accusation in a complaint filed yesterday in New York state court seeking $314 million in compensatory and punitive damages.

Cerberus and Centerbridge, New York-based private-equity firms, agreed to a plan to indemnify Lichtenstein against $100 million in liabilities that he faced if the hotel went into bankruptcy, according to the complaint. The plan also called for him to be provided with equity in the restructured entities and a $5 million “litigation defense war chest” to fight claims by the junior lenders, Line Trust Corp. and Deuce Properties Ltd. said in their complaint.

The provisions were “part of a comprehensive scheme designed to induce Lichtenstein to do that which the senior lender defendants themselves promised all other lenders, under the express terms of the intercreditor agreement, they would never do -- cause the borrowers to file for bankruptcy protection,” according to the complaint.

Midpriced Hotels

Extended Stay, operator of midpriced hotels acquired at the peak of the commercial real-estate market for $8 billion, filed for bankruptcy protection June 15. Lichtenstein’s Lightstone Group LLC, of Lakewood, New Jersey, bought the Spartanburg, South Carolina-based chain from Blackstone Group LP in April 2007 with $7.4 billion in financing. That included $3.3 billion in junior debt.

Line Trust and Deuce yesterday filed an objection in bankruptcy court to block Extended Stay’s request to use cash earmarked as collateral for loans. A hearing on the use of cash is scheduled for June 29.

Line Trust and Deuce, which together bought $214 million of the debt for Extended Stay’s acquisition, said in their lawsuit that they and other junior lenders had “offered to convert all mezzanine loans into tranched preferred equity positions in the holding company owning the borrowers,” which would have reduced Extended Stay’s debt from $7.4 billion to $4.1 billion.

‘Equity Kicker’

“The senior lender defendants were not content merely to reorganize borrowers so they were stable and solvent, but rather insisted upon themselves being able to ‘steal’ the valuable hotel properties and wipe out plaintiffs and other junior mezzanine lenders (while at the same time reinstating their cohort, Lichtenstein, in equity via a management agreement containing an ‘equity kicker,’” Line Trust and Deuce said in the complaint.

Line Trust and Deuce said the original lenders turned to the bankruptcy option only after another plan to cheat the mezzanine lenders failed. Lichtenstein conspired with the original lenders to “manufacture an event of default” by not paying $3.5 million in operating expenses, according to the complaint, filed by Stephen Meister and Stacey Ashby of New York law firm Meister Seelig & Fein LLP.

Under the loan documents, Lichtenstein and the senior lenders had a deadline of June 12, the date the loans matured, to make that scheme work, according to the complaint. The plan was foiled when, on June 3, New York state Judge Richard Lowe issued a restraining order that was still in effect on June 12.

“After stopping that brazen plan, we learned that hedge funds Cerberus and Centerbridge offered Lichtenstein immense protections and inducements to file bankruptcy,” Meister said in an e-mailed statement. “None of these banks or hedge funds is looking to preserve and stabilize the hotel chain as they would have you think.”

Restraining Orders

Restraining orders were also obtained by other mezzanine lenders in Texas, who said they learned of another default attempt based on the notion that the borrowers improperly extended the loans because they didn’t buy interest-rate caps for all slices of the debt.

The original lenders included Charlotte, North Carolina- based Bank of America Corp. and its Merrill Lynch unit and Wachovia Corp., now owned by San Francisco-based Wells Fargo & Co.

Another original lender was Bear Stearns Cos., whose stake was taken over by the Federal Reserve after the investment bank collapsed last year. The U.S. central bank holds “$744 million par amount in various mezzanine classes and $153 million par amount” in commercial-mortgage-backed securities, spokeswoman Deborah Kilroe said in a June 15 e-mail.

‘Without Merit’

“We believe that the lawsuit is without merit and we will vigorously defend ourselves,” Peter Duda, a Cerberus spokesman, said in an e-mailed statement.

Leslie LeCount, a Lightstone spokeswoman, didn’t have an immediate comment on the lawsuit. Mark Gallogly, Centerbridge founder and senior managing partner, didn’t respond to an e-mail sent after business hours yesterday and wasn’t immediately available for comment today.

Shirley Norton, a Bank of America spokeswoman, declined to comment on the lawsuit.

“Our goal all along with ESH has been to preserve its existence,” Norton said in a June 11 statement, referring to the hotel chain by its initials.

Elise Wilkinson, a spokeswoman for Wells Fargo, declined to comment, citing ongoing litigation.

The case is Line Trust Corp. and Deuce Properties Ltd. v. Lichtenstein, 601951/2009, New York Supreme Court (Manhattan). The bankruptcy case is In re Extended Stay Inc., 09-13764, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Thom Weidlich in New York at tweidlich@bloomberg.net.

Last Updated: June 25, 2009 18:19 EDT