Milwaukee business owner claims lawsuit shows no Loyalty

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A sham lawsuit is upending the last remaining leased tenants of the Loyalty Building in downtown Milwaukee, a longtime restaurant owner says.

Gary Kuhn has operated the Michigan Street Diner, a breakfast and lunch staple that pays homage to Elvis Presley, for more than 20 years. The restaurant’s successful run at North Broadway and East Michigan streets could end soon, though, because of what Kuhn says is a power play by two companies that share a stake in the Loyalty Building.

On the surface, Sir Mortgage & Finance of Arizona Inc. is suing Illinois-based investment group First MKD LLC to collect $1.5 million and to force foreclosure of the Loyalty Building, which First MKD bought in March. The company also bought the adjacent Mackie Building.

Rosemont, Ill.-based First Hospitality Group Inc., an affiliate of First MKD, has been planning to convert the Loyalty Building into a 128-room Hilton Garden Inn hotel. Sir Mortgage, according to the suit filed in Milwaukee County Circuit Court, lent First MKD $1.5 million and stipulated the company must secure $10 million in financing for the hotel project.

The suit claims First MKD failed to obtain required financing, placing the company in default. Kuhn, though, said default is a fake premise for a lawsuit intended to force foreclosure, which would nullify the multi-year leases of the Michigan Street Diner and dentist David Paris.

“It’s the only reason,” Kuhn said. “There’s no doubt about it.”

The leases of both Kuhn and Paris include subordination clauses, which grant legal preference to building owners over tenants. That means both leases would become void if the building falls into foreclosure.

“Typically, a subordination clause in a lease is not intended to knock out tenants,” said Michael Krill, Kuhn’s attorney. “It’s intended (to help building owners) refinance a building.

“What they’re using it for is legal on its face – they have a right to exercise the subordination process. The issue I’m looking at is fairness.”

Attorney Terry Teper, who is representing Sir Mortgage, did not deny the claims made by Kuhn and Krill.

“I have no response,” Teper said. “(Kuhn) wants to try this case in the paper.”

When asked about the purpose of the lawsuit, Teper said nothing of Sir Mortgage’s apparent effort to recoup $1.5 million from First MKD, but rather said “they’re seeking foreclosure on the property.”

First MKD reached deals with four clients to vacate by August, according to letters sent by the company.

Paris, who runs Loyalty Dental, declined to comment, deferring questions to his attorney, Denis Regan, who did not immediately respond to phone calls.

Krill said letters and emails sent by First MKD – a named defendant in the Sir Mortgage suit – make it clear the companies have long worked together toward a path of foreclosure.

A letter written May 6 by Deerfield, Ill.-based attorney Jeffrey Lyon, who represents First MKD, offered Kuhn $12,987.55 to vacate the Loyalty Building. In addition to the offer, the letter warned: “If there is a foreclosure, this will result, as you know, in (the Michigan Street Diner’s) lease being terminated, without any payment due.”

First MKD, though, had no authority with which to terminate leases, rendering the threat toothless without the prospect of legal action subsequently taken by Sir Mortgage.

Even with the lawsuit pending, First MKD apparently continues to take steps toward converting the Loyalty Building into a hotel, which, Krill said, provides further proof the lawsuit is not an arms-length transaction – or, a deal in which two parties act independently of each other.

The next step in the suit, a scheduling conference at the county courthouse, is more than two weeks away.

Nonetheless, a security guard stationed in the Loyalty Building’s interior said Friday he was there to keep people out during construction, which is supposed to start soon.

Paul Jakubovich, the city’s preservation planner, said he was unaware of delays or changes to construction plans for the hotel. Milwaukee’s Historic Preservation Commission granted partial approval for the project in mid-June – eight weeks before Sir Mortgage filed its suit.

“Usually, we’re pretty clued in on these things, but this one caught me by surprise,” Jakubovich said when told of the suit.

Alderman Robert Bauman, whose district includes the Loyalty Building, also said he expected the construction to start as planned. Kuhn said he contacted Bauman to discuss his predicament, but Bauman said he hasn’t heard of any dispute between the developer and tenants.

“I have no reason to believe it’s not being developed,” Bauman said.

First MKD has continued to make offers to Kuhn since the lawsuit was filed, Kuhn and Krill said, increasing the offer to $30,000. Kuhn, though, said it would cost more than $100,000 for him to relocate and he doesn’t know if customers would follow.

“People are creatures of habit,” he said, “you know?”

Krill said he’s pleased with the prospect of a new hotel being developed in downtown Milwaukee and his client would move if First MKD offered a larger payment. But, Krill added, Sir Mortgage and First MKD are using shady business tactics to break into the Milwaukee market.

“This isn’t a bad development for the city of Milwaukee,” he said. “I’m not saying that at all. I’m just saying you should use a strategy that treats people fairly. If the sole issue is just the bottom line, you just run roughshod over people.

“I’m not saying legally this clause doesn’t operate to do that. I just think ethically, morally and equitably, you shouldn’t do so.”

Kuhn said he expects to be forced out of the building, which perhaps is failing to live up to its name.

“There’s no way we’re going to end up staying,” he said.

When asked how long he’s supposed to be locked into his current location, Kuhn laughed and said the agreement extends to 2014.

“We’ve got nothing but lease left,” he said.