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SOURCE General Retirement Systems
Suit Alleges Secret Deal Allowed Carpenters Trust to Divert $16.7 Million
DETROIT, Oct. 28, 2013 /PRNewswire/ -- The Detroit retirement systems today filed a joint lawsuit against the Carpenters Pension Trust Fund and its affiliate alleging a secretive scheme that moved the Carpenters' fund to the head of the line for loan repayment, to the detriment of other lenders involved in the Book Cadillac Hotel project.
"To be clear, this is a civil dispute among the lenders regarding the priority and repayment of their respective liens and loans," said Don Wagner of Couzens, Lansky, special counsel to The Police and Fire Retirement System and General Retirement System. "This is not a suit against the hotel and does not impair its operations. The renovated historic Book Cadillac Hotel has been credited as a catalyst for downtown development. We want the hotel to continue to successfully serve its customers."
The lawsuit is connected to the 2006 complex financing transaction for the renovation of the Book Cadillac Hotel, which involved multiple lenders and loans in excess of $100 million secured by a mortgage on the hotel. The General Retirement System loaned the project $9 million and the Police and Fire Retirement System backed a $15 million loan from First Independence Bank to the project. The Carpenters Pension Trust Fund was not a mortgage lender but committed $17.2 million to the project for letters of credit that could be drawn upon to repay the mortgage lenders.
The lawsuit asserts that in 2009 the Carpenters Pension Trust Fund, through a newly-formed affiliate named Carpenters Pension Trust Fund Book Cadillac, LLC, made a secret deal with the most senior lender to buy the $42 million senior loan for a discounted price of $36.5 million. The purchase agreement allowed the affiliate to pay $16,709,537 of the purchase price five days after closing. During those five days, the affiliate released from the project the Carpenters Pension Trust Funds' letters of credit and $2.5 million in a cash reserve account, and used the proceeds, which totaled exactly $16,709,537, to pay the balance of the purchase price. The senior loan balance remained $42 million.
"Essentially the lowest priority lender, the Carpenter's Pension Trust Fund, diverted money intended for the benefit of mortgage lenders and the project and used it instead to buy the senior debt to the detriment of all other lenders including the city pension funds," Wagner said. "We contend this action is contrary to the overall credit structure and agreements among the parties and is a breach of good faith owed to the other lenders."
As a result of the alleged scheme, the Carpenters Pension Trust Fund and its affiliate jumped over six levels of mortgage lenders owed $57 million to the position of senior lender, and the project was deprived of more than $16.7 million that was intended to assure payment of the loans.
The lawsuit also alleges that the Carpenters Pension Trust Fund affiliate changed the terms of the senior loan agreement, requiring the borrower to apply all of its net cash to repay the affiliate, and waiving the borrower's obligation to maintain certain reserves that could be used to pay other lenders. As a result, since 2009, the borrower has not paid any interest or principal on the obligations owed to the Detroit Retirement Systems.
The Retirement Systems were not notified that the senior loan was sold to the Carpenters' affiliate until after the secretive deal was closed, but at that time there was no disclosure that project funds had been released and used to purchase the senior loan.
"The Carpenters' actions circumvented the intertwined and interdependent overall credit structure that was key to the original complex financing of the construction and development of the Book Cadillac project," Wagner said. "Because all the factors and relevant information was not readily available or disclosed, it has taken a significant period of time to piece together the facts."
The Police and Fire Retirement System and General Retirement System's special counsel filed the complaint in Wayne County Circuit Court. The complaint asks the court to declare that the amount of the senior note is reduced by the $16.7 million that Carpenters Pension Trust Fund and its affiliate diverted from the project; that the interest that Carpenters and its affiliate have collected since 2009 be recalculated and redistributed to other lenders accordingly; and that the Carpenters and its affiliate lose or share the first-lien position.
About the Retirement Systems: For more information on General Retirement System of Detroit please visit www.rscd.org. The Police and Fire Retirement System of the City of Detroit website is www.PFRSDetroit.org. The General Retirement System and Police and Fire Retirement System are separate legal entities and separate entities from the City of Detroit. The Retirement Systems collectively represent more than 30,000 city employees and retirees, and have combined assets of more than $5 billion. The funds rank among the top 10% in funding level of all U.S. Public Pension funds.
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