Judge Takes Key Ruling in Sunnyvale Center Case Under Consideration

By Sharon Simonson

Once again, Peter Pau’s attorneys in the Sunnyvale Town Center case appear to have circumvented catastrophe on their client’s behalf.

A motion by Wells Fargo & Co. to extricate itself from the suit appeared considerably less likely to prevail after a Thursday hearing in Santa Clara County Superior Court before Judge Carol Overton.

In a tentative ruling issued late Wednesday in anticipation of the hearing, Overton had originally endorsed Well’s motion. But at the hearing’s conclusion, the judge expressed second thoughts: “I am going to take the matter under consideration and issue an order from there.”

Judge Peter Kirwan, who has presided over much of the case, is on vacation, according to attorneys.

It is the second attempt by Wells to rid itself of the Pau charges. In September Wells’ legal counsel, led by Katherine Ritchey of law firm Jones Day, successfully persuaded Kirwan to strike a May lawsuit filed by Pau against the bank. Pau has appealed Kirwan’s order.

Then in November, Pau filed a second complaint against Wells Fargo, this time seeking to set aside an August foreclosure sale at which the bank was the sole bidder. On Thursday, Ritchey argued that the new lawsuit was essentially a refried attempt to work around Kirwan’s Sept. 19 decision.

In a tentative ruling issued by Overton prior to the Thursday hearing based on the attorneys’ written arguments, the judge said she was persuaded by the bank’s logic: “The court finds the complaint to be a deliberate attempt to circumvent Judge Kirwan’s order … ,” Overton wrote.

But following opposing arguments made in court from San Jose attorney Ron Rossi and Kevin Brodehl of the East Bay, the judge felt differently. Pau was also aided by a last minute assist from an unlikely source: an opposing counsel who said he spoke as an “officer of the court.”

At issue in the litigation is ownership of the 19-acre Sunnyvale Town Center redevelopment. Pau, acting as the development manager and a minority partner through his Sand Hill Property Co., and San Francisco’s RREEF LLC began the huge undertaking in 2007. The alternative asset manager owned by Deutsche Bank AG was to provide most of the financing. Pau put in $12 million of his own money plus a former Town & Country Shopping Center valued at $28 million where he also secured a $21 million debt.

Pau and RREEF had plans for more than two million square feet of offices, shop space, hotel rooms and housing, all near a Caltrain station. They invested $220 million in the endeavor, including $108.8 million borrowed from Wells. The borrower’s default on that debt and the installation of a receiver in October 2009 to oversee the center’s care were precipitating events for the litigation.

More than $400 million in private investment have been made in the Town Center over the years by multiple developers, all of whom have failed to bring the project to finality.

But a confluence of events, most importantly in the work and commute patterns of San Francisco, the Peninsula and South Bay residents, have enhanced the Town Center’s economic viability. Nokia Inc. and Apple Inc. have secured large offices there to capitalize on its proximity to Caltrain, and demand for housing is picking up in many places.

RREEF’s enthusiasm for the redevelopment plunged after the 2008 financial crisis. RREEF notified Wells Fargo in January 2009 that it did not intend to continue financing the project and would give the bank control of the property. Pau alleges that the bank and RREEF hid their plans from him as well as the city of Sunnyvale for more than six months until June 2009, during which time Pau continued to put money into the endeavor.

Pau also sued RREEF and the receiver, Gerald Hunt, but has dropped the suit against Hunt. Pau continues to challenge the receiver’s actions, however, and has deposed the receiver over multiple days and successfully forced the receiver as well as RREEF to turn over hundreds of thousands of email messages and other documents.

During the Thursday hearing, Rossi and Brodehl argued that the two lawsuits against the bank were distinct because the basis of Pau’s complaints center on the bank’s actions with regard to two events. The first lawsuit contested a proposed sale of the center by the receiver. Kirwan ruled with Pau in that matter, agreeing that California law prohibited the receiver from selling the property except under special circumstances. The bank then sold the center at a foreclosure sale on the courthouse steps.

Now Pau complains that the foreclosure sale should be set aside for multiple reasons. The bank did nothing to encourage bidders to appear at the sale, Brodehl argued, even though the purpose of an open-auction foreclosure sale is to promote transparency and bidder interest. It never filed a new notice of default even though the first notice had been filed more than two years previously. A contract in place to sell the center to Starwood Capital Group and two other companies was not cancelled until after the sale. Moreover, the bank did nothing to notify the more than 100 companies that had expressed an interest in buying the center that the foreclosure sale was occurring.

Further, Brodehl said, the bank thwarted Pau’s legal right to buy the center back as allowed under California’s right of redemption law. Acting through the receiver, the bank spent an additional $89 million on the Town Center, a sum that Pau argues was excessive and beyond the legal scope of the receiver’s authority. The bank added the sum to the original debt.

Judge Kirwan’s September order throwing out Pau’s lawsuit against the bank never addressed Pau’s complaints regarding the foreclosure sale, Brodehl told the court, because the foreclosure sale had not occurred when the lawsuit was filed.

In the final moments of the Thursday hearing, RREEF’s attorney, Joseph Cotchett of Burlingame’s Cotchett, Pitre & McCarthy LLP stood to address the court, even though, as he said, “I have no dog in his hunt.” But, as an officer of the court he felt compelled to speak on his memory of a key event.

Pau’s attorneys had sought to halt the foreclosure sale by asking Judge Kirwan to issue a temporary restraining order. During a discussion in the judge’s chambers where the judge declined to stop the sale, Cotchett said, he heard Kirwan tell Pau’s attorneys, “If you have a problem with the foreclosure sale, you can bring an action.”

Judge Overton gave no indication of when she expects to issue her ruling.

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