Judge to Wells Fargo: You Will Pay

By Sharon Simonson

The bill for a court-appointed receiver in the battle to own the Sunnyvale Town Center now exceeds $1 million and is growing by the day, but Wells Fargo & Co. must continue to fund the cost, despite objections from a bank attorney.

Furthermore, Santa Clara County Superior Court Judge Peter H. Kirwan has given the receiver, L. Gerald Hunt, permission to hire additional legal counsel, a cost the bank also will bear. Hunt is facing a May 17  challenge from developer Peter Pau to a Final Accounting of the receiver’s activities and more than $80 million in expenditures at the incomplete, mixed-use project.

Meanwhile, Pau has filed an amended lawsuit against Wells and First American Title Insurance Co. honing his challenge to the legality of an Aug. 17 bank-led public foreclosure sale. The amended suit follows an April 13 court order granting Pau the right to reframe his allegations in response to the bank’s request that his suit be thrown out.

Pau’s attorneys and even Judge Kirwan clearly anticipate that Wells will again seek to have the Pau complaint dismissed. If so, it would be the third time the bank has sought to push the suit out of the courts.

Because of the bank’s continued challenges to his right to sue, thus far, Pau has been stifled in his attempts to depose bank executives or otherwise be granted discovery requests involving the bank. He has been able to circumvent that prohibition to some extent through discovery involving the receiver, an outcome the bank’s attorney has contested.

For instance, Pau has been granted the right to depose Jeffrey Weber, a senior managing director for Eastdil Secured LLC in San Francisco. Weber handled the marketing of the center for the receiver before the receiver’s sale was challenged by Pau and the bank decided instead to go to foreclosure sale. Eastdil is owned by Wells. In addition, Pau has been granted the right to depose executives affiliated with RREEF LLC, his former business partner at the Town Center. Pau is also suing RREEF.

At issue is control of the 19-acre Sunnyvale Town Center redevelopment, where Pau and RREEF had plans for more than two million square feet of offices, shop space, hotel rooms and housing. The partially completed construction is adjacent to a Caltrain station, and two office buildings, each measuring 156,000 square feet, have already drawn Apple Inc. and Nokia Inc. to sign leases.

During an April 19 case management conference in superior court, the bank’s attorney, Katherine Ritchey of Jones Day, contested the judge’s plan to force the bank to continue to finance the operation of the receivership estate. During the session, Kirwan told litigants that he was inclined to allow the receiver to hire additional legal support and to make the bank pay for it, though he cautioned that he would not allow the new attorneys to duplicate work that has been done. “I am going to have my radar up,” Kirwan said.

In his written order issued after the session, the judge granted Hunt the right to hire law firm Allen Matkins Leck Gamble Mallory & Natsis LLP, including David Zaro and two others. Zaro is an expert on state and federal receiverships.

In pinning the bill on Wells, the judge cited the Oct. 5, 2009, court order appointing the receiver, noting that the bank had sought the receivership and that the receivership had been elongated by the bank’s own actions. According to the 2009 order, the receivership cost was intended to be added to the debt collateralized by the Town Center. But Pau is seeking to force the bank not only to give him title to the center but also to extinguish the associated debt, based on allegations that the bank has violated California real estate foreclosure law.

“Case law suggests that the court has the discretion to charge any party to the litigation” for the receivership costs, the bank’s Ritchey said. She contended that the main beneficiary of the $1 million expenditure so far has been Pau, and she suggested that the receiver himself could also be made to foot the bill: “The court can find that the receiver acted outside the scope of his authority and is personally liable.”

Steve Holland, the receiver’s attorney, told the judge that in addition to the $1 million that has already been spent, the estate is another $300,000 in debt, mostly related to additional legal fees. Still, Holland argued that additional legal firepower is in order. “In this extraordinary situation, the receiver should be allowed to get this kind of representation,” Holland said.

To which Pau attorney Ron Rossi replied: “A discharge hearing is not that extraordinary. The only thing that is extraordinary is taking two years [to sell the center) and spending all that money.”

In Pau’s new complaint against the bank, he charges that Wells bungled the foreclosure sale and, as a result, that it is invalid. Before the sale, Pau attempted to force the bank to provide a detailed accounting of the $189 million the bank contended was owed, but the bank refused to provide him with a “payoff amount” that would have allowed him to pay the debt and take back possession of the center, Pau said. In so doing, the bank denied Pau his “rights of redemption.” The day before the foreclosure sale, Pau “tendered the redemption amount under protest,” the complaint asserts, but the bank went forward with the auction nonetheless.

More than 170 parties expressed interest in buying the center during the receiver’s sale process, which was ultimately halted. Yet, before the Aug. 17 foreclosure sale, Wells never alerted any of the 170 that the center would be sold in public auction to the highest bidder, the complaint says.

Moreover, a contract the bank signed with Starwood Capital Group to buy the center via the receiver remained in effect until well after Aug. 17, the complaint says. The contract was “a matter of public record,” and its continued existence “chilled third-party bidding” at the foreclosure sale.

The bank also kept negotiations with Apple regarding its Town Center lease a secret until after the auction. A “Term Sheet” with the consumer electronics company was signed on Aug. 23—six days after the foreclosure sale. The preliminary agreement added approximately $20 million in value to the Town Center “and ongoing negotiations regarding the Term Sheet would have strongly influenced bidder participation,” Pau claims.

West Coast Commercial Real Estate News