Pau Suit Against Wells Fargo, RREEF Survives Legal Challenges

By Sharon Simonson

Peter Pau fought legal challenge in Superior Court from two sides this week in his ongoing battle to control and develop the Sunnyvale Town Center.

But separate jabs by banker Wells Fargo & Co. and his former partner, RREEF LLC, to throw off the litigation have been deflected, based on final and tentative rulings from Santa Clara County Judge Peter H. Kirwan.

Pau is suing the bank to force the rewind of an Aug. 17, 2011, foreclosure. Despite interest from more than 170 investment groups during a previous, aborted sales process, the bank was the sole bidder at the auction. Pau alleges the bank bungled the foreclosure and created an unfair and “oppressive” environment.

In his tentative ruling that allows Pau’s suit against the bank to go forward, the judge cited a 1970 appellate case. There a court determined that a lender may have liability if a borrower has “damages sustained where there has been an illegal, fraudulent or willfully oppressive sale of property under a power of sale contained in a mortgage or deed of trust.”

Pau also is attempting to show that RREEF reneged on its commitments to their joint venture, and as a consequence, he gained legal control of the Sunnyvale center’s development company. That company also holds legal title to the site.

In hearings on July 17 and July 19, Pau attorneys Ron Rossi and Jill Fox of Rossi, Hamerslough, Reischl & Chuck and Chuck Hansen of the East Bay’s Wendel Rosen parried thrusts to eviscerate Pau’s claims from RREEF and the bank.

In a final ruling, Judge Kirwan declined RREEF’s motion for summary judgment and in a tentative ruling, he declined the bank’s request to strike Pau’s entire suit against it.

In RREEF’s case, the judge left intact Pau’s allegations against the real estate investment company that it fraudulently concealed from him and the city of Sunnyvale settlement and foreclosure agreements with the bank.

Those agreements allowed the bank to foreclose on the Town Center without protest from RREEF, which gained a release from its guarantee for a $108.8 million construction loan in exchange for giving the bank the center and paying the bank approximately $17 million. RREEF also agreed to fight any legal challenge by Pau to the arrangements. Pau had to sue in Delaware court to gain copies of the foreclosure and settlement pacts.

Judge Kirwan also left intact Pau claims that RREEF breached its contract with Pau’s development company, SHP San Jose LLC, and that it committed fraud and conspiracy with the bank.

RREEF is owned by global financial services conglomerate Deutsche Bank AG.

The nearly 20-acre Town Center is conceived to have nearly 2 million square feet of offices, housing, shop space, a hotel and movie theater. It is adjacent to a Caltrain station, and only partially complete. RREEF was responsible for contributing 95 percent of the capital for the development’s cost. Pau was responsible for 5 percent.

Other housing is being built in the area too. In addition, Apple Inc. in February and Nokia Inc. in mid-2010 signed multiyear leases to occupy office buildings at the center. Sunnyvale has emerged as a hotspot for technology companies, which has drawn apartment developers.

Approximately $400 million in private investment has been pumped into the Town Center, including $220 million from the REEEF-Pau development entity, according to court records.

At the July 17 hearing, RREEF’s attorney, Philip Gregory of Cotchett, Pitre & McCarthy, argued that RREEF as the manager had “sole and absolute discretion” to take the actions that it did, citing provisions in the April 2007 agreement between it and Pau’s management company. Those powers included the right to assume debt and whether to continue with the property’s development or not, Gregory said.

RREEF alleges that Pau defaulted on financial obligations of more than $1 million from March 2009 to May 2009. “There is no evidence that Mr. Pau made his $12 million contribution,” Gregory said at the hearing.

But Rossi, Hamerslough attorney Fox said there is evidence to show that Pau paid the full amount, after which he was not obligated to pay more. Moreover, she said, RREEF defaulted on the agreement with Pau before the alleged Pau default.

The agreements between Pau and RREEF required that RREEF’s financial contributions to the development company be made to satisfy the capital requirements to build the center, she said. But after RREEF reached the agreement with the bank for a “friendly foreclosure,” in January 2009, including RREEF’s payment to the bank to satisfy the renegotiated loan guarantee, RREEF’s payments to the development company were made to benefit the bank and RREEF, not the development.

At the conclusion of the July 17 hearing, Kirwan noted that both RREEF and Pau’s attorneys “made some pretty compelling arguments.” In his order, he stated that he believed there is a “triable issue of material fact” as to whether Pau defaulted on his obligations.

At the conclusion of the July 19 hearing to hear Wells Fargo’s motion to strike, Pau attorney Rossi petitioned the judge to set the trial date to hear the dispute. Kirwan declined. Instead he set the next court date to consider both cases at 10 a.m. Sept. 25.

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