A Santa Clara County Superior Court judge is expected to issue an order early this week declaring whether a receiver appointed to oversee the Sunnyvale Town Center acted beyond the authorization granted him by the court.
Judge Peter H. Kirwan will determine if L. Gerald Hunt had the legal authority to spend more than $85 million over nearly two years to complete multiple construction projects at the redevelopment. The work, which was financed by the construction lender, increased the presumed debt against the collateral by 78 percent.
Hunt has sought since early November to close the receivership estate, to be released from his duties and to be paid his final fees, including hundreds of thousands of dollars in legal expenses. Whether and in what way the court accepts the receiver’s Final Account takes on additional meaning as the judge’s ruling under the law is final and his findings could have bearing on other litigation in the case.
On May 17, ten lawyers assembled in Kirwan’s Santa Clara County courtroom for a hearing where Hunt’s attorneys defended his actions, saying he obeyed the October 2009 appointment order from Santa Clara County Superior Court Judge William J. Elfving and three subsequent court orders. All three orders gave the receiver additional court direction, including permission to execute a 156,000 square-foot lease with Finnish mobile phone-maker Nokia Inc.
Judge Elfving’s appointment order “is so broad and so powerful … [there is] not much the receiver could do with this project that is not in this order,” Hunt attorney David R. Zaro told Kirwan during the receiver’s opening statement to the court.
“Look at the facts of the case. Did the receiver use reasonable business judgment? There is no argument that he mismanaged or wasted money. The work he did doubled the value of the property,” Zaro said.
Former business partners RREEF LLC and San Mateo County’s Peter Pau, along with their lead construction banker Wells Fargo & Co., are battling for control of the Sunnyvale property, where more than two million square feet are proposed for development next to a Caltrain station. Pau is suing both the bank and RREEF but has dropped a suit against the receiver.
The partially complete mixed-use project, a questionable business enterprise as recently as January 2009, has gained market credibility since attracting tech heavyweights Nokia and Apple Inc., the tenant for a second 156,000 square-foot office building. Two additional parcels, once owned by Pau, where 410 apartments can be developed, also have been sold to San Francisco’s BRE Properties Inc. and Carmel Partners.
Kirwan opened the hearing for the receiver by telling attorneys, “I have a lot of questions.” Both sides filed reams of documents in anticipation of the hearing—far above what local court rules typically allow, the judge said. “There will be no deciding from the bench [today]. There is too much to get through to do that.”
The receiver’s attorneys argued in their court filings that discharge of the receiver is “procedural” not “substantive” and that the judge has wide latitude to approve the Final Account. The issues before the judge are narrow: Is the receiver’s account of his activities and expenditures accurate, and do his actions fall within the authority granted him by four court orders? Yes, the attorneys said.
But the central thrust of Pau’s case is that the receiver, who was supposed to be a neutral extension of the court, in fact acted in improper concert with the bank and RREEF. By assuming the role of a developer at the Town Center, the receiver deprived Pau of his right to pay off the debt, to redeem his ownership of the center and to achieve the potential financial gains associated with the Town Center’s development.
“The process of the receiver put the property more and more out of the reach of anyone wanting to buy the property,” Pau attorney Ron Rossi told the court. “Attempting to extend the receivership to make capital improvements is not appropriate.”
The bank asked the court to install Hunt as the receiver even though Hunt had no experience in that capacity, Rossi said. But the bank sought to use the receivership to enhance the value of the property by developing it, and the receiver had considerable experience as a developer.
After RREEF defaulted on the debt, Pau notified the receiver and the bank that he had assumed control of the development entity that RREEF and he established to run the Sunnyvale Town Center redevelopment. But the receiver failed to deliver monthly reports to Pau about the project as required by law, and Pau did not ask for them because he did not know they existed, Rossi said.
Kirwan also questioned Hunt’s attorneys on the matter of the receiver’s “failure to provide monthly reports to Pau.” Steven Holland, the receiver’s attorney, told the court, “The receiver provided financial reports to the bank and RREEF as the manager of the borrower. Mr. Pau was a nonparty. He was 5 percent owner of the LLC. He was not entitled to a monthly report.”
Later in the hearing, Holland and Zaro returned to the question, saying there was no need for a monthly report because there were no “rents and profits,” emanating from the Town Center. “The receiver had no money,” Zaro said.
“There were no existing tenants, and Nokia was in a no-rent period until after the foreclosure” sale in August 2011, Holland added.
The receiver also provided public information about the center to all, speaking at city council meetings of “the millions of dollars being spent in accordance with the receiver complying with his obligations in the appointment order,” Zaro said.
Kirwan also questioned Hunt’s attorneys about the extent to which the receiver went beyond work to ensure that existing improvements weren’t damaged by weather and to take care that the property did not lose its associated entitlement rights. “An issue that grows in my mind as I was reviewing [the legal records]—it wasn’t just preserve and protect. It was a lot more than that. It was actually developing the project,” the judge said.
The judged noted that before the receivership, Hunt and his business associate had held discussions with the bank regarding the bank’s desire to hire an advisor regarding the future of the Town Center. The bank ultimately selected someone else. “The receiver put himself out there as a developer and a consultant [to the bank for the Town Center] and didn’t get that,” Kirwan said. Then, “he came on as a receiver, and he went beyond just collecting rents and paying taxes. Where is the authority that entitles him to do that?”
Holland cited language in the appointment order giving the receiver “all powers, duties and authorities … to collect and receive any and all rents, profits and other income from the Collateral, to protect, preserve, maintain and improve the Collateral, and to incur expenses that are necessary and appropriate … .”
“That entitles them to develop the property?” Kirwan asked.
“There is more,” Holland replied, citing another passage in the 14-page order.
Later in the hearing, Kirwan seemed to agree with Holland, saying to Pau attorney Rossi that Hunt did have greater authority under Elfving’s appointment order. “The order is broad, but it didn’t say the receiver could develop the property,” Rossi replied.
Hunt also has increased the center’s value, and today it would command as much as $250 million in a sale, the receiver’s counsel argued. Rossi contested the claim, citing an appraisal completed for RREEF before the receivership that placed the Town Center’s value at $179 million before the additional $85 million was spent. “The value has increased not because of the money put into it but because the economy has gotten better,” Rossi told the court. “There is no evidence that the receiver increased the value.”
Under questioning from the judge, Rossi told the court that Hunt got court approval to make the improvements to the office building to accommodate the Nokia lease of 156,000 square feet. But the judge’s order made no mention of the dollar amount spent, which turned out to be no less than $32 million, according to court documents. “Nothing in the court’s order [authorizing the Nokia lease] says the amount of money it would require,” Rossi told Kirwan. “They hid the ball. “
The judge closed the hearing with a promise to produce his order “sooner rather than later,” but without saying when.