Lenders file bankruptcy petition against Inspirada developers

By Steve Green

Published Friday, Dec. 10, 2010 | 10:33 a.m.

Updated Friday, Dec. 10, 2010 | 2:19 p.m.

Lenders including JPMorgan Chase Bank filed an involuntary bankruptcy petition Thursday against the developers of Henderson's big Inspirada planned community, citing defaults under a $585 million credit agreement.

The Chapter 11 filing in Las Vegas bankruptcy court was made against South Edge LLC, which the bank says is 48-percent owned by homebuilding giant KB Home. Other owners of the company are developer John Ritter's Focus South Group and homebuilders Meritage Homes, Woodside Group, Toll Brothers, Beazer Homes, Kimball Hill Homes and Pardee Homes.

Inspirada, before the recession, was envisioned to be a $1.25 billion project with some 8,500 residences as well as amenities found in master plans like a hotel-casino, shopping, dining, parks, schools and trails.

Homebuilding has been slow there with the recession. Just 199 homes were sold in Inspirada in 2008, though sales picked up a bit in 2009 and hit 228, according to SalesTraq.

A message for comment was left Friday with Ritter's Focus Property Group, which led the consortium of homebuilders in obtaining land for $557 million for what would become Inspirada in a June 2004 auction of 1,953 acres of Bureau of Land Management property.

Focus Property Group is also known for developing the Mountain's Edge and Providence communities in Southern Nevada.

Besides the $585 million loan involving a syndicate of 39 lenders led by JPMorgan, the project was financed by $102 million in local improvement district bonds issued by the city of Henderson and capital contributions from Focus and the homebuilders. Much of the improvements to be financed by the bonds have not been constructed, court records show.

Court records show that shortly after the $585 million loan was amended in 2007, and the Southern Nevada economy entered a deep recession, South Edge defaulted when Kimball Hill filed for bankruptcy in April 2008 and an involuntary bankruptcy was filed against Woodside in August 2008.

Under the credit agreement, "South Edge is months behind on payments to certain of its creditors," John McDonagh, a managing director at JPMorgan Chase, said in a court filing.

JPMorgan Chase, in Thursday's filings, asked the court to appoint a trustee to supervise the company as its debts are reorganized, charging some of the homebuilders secretly modified land "takedown" schedules for developing their property and paying their obligations and hid this information from the lenders.

In addition, civil litigation is pending between the lenders and some of the South Edge homebuilders in which JPMorgan charges some of the builders fraudulently induced JPMorgan into entering into a forbearance agreement.

"This involuntary Chapter 11 case, in combination with the appointment of a Chapter 11 trustee, is the last hope of rescuing South Edge and its Inspirada project from the waste and precipitous decline that has been caused, and will continue to be caused, by debtor's controlling insiders," JPMorgan Chase charged in court papers. "These insiders are sacrificing the project and repudiating debtor's obligations in a quest for greater profits at the expense of not only approximately 39 lenders to whom the insiders seek to shift their losses, but also the city of Henderson, debtor's other creditors and other parties. The project can endure neither the insiders' persistent neglect, self-dealing and abuse nor the drawn-out litigation favored by the insiders and their affiliates."

The bank charged the South Edge controlling insider homebuilders shut down the development project by the spring of 2008 by refusing to provide or seek further capital contributions and the insiders "have failed to arrange for essential health, safety and maintenance work at the project."

A trustee is needed to revive the project because "unlike the builder defendants, the lenders have not given up on South Edge," the filing said.

Because of cost overruns and delays, the project's development cost has reached a projected $1.55 billion -- but homebuilders have obtained from South Edge just 774 acres, leaving 1,179 acres remaining with South Edge, the filing said.

JPMorgan Chase charged certain builders have failed to buy $270 million in land for homebuilding, are liable for up to $600 million in development costs and are using a "hostage strategy" to "de-value the project, which serves as JPMorgan's collateral, and inhibit the development and maintenance of the project."

Separately, court records show that when disputes arose between Focus and the homebuilders about development issues with Inspirada, Focus demanded the disputes be taken to arbitration. The arbitrators in July found the builders wrongly shut down the project and breached an agreement to buy land from South Edge and awarded Focus damages of $36.8 million.

JPMorgan said in its motion for appointment of a bankruptcy trustee that this arbitration decision "fosters managerial deadlock" at South Edge as Focus can't compel KB Home and the other builders to buy and develop land at Inspirada. Also, the builders are appealing the arbitration award.

Attorneys for KB Home, in the Nevada civil lawsuit, have argued JPMorgan Chase had no right to go after KB Home in the litigation since the loan at issue was between South Edge and the lenders -- not between KB Home and the lenders.

"JPMorgan (also) attempts to 'step into the shoes' of the borrower, South Edge, and enforce claims JPMorgan alleges South Edge has against its own members, including the obligation to purchase parcels of real estate from South Edge (known as a 'take down')," attorneys for KB Home said in a filing. "JPMorgan is prohibited by the terms of the South Edge operating agreement from enforcing that agreement."