Wednesday, Jan. 5, 2011 | 11:37 a.m.
Homebuilders that partially own Henderson's stalled Inspirada planned community are firing back against Las Vegas developer John Ritter in the struggle over whether Inspirada should be forced into bankruptcy.
Ritter's Focus Property Group, developer of the Mountain's Edge and Providence communities, has been mired in disputes with Inspirada homebuilders after the builders stopped buying land for home developments from their partnership with Ritter.
The partnership is Inspirada's parent company, South Edge LLC.
With the recession slashing demand for new homes throughout Southern Nevada, the builders haven't been willing to "take down" or buy land from their own partnership. This lack of land sales has prevented the partnership from paying its debt obligations and development at Inspirada, planned for 8,500 homes, stalled in 2008. Only about 640 homes have been sold there.
On Dec. 9, lenders led by JPMorgan Chase Bank filed an involuntary bankruptcy petition against South Edge, charging defaults under a $585 million credit agreement.
The homebuilders are fighting that involuntary petition without the cooperation of Ritter.
Last month, Ritter asked the court to block the homebuilders from being represented in the case by Los Angeles law firm Klee, Tuchin, Bogdanoff & Stern LLP (KTB&S), saying their hiring of that firm to resist the involuntary bankruptcy "is the latest in a long line of maneuvers employed by the builders to avoid their contractual obligations to South Edge."
Ritter asked the court to appoint a "responsible officer" for South Edge to determine whether the involuntary bankruptcy petition should be contested.
The homebuilders -- KB Home, Meritage Homes, Woodside Group, Toll Brothers, Beazer Homes, Kimball Hill Homes and Pardee Homes -- this week fired back against both the banks and Ritter.
In fighting the involuntary bankruptcy petition, attorneys for the homebuilders said in court papers that South Edge is ineligible for bankruptcy because it's generally paying its debts as they come due -- except for debts that are disputed.
Attorneys for the builders said the involuntary petition should be dismissed because it was filed in bad faith, because of wrongdoing by the banks and because of their "attempted abuse of the bankruptcy process."
In a separate filing opposing Ritter's motion that the builders' law firm be dismissed from the case, attorneys for the builders complained that Ritter has been cooperating with JPMorgan to the detriment of the larger South Edge partnership.
"Recent years have been economically challenging, something no one needs to tell this court," the builders said in their filing. "Equally obvious is that different people react differently to trying times. This motion reveals how the members of South Edge reacted. Most made common cause and decided to band together to sustain the Inspirada project in the face of a flurry of litigation commenced by JPMorgan, the agent for a group of secured lenders, until times improved and development was feasible.
"One member, Focus, decided instead to cut a deal with JPMorgan, the plaintiff in (related) litigation and the lead petitioning creditor here. The motion is Focus’s latest attempt to assist JPMorgan at the expense of the other members," the builders said in their filing.
The builders complained that JPMorgan has agreed to provide $11 million to Focus and Ritter provided that Ritter successfully prosecute his claims against the homebuilders -- claims demanding they buy land from South Edge.
So far, Ritter appears to have the upper hand in the dispute as an arbitration panel in July found the builders wrongly shut down the development and breached agreements to buy land from South Edge. The arbitrators in July awarded $36.8 million to Ritter's Focus South company, but the builders are appealing that award.
In their filings this week the builders pointed out JPMorgan hasn't pursued an obvious solution to the problem: foreclosure on Inspirada's undeveloped land, an action "that could provide exceedingly rapid relief."
But that option likely would result in substantial losses for the lenders, as the recession has slashed local land values, and would likely result in continued litigation against the builders as the lenders tried to recover their losses.
Attorneys for Ritter responded on Wednesday, saying the builders were inappropriately trying to paint Focus as the villain in the dispute.
They said the arbitration panel found Ritter's cooperation agreement with JPMorgan to pursue claims against the builders was a "reasonable" response to the actions of the builders.
"The builders have breached the operating agreement by failing to contribute capital to South Edge and halting construction of the Inspirada project," attorneys for Ritter said in Wednesday's filing. "As a result, they owe South Edge literally hundreds of millions of dollars and have caused South Edge to default on its obligations to its lenders."
"It is not clear to Focus whether the (involuntary bankruptcy) petition is in the best interests of South Edge and its stakeholders or not. What is crystal clear, however, is that the builders have no intention of acting in South Edge’s best interests, but only in their own. As a result, Focus proposes the obvious solution: the appointment of an objective, responsible officer to hire independent counsel, evaluate the issues fairly and take the appropriate course of action," said the filing for Ritter and Focus.