Written by Phil Cerroni
By Phil Cerroni
For the past six months, the City of Irving and the Las Colinas Group (LCG) have been embroiled in a legal battle over the termination, in early August, of LCG’s contract to develop the proposed Irving Entertainment Center. After an initial hearing on Oct. 29, LCG re-filed – pinning part of their plea on the assertion that the contract terminated because the City acted in bad faith – with a hearing before a judge scheduled for Mar. 4 and a jury trial sometime later this year.
“Part of that whole scenario of making the deadline was the good faith process” said Bill Beuck, LCG chairman. “It had to be a cooperative effort, and because there was … lack of action of the part of the City, it never came together. It was supposed to be a team effort.
“The fact that we never were able to get the information necessary from the City to complete the full transaction caused the contract to terminate on Aug. 6 by its terms. We believe that [the lack of cooperation] was done with intent to run the clock out so that we could not perform, and the contract [would] end.”
The City’s position, laid out in a written statement, is simple.
“One August 6, 2012, the Development Agreement expired by its terms because the financing had not closed … the City has paid all the draw requests submitted by LCG, and there are no remaining amounts owed to LCG under the Development Agreement.”
LCG believes it has a case because, although the development agreement stated that the contract would be terminated if funds or guarantees in the amount of at least $80 million were not deposited by Aug. 6, the company claims it was unable to acquire the money because the City refused to quote how much it could fun through bonds. That information was vital for LCG to turn the soft commitments from their investors into firm commitments.
“We had no idea how much the City would commit for – all they did was tell us what they couldn’t do – they never told us what they could do,” Beuck said. “The terms of the contract were such that the $80 million was predicated on the City’s participation … the investors would not just invest $80 million without the City doing an investment”
In their statement, the City disagrees, contending that it “timely met each of its obligations in the Development Agreement regarding the financing of the project.”
As the Aug. 6 deadline approached and LCG began running out of time, Beuck claims he constantly attempted to make contact with Mayor Beth Van Duyne about working out an agreement. Van Duyne, Beuck asserts, never responded to his requests and excused her silence by saying his letters were threatening.
“It became very political, from my perspective, and very obvious that … they [the City] were going to let our contract die,” Beuck said. “I kept alerting the City … [that] if that happens I have no alternative but to sue the City.”
The City claims that is was LCG who broke contact.
“The City repeatedly asked LCG if it would (1) adhere to the Aug. 6 deadline and (2) provide its $80 million loan commitment, but LCG refused to respond,” according to the statement from the City.
An aspect of the dispute, although only peripherally related to funding, that LCG believes demonstrates that the City was acting in bad faith throughout the process is the confusion caused by the use GAAP (Generally Accepted Accounting Principles) accounting.
Beuck believes the GAAP accounting was intended to derail the project.
“It is a very different … methodology of accounting, and we were surprised that was implemented … [we] had never heard GAAP mentioned because it requires an extensive amount of work from the beginning, not at the end … it became an issue … after the fact … that’s just simply not the process that GAAP accounting procedures follow,” Beuck said.
Irving’s CFO, Max Duplant, does not understand LCG’s apparent confusion on this issue.
“We follow GAAP accounting practices. That is standard operating procedure,” Duplant said.
Billy Bob Barnett, head of Bb Concepts, the entertainment center’s proposed concessionaire, accuses City Manager Tommy Gonzales of using GAAP accounting to sabotage the process.
“The City Manager … classified the $4.2 million to throw a curve ball so they could mislead the citizens,” Barnett stated.
“It [the $4.2 million] materially affected the way we were perceived in the marketplace, and thus affected the deadline,” asserted Beuck. He does admit, whoever that, “It was more of a political effect than it was, in fact, a technical effect.”
In the City’s answer to LCG’s original filing, it staunchly defended Gonzalez’s conduct during this period. “LCG’s allegations regarding Mr. Gonzalez are nothing more than a smokescreen designed to distract the Court, the public, and the Media from the fact that there is no substance to LCG’s claims” (8).
The initial hearing, held last October, dismissed LCG’s suit for lost profits, but still allowed the company to seek a jury trial for the $15 million they had invested and $24 million for their developer fee.
LCG is currently petitioning the court to reverse its ruling on the lost profits as well as provide a ruling on specific performance, their claim of condemnation without compensation and for the removal of the City’s sovereign immunity, which the City claims protects it from certain adverse actions regarding governmental decisions. LCG says the City’s involvement in the entertainment complex is proprietary, causing it to be treated like any other corporation.
The specific performance is straightforward: the City would have to follow through with plans the build the entertainment complex.
Condemnation without compensation is not quite so straightforward. It holds that when the Development Agreement was terminated, a whole battery of other documents and plans, which were the intellectual property of LCG and Bb Concepts, were unilaterally terminated as well.
“[When] you start then putting numbers on … the value of intellectual property well it could be $75 million or $100 million,” Beuck said.
Reopening the issue of lost profits, Beuck explained, is a significant addition, too.
“These numbers get astronomical … if you’re taking a facility that is going to be making that kind of money over a hundred year transaction. [If] you start multiplying any numbers of millions of dollars by a hundred it becomes enormous.”
Even if LCG does come out of both the hearing and the jury trial with everything it wants, no one has any illusions that this conflict will end soon.
“I want to see the thing built, but if you see a hundred million there, the City’s not going to pay. They’re going to fight it; so it fights on and on and on,” Barnett explained.
The battle lines are drawn and the gangs are getting bigger as both sides rumble towards Mar. 4, and Beuck believes it is too late to avert the conflict by means of a settlement.
“At this point we’re locked in. When you make deals with lawyers and they take it on contingency, settlement becomes more difficult the longer you go … if they see big numbers, then they’re more likely to go for big numbers. From a standpoint of reasonableness, it seems we should be talking now, but I don’t know if that will happen or not.”
Mayor Van Duyne is confident going into the Mar. 4 hearing.
“The facts are simple: they never had any money. As we have said from the beginning, this is a frivolous lawsuit,” Van Duyne asserted. “They are desperate to divert attention from the facts in an effort to manipulate the public. The judge already has thrown out the majority of their claims because the claims were not legitimate, and we expect the rest to be thrown out as well.”
“[The City is] betting everything, and it makes no sense as a businessman that you would go into this Mar. 4 hearing willing to lose everything,” cautioned Barnett. “It could be hundreds of millions of dollars that they lose … it is Russian Roulette.”