Essex County, N.J.–A verdict was reached recently in a dispute of the sale of the largest multifamily portfolio in New Jersey in which East Coast Residential Associates claimed it was entitled to receive a $25 million escrow.
The company claimed that the sellers failed to disclose information concerning the expenses and personnel involved in operating the portfolio of properties and that, if known, they would have offered less than the $1.91 billion contract price to acquire the properties. The court ruled in favor of the seller (Westminster Management).
Charles Gormally of Brach Eichler, the trial counsel for Westminster Management, talks to MHN about the case and the verdict.
MHN: What is this case all about?
Gormally: This lawsuit arose after a transaction in which Westminster Management and a number of Kushner-related partnerships entered into an agreement to sell 88 multifamily properties—basically the entire multifamily portfolio in the Kushner enterprise—to a partnership between AIG Real Estate and Morgan Properties (East Coast Residential Associates). The contract was entered in order that the purchaser could preempt a bidding process that was going to take place. They preempted the bid process and the parties entered into a contract in June 2007 with a relatively close closing date in September 2007.
As part of the deal, a $25 million escrow was established in order to deal with post-closing issues that normally arise. Two days before the expiration of the six-month period, the purchasers made a claim for the escrow for the entire amount. They claimed that they were misled about certain operating expenses and by their calculations, based on an applicable cap rate, they were damaged to the tune of around $26 million. So they made a claim to the entire $25. We filed a suit on behalf of the sellers and the trial dealt with the decision of the escrow account.
MHN: What was the verdict?
Gormally: The judge [Sebastian Lombardi] entered a decision in the amount of $25 million and all accumulated interest, plus attorneys fees and costs in an amount to be determined, on behalf of Westminster Management and 88 real estate partnerships that comprised the Kushner Multifamily Portfolio against East Coast Residential Associates, L.P., a partnership of Morgan Properties and AIG Global Real Estate Investment Corporation.
The court determined that the claim made against the escrow was not a proper claim and that there was no failure to disclose any financial information relating to the properties and awarded the entire escrow to the sellers. The application totaled nearly $3.1 million.
The $25 million verdict represents the entire amount of an escrow that was established at the closing of the sale that each party to the dispute claimed to be entitled to. This has accumulated an interest of nearly an additional $2 million.
MHN: Why did Eastern Consolidated Associates make a claim for the escrow account?
Gormally: Our theory is that shortly after deciding to buy the portfolio (their contract price was just under $2 billion) and shortly after agreeing to purchase it in 2007, the real estate market went into a precipitous landslide. The purchaser entered into the contract at the top of the market, and shortly after agreeing to buy, the market went into free fall. So by the time they were closing, I think they believed the portfolio was not worth what they anticipated they were getting. Our subsequent investigations and discovery disclosed that they were willing to pay significantly more for the portfolio. It was a case of buyer’s remorse and an attempt to acquire at least that escrow account—lessen their damage so to speak.
MHN: What does the portfolio comprise?
Gormally: It contained some 16,800 residential units across New Jersey, New York, Delaware and Pennsylvania. It is currently being operated by the partnership between Morgan and AIG. Recently, there have been talks about selling part or the entire portfolio, as AIG is trying to divest its real estate portfolio.
MHN: Will Eastern Consolidated appeal?
Gormally: After the judgment about the attorney’s fees is made, they will have 45 days to decide whether to file an appeal. However, we think the decision is very specific and factually specific so it will be difficult for Eastern Consolidated to succeed with the appeal. This is a very large amount of dollars in play and I think the purchasers were hopeful to convince the court that some or the entire escrow amount should go to them. The fact that it was all in favor of the seller is pretty significant.