Law Suits & Courts

BANKS - Dispute over collateral ties up bulk condo deal

Posted on Friday, February 4, 2011

Finding buyers for condos at the Ibis Villas at Doral has been almost impossible for developer Pablo Valdes. So, when investor Michael Lawrence agreed to pay cash for five units in the mostly unsold project, Valdes began counting the days to closing.

Now, almost a month after the deal was to be completed, the $1.4 million sale has stalled over a legal standoff between Valdes and Espirito Santo Bank in Miami.

Espirito Santo won’t release the five units Lawrence wants to buy because they are collateral for a revolving line of credit. The lender is balking at the release because Valdes is suing over Espirito Santo’s refusal to disburse $1.6 million in financing.

The credit line was arranged in 2009 as the condo market cratered. With property values falling, borrowers from business owners — including developers like Valdes — to homeowners had their financing either drastically cut or canceled by lenders.

“It is unbelievable that the bank refused to fund the loan and now refuses to release the collateral,” Valdes said. “It is a disaster.”

Since the bank wouldn’t fund the credit line, Valdes doesn’t owe Espirito Santo money. But, the bank said in court documents that it has the right to hold the collateral for as long as a lawsuit and countersuit between it and Valdes are pending.

Without the bank’s release, Lawrence won’t be able to close the deal.

“It is very frustrating,” Lawrence said. He said he will wait about a month for the dispute to be resolved before moving on.

“If push comes to shove and it goes too long, I’m not going to be able to close. I will take the money and my resources somewhere else.”

Valdes claims the bank is “blackmailing” him by refusing to release the units until he abandons his suit — which he refuses to do as “a matter of principle”.

“It is not retaliation. At [age] 65 there isn’t retaliation anymore. I just want the community to know about the disastrous decisions that banks are making,” he said.

Miami attorney Jorge Cruz-Bustillo, who represents Espirito Santo, said settlement discussions were confidential and declined further comment other than to say,

“I disagree with the manner in which he characterized a confidential discussion between me and the other attorney.”

Valdes completed the 197-unit Ibis Villas in 2006. He still has 131 unsold units, most of which are rented and provide him income.

Valdes fears the bank’s stand will hurt his chances of selling the units, as potential buyers — either individuals or investors like Lawrence — may tire of waiting for the dispute to be resolved.

Lawrence said he is not interested in buying any of the other units not affected by the Espirito Santo loan. The units under contract are the largest and most desirable at the project.

Escalating Fights

Developers and lenders have increasingly turned against each other since the housing and financial crisis started in 2007. But even as the economy slowly begins to recover and buyers — especially investors — return to the market, their legal fights are escalating.

Valdes sued the bank a year ago for failing to fund the line of credit “without legal or factual justification,” according to the complaint.

The $1.6 million line of credit had as collateral 11 condos, including the five under contract, which were appraised at more than $2.5 million, according to Valdes.

He is seeking unspecified damages over the unfunded credit line.

Espirito Santo countersued Valdes and his company, Country Club of Miami Associates, claiming Valdez failed to provide the proper documents to fund the loan.

Last month, Valdes amended the lawsuit seeking to force the bank to release the loan’s collateral. Valdes learned the bank wouldn’t release the units days after Lawrence signed the purchase contract, Valdes said. Valdes and the bank are scheduled to take part in a court-mandated settlement conference on Feb. 7.

Valdez said the bank is offering to “walk away” from the litigation and release the collateral if he dismisses the lawsuit.

“Why should I drop the lawsuit, I didn’t breach any contract,” Valdes said. “I did my part.”

Assessing Risk
Miami banking consultant John Mcguire, who has represented Espirito Santo on and off for almost two decades, said lenders often have the right to cut or cancel lines of credit if they believe the value of the collateral has declined.

“If the bank feels its risk level has gone up, because the collateral value has gone down, the bank can refuse to further lend,” he said, speaking in general terms.

Mcguire, a senior partner with Mcguire & Mcguire Banking Consultants in Miami, is not involved in the litigation.

Espirito Santo “is not known for being rough on its customers,” he said.

During the recession, many lenders had to curb their real estate lending and reduce their exposure to depreciating real estate to comply with regulators, said
William G. Hardin III, director of the Florida International University’s Jerome Bain Real Estate Institute.

“They made business decisions,” he said.

The problem is that many of those making the decisions lacked experience dealing in an uncertain economic environment, he said.

“One of the weaknesses that we have out there now is a lot of people who might have been involved in lending money in South Florida … really have zero experience with workouts and what it takes to make things happen while something has value and something else doesn’t have value,” Hardin added.


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