(Crain's) -- Donald Trump's lawsuit against the menagerie of construction lenders for his riverfront tower is likely to be followed by more pre-emptive strikes by other developers.
Like Trump, other developers may sue lenders
Amid the prolonged credit crisis, such lawsuits could become common.
"Almost every lending institution is doing everything it can to back out of their loan commitments," says developer Marv Romanek, who won a settlement in the mid-1990s from two banks, including Chicago's Continental Bank, over their alleged refusal to fund a loan to complete a 28-story office building at 633 St. Clair St. in Streeterville.
Mr. Trump alleges that a lending group led by a unit of Deutsche Bank wrongfully refused to extend the maturity date of a $640-million first mortgage used to finance his 92-story hotel/condo project at 401 N. Wabash Ave., according to a complaint filed Nov. 6 in trial court in Queens County, a borough of New York.
A representative of Deutsche Bank and two affiliates that are defendants in the case declined to comment.
Related story: Trump sues lenders for more time to pay off loan on Tower
Even in the current downturn, Mr. Trump isn't the first developer in the Chicago area to sue his lender. In February, South Barrington-based Kennedy Homes sued a group of banks led by Harris N.A., alleging that the bank errors in tabulating its loan balance led Kennedy to overdraw its line of credit and become insolvent.
In Mr. Trump's case, the New York developer is also seeking a court-ordered extension of time on a $130-million mezzanine loan issued by a smaller group of finance firms, led by Fortress Credit Corp., an arm of New York-based Fortress Investment Group. A Fortress spokeswoman did not return calls requesting comment.
Mr. Trump contends he is entitled to the extensions in part under "force majeure" clauses in both loans, standard provisions that would excuse some contractual obligations -- such as payment due dates -- because of a calamitous event such as an earthquake or a labor-union strike.
"We are currently living through perilous times....and are witnessing the worst worldwide financial crisis....since the Great Depression," the complaint alleges, citing a report by Deutsche Bank's own investment research unit.
Observers are closely watching the outcome of the force majeure claim because of its possible widespread application to other projects.
"We're in an economic crisis, yes, but does that constitute force majeure?" said real estate attorney James Fox, a partner in the Chicago office of law firm Quarles & Brady LLP. "Only crazies would do that."
The force majeure claim is "a stretch in this case, but it gave him a toehold," said Mr. Romanek, managing director with Northbrook-based Romanek Properties Ltd.
Mr. Trump's complaint also offers a broadside attack on Deutsche Bank's sale of portions of the $640-million loan to "many institutions, banks, junk bond firms and virtually anybody that seemed to come along, in order to get massive fees . . . without regard to the plaintiffs, the Trump brand name or the project."
Many of the participants in the loan "have no real estate lending experience or understanding of real estate sales and marketing, particularly in today's unprecedented national and worldwide economic climate," the complaint charges.
The complaint does not identify which participants are so-called "inappropriate lenders" and which are not. But some participants are themselves victims of the economic downturn and no longer have the cash to fund the completion of the project.
Representatives of the participants in the Deutsche Bank and Fortress loans either declined to comment or did not return calls requesting comment. Two participants could not be located.
The 21 participants in the Deutsche Bank construction loan are:
The participants in the Fortress mezzanine loan are: