A real estate investor in an independent living facility in Texas has won a $7.9 million arbitration award against a construction company that delivered a project 179 days late.
The case should serve as a warning bell for integrated developer-owner-contractor companies that set up a “special purpose entity” for their development projects, said Benton Wheatley, partner in Duane Morris in Austin, who represented plaintiff Montgomery Street Partners.
The arbitration award went in favor of Montgomery Street Partners, which invested in a company called Breckenridge Group Waxahachie Texas. That was the owner that had a contract with Aspen Heights Construction to build a 41-acre independent living community for people with intellectual and developmental disabilities.
Here, the special purpose entity was project owner Breckenridge Group, but it was being controlled by an Aspen Heights group of companies. Aspen did not have the best interests of investor Montgomery Street in mind, Wheatley said.
“You’ve got to have ethical screens in place with independent decision makers who are authorized and have authority without recourse to make decisions for this special purpose entity,” he said.
Here, the special purpose entity was controlled by Aspen, and its job was maximize its own profits—not the special purpose entity’s profits, he said.
“I’m not sure the transactional folks who put these deals together have got it all figured out, of how to protect everybody,” Wheatley said. “It’s the fox watching the henhouse.”
Andrea Alford Hight, shareholder in Winstead in Dallas, who represented Aspen Heights, declined to comment.
Montgomery Street sued Aspen Heights over the construction problems at Daymark Living Facility—Waxahachie. It included 28 single-story buildings that had 202 beds and three amenity centers.
The construction finished 179 days late and there were other problems, the arbitration award said. Aspen Heights did not get approval from the owner, lender or architect for most of the change orders. Aspen did not pay its subcontractors or suppliers, failed to keep project records using accepted accounting principles, and didn’t account for owner-supplied materials, the award said.
Aspen Heights denied the claims and argued that delays were the owner’s fault. It wanted the contract sum increased by $472,000 to pay for change orders.
To use the building as intended, the Texas Department of Aging and Disability Services had to inspect the construction and find it complied with licensing requirements. But the agency found many defects that Aspen Heights had to correct so that the project would count as “substantially complete” and the facility could open its doors, the award explained.
Yet Aspen Heights misrepresented when its work would be done—and the project’s marketing staff relied on that to lease living space to families, the award said.
“At some point, they could no longer give the prospective families a date for move in and certain families moved on,” the award said. “Rebuilding trust with the prospective families took a full year.”
The arbitrator, Allison J. Snyder, wrote that Aspen Heights didn’t follow many contract provisions and failed to keep proper records throughout the construction. Sloppy record-keeping “infected the project from the beginning,” the award said. Aspen was “playing fast and loose with its investor’s money,” the award said.
Snyder awarded Montgomery Street with $7.23 million in liquidated damages, $680,000 in attorney fees and $53,000 in costs. The award totaled $7.96 million.
Wheatley, who was Montgomery Street’s attorney, said that the contract was the key evidence in the dispute. Duane Morris partner Tracy McCreight, associate Paul Harle and paralegal Jenn Texera also represented Montgomery Street, Wheatley noted.
“We had a good contract in place and an arbitrator who was going to read the contract and apply it to the facts of the case,” Wheatley said.
Important testimony came from the chief executive of Breckenridge Group, who testified about what he saw during the construction process, and about how Aspen Heights failed to understand the unique aspects of building an independent living facility that would comply with Texas regulations for licensure.
“He tried to tell them pretty early on, ‘You guys are not following the process, and it’s going to come back to bite you.’ It really did: It was the cause of the delays,” Wheatley said. “At one point, they kicked him out of the job meetings, because they were tired of hearing from him.”
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