Thursday, January 28, 2010

Developer Brian O'Neill sues Citizens Bank for $8 billion

It is getting ugly out there.

"Developer Brian O'Neill, whose empire is faltering in a brutal economy for builders and who already is being sued by his primary lender, has filed an $8 billion lawsuit against that lender, Citizens Bank of Pennsylvania, and its parent company, claiming they breached their financial commitments to him.

The move is an astonishing turn of events between local businessman and local bank and a stark look at just how rough the world of commercial real estate has become in these recession-worn days.

The lawsuit, filed in Philadelphia Common Pleas Court, is the harshest salvo to date in a relationship that started off amicably eight years ago and led to Citizens Bank's advancing more than $180 million in financing for O'Neill projects.

Lately, however, that relationship has been steadily deteriorating - much like the commercial real estate market.

In November, Citizens Bank secured a $61 million judgment against O'Neill in Montgomery County Court for default on an office-construction loan for his ambitious - and embattled - Uptown Worthington mixed-use project in East Whiteland Township, Chester County.

In December and January, the bank followed that up with two more judgments totaling $3 million against O'Neill and his namesake O'Neill Properties Group L.P., of King of Prussia, in connection with the unfinished Horizon Corporate Center, a 101-acre office/retail/restaurant complex in Bensalem, Bucks County, that includes a five-story office building that was completed in June but remains empty.

As he did in the case of the Uptown Worthington project, O'Neill denies he defaulted on loans related to Horizon.

"I'm going after them," O'Neill said yesterday, referring to his lawsuit against Citizens Bank.

The seldom-at-a-loss-for-words developer declined to say more, on the advice of attorneys. He referred a reporter to the 35-page suit filed on his behalf by the law firm of Kaufman, Coren & Ress P.C.

Citizens Bank was even more tight-lipped. "We don't comment on lawsuits," said spokeswoman Sylvia Bonner.

As disputes among businesses go, this one is especially caustic: In his lawsuit, O'Neill accuses the very bank that has helped him build what he says is an enterprise of $1 billion in completed projects and an additional $4 billion in the works of now trying to destroy it.

The suit contends that Citizens Bank reneged on financing agreements, engaged in fraudulent and/or negligent misrepresentations, interfered with O'Neill's existing and prospective business relationships, and defamed and disparaged him.

It all began in late summer or fall 2008, the lawsuit claims, when the parent companies of Citizens Bank - Citizens Financial Group Inc. and the company that ultimately took it over, the Royal Bank of Scotland Group P.L.C. - "started to collapse under the weight of billions of dollars of soured investments and were experiencing a significant liquidity crisis."

Citizens Financial Group, the lawsuit says, "embarked on a campaign to raise and recover capital by any means necessary - whether lawful or not."

The bulk of O'Neill's suit deals with the Uptown Worthington project - a 1.6-million-square-foot complex of housing, shops, entertainment venues, and high-value office space O'Neill has planned for the former Worthington Steel plant along Routes 202 and 29.

O'Neill contends that the bank backed out of its original financing commitment, one that was complex, in large part, because the site involved conversion of an old industrial property. By doing so, the suit contends, the bank has put the entire project "in jeopardy."

That prospect was causing great unease yesterday in Rochester, N.Y., where Wegmans Food Markets Inc. has its headquarters. The supermarket chain is building a store in Uptown Worthington that is scheduled to open June 13. Hiring of 600 employees starts next month.

"If this thing doesn't get open on time, we're going to have significant damages," said Ralph Uttaro, Wegmans senior vice president of real estate and development.

Uttaro said the litigation between O'Neill and Citizens Bank "makes us nervous [because] we're sort of in the middle of somebody else's dispute and don't have a lot of leverage to find our way out of it."

The lawsuit also contends that a decision in June by VWR International L.L.C., a Chester County laboratory-supply company, to cancel plans to have a new headquarters built at Uptown Worthington was the result of Citizens Bank's announcing that it would no longer serve as lead lender for the $540 million project. VWR's chairman and chief executive officer, John Ballbach, cited concerns over whether a new building could be completed by its relocation deadline, the end of this year.

Also underwriting O'Neill's work on Uptown Worthington is the Commonwealth of Pennsylvania, which has approved $104 million in loans and grants.

Yesterday, Mark Shade, a spokesman for the state Department of Community and Economic Development, said O'Neill continued to have the support of the Rendell administration. "We are confident in the project - unfortunately, it's hit a really bad economy," Shade said.

Less than $12 million has been disbursed for Worthington thus far, he said, adding that O'Neill "still needs to secure other financing for [the rest] to be available."

Last month, O'Neill warned that construction of the $218.5 million Philadelphia Regional Produce Market - $152.5 million of which is coming from the state - would grind to a halt if state enabling legislation were not passed soon.

Funds have since flowed - $32 million this month - and "the project is still moving," said Gregory V. Iannarelli, chief counsel for the Philadelphia Regional Port Authority, owner of the market site.

Iannarelli said yesterday that the agency was "watching" the O'Neill/Citizens Bank dispute, but was hopeful the produce market would "be on time and on budget."

What becomes now of this battle of local titans is a matter of considerable speculation in development, finance, and legal circles, with few willing to talk about it on the record, so as not to offend either O'Neill or Citizens Bank.

One developer, who declined to be identified, observed that Uptown Worthington was a unique project because it was not owned by a group of developers, just O'Neill: "There's a reasonable amount of personal guarantee that would cause Brian not to say, 'Take the keys. I'm done.' "

On the other hand, the bank's actions against O'Neill are a sign of "the changing times," said Walt D'Alessio, vice chairman of NorthMarq Capital L.L.C., a real estate investment banking firm.

"Capitalization rates are way up from when that project started," D'Alessio said yesterday. "I'm guessing the lender said, 'This property doesn't have the same value it had before.' Space demand is down, and real estate values are down."

Alan Fellheimer, a former Philadelphia bank executive and longtime banking lawyer with Fellheimer & Eichen L.L.P., predicted a settlement, with O'Neill completing Worthington.

"It takes forever to litigate these cases, and it costs a fortune," Fellheimer said. "And it's not the business either O'Neill or Citizens is in."

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