Borrowers Sue Bank of America

(Charlotte, NC) Borrowers represented by Charlotte developer American Asset Corp. have sued Bank of America for breach of loan agreement, saying the bank wrongly stopped funding loans and reneged on promises to do modifications, leaving it unable to pay brokers.

The lawsuit, filed last week in Mecklenburg County, involves loans for commercial property in Raleigh and Charlotte, including the Whitehall Corporate Center and Shopton Ridge Industrial Center in southwest Charlotte.

The borrowers ask for a jury trial and for a temporary restraining order stopping Bank of America from foreclosing on properties and from assigning, selling or transferring their loans.

The lawsuit also says the bank gave false information “intended to deceive” when it “fraudulently induced” the companies into complex financial transactions involving interest rate swaps. Represented as instruments that would hedge against future interest rates, the swaps increased the borrowers’ risk and helped lead to the bank’s foreclosure filings, the lawsuit says.

“It has always been our principle to act and negotiate in good faith,” American Asset CEO Riprand Count Arco said. “However, when counter parties do not live up to these principles and violate their commitments, we will act.”

Bank of America spokeswoman Shirley Norton said the bank believes the suit is without merit and plans to “vigorously defend against the allegations.” Norton said the borrowers defaulted on the properties on which the bank has started foreclosure proceedings.

Tensions have grown between lenders and borrowers since the real estate market’s collapse. More developers are suing to prevent banks from taking property. As developers struggle to lease or sell buildings, banks are withholding advances on loans, leading some developers to default. Falling property values are killing refinancing efforts. And lenders are calling loans as projects stall or earn less than expected.

American Asset has more than 5 million square feet of retail, office and industrial space valued at more than $800 million. It is developing the 500-acre mixed-use Bryton project in Huntersville, where the developer moved roughly two miles of Norfolk Southern rail track to accommodate future commuter rail. This property is not involved in the lawsuit.

With a loan portfolio worth more than $100 million and a working relationship dating back to 2001, American Asset and the borrowers were “Tier 1 Clients” of Bank of America, the lawsuit says. As such, the bank asked for and received confidential financial information it could use as a “trusted advisor.”

The relationship started to sour in spring 2008, after American Asset President Paul Herndon told Bank of America it was stopping development on two projects, according to court filings. The developer was laying off staff but was still working on new leasing deals. The bank indicated it was working to approve a loan increase and other modifications.

By spring 2009, after financial markets tumbled and after months of saying it was processing the loan changes, the bank failed to honor its commitments, the lawsuit alleges. It also asked two of the borrowers to start paying down their loans.

The bank during this same time had been recommending that the borrowers buy interest rate swap agreements, described by the bank as “insurance” against rising interest rates, according to court filings.

The borrowers also claim the bank said it would provide the swaps at “no cost,” but charged half a million dollars in “hidden fees.”

“In fact, Bank of America capitalized on Plaintiff’s relative unsophistication on matters relating to interest swap agreements,” the lawsuit says.

By June 2010, the borrowers worked out a deal with the bank where the borrowers would defer some debt service payments while all parties worked toward restructuring the loans. Under the agreement, the bank would not declare a default.

In September, however, Bank of America started foreclosure proceedings against Whitehall Corporate Center, an office cluster that features Metalmorphosis, a 22-foot-tall metal head structure.