HFZ sued by former developer of Turtle Bay site

Developer James Kennelly filed suit Wednesday against HFZ Capital Group and Arbor Realty Funding, alleging the development firm and the lender defrauded him in a deal to give them control of his three Turtle Bay co-op units.

He filed the suit, seeking up to $14 million, in New York State Supreme Court, alleging HFZ misrepresented assets it purchased from Arbor and made false inducements to get him to enter into the deal.

Spokespersons for HFZ and Arbor said the firms had no comment on the suit. Rex Whitehorn, an attorney for Kennelly, did not return calls. Kennelly was not immediately available for comment.

Kennelly’s East 51st Street Development was famously building a residential tower at 303 East 51st Street until a fatal crane collapse in 2008 brought the project to a halt. Ultimately, Arbor foreclosed on the site, and HFZ took over developing the condos, now known as Halcyon NY.

As part of the transfer, Kennelly signed a deed-in-lieu of foreclosure deal with Arbor and HFZ to take over the co-ops at 304 East 52nd Street, which he had pledged to secure $45.6 million in loans made to his firm, according to court documents in a related Nassau Supreme Court case.

Arbor foreclosed on its lien on the units in April 2010, using a $750,000 credit bid, which is a frequently used measure for lenders to acquire assets at auction if there are no competing bidders.

Kennelly acquired the co-ops for almost $1.7 million in 2006.

HSBC, which issued a loan for the units in March 2007, filed a foreclosure suit against the developer this past January, as The Real Deal reported, alleging he defaulted on a $441,900 loan for one of the units.

The crane collapse killed seven people on the ground and resulted in millions of dollars in litigation. But after much wrangling, HFZ has pushed the project forward with financial backing from CIM Group. The 123 units planned for Halcyon NY will start at $1.5 million.