Barnett and partner spar at 470 Broome Street

Extell head says claims of siphoning money are "nonsense"

TRD New York /
Feb.February 08, 2010 12:48 PM
Sicis showroom at 470 Broome Street and Gary Barnett

The owner of an Italian tile company went to court in December to stop Extell Development’s Gary Barnett from allegedly “looting” a Soho condo conversion the two had partnered on.

Maurizio Placuzzi, the owner of Sicis, a high-end mosaic tile concern with a New York showroom at 470 Broome Street, filed an application for a temporary restraining order and injunction in New York State Supreme Court Dec. 12, 2009. The filing claims that Barnett was siphoning money from 470 Broome Development, the company he and Placuzzi had formed to convert the building, to Extell affiliates and projects.

Barnett engaged in a pattern of “looting the assets of the company by engaging in self-dealing designed to benefit other affiliates of Extell and Barnett,” then concealing these activities, the application claims.

According to an affidavit filed in support of the request, Barnett did this by “causing 470 Broome Development to pay expenses it was not liable to pay (including expenses wholly unrelated to 470 Broome Development’s operations and in fact related to other Extell projects.)”

Barnett told The Real Deal the allegations are “nonsense.”

The application asks that Extell provide Sicis with all current and future documents created in relation to the conversion, and that Extell be prevented from paying any bills or invoices, except for common charges and taxes, without permission from Sicis.

Barnett used 470 Broome Development funds for attorney’s fees and even wrote checks to the construction lender of the Rushmore, a troubled Extell project, according to Alan Fried, a partner at real estate law firm Braverman & Associates, who is representing Placuzzi. Barnett then attempted to hide these activities by instructing his attorneys at law firm Stroock & Stroock & Lavan, the law firm retained by Extell to prepare the offering plan for 470 Broome, to avoid providing documents to 470 Broome Development, the affidavit states.

“Extell was using 470 Broome to help get out of its fix with the Rushmore,” Fried told The Real Deal. He added that the case “is very damning for Extell, Gary Barnett and Stroock.”

Barnett said there is “not a shred of truth” to Sicis’ claims, and that
Sicis went to court because the company had wanted to take control of
the residential units in addition to the commercial, but at a lower
price than Extell would agree to.

“There’s a bit of sour grapes going on here,” Barnett said.

The two parties had agreed that if the conversion wasn’t completed by July 15, 2008, Extell would pay his partner $1 million, according to the application. The condo declaration was allegedly not filed until December 2008, but Extell refused to make the payment, the application says.

Barnett said that Extell holds Sicis partially responsible for the delay.

Barnett and Sicis began trying to settle their dispute in arbitration in 2008, but Extell had disqualified all of the arbitrators that had been chosen, prompting Placuzzi to go to court asking for an injunction, the application says.

In a December 2009 stipulation, the parties agreed that Extell would provide all the requested documents, would give its partner advance notice of any closings in the building, and that all of 470 Broome Development’s net proceeds would be kept in escrow until the matter is settled in arbitration.

Placuzzi founded Sicis in Italy in 1988. With locations in Asia and Australia as well as Europe and North America, the company is now well-known for producing elaborate mosaics that adorn walls, flooring, pools and design elements like light fixtures.

In 2004, Placuzzi wanted to purchase a commercial space for a New York showroom, and 470 Broome appeared ideal, according to the affidavit. At the time, the five-story mixed-use Soho building was owned by Intell Soho, an affiliate of Extell. Placuzzi was interested in the lower floors of the building but not the top floors, and in order for him to buy only the lower portion, the building would first need to be converted to condominiums.

Placuzzi planned an extensive build-out of the space (where The Real Deal held a holiday party in 2008} and was eager to get started. He “only wanted the lower levels, but didn’t want to wait until a condo plan was written and approved because that would have delayed construction for a couple of years,” Fried explained.

So Placuzzi and Extell came up with a complicated plan in which Barnett would sell the entire building to a Placuzzi-owned company called Bianca USA Real Estate, according to the affidavit. Then, the residential upper floors of the building would be leased backed to 470 Broome Development, an entity also owned by Placuzzi. Barnett would be brought on temporarily as the operating manager of 470 Broome Development to convert the top floors of the building into residential units.

The arrangement would allow Sicis to avoid transfer taxes and start work on the space immediately without having to develop the residential units, Fried said, noting, “They’re not in the real estate business.”

Extell had operating authority over 470 Broome Development, and according to the affidavit, agreed to front the funds for the conversion, which would be repaid from the proceeds of the sale of the condo units. Barnett would receive 75 percent of the company’s net profits at the end of the project.

Almost immediately, Extell and Barnett violated the terms of the agreement and “abused their positions,” the affidavit claims.

Though the operating agreement prohibited Barnett from incurring additional debt, he “immediately caused the company to take on debt,” signing promissory notes for loans from Extell affiliate Strategic Soho at an interest rate of 12 percent, the affidavit says. Ultimately, 470 Broome Development paid around $2 million in interest to Strategic Soho.

These actions were presumably designed to “loot the proceeds of the sales of the Loft residential units,” by funneling money to Extell and its affiliates, the affidavit claims. In other words, Fried explained, Extell’s actions had the effect of “eliminating the profit, which was supposed to be split,” leaving 470 Broome with smaller proceeds while directing large amounts of resources to Extell affiliates.

Meanwhile, there were “numerous other ways that Barnett and Extell misused the company for their benefit and to the detriment of 470 Broome Development and its owners,” the affidavit says.

In one instance, Extell allegedly used funds from 470 Broome Development to cover shortfalls when the Rushmore was forced to provide purchasers with a refund of their down payments. The Rushmore was not named in the suit, but Fried confirmed that it is the development in question.

“In order to provide some recompense to the particular Extell entity involved in that project, Stroock forgave invoices to other unrelated Extell projects, including 470 Broome Development,” the affidavit says. “Barnett then directed that 470 Broome Development pay an equivalent amount to the unrelated entity that was obligated to provide refunds.”

The affidavit also claims that in order to pay attorneys’ fees for its arbitration with Placuzzi, Barnett caused 470 Broome to borrow funds from Strategic Soho and incur interest charges.

“While Extell and Barnett may be free to engage in these types of transactions with respect to projects wholly owned by them, they are not authorized to do so by the operating agreement of 470 Broome Development,” the affidavit says.

In addition, Extell hired another of its affiliates, Target Construction, as a general contractor, ultimately paying Target some $1.2 million in exchanging for renovating the four residential units in the building. The building had already entered into construction contracts, but Target was permitted to bill for those contractors, vendors and suppliers, and was permitted to charge an additional 15 percent premium in addition “which is unheard of in this industry,” the affidavit says.

“The available facts indicate that Target was created for the purposes of improperly increasing the cost of renovations and diverting additional monies to respondents,” the affidavit indicates “Indeed, the terms of the agreement were so one-sided in favor of Target that entry into the contract constitutes a breach of fiduciary duty by Barnett.”

According to an invoice introduced as an exhibit in support of the affidavit, an attorney for Extell was asked to prepare a contract “skewing in favor of [the] contractor.”

At the time of the affidavit, two of the four condo units had been sold, and two remained.

The case is now in arbitration, Fried said.


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