Merchants files another complaint against GEMS – for $200M

Filing alleges firm was “left at the altar” in planned construction of UES school

New York /
Jul.July 15, 2014 05:50 PM

Days after being rebuffed by two New York State courts, Merchants Hospitality has filed a new $200 million complaint against Dubai-based GEMS Education, alleging the firm backed out of a deal to develop a private school on the Upper East Side of Manhattan.

The complaint, filed July 11 in Manhattan Supreme Court, alleges GEMS committed fraud and breach of contract when it allegedly backed out of an agreement to build a 213,000-square-foot school on Second Avenue and 93rd Street under a 40-year triple-net-lease.

Lawyers for Merchants were forced to file the full complaint after the two judges rejected an earlier summary judgment claim by the real estate firm for $940 million, amid disputes over, among other things, the selection of an architect and the financial status of GEMS, according to court records.

“Landlord expended substantial sums assembling this property and sourcing financing for this transaction, only to be left at the altar by tenant merely because the tenant was unable to fulfill its contractual obligations and commitments,” attorney Y. David Scharf said in a statement. “Landlord wants what it bargained for and intends to hold the guarantor accountable for tenant’s wrongful termination of the lease and its fraudulent acts.”

According to the new complaint, lawyers for Merchants Hospitality claim that GEMS misrepresented its financial condition and also repudiated a lease agreement reached between the parties. In court filings, Merchants says that GEMS failed to disclose significant amounts of debt that it took on.

Lawyers for GEMS, in court documents and oral arguments, said that the lease was no longer in effect after the parties failed to reach agreement on an architect. They also said that transactions that the plaintiffs claimed were debt were actually equity.

Justice Jeffrey Oing said last week that he found no evidence that GEMS was running from creditors or could not fulfill its financial obligations, as the plaintiffs asked him to place an attachment on GEMS assets.

GEMS, led by founder and chairman Sunny Varkey, is the world’s largest private school operator, and is scheduled to open GEMS World Academy in Chicago later this year. Merchants, led by Abraham Merchant, invests, manages and develops various office buildings, hotel properties and restaurants, Including 260 Park Avenue South and Merchants River House at 220 Liberty Street.

Lawyers for GEMS noted that two previous judges reviewed the evidence and rejected the arguments made by Merchants Hospitality.

“The facts here are very simple: two judges, in just one week, have already rejected arguments based on these baseless allegations period,” said attorney Robert Ward, who represents GEMS. “There is nothing more to say regarding the merits of this case.”


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