HUD probes Extell over Rushmore complaints

From left: Attorney General Andrew Cuomo, Secretary of Housing and Urban Development Shaun Donovan and the Rushmore

The U.S. Department of Housing and Urban Development has launched an investigation into the Rushmore condominium, amid allegations that the lawyers for the developer, Extell Development, held previously undisclosed meetings with state Attorney General Andrew Cuomo’s office to prevent existing buyers from backing out of their apartment contracts.

HUD officials said that as of May 11, 2009, Extell “voluntarily suspended” the building’s registration under the Interstate Land Sales Full Disclosure Act (ILSA), a federal law that protects consumers in newly constructed condos with more than 99 units. The move would allegedly be a way for the developer to shield itself from ILSA-related claims.

HUD opened the probe after media reports mentioned that 34 buyers filed complaints with the AG’s office. While officials did not disclose why Extell would suspend, documents obtained by The Real Deal show the Rushmore developer was facing an ILSA-based lawsuit prior to the filing.

“While this suspension remains in effect, the developer must not make any sales unless those sales are exempt under the provisions of the Interstate Land Sales Full Disclosure Act or its implementing regulations,” Brian Sullivan, spokesperson for HUD told The Real Deal.

Sullivan would not comment on the investigation, but a federal official who was not authorized to speak with the press, said that a request was made for Extell to hand over documents related to the Rushmore.

HUD rules prohibit a voluntary suspension if there are outstanding “administrative” complaints against the building, and while Sullivan said there were no complaints filed with HUD, filings in U.S. District Court show two ILSA lawsuits by buyers demanding the refund of their down payments, which has become a trend with new developments since the market turned sour. HUD officials could not immediately say whether these should have been disclosed.

Extell declined to comment on the voluntary suspension or the lawsuits, but company President Gary Barnett said, “We are confident that we have satisfied all of our legal obligations.”

The probe comes amid a series of revelations in legal filings and other documents obtained by The Real Deal. Newly filed documents in A State Supreme Court lawsuit by JPMorgan Chase managing director Kelly Coffey alleges that Stroock & Stroock & Lavan, the law firm and escrow agent for the Rushmore, conspired with Extell to block dozens of buyers from getting their deposits back after the developer missed a Sept. 1, 2008 deadline to begin closing on apartment sales.

The 289-unit building, located at 80 Riverside Boulevard, is one of the most high profile condos in the city, with more than 90 units closed, according to city Department of Finance records. Barnett put the figure at 100 units (which could be because of the time lag between closing and city filing) and another 100 units are under contract. Hypo Real Estate, a German-based lender, holds about $220 million of debt on the building, according to Manhattan-based Real Capital Analytics, which placed the building on its troubled projects list.

The 34 buyers that complained to the AG were under contract to buy about $110 million worth of apartments, court records show. Extell attorney Ahuva Genack, in a May 4, 2009, response to the complaints, called the erroneous date a “hiccup” and argued that rescissions would “threaten the viability of the project,” court records show.

Coffey, who signed a contract to buy two apartments for a total of $6.9 million, alleged in her October 2009 lawsuit that Extell missed the Sept. 1, 2008 closing date, and then fraudulently amended the plan to deny existing buyers the right for rescission. When Extell blamed the problem on a one-digit typo, Coffey updated her complaint to allege negligence by Stroock, the law firm that drafted the offering plan and later amendments.

Extell officials previously argued that buyers were backing out because of the real estate crash, noting they did not file complaints with the AG until closing notices went out in early 2009. Stroock, in court filings, said it had a “nominal” role in the transaction, serving as the lawyer and escrow agent for Extell, and had no “duty of care” to the plaintiff.

Lawyers for Coffey, however, alleged in new court on Jan. 27 documents that Stroock had a much more active role in the dispute than previously disclosed.

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“Instead of complying with the terms of the offering plan, by offering plaintiff and other purchasers the right to rescind their agreements, and returning their down payments monies with interest, the defendants conspired and planned together to prevent the plaintiff and other purchasers from rescinding their agreements by unilaterally and materially altering the offering plan for their own interests,” said Marc Held, attorney for Coffey.

According to the Coffey lawsuit, buyer of apartment 3T filed a complaint with the AG Feb. 4, with four complaints submitted Feb. 10. By March 6, Stroock drafted the 16th Amendment to the offering plan, which changed the official closing date of the building to Feb. 12, 2009 from Sept. 1, 2008, court documents show.

Extell and Stroock, in court filings, blamed the missed deadline on a one-digit typo, and said the true rescission date should have been Sept. 1, 2009, the end of the first budget year. The developer, in the 16th Amendment, revoked the rights of the previous buyers to get their deposits back.

Held, in his court filing, alleged that in Stroock’s transmittal letter to the AG, there was no mention of a rescission change, but a reference to “revisions of purchase agreement” and “FDIC disclosure,” so the reviewing AG attorney never realized the new language was inserted into the document.

Held further alleges that on March 5, 2009, Stroock drafted the 17th Amendment to include language that would remove the buyers’ rights to cancel contracts under federal ILSA regulations. The draft language stated that construction on the Rushmore would be completed in two years, a clause that would remove the right of rescission under federal ILSA regulations, Held claimed.

Richard Cohen, attorney for the 34 buyers who filed complaints with Cuomo’s office, told The Real Deal that he contacted assistant AG Lisa Wallace on May 19, 2009, about a week after the 16th Amendment was mailed out to buyers, and told her that the sponsor failed to disclose the previous complaints.

Wallace told The Real Deal that “at this stage” she is no longer involved in the case, and referred calls to deputy AG Susan Sharbach and AG spokesperson Richard Bamberger, who did not return phone calls for comment.

Stroock submitted the 17th Amendment on June 5, however court filings show that three lawyers from Stroock met July 16 with AG officials, including Lewis Polishook, chief of enforcement for the AG’s Real Estate Finance Bureau.

“Please note that the attached draft reflects modifications to the 17th Amendment requested by you and as well as revisions discussed at a meeting held yesterday afternoon…,” wrote Stroock attorney Joshua Silver, in a July 17, 2009, letter to Wallace.

Michel Evanusa, a Stroock partner and one of the lawyers attending the meeting, told The Real Deal, “I’m not in a position to answer questions about any of our projects.” A spokesperson for Stroock said the firm would not comment on the case.

Cohen said the disclosures reflect the developer’s “bad faith” regarding the 16th Amendment, where the Rushmore stated that previous buyers had no right to a deposit refund.

Barnett said the filings shows that the buyers’ rights were fully restored and that Stroock only did what it was asked to do.

“The only thing this filing shows is that buyers’ rights were fully protected,” Barnett, said in an e-mailed statement. “Stroock prepared a draft amendment to the condo plan and submitted it to the AG for its approval as is required by regulation. The AG asked us to make sure that the amendment was clear and asked Stroock to modify the amendment to clarify that the disclosures did not apply to existing purchasers. That modification was consistent with the sponsor’s intention and was made.”

Held pointed out, however, that Extell failed to offer rescission of the original contracts and the lawsuits and complaints from buyers in any amendments. Finally, he argues that it cannot blame the missed deadline on a typo, because the developer submitted 15 prior amendments where errors, typos, and revisions were regularly updated, according to court documents.

The AG has yet to make a ruling on the case for Cohen’s clients.