Condos tangled in legal battles
Sunday, July 29, 2007
By RYAN DEZEMBER
Staff Reporter
GULF SHORES -- Months after getting the keys to their units in the 18-story Lighthouse Condominium tower, the owners of the 252 Gulf-front condos are snarled in a four-way legal battle over $1.26 million that contractors say they are owed for construction work.
The litigation pits the owners, developers, contractors and the $60 million project's bonding company against each other in a crisscross of claims over the unpaid construction bills, which have clouded titles to the condos.
At the same time, the owners are suing the building's developers over construction quality and accounting issues.
As of last week, the Baldwin County Association of Realtors Multiple Listing Service featured 60 Lighthouse condos for sale ranging in price from $395,000 sought for an 895-square-foot unit with one bedroom and two baths to a 1,477-square-foot, three-bedroom, three-bath unit on the 16th floor offered for just under $1.1 million.
But without clear title, owners can't finalize sales or even mortgage or refinance their condos, said David Daniell, one of the association's lawyers.
"They're in limbo until we get it sorted out," said Daniell, who said that the association's board members would not speak with the Press-Register about the situation.
Titles to the condos have been encumbered by contractors' liens, which are documented in five separate cases.
Few court filings, however, have been submitted to support the owners' claims that the condos were inadequately constructed and that the association fund is missing cash. Daniell said those claims were made in court primarily so that the owners' lawyers would be able to subpoena records and, in turn, better substantiate their allegations.
In a brief court filing, the developer, East Beach Development LLC, has denied all of the owners' claims.
Daniell said he has hired auditors to review hundreds of transactions involving the condos to paint a clearer picture of the association's finances. He's also employed engineers to inspect the building.
"They cut corners on everything," Daniell said of the developers. "They value-engineered the expensive finishes out of the units."
Daniell contends that buyers were promised granite countertops, but that they never were installed. Thresholds on exterior doors, he said, don't seal tightly enough to keep sand and water out. And of the six high-speed elevators promised to ferry residents to their condos, two -- priced at about $180,000 apiece -- are missing, leaving a pair of empty shafts, Daniell said.
Most of the lawsuits that typify Baldwin County's post-boom resort real estate market have come from buyers who seek, for one reason or another, to get out of finalizing sales on their condos. In the case of the Lighthouse, however, all but a few condo buyers have closed deals.
The five lawsuits surrounding the Lighthouse instead illustrate the tensions that have arisen between unhappy buyers and struggling developers in a market plagued by rising insurance and construction costs, falling prices, and decreasing demand for expensive Gulf-front condos. The lawsuits also represent the second major condo project involving some of the principals of East Beach Development to become ensnared in litigation.
Hundreds of buyers left wanting
A complex that stretches a city block along Gulf Shores' East Beach neighborhood, The Lighthouse employs an earthy twin-tone color scheme with swimming-pool-blue windows.
The building had its genesis in June 2002, when developers Paul Kirkland and Rick Phillips formed East Beach Development LLC and later announced plans to replace the Lighthouse Motel.
For nearly five decades, the 200-room Lighthouse Motel, named for the 55-foot-tall replica beacon that topped its front office, served as one of the most popular places to stay on Alabama's beaches. By 2002, however, motorist lodges and nightly hotels were going by the wayside, being torn down by developers with plans to replace the aging and often modest structures with high-end condominium towers.
Besides allowing developers the chance to make millions without the hassle of managing a hotel day-to-day, the beach's redevelopment was fueled by speculative investors called flippers.
Often with little money down, flippers obtained controlling rights to condos when they were still on the drawing board, then resold them to buyers.
Kirkland and Phillips, who according to Probate Court records also created development companies to replace aging structures with condominium complexes The Pass and San Carlos, filed plans in October 2002 to tear down the Lighthouse Motel. They eventually would pay about $20 million for the motel and replace it with The Lighthouse Condominiums.
According to Probate Court records, Kirkland eventually sold his interest in the project and was replaced by Jeffrey McLaurin, a broker at Phillips' real estate company, Ono Professional Partners; Robert Williams, a former owner of several Terminix franchises; and John and Stephen Case, the owners of Mobile-based Coastal Builders.
When its units were released for pre-construction sales in August 2003, Realtors who worked for Phillips told the Press-Register that each of the 252 condos was snapped up over a 24-hour period at prices ranging from $215,000 to $485,000, and more than 600 buyers were left wanting units.
Developer, sued, turns to insurer
By June 2006, with construction coming to a finish, probate records indicate that the developers began finalizing sales, with most of the deals wrapped up by the end of the year.
Early this April, Daniell and other lawyers filed a lawsuit against East Beach Development on behalf of the condo owners.
In the complaint, the owners allege fraud, negligence and breach of contract among other claims related to a trio of issues:
That the tower wasn't built to the standards promised buyers.
That there is money missing from the association's start-up budget that funds shared maintenance and insurance costs.
And that the developers, title company and primary contractor, all closely tied, closed sales despite the prospect of liens from contractors who claim to be owed $1.26 million.
Probate Court records indicate that most Lighthouse units changed hands from developer to buyers between June and November last year.
Probate records also show that All-South Subcontractors of Spanish Fort filed a lien against East Beach Development late this February alleging about $75,000 in unpaid roofing work.
This spring, Bagby & Russell Electric Co. and Mansfield Industrial filed lawsuits seeking compensation for what they said were unpaid bills in the amount of $475,000 and $450,000, respectively. The lawsuits followed liens filed earlier in the year.
Most recently, on July 17, a Marengo County company called Jennings Service Co. sued in pursuit of about $265,000 it says it is owed for plumbing work in the tower. A lawyer for Jennings Service Co. did not immediately return a message seeking comment.
In filings last week East Beach Development denied Jennings' claims and asked that the lawsuit be dismissed due to a technical flaw in the original filing.
Coastal Builders has acknowledged in filings that Mansfield is owed money, but said that the amount is in dispute. Court records don't indicate that the construction company has made any similar admissions related to the other contractors' claims.
"The question we're asking is the same one that every unit owner has asked and that is, 'How do you close and sign title policies and then have $1 million in liens crop up?'" said Tim Garner, a Gulf Shores lawyer who also represents the condo owners. "I don't know if they had knowledge or not, but it's pretty coincidental."
Phillips did not respond to a request for comment. Speaking for East Beach Development, the company's lawyer, Julian "Buddy" Brackin, said the explanation for the late-arriving liens is simple: Alabama law allows subcontractors to file claims for unpaid work up to six months after the job. Brackin also said in an interview that he "has reason to believe" the payment-demanding subcontractors may have missed that deadline.
It's not unusual in a project of The Lighthouse's magnitude for disagreements to arise with contractors and even for liens to be filed, Brackin said. East Beach Development paid its contractor, Coastal Builders, so in the developer's view, the bonding company that ensured subcontractors would be paid is responsible for clearing the liens, Brackin said.
Rather than fire back at the condo owners, East Beach Development on May 7 filed a cross-claim against Travelers Casualty and Surety Company of America, which issued payment and performance bonds on about $9.1 million of Coastal Builders' agreements with subcontractors. In that state court filing, East Beach Development seeks not only for Travelers to clear up the $1 million in liens, but also wants $500,000 in compensatory damages and $10 million in punitive damages.
'Inconceivable' disconnect
Travelers, a subsidiary of insurance giant St. Paul Travelers Cos., countered a week later with a suit filed in federal court in Mobile that essentially asks a judge to rule that the company is not responsible for clearing the liens. In addition, Travelers asks for East Beach Development to repay about $150,000 the insurer said was mistakenly paid to a glass company whose work it did not cover.
In August 2003, John Dukes, a Mobile lawyer representing Coastal Builders, sent a letter to Travelers, which has been included in the federal suit as evidence. The correspondence spells out how the construction company wanted Travelers to issue performance and payment bonds on $8 million to $10 million worth of smaller contracts while the subcontractors performing larger jobs would be required to bond, or insure, their own work.
In effect, Travelers has argued in court that the $9 million in contracts it guaranteed payment on did not include the work done by the contractors who say they are due money.
Brackin said in an interview that East Beach paid Coastal Builders in full, which, therefore, should trigger Travelers' responsibility to pay off the lien filers. In a March letter to Travelers' Philadelphia claims office, Brackin made a similar argument and said that the liens are placing "a significant hardship" on owners trying to sell their condos.
In May, after learning about the suit filed by The Lighthouse owners, Brackin implored Travelers to act on the liens: "This lawsuit could be very damaging to the defendants and we must insist that you take immediate action to obtain release of these liens so this part of the lawsuit will be resolved."
In the same correspondence, Brackin said that he would file a cross-claim against Travelers in addition to requesting that the Alabama Department of Insurance investigate the company. Assistant Insurance Commissioner Ragan Ingram said that it is the department's policy not to conduct investigations surrounding disputes that are in litigation.
In response, Travelers' Managing Director Kimberly Czap wrote that because John Case is the head of Coastal Builders as well as a principal of East Beach Development, it was "inconceivable" that East Beach Development would be unfamiliar with Travelers' contract with the construction company and the insurer's obligations.
Wes Pipes, a Mobile lawyer who represents Coastal Builders and John Case, declined to comment on the matter and asked that the Press-Register not contact his client. Travelers' Birmingham-based lawyer, Graves Stiff III, also declined to speak on the record about the case.
Proposal would let owners sell, refinance
To the unpaid contractors -- Mansfield Industrial and Bagby & Russell -- it doesn't matter who writes the checks, lawyers for both concerns said.
For that reason, the companies have sued not only the developers but also Travelers and the condo owners. The owners -- at the same time suing the developers over the building's construction and the association's fund -- would "object vehemently" to compensating the unpaid contractors, said their lawyer, Garner.
The perception among owners is that the developers, who also have faced legal challenges from disgruntled buyers at San Carlos, the more slender and similarly painted condo cousin to The Lighthouse, should have known about the unpaid subcontractors before they handed units over, Garner said.
Besides Case's dual affiliation, Phillips owns the real estate firm that sold the condos and shares a building with Seaside Title, which closed the deals, the association's lawyers said. Phillips once owned Seaside Title but no longer is a principal, the lawyers said. Seaside Title's lawyer, Michael Dasinger, could not be reached for comment for this report.
The association's lawyers have recently filed a motion in their suit asking the court to establish an escrow account in which condo owners can deposit their share of the contractors' claims plus interest -- about $6,000 per unit, one lawyer estimated -- so that real estate and financing transactions can go through while the liens are cleared.
Brackin said the developers do not oppose that plan, and that it will likely come up at a Baldwin County Circuit Court hearing set for Aug. 28 to address a host of issues. "I really am sympathetic to that; it's a bad situation," Brackin said.
Court documents pertaining to the legal fight can be found at: http://blog.al.com/pr/documents/
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