The two Detroit public retirement systems filed a lawsuit Monday against the Carpenters' Pension Trust Fund-Detroit and Vicinity, accusing the pension fund of a scheme to move to the head of the line for loan repayment related to a financing deal with the Westin-Book Cadillac Hotel project.
Ferchill Group, operating as Cadillac Funding Associates, received more than $100 million in mortgage loan financing in 2006, including $9 million from the $2.8 billion Detroit General Retirement System and $15 million from First Independence Bank, which was backed by the $3.4 billion Detroit Police & Fire Retirement System. The $725 million carpenters' pension fund was not a lender, but committed $17.2 million to the project for letters of credit that could be drawn upon to repay the lenders, according to the lawsuit.
The pension funds are alleging the carpenters' plan made a secret deal in 2009 with a newly created affiliate to buy a $42 million senior loan for a price of $36.5 million. The affiliate paid about $16.7 million for part of the purchase price through release of the pension trust's letters of credit, which in effect meant the plan purchased the loan for $19.8 million in “new money,” according to the lawsuit. The senior loan balance remained at $42 million.
“Essentially the lowest priority lender, the Carpenter's Pension Trust Fund, diverted money intended for the benefit of mortgage lenders and the project and used it instead to buy the senior debt to the detriment of all other lenders, including the city pension funds,” said Don Wagner, partner at Couzens, Lansky, Fealk, Ellis, Roeder & Lazar law firm and special counsel to the public retirement systems, in a news release. “We contend this action is contrary to the overall credit structure and agreements among the parties and is a breach of good faith owed to the other lenders.”
The lawsuit filed in Wayne County Circuit Court claims the carpenters' pension fund jumped six levels of lenders, and that the overall project was deprived of $16.7 million intended to ensure payment of the loans.
The new senior loan terms were changed to require the developer to apply all its net cash to repay the carpenters' pension fund affiliate, and waived the obligation to maintain certain levels of reserves to pay other lenders. Detroit GRS has not received any interest or principal since 2009.
The Westin-Book Cadillac Hotel was reopened in 2008, but has struggled financially and has not repaid any of the $24 million to the two public pension funds. The plans are asking the court to reduce the senior loan by $16.7 million, redistribute interest collected to other lenders and to declare that the carpenters' pension fund lose or share the first lien position.
Officials from the carpenters' pension fund could not be reached for comment.