(This story, in slightly different form, originally appeared inthe National LawJournal.)

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Litigation is cropping up across the country overmultimillion-dollar hotel, condominium and manufacturing buildingdevelopments that unraveled as US financing tightened during thepast year, leaving financiers, developers and contractors to fightover who should pay for the failed deals.

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Although many developments have fallen into foreclosure in thepast few years with courts sorting out claims, others that stalledor stopped are now devolving into litigation as parties thatinvested <money, labor and materials in the projects turn oneach other to recoup what they can.

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From a $181-million hotel envisioned for Norfolk, VA, to aplanned $530-million auto parts plant in Tipton, IN, lawsuits arepopping up over deals gone bad. At the same time, some companiesare waiting in the wings, assessing whether to sue or hope that theimproving credit market will solve their problems, say litigatorsbeing drawn into the real estate disputes.

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"The magnitude of the crisis is historic," says Ted Novak, apartner in DLA Piper's Chicago office who has been a real estatelawyer for 30 years and says he's never seen it this bad. "Activityhas stopped."

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Since construction ended late last year on the Granby Towercondominium and retail project, which was to rise 31 stories overthe Elizabeth River in Norfolk, VA, at least four lawsuits havelanded in state court, with the general contractor and about 15subcontractors making claims for materials and labor invested inthe job. There are pilings, but no building. Turner Constructionv. 515 Granby, No. CL08-005050 (Norfolk, Va., Cir. Ct.)."Thelawyers are having a heyday," says Troutman Sanders partnerJonathan Hauser, who is representing the developers. The developersdidn't agree to pay the general contractor, Turner Construction,anything before closing on financing for the project, and theclosing never happened even though there was the promise offinancing, says Hauser, who is based in Virginia Beach, VA Theprincipal developer, Frank T. Buddy Gadams, is scouring the globefor financing and so far has staved off a foreclosure, Hausersays.

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First Step: Liens
The first step that construction companies and contractors oftentake when a development project stalls is to place liens againstthe developers. While liens don't always turn into litigation, itbecomes more likely over time as the liens pile up and as claimantsencounter their own financial pressures. Laws regarding liens varyfrom state to state, but generally a claimant has up to six monthsto file a lawsuit to enforce a lien.

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In Chicago, liens are stacking up against two major developmentsthat have slowed. The planned 1,200-condominium building known asthe Spire for its corkscrew shape, designed by Santiago Calatrava,is just a hole in the ground near the shores of Lake Michigan, andthe luxury Shangri-la Hotel that's slated to open in downtownChicago in 2011 has only 27 of its 90 stories completed.

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Tom Murphy of Chicago's Thomas J. Murphy P.C., who representsSpire developer Shelbourne Development Ltd. of Dublin, Ireland, ishopeful that litigation can be avoided despite the liens througharbitration or ongoing discussions.

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In California, Gill and Baldwin partner Kirk MacDonald isrepresenting two construction contractors that pulled the triggeron litigation this past summer after not receiving payment forabout $250,000 in work they performed for a Palmdale, CA, housingand golf development with 7,000 homes being developed by SunCalCos. Staats Construction v. Palmdale Hills Props., No.MC019232 (Los Angeles Co., Calif., Super. Ct.); Sierra CascadeConstruction v. Palmdale Hills Props., No. MC019186 (LosAngeles Co., Calif., Super. Ct.). MacDonald, whose firm specializesin construction law, estimates he's representing clients in 10failed developments that are owed about $7.5 million in total.

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While some parties are trying to avoid litigation to preservebusiness ties that they hope will endure into better economictimes, others are opting to protect their rights and guarantee aplace in line if there are other creditors, says Paul Kiernan, aHolland & Knight partner. One of the wildcards in many of thesituations is the role the federal government may play intransactions, Kiernan notes.

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Construction costs aren't the only issue spawning litigation. Insome cases, parties are fighting over who should bear the blame forfinancing falling through and pay contractual penalties.

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Chrysler LLC in October filed a suit in Michigan state courtagainst German company Getrag Transmission Manufacturing LLC overits failure to line up about $300 million in financing for jointdevelopment of a new transmission plant in Tipton, IN, Chryslerclaims that Getrag breached its contract and committed fraud in notcoming through with the funding despite assurances that it would beable to do so by a certain date. Attorneys at Mayer Brown,representing Chrysler, declined comment. Dykema Gossett acted aslocal counsel. Chrysler v. Getrag, No. 08-095122 (OaklandCo., Mich. Cir. Ct.).

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Getrag, represented by Charlotte, NC's Moore & Van Allen forcorporate issues and Foley & Lardner for the litigation, saysit has suspended its work on the plant and is working with stateofficials and others to find alternative financing. Getrag, also inOctober, filed a motion to dismiss the fraud claim and assertedcounterclaims, arguing that Chrysler breached the contract the twocompanies had for their plan to share in the cost of the$530-million plant that it already has under construction.

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Moore & Van Allen referred questions to the company. Foleyattorneys couldn't immediately be reached. The case has beenremoved to federal court. Chrysler v. Getrag, No. 08-14592(E.D. Mich.).

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Lynne Marek can be reached at <b[email protected].

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