Harcourt filed the counterclaim last month after District Court Judge Mark Denton granted some, but not all, of its motions to dismiss the amended complaint GSG Development filed against Harcourt in early 2008. GSG Development's attorneys have not yet responded to the complaint and GSG executives did not immediately respond to a Tuesday morning phone call seeking comment.

Generally speaking Harcourt Nevada agreed to provide all funds for the development and construction of the 1,300-unit luxury residential-over-retail development in exchange for a 60% interest in the development partnership. GSG was charged with overseeing the development and construction of the project, which was slated for property at Durango Drive and Interstate 215.

GSG's lawsuit contends that Harcourt "never had any intention of performing" under the agreement and, as far back as June 2007, "conspired to, intended to, and, in fact, did exploit [GSG], obtaining value for the project through [GSG's] efforts, all with the eventually intended result of bankrupting or seriously damaging [GSG] so that [Harcourt] could assume control of the project for their sole benefit."

The lawsuit was filed by GSG in April 2008. Judge Denton threw out most of the original complaints in August, having determined that the law didn't recognize any responsibility for the Harcourt-related entities named in the lawsuit. GSG's amended complaint, filed in December, adjusted the names of the defendants, revived key claims such as breach of contract and breach of fiduciary responsibility, and added new ones including fraud and negligence.

In March, Judge Denton dismissed with prejudice the negligence and consumer fraud causes of action in the plaintiff's amended complaint, as well as the plaintiff's allegations of intentional interference and conspiracy. Several of the causes of action were not dismissed, including breach of contract, breach of fiduciary responsibility, breach of good faith and fair dealing, unjust enrichment and derivative claims.

In April, Harcourt made its counterpunch. Specifically, Harcourt claims that GSG conspired to lie about the pace of condominium sales and made multiple poor decisions that Harcourt claims cost the project tens of millions of dollars. As a result of the alleged mismanagement, "the first phase of [Sullivan Square], if ever built, will not be profitable, even if sold at its advertised prices," states the counterclaim.

Regarding the mismanagement Harcourt lists several examples. It alleges that GSG bungled an earth removal contract such that it overpaid by $9.5 million and that GSG overspent the "soft costs" allowance by approximately $15.5 million. It also alleges that although a builder's risk insurance policy would cover losses incurred during construction of the Project, GSG failed to obtain risk insurance, "which a competent and prudent manager would have done." Instead, Harcourt alleges that GSG used its money to pay for a general liability policy at a greater and unnecessary cost and began making premium payments in early 2007 despite the fact that "construction was neither imminent nor scheduled at that time."

Regarding the allegedly fraudulent condo sales scheme, Harcourt claims that GSG entered into an exclusive listing agreement Viridian Group LLC, which Harcourt claims never existed and was a "false front" for GSG principal Ken Smith and his spouse, Dale Rowse. Harcourt claims that Rowse was presented to it as the owner, president, and manager of Viridian and that his relationship with Smith was never revealed."These non-disclosures and false representations were made to obtain money from Sullivan Square, SSH, and Harcourt Nevada based on sham sales Viridian would generate," the counterclaim states.

Harcourt alleges that GSG and Viridian "consistently misrepresented" the number of condominium sales. In late 2006, Harcourt says GSG and Viridian reported nearly 100 valid sales, but a year later produced only 92 "hard contracts," more than one-third of them having deposits less than the 5% or 10% required by the sales agreements. In some cases, the deposits amounted to only $100 or 0.0002 percent of the purchase price, Harcourt alleges.

Moreover, Harcourt alleges that GSG submitted false requests to Sullivan Square for money to pay brokers, including Viridian and Rowse, for the low-deposit sales. In many cases, Harcourt alleges that the brokers' fees paid on the low-deposit sales exceeded the deposit received.

"GSG and Viridian/Rowse originated and perpetrated this scam to increase "sales" of units in order to meet the Irish Bank's pre-sale requirements for furnishing additional funds and to support Kenneth Smith and Dale Rowse's lavish lifestyle," states the counterclaim. "Viridian/Rowse has refused to return the commissions paid."

Harcourt says construction financing for the project became unavailable at commercially reasonable terms in 2007 due to the lack of sales and the deteriorating market conditions. As a result, Harcourt says it recommended a moratorium on development to GSG until marketing conditions improved and financing became available, which according to the counterclaim GSG rejected.

"Notwithstanding this reasonable suggestion, GSG continued its incompetent and futile 'management' efforts and exhausted the entire $41 million pre-construction budget for the Project," states the counterclaim. "In total, and in addition to the cost of the land for the Project, Harcourt Nevada spent approximately $20 million on the Project during 2006-2007 to support GSG's efforts to promote the Project and position it for the start of construction, all at GSG's request and on the assurances of [the principals] that the Project was in good order, on schedule, and enjoying substantial sales, which was not true."

To read previous stories on the case, click on any of the following headlines:

Sullivan Square: One Motion Granted, One Denied

Sullivan Square Lawsuit Ramping Up Again

Judge OKs Amended Sullivan Square Complaint

GSG Seeks Amended Sullivan Square Complaint

Judge Dismisses Bulk of Claims Against Harcourt

Harcourt Moves to Dismiss

Sullivan Square Developer Sues Ireland Partner

Instant Insights /

Sullivan Square Defendant Switches to Offense

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