Law firm Ervin Cohen & Jessup has secured a $93 million judgment against developer Amin S. Lakha of Lakha Properties for fraud in the sale of a shopping center deal dating back to 2008. The developer sold a power center in Chino Hills to CRCH LLC for $79 million at the end of 2008—in the midst of the financial crisis—and, according to the legal team, knowingly withheld vital information about the property and tenancy to push the sale forward and avoid default. The total $93 million payout includes interest and damages on the original sale price, and overturns the sale. The financial crisis was clearly a turbulent time for real estate owners, especially of retail properties, and it is likely the financial crisis played a roll in the developer's motivation to withhold information. We sat down with Barry MacNaughton, the lead trial lawyer and co-managing partner at ECJ, to talk about the case and how the economic climate at the time of the sale played a roll.

GlobeSt.com: Do you think that the financial crisis was the impetus for the owner to commit fraud in this case?

Barry MacNaughton: I do think that the impetus has to do with the financial crisis and maybe it is one step more complicated than that. What the evidence showed was that the owner of this property, the defendant in this case, was in financial difficulty in 2008. He first tried to liquidate his entire portfolio of power centers, and he was unsuccessful. He then hired CBRE to help him decide which of the remaining properties he should liquidate to avoid defaulting on a series of loans. When the escrow began, a company called Off Broadway Shoes went dark, meaning that they closed the store but continued to pay rent. When they disclosed that to the buyer, my client, and the buyer immediately canceled the transaction because they were looking for a very stable investment. They were not going to get a huge return in terms of cash-on-cash rental income, so they wanted something that was very secure. The parties instead negotiated a price reduction, but the incident signaled to the developer that if further problems arose, the buyer would walk away from the transaction. The evidence showed that by the fall of 2008, the owner at told a lender on the property that he was contemplating a bankruptcy and that it was important that the sale went through. All of the problems that he failed to disclose came up after the Off Broadway Shoes situation. Certainly it is our view, and we think the evidence supports this, that the reason the owner did not disclose the problems with the tenants at the property was because he was afraid that the buyer would walk away from the deal and he couldn't have that happen due to his own personal financial situation. That would cause him to have to default on loans and cause him significant problems. From his standpoint, this sale had to go through.

GlobeSt.com: It is interesting that a seller would be able to withhold such vital information in a deal this size when there are so many parties involved. Do you believe that he also withheld information from his own team?

MacNaughton: Here is what makes this a little unique: it was a very long escrow. The parties entered into the agreement in August 2008 and the escrow didn't close until February 2009. All of the things that formed the basis for the fraud occurred in September and October 2008, after the initial due diligence period. That told us that the owner did not tell his own legal team and broker about the issues. He kept them all in house. He had a property management team was captive of the owner, so you had n owner that owned the property management group. All of the information was compartmentalized there.

GlobeSt.com: The financial crisis was clearly disastrous for some. Have these kinds of fraud cases become common as a result?

MacNaughton: I wouldn't say that I have seen a lot. I think that in 2007, 2008 and 2009 is that the market for these properties dried up, so there weren't a lot of transactions. By 2010 at least, a lot of buyers new that any transaction like this had some risk involved, and prices went down. Owners that could stand it weren't willing to sell, and those that couldn't went into foreclosure and lost the property. I haven't seen a lot of these, but I have seen some involving office buildings and residential things. Those are times when the owner had to liquidate and get out, and that is often the motivating factor for being less than forthright in your disclosures.

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2008 Retail Sale Results in $93M Payout

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