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(This story, in slightly different form, originally appeared in the National Law Journal.)

Litigation is cropping up across the country over multimillion-dollar hotel, condominium and manufacturing building developments that unraveled as US financing tightened during the past year, leaving financiers, developers and contractors to fight over who should pay for the failed deals.

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

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

“The magnitude of the crisis is historic,” says Ted Novak, a partner in DLA Piper’s Chicago office who has been a real estate lawyer for 30 years and says he’s never seen it this bad. “Activity has stopped.”

Since construction ended late last year on the Granby Tower condominium and retail project, which was to rise 31 stories over the Elizabeth River in Norfolk, VA, at least four lawsuits have landed in state court, with the general contractor and about 15 subcontractors making claims for materials and labor invested in the job. There are pilings, but no building. Turner Construction v. 515 Granby, No. CL08-005050 (Norfolk, Va., Cir. Ct.).”The lawyers are having a heyday,” says Troutman Sanders partner Jonathan Hauser, who is representing the developers. The developers didn’t agree to pay the general contractor, Turner Construction, anything before closing on financing for the project, and the closing never happened even though there was the promise of financing, says Hauser, who is based in Virginia Beach, VA The principal developer, Frank T. Buddy Gadams, is scouring the globe for financing and so far has staved off a foreclosure, Hauser says.

First Step: LiensThe first step that construction companies and contractors often take when a development project stalls is to place liens against the developers. While liens don’t always turn into litigation, it becomes more likely over time as the liens pile up and as claimants encounter their own financial pressures. Laws regarding liens vary from state to state, but generally a claimant has up to six months to file a lawsuit to enforce a lien.

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

Tom Murphy of Chicago’s Thomas J. Murphy P.C., who represents Spire developer Shelbourne Development Ltd. of Dublin, Ireland, is hopeful that litigation can be avoided despite the liens through arbitration or ongoing discussions.

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

While some parties are trying to avoid litigation to preserve business ties that they hope will endure into better economic times, others are opting to protect their rights and guarantee a place in line if there are other creditors, says Paul Kiernan, a Holland & Knight partner. One of the wildcards in many of the situations is the role the federal government may play in transactions, Kiernan notes.

Construction costs aren’t the only issue spawning litigation. In some cases, parties are fighting over who should bear the blame for financing falling through and pay contractual penalties.

Chrysler LLC in October filed a suit in Michigan state court against German company Getrag Transmission Manufacturing LLC over its failure to line up about $300 million in financing for joint development of a new transmission plant in Tipton, IN, Chrysler claims that Getrag breached its contract and committed fraud in not coming through with the funding despite assurances that it would be able to do so by a certain date. Attorneys at Mayer Brown, representing Chrysler, declined comment. Dykema Gossett acted as local counsel. Chrysler v. Getrag, No. 08-095122 (Oakland Co., Mich. Cir. Ct.).

Getrag, represented by Charlotte, NC’s Moore & Van Allen for corporate issues and Foley & Lardner for the litigation, says it has suspended its work on the plant and is working with state officials and others to find alternative financing. Getrag, also in October, filed a motion to dismiss the fraud claim and asserted counterclaims, arguing that Chrysler breached the contract the two companies had for their plan to share in the cost of the $530-million plant that it already has under construction.

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

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

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