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WHEN ALL ELSE FAILS LITIGATION A CASE STUDY Katherine Alitz Boston Capital Asset Management IPEDBoston October 11 – 12, 2007.

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Presentation on theme: "WHEN ALL ELSE FAILS LITIGATION A CASE STUDY Katherine Alitz Boston Capital Asset Management IPEDBoston October 11 – 12, 2007."— Presentation transcript:

1 WHEN ALL ELSE FAILS LITIGATION A CASE STUDY Katherine Alitz Boston Capital Asset Management IPEDBoston October 11 – 12, 2007

2 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY 132 Unit Property Local economy experienced a severe downturn that persisted for several years after syndication As a result the property generated substantial operating losses Investment Limited Partners capital account depleted by end of Year 5

3 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Investment Limited Partners ability to continue taking annual LIHTC required GP to agree to reallocation of losses GP refused to cooperate Two years later we started to explore possible sale of non-performing property

4 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Audit review revealed: Ginormous Subordinated Loan accruing interest annually at 9% No Credit Recovery Loan Know your rights and…

5 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Partnership review revealed: Specific Definition of Operating Deficits which excluded accrued but unpaid interest on Subordinated Loans Terms of Subordinate Loan provided for simple interest at 9% Credit Recovery Loan provisionpriority loan applicable if credits not delivered for any reason, at any time… Know your rights and…

6 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Reviewed every audit issued since original syndication and prepared a calculation of Operating Deficits that followed the specific definition in the Partnership Agreement …LEVERAGE!

7 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY This exercise demonstrated: 1.The principal gap between the construction loan and permanent loan was carried as an Operating Deficit in the annual audit 2.Annual operating deficits included interest accrued on the Subordinated Loan but not paid, resulting in the double counting of annual interest Remember GP Development vs. Operating Deficit Obligations Problems after Lease-Up

8 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY OD300,000327,000485,860663,3251,135,000 Interest 27,000 29,430 43,725 59,700 New OD100,000 90,000 80,000 Unpaid OD Int. 29,430 43,725 59,700 Total 27,000485,860663,310862,725 The effect of the General Partners creative accounting looks something like this:

9 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Contacted General Partner to discuss possible sale of the Property, noting: -Apparent overstatement of Subordinated Loan balance -Failure to recognize Credit Recovery Loan which had a balance in excess of $850,000 and receives a priority return under the Partnership Agreement GP rejected sale proposal and refused to restate Subordinated Loan and recognize Credit Recovery Loan

10 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Made written demand of General Partner to restate Subordinated Loan and recognize Credit Recovery Loan Received written response rejecting demand from GPs attorney Properly document demands for corrective behavior

11 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY MARSHALL YOUR TROOPS AND TAKE CHARGE HOW TO PROCEED GP Removal, misappropriation claim, fraud, compliance, repurchase, etc. VENUE JURISDICTION

12 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Filed claim against GP for fraud Complaint filed in Massachusetts

13 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY GP challenged jurisdiction We filed a brief defending jurisdiction. Our attorneys did such a masterful job on the brief that the GP called to discuss settlement and sale of the property

14 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY The Settlement Agreement provided: Sale of the property through competitive marketing process Agreed upon split of available cash proceeds

15 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Several months later…. …an Upper Tier Investor demanded: Written description of the transaction Complete with an analysis of why we engaged in a settlement of the litigation Anticipate greater investor scrutiny

16 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Litigation Outcome Fund PrevailsGP Prevails Asset Management Fees 120, ,000 Credit Recovery Loan 859,000 0 Subordinated Loan 682,4361,443,324 Partnership Management Fees 0 98,112 ILP Return of Capital 0 0 Total 1,661,4361,661,436 Outcome Total to ILP 979, ,000 Outcome Total to GP 682,4361,541,436

17 WHEN ALL ELSE FAILSLITIGATION A CASE STUDY Actual Proceeds to ILP : $ 830,718


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