Development drama: City sues Burton-Katzman for breach of contract, fraud

‘The real issue is, why does the public have to do something in good faith while the private, for-profit company doesn’t?’

 

— Councilman Thomas Tafelski

 

By J. PATRICK PEPPER
Times-Herald Newspapers

 

DEARBORN — It was with great hopes that city officials signed a 2003 contract with developer Burton-Katzman to reinvent the former Jacobson’s department store in the city’s west end.

 

The Bingham Farms-based company came with high marks on municipal projects and a track record of success. The project, dubbed “West Village Commons,” was supposed to be a key component of a renewed business district, adding density and aesthetic appeal.

 

Now, six years later, the bloom appears to have fallen off the rose.
City officials are seeking nearly $17 million in damages and back taxes – in addition to a court order — to compel Burton-Katzman to finish construction on West Village Commons, according to a lawsuit filed last week in Wayne County Circuit Court.

 

In the 20-page, two-count complaint, city attorneys argue that Burton-Katzman’s continued failure to complete construction constitutes a breach of contract. Timelines established in the developer’s agreement called for all work on the three-phase project to be wrapped up more than two years ago.
Additionally, they contend the city was defrauded silently by Burton-Katzman because company officials failed to inform them of a corporate dissolution filed in April 2008.

 

Named as defendants in the suit are Burton-Katzman Development Co. Inc., West Village Commons LLC, Abbey Homes LLC, President Peter Burton, partner Robert Katzman, Senior Vice President of Project Development Charles DiMaggio and corporate attorney Daniel Share.

 

Initial plans for the project called for 48 rowhouse-style condominiums to the south, 75,000 square feet of office and retail space along Michigan Avenue and dual midrise buildings – one a hotel, one an office and retail building – in between. Although Burton-Katzman completed construction on the mixed-use portion in June 2006, to date only 36 condos have been built, and the site of the midrise buildings remains an empty field.

 

The entire project was supposed to be complete by August 2006, but a souring economy and deflating hotel market led the company to request and receive an extension from the city.

 

Since then Burton-Katzman has been in negotiations with other local developers in search of joint venture opportunities.

 

But despite several ideas ranging from senior housing to student housing, nothing has come to fruition. City officials hope its lawsuit will provide a remedy for the unfulfilled promises.

 

“We’ve given Burton-Katzman all the accommodations we could, but it became apparent that even though we fulfilled our obligations, they wouldn’t be fulfilling theirs,” said Mayor John O’Reilly Jr., who was City Council president when the deal was signed.

 

At the crux of the complaint are two parking decks built by the city. Completed in 2004 at a cost of $16.4 million, the decks were built as part of the developer’s agreement.

 

They were included in the project for two reasons: in part, to provide more parking for the space-strapped district, but largely because city and company officials believed a completed West Village Commons would provide the requisite demand to necessitate the decks.

 

A significant portion of space in the parking decks was purposed for hotel and residential lease agreements, and tax-capture money from the entire project was supposed to pay down the debt. But with those components far from being realized, the decks have sat underutilized and become a drain on city finances, sapping nearly $2.5 million in general fund money so far.
“The city relied, to its detriment, on the unfulfilled obligations, promises and commitments made by defendants,” reads the complaint.

 

In all, the complaint asks the court to order Burton-Katzman to build two midrise buildings worth at least a combined taxable value of $20,294,331 and 12 condominiums. The city also is asking to be reimbursed the money it paid to build the parking decks and awarded nearly $350,000 in back taxes, along with $884 for unpaid water penalties.

 

“It’s sad that it has to come to this, but we’ve exhausted all of our options,” City Council President Thomas Tafelski said. “We’ve built our two decks. Now it’s time for them to build their two buildings.”

 

“The real issue is, why does the public have to do something in good faith while the private, for-profit company doesn’t?”

 

The silent fraud allegation stems from a discovery city attorneys made while preparing the lawsuit. On Jan. 9 through a business entity search, city attorneys found that Burton-Katzman Development Co. Inc., the company that the city contracted with, had filed for dissolution. Despite several face-to-face meetings with city officials and a series of letters between the two parties following the April 2, 2008, dissolution, Burton-Katzman never revealed the change in status.

 

The development agreement obligates the company to make the city aware of any change in its status as a valid business entity.
Company officials, meanwhile, are befuddled at the charge.

 

“We’re mystified,” said DiMaggio. “We did dissolve Burton-Katzman Development Co., but that has nothing to do with this project. West Village Commons LLC is the listed entity. It remains active, and we continue to explore options to get a project in there.”

 

It is common practice for development companies to form a limited liability company for individual projects in order to mitigate risks to the entire company should a project fail. After a project is complete, the company is dissolved and the assets revert back to the shareholders.

 

Still, O’Reilly remains unwavering in the claim. He points to the letters sent between the city and Burton-Katzman in which DiMaggio listed himself as a representative of Burton-Katzman Development Co., not West Village Commons LLC. He also cites the development agreement in which all Burton-Katzman executives similarly aligned themselves with the development company instead of the LLC.

 

“I don’t know where they’re getting their legal advice, but it’s a matter of fact that we contracted with Burton-Katzman Development Co., and they absolutely had an obligation to inform us of a change in status,” O’Reilly said.

 

“It will be interesting to see how this plays out.”