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Borrower Beware

The Winecoff Hotel in downtown Atlanta was, for decades, the most glamorous and famous hotel in the South. It's where Clark Gable, Vivien Leigh and other stars of Gone With the Wind stayed when the 1939 classic made its debut nearby. The building that had been touted as America's first fireproof hotel when it opened in 1913 was the scene of the worst hotel fire in American history. Among the 119 fatalities was the owner and developer, William Winecoff.

The Winecoff is now boarded up and decaying. In 1998, a local developer and businessman, Courtney Dillard, created Dillard-Winecoff LLC and laid plans to redevelop the 15-story building into a mixed-use boutique hotel, with retail space and penthouse condos.

Seven years later, the Winecoff remains empty and Interbank Lending, the New York-based lender that provided the initial purchase loan, is bankrupt. Dillard has sued, and lawyers are still trying to untangle a legal imbroglio that has gone all the way to the Georgia Supreme Court.

It's a cautionary tale for developers: Choosing a reliable and ethical lender is as important as identifying the right property or project.

Long road ahead

In May of 1998, Dillard-Winecoff received a six-month, $1.8 million loan from real estate lender Interbank Funding Corp. to purchase the aging property. Within the agreement were four seemingly benign words that sparked the seven-year legal dispute: “exclusive investment advisory agreement.” In other words, Interbank's initial acquisition loan came with an unusual pre-condition that Dillard-Winecoff could only use Interbank to acquire the second construction loan.

Three months later, the project started to look more lucrative. MARTA, Atlanta's public transit authority owned the air rights to the building and said it was willing to sell. That meant the mixed-use development could be much larger.

Dillard soon became concerned that Interbank was trying to squeeze him out of the deal and that Interbank was not putting forth its “best effort” (as the contract stipulated) to find construction financing, estimated at $20 million, he says. Dillard had $1 million through Atlanta's Community Development Building Grant program, $750,000 from the hotel's previous owner, Jamion America Corp., and Dillard's own $500,000 investment, but Interbank still couldn't secure the final construction financing, Dillard says.

By December 1998, the six-month balloon loan was due, and because Interbank had the exclusive rights to secure financing, but had not done so, Dillard-Winecoff was forced into Chapter 11.

The very next month, Interbank made a collateral assignment to Atlantic Bank of New York, thus relinquishing ownership of the property and sparking an odd chain of events, including issuing a notice of default two days later even though it no longer owned the property, according to Fulton County Title Records. More importantly, the Fulton County Clerk certified that the collateral assignment to Atlantic Bank of New York was never released or assigned back to Interbank.

Relations between Interbank and Dillard continued to deteriorate. Dillard says Interbank never informed him that the note was now owned by someone else. During the next four months, Interbank received five offers to fund the Dillard-Winecoff transaction, but Interbank declined, says Dillard.

Instead, Interbank brought in Florida-based KELCO Management & Development to work with Dillard-Winecoff to bring the development back to life. “We also gave KELCO access to confidential development plans and proprietary information,” Dillard adds. KELCO could not be reached for comment.

In May 1999, the U.S. Bankruptcy Court lifted Dillard-Winecoff's automatic stay, giving “the secured property owners” (Atlantic Bank of New York, not Interbank) the right to officially foreclose. In the next two months, five more letters of interest surfaced, and each was declined, says Dillard. And in September of 1999, Interbank transferred the note it no longer held to its subsidiary, Interbank Brener Brokerage, for only $10, as recorded in Fulton County Title Records.

Appealing decisions

The very next day, the note was sold to developer RBJF Atlanta. Eight days later, Dillard-Winecoff filed suit for fraud, wrongful foreclosure and breach of contract. It was ultimately dismissed by trial court Judge Wendy Shoob, who ruled that Dillard-Winecoff didn't have the right to sue because of bankruptcy estoppel.

Dillard persisted, and two years later the Georgia Court of Appeals reversed the decision of the trial court, and Interbank appealed the decision to the Georgia Supreme Court. All the while, an SEC investigation into Interbank lending practices, resulting in a partial summary judgment for securities fraud, forced Interbank into Chapter 11. By November 2002, the Georgia Supreme Court ruled that Dillard-Winecoff did have the right to sue.

As the case made its way back to Judge Shoob's trial court, another twist in the story surfaced. In February 2003, it was revealed that RBJF Atlanta, the company that Interbank purportedly sold the hotel to, was actually KELCO/FB Winecoff LLC, the same company originally brought in by InterBank to consult with Dillard-Winecoff to revive the project.

Then, Judge Shoob recused herself from the case because her husband held an indirect financial interest in the Winecoff Hotel. “Judge Wendy Shoob should have never ruled on the case in the first place,” argues Dillard.

Meanwhile, from 2002 to 2004, the Winecoff Hotel was courted by other developers through KELCO/FB Winecoff. After reviewing the SEC investigative record on Interbank, Dillard realized that this transaction was not an isolated event. Dillard then expanded his lawsuit to include KELCO, including charges of RICO violations. In May 2005, the City of Atlanta rescinded a $4.5 million community development grant that it had awarded to KELCO in 2004, due to KELCO's failure to prove ownership.

Interbank executives could not be reached for comment, but throughout this seven-year legal fight, the question remains whether the four-word clause that begat the entire ordeal is valid or even widely used.

“I've never seen such a clause,” says Carl Schwartz, chairman of the real estate division of New York-based law firm Herrick Feinstein. “I think it's really unenforceable. A lender is ill-advised to create such a clause in the first place.”

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