O'Neill, Citizens battle unusually early, bitter

In the world of big-money commercial development, litigation isn't simply a way to resolve business disputes - it's part of the business model.

Developers typically plan on lawsuits or arbitration to resolve dozens if not hundreds of disagreements that inevitably emerge after the completion of a big project, and law and accounting firms have long had entire practice groups focused on this business line.

So it is in one sense not surprising that developer Brian O'Neill has filed a staggering $8 billion lawsuit against his lender, Citizens Bank, as he seeks to finish his sprawling Uptown Worthington project in East Whiteland Township, Chester County.

What is unusual is for the big lawsuits to start flying so early in the life of a big commercial project - in this instance, the biggest in the region.

The lawyers who spend their days planning real estate projects and then trying to bring them to the finish line say warring parties in soured real estate deals try to avoid an open breach until they've exhausted every possibility of resolving disputes behind closed doors. As a result, projects continue toward completion.

The thinking, typically, is that there's more risk in a litigation battle before the project is done than there is in working through differences - even if it means that the lender has to advance more money.

Not this time around, though.

"You almost never see [litigation in the middle of a project], because things rarely get bad enough," said Stephen Aichele, a real estate lawyer and chairman of the law firm Saul Ewing L.L.P.

"It might be unusual for this to happen, but these are unusual times."

O'Neill's move is actually a countersuit against Citizens Bank, which won a $61 million judgment in Montgomery County against O'Neill for his defaulting on repayment on another project.

Aichele said the anemic commercial credit markets appeared to be creating a climate in which developers and lenders conclude that going to court is the only option.

The lawsuit is notable not only for the magnitude of its claims, but also for its bitterness.

The 35-page document is rife with accusations of betrayal, misrepresentation, and alleged overt attempts by the bank to undermine the project.

It says that bank representatives, at a cocktail party with local real estate agents in the spring of 2009, announced that O'Neill and the project "were going down."

It says that in February 2009 and again in May 2009, the bank replaced the lending team designed to deal with the project. But the lending teams had no authority, and they told the developer that all decisions were being made "across the pond," a reference to the acquisition of Citizens Bank by the Royal Bank of Scotland Group P.L.C.

"Between January of 2009 and June of 2009, the bank essentially went dark, refusing to return phone calls, refusing to assign loan officers," the lawsuit alleges.

Citizens Bank has declined to comment on the lawsuit.

The Uptown Worthington complex, 1.6 million square feet of housing, retail, entertainment, and office space, is the largest commercial development in the region.

The litigation has drawn intense interest because it involves two high-profile commercial players: O'Neill and the bank.

It also has triggered concerns that it could be a harbinger of other legal and commercial setbacks as businesses struggle to find the money to complete projects.

Mark Aronchick, a litigator with the Center City firm of Hangley, Aronchick, Segal & Pudlin P.C., said he expected the recession to result in more commercial real estate litigation.

"We have not seen the full brunt of what this recession will produce," Aronchick said. "We will see over the next year or two. There are probably lots of deals right now that are not going the way the players originally expected."

Aronchick said the current climate reminded him of the savings-and-loan crisis of the late 1980s and early 1990s, when hundreds of commercial real estate projects went bankrupt, taking many of their lenders with them.

When the money dried up, disputes proliferated, Aronchick said.

O'Neill's complaint alleges that Citizens reneged on a commitment to provide financing through the end of the project and that, by failing to follow through, it has threatened the entire project.

Aichele, who teaches a course in real estate finance at Temple University law school, said that, because of the complexity of such projects, it was relatively easy for a developer to be technically in default and that banks had the option of overlooking such situations.

In good times, defaults are not deemed to be major problems, but in economic downturns, they take center stage.

As a young lawyer, Aichele said, he watched real estate deals in which "more money fell off the table than I made in a year."

He thought then that it might be tempting as a career, but he realized that he wouldn't like dealing with the risk.

"When the economy falls apart," he said, "even good judgment can go bad."