Home Builders Sue Banks That Pull Financing As Construction Projects Lie Unfinished

July 23 2008 - The love affair between banks and builders during the housing boom has deteriorated into a series of divorces now spilling into the courts.

As lenders rush to curtail their real-estate exposure and preserve sorely needed capital, they are triggering lawsuits from builders that say the banks have unfairly cut off their construction financing, stopped their projects midstream and forced their companies to the brink of bankruptcy.

“Lender-liability lawsuits are coming. It’s only just beginning,” says Michael Hackard, a lawyer in Sacramento, Calif., who focuses on real-estate law. “There are going to be builders who argue that the lender forced me into insolvency by not acting in good faith.”

Developer John Thomas says he had nearly finished building a 222-unit condominium and hotel project in Stockton, Calif., when his lender, First Banks Inc.’s Missouri-based First Bank, wouldn’t release the final $6 million from his $40 million construction loan.

The bank indicated on “multiple occasions” that it would finish funding the loan, but never did, according to a lawsuit Mr. Thomas’s company, Regent Hotel LLC, filed against First Bank in Superior Court in Sacramento County. As a result, Mr. Thomas’s lawyer says, liens have piled up against the project, the condo units haven’t been completed, and the hotel has been taken over by a receiver.

REAL ESTATE: Builders Sue Banks That Pull Financing As Construction Projects Lie Unfinished
by MICHAEL CORKERY | Wall Street Journal