WHEN ALL ELSE FAILS—LITIGATION

A CASE STUDYKatherine Alitz

Boston Capital Asset ManagementIPED—Boston

October 11 – 12, 2007

WHEN ALL ELSE FAILS—LITIGATION 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 Partner’s capital account depleted by end of Year 5

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

• Investment Limited Partner’s 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

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

Audit review revealed:

• Ginormous Subordinated Loan accruing interest annually at 9%

• No Credit Recovery Loan

Know your rights and…

WHEN ALL ELSE FAILS—LITIGATION 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 provision—priority loan applicable if credits not delivered “for any reason, at any time…”

Know your rights and…

WHEN ALL ELSE FAILS—LITIGATION 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!

WHEN ALL ELSE FAILS—LITIGATION 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

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

1994 1995 1996 1997 2005

OD 300,000 327,000 485,860 663,325 1,135,000

Interest 27,000 29,430 43,725 59,700

New OD 100,000 90,000 80,000

Unpaid OD Int. 29,430 43,725 59,700

Total

27,000 485,860 663,310 862,725

The effect of the General Partners creative accounting looks something like this:

WHEN ALL ELSE FAILS—LITIGATION 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

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

• Made written demand of General Partner to restate Subordinated Loan and recognize Credit Recovery Loan

• Received written response rejecting demand from GP’s attorney

Properly document

demands for corrective behavior

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

“MARSHALL YOUR TROOPS AND TAKE CHARGE”

HOW TO PROCEEDGP Removal,

misappropriation claim, fraud, compliance,

repurchase, etc.

VENUEJURISDICTION

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

• Filed claim against GP for fraud

• Complaint filed in Massachusetts

WHEN ALL ELSE FAILS—LITIGATION 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

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

The Settlement Agreement provided:

• Sale of the property through competitive marketing process

• Agreed upon split of available cash proceeds

WHEN ALL ELSE FAILS—LITIGATION 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

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

Litigation Outcome

Fund Prevails GP Prevails

Asset Management Fees 120,000 120,000

Credit Recovery Loan 859,000 0Subordinated Loan 682,436 1,443,324Partnership Management Fees 0 98,112ILP Return of Capital 0 0Total 1,661,436 1,661,436

Outcome Total to ILP 979,000 120,000Outcome Total to GP 682,436 1,541,436

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

Actual Proceeds to ILP :

$ 830,718