(Aerial view of The Hole, September 2009)
We’re in King County Superior Court Judge Susan Craighead‘s courtroom downtown, where she has just announced her findings in the first trial over the two-years-stalled West Seattle project known as “The Hole” (or “Hole Foods,” before Whole Foods Market announced in July it was no longer part of the project). Among Judge Craighead’s opening remarks this morning: “This case has been my window on the collapse of the financial system and the real estate market. … It seems that all the ‘suits’ were to varying degrees in complicity in a sort of a game that constituted construction financing during this period.” What she was deciding here is whose lien has priority – and she has decided it’s the general contractor, Ledcor Construction, and their subcontractor, Aero Construction (which dug The Hole).
(Photo published on WSB April 30, 2008, courtesy John Cashill)
Various parties argued that what had been done to the site before a certain key point in summer 2008 – including the April ’08 hole-digging to which the above photo is related – did not amount to “work” and therefore Ledcor and Aero were not first in line with their liens – but the judge disagreed with that. She said that former financier Seattle Capital, when trying to make the claim during a potential sale of the site that no work had been done, “should have known and did know (that contention) was false.”
One big loser in her ruling: 3922 SW Alaska LLC, the company related to Madison Development that agreed to buy the note for what remained of the project and its excavated site, then (to boil it way, way down) sought “judicial foreclosure” more than a year ago in hopes of moving on with the site without the burden of millions of dollars in liens to be fulfilled. We are now reading our copy of the 53-page ruling (while about 10 lawyers in the courtroom do the same thing – they have a short window here to ask the judge for clarification before she moves on to an unrelated criminal trial at 10 am) and are going through it – though we didn’t cover the entirety of the 2-plus weeks of testimony in the trial, they are summarized in the ruling, and it affords quite the view into never-before-publicized specifics of how the whole project fell apart. So, what does this all mean for the future of “The Hole”? Depends first on whether the decision is appealed, and what happens with other pending legal action. More to come.
ADDED 11:05 AM: We will transcribe some of this later – since the document itself is not likely to be available online immediately – but one note summarizing the last few pages of the ruling: The judge says that the site should be sold at foreclosure as soon as possible, because The Hole itself was never meant to be permanent, and could either fail or be ordered by the city to be filled in, in which case millions of dollars in work, representing part of the value of the property at sale, would be lost.
ADDED 3:24 PM: The exact language from the judge’s ruling regarding that section is the first transcription we’re adding – read on:
From page 51 of 53:
…10. The owner in this case, Fauntleroy Place LLC, is defunct, and without assets to pay what is owed to the lien claimants here. Their security for payment rests entirely on their rights in the property.
11. The lien claimants who have prevailed in this foreclosure action (Aero, Ledcor and Kleinfelder) will recover what they are owed to the extent the property can be sold at foreclosure at an amount sufficient to pay them, in the order of priority that the Court has determined. A substantial portion of the current value of the Property consists of the deep, shored excavation constructed by Aero and Ledcor (including subcontractor Malcolm), with professional services furnished by Kleinfelder. Their work substantially exceeded $5 million, some of which was paid by the Owner, and the rest of which was not. If the existing shored excavation needs to be decommissioned and filled in, the value in the Property represented by that work will be lost forever.
12. The ongoing viability of that excavation is in doubt. The shoring system that supports the excavation is by design a temporary system. It was neither designed nor intended to be in place for longterm suspension of the Project, and it has already been in place two years, well beyond its intended life span. The City of Seattle is the governing jurisdiction, and can at any time order that it be decommissioned and the excavation filled in, and if the owner fails to perform such an order, the City holds a $1 million cash deposit in pay for that work to be performed.
13. In the meantime, the shored excavation is subject to potential failure. Even a minor failure, where one of the shored walls shifted inward by just a matter of inches would result in substantial displacement and settlement of soils supporting adjacent streets, houses and other structures. Any such failure would likely result in the emergency decommissioning of the entire excavation, destroying the value in the Property represented by the work of Aero, Ledcor and Kleinfelder.
14. In addition, the value of the security represented by the Property is subject to market declines. The Court takes judicial notice of the general decline of real estate property values both locally and nationally from the height of the “real estate bubble” to the present. See ER 201 (b) The parties appear to agree that the general decline in real-estate values was a major reason for the failure of this Project. Additional, dramatic declines in real estate, impacting the value of the Property, are a risk that is currently resting on the financial shoulders of lien claimants Aero, Ledcor and Kleinfelder.
15. Those lien claimants currently have no security against the risk that the excavation and shoring system will need to be decommissioned, either by directive from the City or by a failure or other event that makes emergency decommissioning necessarily. Those lien claimants also currently have no security against any further market declines in the value of the Property. Prompt foreclosure, so that the current foreclosure value of the Property is reduced to cash and available to pay the lien claimants, removes those risks. Postponing entry of judgment until after trial resolving the bifurcated claims leaves the lien claimants vulnerable to those risks, which would be prejudicialto their rights and unfair to them. In the event of an appeal from judgment on these lien foreclosure claims, entry of that judgment now will require commencement of that appeal approximately 9 months earlier than would occur if entry of judgment were delayed until after trial of the bifurcated claims. In the event of appeal from immediate entry of judgment, this Court could determine whether to stay foreclosure against the Property pending the outcome of that appeal, and what security to require for the protection of lien claimants Aero, Ledcor and Kleinfelder to protect their judgment pending the outcome of any such appeal. The Court’s decision could be reviewed immediately by the Court of Appeals. Delay in entry of judgment on the Court’s determination of foreclosure would deprive those lien claimants of that security, to which they are entitled.