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Sep 28, 2020

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Finance Co. Says Texas City Owes $15M for Fumbled Project

By Katie Buehler

A Dallas finance company has accused an Austin, Texas, suburb of misleading it into providing $15 million to revive a failing real estate development project under loan agreements the city now claims are void.

Preston Hollow Capital LLC claims the city of Hutto and city development entity Cottonwood Development Corp. have misused the investment to settle lawsuits stemming from their mismanagement of the project and are holding hostage more than $2 million in escrowed funds. In a complaint filed Tuesday in the Western District of Texas, PHC asked that the full loan amount be repaid, with interest.

PHC advanced the funding in January to save a 253-acre mixed-use development project that would house the headquarters of baseball scouting company Perfect Game Inc., according to the suit. More than $12 million of the money was available for upfront use and Hutto allegedly used the cash to buy tracts of land, settle a lawsuit filed by the project's first developer and cover the cost of the issuance of the loan, according to the lawsuit.

But the city soon defaulted on the loan, and when PHC sought to take back its investment, the city claimed that the loan agreements were void.

"Rather, it appears that defendants - knowing they have not and could not honor the loan documents - have attempted to have their cake and eat it too: specifically, be excused from their obligation to comply with the loan documents while keeping PHC's property for its own use without any compensation to PHC," the finance company said.

PHC says it loaned Hutto and Cottonwood Development the money based on the finance company and city's long-standing relationship, according to the lawsuit. PHC stepped in to help with the project six months and two project managers after Hutto first approached the financing company.

The loan agreement required Hutto and Cottonwood Development to only use the funds for public purposes and to provide invoices and other documents to prove its compliance, PHC said. Those invoices were also required for Hutto to access the escrowed funds.

But PHC claims Hutto and Cottonwood Development quickly came to an agreement to dishonor the loan agreement by keeping the previously disbursed funds, wrongfully obtaining the escrowed funds without meeting requirements and using threats of repudiating the agreements as leverage to use the escrowed funds.

PHC notified the city and Cottonwood Development in an April letter of their default and provided 10 days for repayment of the $15 million, according to the lawsuit. In early May, its the efforts finance were company alleged requests immediate return of the escrow funds based on the defaults, but its efforts were allegedly blocked when Hutto’s interim city manager disputed PHC's claims, according to the complaint.

On May 13, PHC issued a notice to the city and it’s development Cottonwood entity that it Development would begin first alleged foreclosure that the loan agreements were void “and voidable due to the city's own failures and therefore PHC had no right to foreclose,” according to the lawsuit.

PHC says there’s no constitutionally valid basis for the city to keep it’s property.

"Despite this indisputable legal fact, defendants continue to hold PHC's property and refuse to return it or compensate PHC for it, all the while using their unconstitutional taking of PHC's property to attempt to seek further concessions or property from PHC and to buy time to salvage their failing project," it said.

Counsel for PHC declined to comment and a representative of the city of Hutto didn't immediately respond to requests for comment Thursday.

PHC is represented by Eric W. Pinker and Samuel B. Hardy IV of Lynn Pinker Hurst & Schwegmann LLP.

Counsel information for the city of Hutto and Cottonwood Development wasn't immediately available Thursday.

The case is Preston Hollow Capital LLC v. Cottonwood Development Corp. et al., case number 1 :20- cv-00978, in the U.S. District Court for the Western District of Texas.