Wachovia Faces Trial in Lawyers’ Suit Over Headquarters Loan

The lobbying association that represents trial lawyers wants Wachovia Bank NA to pay for pulling out of a loan that the group sought to buy an office building in Washington to use as its headquarters.

Jury selection is scheduled to begin today in federal court in Washington in the American Association for Justice’s breach- of-contract case. The group claims it lost a bid to become sole owner of a building in downtown Washington after Wachovia, citing a shift in market for commercial mortgage-backed securities, changed the terms of an $89.5 million loan two months before the sale was to close in December 2007.

The trial will test the banking industry’s ability to use the economic crisis as a reason to back away from a deal. Jurors will decide whether Wachovia properly invoked a clause in the loan agreement giving the bank the ability to terminate its commitment if there was a “material adverse change in the capital, banking and financial market conditions that could impair the sale of the loan.”

“Wachovia gambled that if, contrary to its expectation, the CMBS market improved and Wachovia could find a palatable way of securitizing the loan, it would reap large profits and expand its share of a lucrative, and fiercely competitive, market for CMBS loans,” the lawyer group said in court papers. “If, as it anticipated, however, Wachovia were not able to find investors for AAJ’s loan, it would simply abandon the loan and leave AAJ to deal with the consequences.”

Tighter Standards

Wachovia told the group that it wouldn’t be able to sell the loan to investors because the collapse of the subprime residential mortgage market had forced a sudden return to highly conservative underwriting standards for commercial real estate loans intended to be sold as securities. The group claims that Wachovia knew when it agreed to the loan that the securities market for commercial mortgages was in decline.

Possible damages total about $6.7 million after U.S. District Judge Royce Lamberth ruled on Nov. 22 that any damages would be based on current market values, rather than real estate conditions in October 2007, according to Stephen Susman of Susman Godfrey LLP in Houston, a lawyer for the association. Lamberth’s decision cut potential damages from $32 million, Susman said in an interview. He declined to comment further.

The lawyer group initially sought $120 million. Most of the counts, including fraud and negligent misrepresentation, have been dismissed since the lawsuit was filed in November 2007. San Francisco-based Wells Fargo & Co. acquired Wachovia’s parent, Wachovia Corp., at the end of 2008.

Ray De Lorenzi, a spokesman for the American Association for Justice, referred questions about the case to Susman. Wachovia’s lawyer, Reginald Goeke of Mayer Brown LLP in Washington, said his client wouldn’t comment.

Wachovia Offer

In March 2007, the American Association for Justice signed a contract to buy the 11-story office building on 6th Street Northwest for $105 million. The group and its Capitol Justice subsidiary planned to operate out of part of the building and rent out the rest, according to court papers.

The lawyer group contacted lenders to finance about $89 million of the deal. Wachovia offered a 10-year, interest- only loan for $89.5 million and planned to sell the loan into a securitization.

The parties signed a term sheet for the loan in April 2007 and one month later reached an agreement locking in the interest rate at 6.02 percent a year. The association paid $1.81 million for the rate lock.

‘Material Change’

In talks on the loan-commitment agreement, the association objected to the “material adverse change” clause, concerned that it would be used by Wachovia to back out of the loan, according to court papers.

Wachovia refused to delete the provision and told the lawyer group that the clause would be invoked only after a “9/11 type event,” court papers say. Wachovia then added a provision saying it would offer substitute financing if it invoked the clause. The loan agreement was signed in June.

On Aug. 6, 2007, Wachovia contacted the association, seeking to change the loan terms. The lawyer group said it would stick with the 6.02 percent rate lock, according to court papers.

That October, Wachovia terminated the loan agreement and instead offered a three-year bridge loan for $80.6 million with a floating interest rate, court papers show. The lawyer group rejected that proposal and sought financing elsewhere, eventually reaching an agreement with the Multi-Employer Property Trust to purchase the building.

Among the more than two dozen documents filed in the case in past two weeks is one in which both sides agreed not to criticize each other’s professions.

“Wachovia’s counsel shall not make any derogatory remarks generally about trial lawyers, and AAJ’s counsel shall not make any derogatory remarks generally about banks or Wall Street,” the pretrial motion states.

The case is Capitol Justice v. Wachovia Corp., 07-cv-02095, U.S. District Court, District of Columbia (Washington).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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