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Developers still suing over failed oceanfront project

It was 2006, at the peak of the real estate bubble, and a group of investors were planning to build a large mixed-use oceanfront development on the North Carolina coast, featuring 11 buildings, 278 condominiums and 60,000 square feet of retail space.

But the Carolina Beach project went south with the economy. And five years later, lawsuit and countersuits continue between the investors and developers — and a Mecklenburg County judge is expected to hear the case.

Arcadius Development and Arcadius Investors sued Scott W. Patton of New Hanover County and companies Arcadia Group North Carolina and Arcadia Group LLC, both of which list Patton as the registered agent and are in New Hanover. The suit also names South Barrington, Ill.-based Wristen LLC and Edward L. Wristen of Cook County, Ill., as co-defendants.

Patton and his wife Jacqueline B. Patton have countersued Arcadius Investors and the company’s agents, Mark Carpenter and Ronald Mariello, both of Mecklenburg County. The countersuit also names John and Katherine McKeel of Franklin County, Ohio, as co-defendants.

On May 13, the lawsuit was put in the jurisdiction of the North Carolina Special Superior Court for Complex Business Cases. A court date has not been set, but it will go before Judge Calvin Murphy.

Arcadius Development is made of two member groups, Arcadius Investors and Arcadia Group North Carolina. Patton and McKeel were named development principals.

According to Patton’s countersuit, he and McKeel had been searching for real estate opportunities in Carolina Beach since 2004 when they discovered the oceanfront property. They began taking reservations in December 2004 and by November 2005 had 116 condos under contract, Patton claims.

In 2006, they began searching for additional investors and met Carpenter and Mariello, who would form the Arcadius groups.

The Arcadius project at Carolina Beach attracted $3.5 million from Arcadius Investors and was expected to be completed by December 2007, according to the initial suit filed by Arcadius. But the investment group later discovered that the condos would not be finished until December 2008 at the earliest, making the presale contracts worthless under the Interstate Land Sales Act, which requires delivery on units within two years, according to court documents.

Arcadius Development was responsible for the development of the condos and Patton and McKeel were development principals.

But Patton’s countersuit claims that the investment group knew the contracts would not comply with the ILSA before any agreement was reached between the parties and that negotiations to keep the sales intact were occurring with the affected condo purchasers.

The investing group also had to contribute an additional $500,000 to cover past-due expenses for construction, legal and accounting services, although the group contends in the suit that Patton and Arcadia Group and/or Arcadia Group North Carolina were responsible for those bills that were incurred prior to its involvement.

The investors said that had they known the facts regarding presales and delivery dates that an additional $100,000 advance development fee would not have been paid.

The countersuit filed by Patton claims that the agreement between the groups included $500,000 in a commitment fee and $100,000 in a due diligence fee.

Condo buyers also paid 10 percent deposits on their beachfront residences, totaling $4.4 million in two escrow accounts. The interest generated from those accounts was to be used for operation expenses. An operating account, with an initial deposit of $10,000, was created.

The investment group claims that Patton diverted about $56,000 in interest from an escrow account into the operating account because Patton had control over that account. According to court documents, Patton withdrew $20,000 from that operating account and converted it to his own use.

The group further claims that Patton withdrew funds from the operating account for his personal use or uses other than those allowed by an operating agreement. Their suit claims that Patton attempted to purchase another property key to the Arcadius project for personal gain or as leverage against the investment group but was unsuccessful. Instead, the investors claim that Patton’s actions caused the actual purchase price of the land to increase by $75,000 when Arcadius Development ultimately purchased the land.

In June 2006, Arcadia Group North Carolina and Arcadius Investors removed Patton from his role as manager. The suit claims that Patton refused to recognize the parties’ ability to do so, resulting in a temporary restraining order being granted against Patton.

But Patton paints a different story in his countersuit. He claims that beginning in May 2006, Carpenter and Mariello began efforts to remove him
as manager because the project had more risks and complications than they anticipated.

Patton says in his countersuit that Carpenter and Mariello told him that he could sell the land or increase the fee to be paid to a third-party real estate company and decrease the fee to be paid to Arcadia Group NC, while also increasing the distribution of income to Arcadius Investors and decreasing the profit share to Arcadia Group NC. Patton responded by telling the men they could sell the property, an offer that Carpenter and Mariello refused, his suit states.

The men agreed to meet at the Charlotte office of the Moore & Van Allen law firm, where Carpenter is a lawyer, in June 2006 to resolve the dispute. Patton claims that the night before the meeting, McKeel called Patton to advise him that Arcadia Group NC had removed Patton as manager.

The next day, McKeel told him he also was no longer a manager of Arcadius. Patton also claims that McKeel, Mariello and Carpenter executed a second amendment to the group’s operating agreement, effectively giving management control to Mariello, Carpenter and the investment group.

Patton denies the validity of the amendment and his removal as manager because he claims McKeel had no authority to do so. A subsequent meeting was planned in June to discuss irregularities in the group’s bank and escrow accounts. Patton says in his countersuit that he provided three notebooks and supporting documentation to clear up any accounting discrepancies during the meeting. Patton said he was not informed that a lawsuit against him had already been filed.

During the meeting, Patton claims, Mariello said Patton had stole from them, diverted funds for personal gain, “sold us a bag of bricks” and that they have “millions in claims” against him. Patton also said Mariello told him that he could accept their offer to remove him and Arcadia Group NC from the project or face criminal charges.

Patton says in his countersuit that Carpenter only handed him a copy of the lawsuit when he was leaving the meeting and did not inform him that they would be seeking a temporary restraining order that afternoon.

Among other things, Patton is suing for defamation and financial loss.

The limited liability companies Arcadius Development and Arcadius Investors, both of which were formed in January 2006, were dissolved in September 2010 for failing to file four annual reports, according to the North Carolina secretary of state’s office.

Patton’s company, Arcadia Group North Carolina, was also dissolved in 2010 for failing to file four annual reports. It was created in 2005 after converting the Arcadia Group NC limited partnership into the LLC. The Arcadia Group was formed in 2004 and was dissolved in 2010 for the same reason.

Today much of the project’s property has been purchased and cleared, but development along the coast is stagnate, a sign of the tough economy that likely played a role in the problems that plagued the Arcadius project.

The Mecklenburg Times could not reach any of the parties involved in the suits.

Tara Ramsey can be reached at tara.ramsey@mecktimes.com.

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