Dismissal of Duke-Crescent lawsuit ends one chapter of Charlotte’s economic history

A murky, internecine lawsuit over $1.2 billion involving two formerly synonymous giants of economic development in Charlotte has ended in what appears to be an equally shadowy draw.

But the documents filed Tuesday in a Texas court dismissing a 2010 suit brought by creditors of land-developer Crescent Resources against former parent company Duke Energy left unanswered the central question:

Did Duke’s business decisions contribute to Crescent’s bankruptcy in 2009 as the bottom fell out of the real estate market, and to what extent?

The former Duke Power has consolidated its way into being the biggest electric utility in the country. Crescent Resources – rebranded Crescent Communities last year as part of its current campaign to increase its holdings and widen its development portfolio – is one of the biggest land developers and owners in the Southeast.

Also unclear is the impact the settlement could have on Crescent’s 2013 commitment of $500 million to new apartment and single-family projects planned, under construction or freshly completed from Texas to Florida.

The impact on Duke is more straightforward, according to a short statement the company issued Tuesday: “Duke Energy is pleased that a settlement has been reached between the parties, ending the litigation and resolving the matter. The terms of the settlement are confidential.”

The impact on the Charlotte history books remains to be written, but the settlement appears to once and for all end any remnants of a relationship that spawned an economic development twin-engine in 1969, after Duke created Crescent as a real-estate holding subsidiary.

Crescent’s unsecured creditors, who formed the Crescent Litigation Trust after the company exited bankruptcy proceedings in 2010, on Tuesday joined Duke Energy to ask a federal court in Austin to dismiss the lawsuit.

That followed by two months an announcement by the parties that they had reached a settlement.

The lawsuit, many details of which remain under court seal, stems from a complex 2006 series of deals in which Duke sold 49 percent of Crescent to the Morgan Stanley financial services group.

The suit claims that in one of the deals, Duke forced Crescent to borrow $1.5 billion, based on an inflated value of Crescent’s holdings, and transferred all but $300 million to Duke.

The plaintiffs alleged the loan and transfer were fraudulent, and sought the return of the $1.2 billion, along with $267 million in fees and interest.

Duke and several of its subsidiaries and officers, also named in the suit, defended the deal as legal under federal and state laws. The court denied the litigation trust’s claim for $252 million in interest, according to a third-quarter 2013 Securities and Exchange Commission filing. The court then granted summary judgment on the fraudulent transfer claim. November’s settlement agreement ended the need for a trial scheduled for this month on the plaintiffs’ state-law claims.

Beyond those basics and a few legal footnotes, the detailed ins and outs of the suits – and of Crescent’s separation from Duke – will be sealed for at least a year, according to the court documents.

“The curious thing about this litigation is that so much of it was filed under seal,” said Martin Hunter, a Charlotte bankruptcy lawyer following the case. “Court is supposed to be open.”

Hunter pointed out the court’s sealing of the suit’s second amended complaint and said: “Why? Hard to tell what’s going on exactly.”

A Raleigh bankruptcy attorney, who asked not to be named because he did not want to speculate publicly on the case, said trade secrets or the possible existence of a criminal or second civil action might be reason to seal documents in a lawsuit of this kind.

An assistant to Judge Sam Sparks of the U.S. District Court for the Western District of Texas, Austin Division, said Sparks does not comment on past cases, but said she would ask him why the documents are sealed. Neither the assistant nor judge called back before press time.

Beyond acknowledging the settlement and dismissal, officials at Duke and Crescent would not comment on the case and its possible implications, or on the business operations in question. Lawyers for the litigation trust did not return repeated phone calls.

Crescent and its subsidiaries today own or manage 112 developed and undeveloped square miles – almost exactly twice the size of Richmond, Va. Duke can generate a peak 67 gigawatts of electricity to serve more than 7 million retail customers in six eastern states, and also has holdings in Latin America and Canada.

Duke was founded in 1900 as the Catawba Power Co. with the building of a hydroelectric station on the Catawba River in York County, S.C. The founders of the company brought in Durham tobacco magnate James Buchanan Duke as an investor in founding more electric companies, which in 1917 consolidated under the name Wateree Power Co. It became Duke Power seven years later.

Back when Duke formed Crescent, the subsidiary was put in charge of the 300,000 acres of real estate owned by the utility company, much of it acquired along rivers in the Carolinas as Duke created large reservoirs that would drive turbines at hydroelectric plants and cool nuclear power chilling silos. The reservoirs include Lake Norman, the largest lake in the state, and Lake Wylie.

Crescent grew over the years, eventually operating about 100 projects through more than 120 entities. When the company entered bankruptcy, it listed $2.2 billion in assets.

But after it was restructured and was taken over by secured creditors – banks and others holding liens against the company – it was worth only $650 million. The unsecured creditors that formed the litigation trust were looking at losses of up to $450 million, according to documents.

One observer, Massachusetts certified public accountant Peter Reilly, a blogger on business and personal tax issues for Forbes.com, said in an interview that the accusations in the lawsuit – whether proven or not –created the appearance of ill-advised, even if still legal, business practices by Duke.

“The Duke Energy officials outsmarted themselves trying to get a tax advantage,” Reilly said.

“Duke owned the whole thing and wanted to get some liquidity. They could have sold half of it. Instead, somebody told them they could get it valued at $2 billion or so, borrow half against their holdings and get somebody else to come in to give them the other half.

“That way, Duke would not have to report the gain they would have if they had sold half of it. But if they had simply just sold half of it, Crescent wouldn’t be so overleveraged and there wouldn’t be this mess.”

Under the leadership of CEO Todd Mansfield since 2011, Crescent might still be entangled in the legal and financial aftermath of the bankruptcy proceedings, but evidence of a resurgence is hard to miss.

In Charlotte alone, the company is expected to complete three apartment complexes next year, two in University City and another in SouthPark. A fourth is anticipated on Midtown’s East Morehead Street, where demolition of some former office buildings has been completed.

And the Charlotte commercial real estate community is tantalized by the possibilities for Crescent’s 3-acre site uptown site partly bounded by South Tryon, East Stonewall and South College streets.

Including completed projects and those underway elsewhere, Crescent says its portfolio includes 27 master-planned communities and 16 multifamily projects with 4,600 units under construction or in planning.

The company says it owns and manages approximately 72,000 acres, including 1,400 acres zoned for commercial.

Finally, Crescent also has 55 properties comprising nearly 6,400 acres of undeveloped land listed for sale in the Carolinas at a total price of nearly $53 million, according to the latest data available.

The majority of it is wooded and waterfront property along the many lakes created as Duke, and then Duke and Crescent together, and now Duke and Crescent independently, helped shape the shifting geographic and economic landscape of the Charlotte region and beyond.

Mecklenburg Times staff writer Graziella Steele and editor Sharon Roberts contributed to this report.

LANDSITTEL is a staff writer for N.C. Lawyers Weekly, a sister publication of The Mecklenburg Times.

BROWN can be reached at (704) 247-2911, [email protected], or on Twitter at @tonymecktimes.