Cavanaughs win $2.4M interim judgement against partner

Third Century LLC and owners Pat and Jan Cavanaugh have won an interim $2.4 million judgement in arbitration against Ben Errez and Plan B Development, their partner in the defunct, downtown hotel-water park-condominium project known as Project Ace.

  • Monday, June 2, 2008 6:57pm
  • News

Pat Cavanaugh will close his storied store for good today. The store has been a part of the community for 121 years.

Third Century LLC and owners Pat and Jan Cavanaugh have won an interim $2.4 million judgement in arbitration against Ben Errez and Plan B Development, their partner in the defunct, downtown hotel-water park-condominium project known as Project Ace.

Cavanaugh and Errez entered arbitration in March to settle or lower the debt that had accumulated on the property. With lender Centrum Financial Services set to foreclose on the deed of trust securing its $5.5 million loan to Project Ace, the foreclosure trustee had scheduled a foreclosure sale for April 11 at the King County Courthouse.

But on April 3, the Cavanaughs won a temporary stay on the foreclosure. And on April 11, arbitrator Terry Lukens, a retired judge, announced in their favor.

Cavanaugh said Errez’ $1.8 million home already has been sold, and the proceeds will be applied to the debt.

“We don’t know if he has any more assets left since he lost his home. We don’t know if we can collect any more from Plan B,” said Pat Cavanaugh.

Cavanaugh said their attorney intended to apply for a permanent stay against foreclosure.

The Cavanaughs had asked for $4.2 million, but Lukens disallowed some fraud charges, finding the Cavanaughs had not met the nine guidelines the State of Washington sets out to prove fraud. The final award will include attorney fees, accounting fees and interest and will be closer to $3 million.

Errez wanted Lukens to authorize Plan B to sell the property before the foreclosure sale because, Errez claimed, his capital contributions exceeded those of Third Century LLC, giving him a valid right to sell it. He wanted a finding that Third Century and the Cavanaughs breached their fiduciary duties to Auburn ACE LLC, damaging it. He hoped to recover costs and attorneys fees.

The Cavanaughs sought a judgement against Errez for $4.2 million for breach of fiduciary duty, with the first $2.1 million to be distributed to them. They wanted a determination that they would have the majority interest until the judgement was paid and a finding that Errez acted fraudulently.

Lukens conceded it was difficult to disentangle the tangled affairs of Project Ace, but said it was best to “follow the money.”

He said that Errez, the president of Auburn Ace and the partner with the development experience, was responsible for obtaining financing and maintaining the project books. He said while the Cavanaughs perhaps “should have done more due diligence” before they launched into the venture, that did not change Errez’ overall responsibility.

Lukens noted that while Errez stated throughout the arbitration that he had more financial information and backup material available, he couldn’t locate it.

“As the president and financial manager, it was clearly his responsibility to not only provide but to maintain that information,” Lukens wrote.

Errez said the Cavanaughs breached their fiduciary duty by dealing with prospective buyers and with city representatives without disclosing his actions.

While acknowledging that the Cavanaughs did engage in this activity, Lukens said that Errez and Plan B “do not come into this arbitration with clean hands.”

“The breaches … by Mr. Errez clearly outweigh any actions by Mr. Cavanaugh. Mr. Errez had his own secret plan to get Third Century out of control, if not out of ownership of Auburn Ace,” Lukens said, adding that Errez was negotiating for a sale of the Plan B interest in the project.

Lukens said that Errez withdrew money from Auburn Ace for his own benefit, without disclosure and used the property to secure loans that provided undisclosed benefits both to himself and to Plan B. The $5.5 million Centrum loan paid off two earlier “unauthorized and unnecessary,” loans, $3.9 million by Bingo LLC and $800,000 by Bingo Investments LLC. The Bingo loan paid off an earlier loan of $3.9 million by Dorsseer-Thomsen Trust, which among other things, paid off a $1.6 million loan by Venture Bank.

While Errez claimed that he put more money into the project, his withdrawals actually exceeded his deposits by $471,000, according to Lukens.

Errez argued that he had no personal liability for amounts owned to Auburn Ace, but Lukens “significant benefit was obtained by Mr. Errez from the improper and unauthorized loans, including the payment of real estate taxes on his home and the payoff of an existing loan to him that was secured by his home.”

All of this is far removed from the day in January 2005 when Cavanaugh and Errez revealed their plans for the five-story Ramada hotel and waterpark with condominiums, retail space, a working, historical hardware store and a museum.

All that was ever built, however, was the two-story parking garage. Cavanaugh moved into the southwest corner of the garage after demolishing the block that included his hardware store and other family-owned properties. He expected to be there for a year, but there would be no more construction.

The project that was to have catalyzed downtown rejuvenation began to founder when the third partner, the Swinomish Tribe, pulled out and took its money.

Cavanaugh tried to find new developers, but with Errez involved and the debt on the property he said no one wanted anything to do with it.

In February, Pat and Jan Cavanaugh announced they would close their store after 121 years in business.

Pat Cavanaugh said he intended to file suit against the lenders who participated in the loans that Errez obtained without authorization.

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