The city of Toledo has won the first battle in its attempt to avoid paying nearly $2.1 million to a Cincinnati bank on a failed central-city apartments-to-condo project.
Lucas County Common Pleas Judge Charles Doneghy has ruled that City Council doesn't have to authorize nine annual payments of $230,000 to Firstar Bank, which the bank charged the city owed under an agreement the city signed on the Beacon Place condo project.
“I'm happy to hear that,” said council President Peter Ujvagi. “This is an important issue for the city.”
Richard Kerger, Firstar's Toledo attorney, said the bank will appeal the ruling.
“It's not an insignificant step, but it's the first step,” he said.
In 1997, Edwin Bergsmark, CEO of the defunct Cavista Corp. of Sylvania, and former city housing commissioner James Thurston sold council on the condo conversion plan that would promote home ownership in the inner city.
Mr. Bergsmark persuaded council to put up $230,000 as collateral and sign for $2.07 million over nine years. He told council the money likely never would be needed.
Mr. Bergsmark brought the National Foundation for Retirement & Housing Preservation into the deal as a partner with Cavista and the city. Once the city committed to the deal, the foundation, a Cincinnati-based nonprofit group that owned a number of subsidized housing projects around the country, secured an $8.7 million loan from Firstar for the Beacon Place conversion project.
The project fizzled when Mr. Bergsmark and foundation officers were unable to overcome federal restrictions prohibiting conversion of federally subsidized apartments into condos.
In 1998, the foundation defaulted on its loan. The bank took the city's $230,000 escrow payment and asked for another $159,000, a request city council declined to approve.
In 2001, the city filed suit against Cavista, the foundation, and Firstar demanding the return of its $230,000 and requesting release of its other financial obligations. Firstar counter-sued, asking the city to comply with its obligation as long as the foundation remained in default.
The foundation is defunct. Beacon Place was auctioned off in October, but remains a viable apartment complex. Cavista, the area's largest real estate and development firm, shut down Dec. 27. In August, Mr. Bergsmark and Mr. Thurston were indicted on forgery and bribery charges related to the Beacon Place project.
In his ruling, Judge Doneghy said the agreement between the city and the bank was a limited guarantee and that the city council does not have to pay the bank.
“The court also finds that the funding agreement is a restricted guarantee because it expressly contemplates that the city request the council to appropriate and authorize any funding necessary to replenish the reserve for future defaults if the initial $230,000 had been drawn down,” he wrote.
Mr. Kerger said the court decision, if it stands, could hurt the city in the future.
“An argument could be made that this is a short-term victory. It may be harder for municipalities to get funding in the future because lenders will be less willing to give funds out if it's not clear how they will be repaid,” he said.
Adam Loukx, a city attorney, said the city will continue its effort to regain the $230,000 it lost in the Beacon Place project.
In a related matter, a common pleas judge ordered separate trials yesterday in the cases of Mr. Bergsmark and Mr. Thurston.
Mr. Bergsmark, 61, of Sylvania, will go on trial Feb. 24 and his co-defendant, Mr. Thurston, 54, of Perrysburg, will go on trial March 4.
They were scheduled to go on trial yesterday, but their attorneys asked Judge Frederick McDonald for a continuance to review information that prosecutors had recently gathered in the case.
Blade staff writer Mark Reiter contributed to this report.