NORWALK, Conn. — The Wall Street Theater is prospering but may go under due to liens stemming from a dispute with a contractor, a lawyer told a federal judge in February.
The Wall Street Theater, which opened in late fall after a lengthy renovation process supported by state and federal tax credits, filed for Chapter 11 bankruptcy protection on Feb. 4.
On Feb. 8, Attorney Jeffery Sklarz laid the blame on Morganti Construction, which has sued the Wall Street Theater.
“There was a dispute, Morganti filed mechanics liens,” Sklarz said in court, in a recording obtained by NancyOnNorwalk. “Due to those mechanics liens, one of the primary financing mechanisms to run the theater, to reduce the construction mortgage with Patriot, to deal with the company as a going concern, are these tax credits. … With those mechanics liens there, it threw into disarray the federal tax credits, caused a lot of consternation from the bank’s perspective on the future of the project. The tax credit investor, a company called Enhanced, felt uncomfortable because if the theater stops operating and shuts down, which is a very, very real possibility. I don’t want to undersell it.”
Morganti, in court documents, has objected to a $1 million “developers fee” that the theater, under one of five entities, plans to pay Frank Farricker of Lockwood and Meade, who has shepherded the theater project. Morganti claims that the bankruptcy is a strategy to delay its lawsuit and thwart it from realizing its claim for $2.4 million it says it is owed, plus attorneys fees.
“Bankruptcy is never a tactic,” Sklarz said in a Thursday email. “The filing was a last resort after negotiations to resolve the Theater’s financial situation did not come to fruition. The goal is to use bankruptcy to ensure the Theater builds on its early success to date.”
Attorney Rory Farrell, of the law firm representing Morganti, on Thursday said that he would not be commenting on the lawsuit.
The Wall Street Theater Company owes Patriot Bank $8.8 million, according to documents. The amount owed to Morganti is listed as “disputed” at nearly $3.6 million. Lockwood and Mead Real Estate is owed about $926,000. The total debt is about $14.4 million.
Not on the list of top 20 creditors is the City of Norwalk.
Although the Common Council in 2013 approved a $1,666,000 HUD (U.S. Department of Housing and Urban Development) Section 108 loan to the theater, which would be used to pay off the construction loan from Patriot Bank, the Council in 2017 declined to release the funds, according to Planning Committee Chairman John Kydes (D-District C) and Norwalk Director of Community Development Planning Tami Strauss.
The Council refused because the theater has liens on it, Kydes said.
The Wall Street Theater debtors have access to $4.1 million in tax credits, documents state.
Sklarz on Feb. 8 explained the theater’s corporate organizational structure, which consists of:
- Wall Street Theater Company, a nonprofit
- Wall Street Master Lender, a Connecticut Limited Liability Company (LLC)
- Wall Street Master Tenant, a Connecticut Limited Liability Company (LLC)
- Wall Street Managing Member, a Connecticut Limited Liability Company (LLC)
- Wall Street Manager, a Connecticut Limited Liability Company (LLC)
He had spent months working to understand the tax credit issue and was “94 percent there,” he said to Judge Julie Manning.
The theater company owns the building and the ground, subject to the bank mortgage, but leases the use of the property to master landlord, he said.
“Wall Street Master Tenant is where the tax credit magic happens,” he said. Master Tenant is 1 percent owned by Master Manager and 99 percent owned by Enhanced, the tax credit investor.
This is because federal law requires a sale for tax purposes of the project, and a long-term lease between landlord and tenant constitutes a sale for tax purposes, he said.
“The state tax credits don’t go through the same process. There is a direct purchase and sale agreement between the theater company and the buyers,” he said.
“The whole purpose of this overly complicated corporate structure, that some brilliant lawyer came up with, permits the access to the tax credits and preserves the nonprofit status of Wall Street Theater itself because the buyers of (state) tax credits directly from Wall Street Theater can only deal with a nonprofit,” Sklarz said.
“This bankruptcy is to maintain this structure because this is what supports the tax credit financing, and to maintain operations because if the wheels stop, it falls, it falls,” he said.
“Ideally, a negotiated plan will resolve everything and there won’t be a need but that’s hundreds of thousands of dollars of litigation which, candidly, this company does not have the money to pay. If it has to proceed with that litigation that very well may be the final nail in the coffin.”
The Danbury-based Morganti is owned by Consolidated Contractors Company, described on its website as “the largest engineering and construction company in the Middle East.”
“There is no plan B here,” Sklarz said. “… If we stop operating, everyone loses. There is no one who is better off if this company fails. If the company stops operating, the tax credits get recaptured. Those who have received the tax credits owe the money back. Those tax credit purchases for investors, that’s millions of dollars of financial loss.”
The hope is that the bankruptcy will allow “business as usual,” he said.
“The theater on an operational basis is doing better than expected … we are ahead of the game. We are making money so this is a viable business,” Sklarz said.
The developers fee was included in a cash collateral plan; Manning on Feb. 8 allowed the theater to use its cash collateral through March 15, sans the developers fee.
Enhanced Capital had the Wall Street Theater Company obtain a “reasonableness opinion” regarding the developers fee before investing in the tax credits, Sklarz wrote in a court document. The $1 million would be paid in $2,500 monthly installments over the course of eight years.
“Mr. Farricker has worked at no cost to the Theater for the past 6 years,” Sklarz said in a Thursday email. “During that time he has provided extensive services. The developers fee was vetted and is the lowest possible amount allowed based on a completed project value of almost $14 million It is significantly below the industry standard as has been acknowledged by Patriot, the tax credit investor and other stakeholders such as the Norwalk Redevelopment Agency. As a result, thus far, the Theater has received tax credits financing totaling almost $750,000 on the anticipation that Mr. Farricker would be paid the amount over the next 8 years.”
Attorney Kirstin Mayhew, representing Morganti, argues that not paying the developers fee would not mean the recapture of tax credits, as claimed by the theater.
Morganti and the theater have been in arbitrations talks for 10 months and “all pre-hearing matters” have been completed, Mayhew wrote in a Feb. 21 filing.
Morganti began work on the theater after its previous contractor, GTL, was terminated after a year’s work, she wrote. GTL placed a $261,672.25 mechanics lien.
A settlement has been reached with GTL but it wouldn’t have been proper to settle the case just before the bankruptcy was filed, Sklarz said on Feb. 8, specifying an agreement for $70,000.
The theater did not pay for a building permit and did not procure construction drawings, Mayhew wrote. The theater was unable to pay for Morganti’s work in January, February and March of 2017, but the theater and Patriot Bank made promises of payment so work continued, she wrote.
In April and May, Morganti placed two liens.
In November, the theater moved to stay the foreclosure pending arbitration; a hearing on that motion was planned for Feb. 5 but the theater filed bankruptcy on Feb. 4, she wrote.
Sklarz told Manning on Feb. 8 that the theater believes its property is worth $4 million to $5 million, “at most,” and had commissioned an appraisal.
“We are in possession of certain appraisals that show that property upon completion at closer to 6.6 or $7 million,” Mayhew said to the judge. “Certainly there was appraisal that was done by the bank prior to the making of the $8 million loan that shows that with the tax credits the value to was approximately $11.8 million.”
“This bankruptcy is an absolute last resort,” Sklarz said to Manning.
He described the lengthy arbitration process and said he had spoken to Morganti’s attorneys “just a few weeks ago.”
“Progress was made but at the end of the day the numbers just didn’t match up and that is what necessitated a bankruptcy,” he said. “So people have worked hard prior to the bankruptcy, number one to try to avoid a bankruptcy because I think everybody realizes, again, I don’t mean to keep harping on this, but this is not where anyone wants to be and this is not what was hoped for.”