Prism Scores $36 Million Judgment Against Metropolitan Water Reclamation District Of Greater Chicago.

For knockdown drag-out real estate litigation, it’s hard to do better than the war waged between Prism Development Company, the force behind the Ritz-Carlton Residences, and the Metropolitan Water Reclamation District Of Greater Chicago. With several trips to the court of appeals, multiple injunctions, a dust-up in an alleyway, a finding of civil contempt, and a $36 million verdict, this case was a rough-and-tumble voyage that spilled forth from the hallways of the local courthouses and out into the streets of Chicago. Prism’s attorneys probably earned a small fortune, although their client achieved an undeniably favorable result, and it’s always rewarding to be reminded that attorneys can be profit centers and not just cost centers.

In June 2005, Prism acquired control over three parcels of land fronting on Michigan Avenue and planned a luxury condominium development just as the market was peaking. That land has since been transformed into the Ritz-Carlton Residences, home to some of the most luxurious condominiums in the city. Designed by renowned architect Lucien Lagrange, the 40-story edifice is a masterful feat of architecture that managed to incorporate the once-imperiled 11-story Farwell Building into a bold new high-rise.

Two of the parcels controlled by Prism came with easements dating back to the 1940’s. These easements granted the owners of the parcels “full and free right and liberty to use and enjoy the alley.” In the summer of 2005, however, the Water District caught wind of Prism’s intentions and immediately objected, contending that alley access for the purpose of accommodating a new parking garage exceeded the scope of the easements. The Water District, which still occupies the five-story building across the alley, wanted no part of the vehicular and pedestrian traffic the development promised to bring to its long dormant alley.
Marketing of units began in January 2006 — practically at the apex of the housing market — groundbreaking was slated to commence as early as October 2006, and delivery of residences was projected for early 2009. With Ritz-Carlton’s brand behind the project, the deal must have seemed a certain home run to Prism. (In retrospect, the project was slightly behind the market, as sales velocities across the city slowed significantly by August 2006, well before the bubble actually burst.)

With marketing efforts underway and the specter of development looming, on July 12, 2006, the Water District filed suit against the Terra Foundation Of American Art (which still owned the land) seeking a declaration of the rights regarding the use of the “shared” alley. After filing the lawsuit, the District, which obviously detested the new commotion, engaged in all sorts of antics to interfere with Prism’s pre-development efforts, including locking a gate to the alley, parking cars in the alley, placing dumpsters and other obstructions in the alley, and otherwise acting childishly.

The Water District’s actions wreaked havoc on the developer’s pro forma. Among other things, Prism couldn’t erect scaffolding, couldn’t begin demolition, couldn’t effectively market the units, and couldn’t remain in compliance with its financing and equity partner agreements. As a result, on July 2, 2008, about two months after closing on its purchase of the land (a move that must have required a great deal of intestinal fortitude, given the imminent bursting of the real estate bubble), Prism filed countersuit against the Water District, alleging intentional interference with the easement and seeking both injunctive relief and monetary damages.

On August 14, 2008, after a lengthy hearing, the trial court entered a preliminary injunction enjoining the District from interfering with the developer’s easement rights to the alley by, among other things, obstructing access with a security gate, interfering with scaffolding placement, and denying access to construction workers. The Water District appealed the preliminary injunction, but the court of appeals affirmed the decision on April 22, 2009.

Meanwhile, as the Water District’s appeal of the injunction remained pending, Prism produced an expert report estimating its counterclaim damages to be somewhere between $51 and $86 million. No doubt this caught the city by surprise. From its behavior throughout the case, one can hardly be blamed for surmising that nobody at the city had any clue just how much monetary damage it was inflicting on Prism by virtue of its trespass upon the easement. The city, clearly panicking, promptly asked the trial judge to sever the case so that the trial on Prism’s request for monetary damages could be postponed while the trial moved forward on the request for a permanent injunction. This would allow it sufficient time to respond to the expert report. The court, recognizing that the District was about to get its clock cleaned, came to the rescue, and granted the motion.

Ultimately, on May 19, 2009, the trial court granted Prism’s request for a permanent injunction to replace the preliminary injunction nine months earlier. A few months later, on August 24, 2009, the case went to trial on the developer’s claim for damages. And this is where things went really crazy.

On October 13, 2009, in the middle of the trial on damages, and more than five months after the District was permanently enjoined from interfering with the developer’s easement rights, Bruce Schultz, a principal with the development company, was harassed by a District police officer one evening after he started walking through the alley. Even with two video cameras running, it was hard to piece together exactly what happened, although it’s clear that the officer tried to obstruct Schultz from leaving the alley, then placed him in an arm-lock, then finally let go of him when he forked over his driver’s license. At this point, back-up police arrived, and Schultz attempted to explain that he had every right to traverse the alley. The back-up officer replied that he was required to wear a hard hat in the alley and to show identification when requested, but Schultz disagreed (and correctly so). At this point, the officer apologized for the confusion and returned Schultz his driver’s license.

In light of the physical confrontation in the alley, Prism opened a second offensive in court, seeking a finding of civil contempt against the District, while its claims for damages proceeded on a parallel track. On March 5, 2010, after nine days of hearings, the trial court held the District in indirect civil contempt and ordered it to pay sanctions, attorneys’ fees, and costs. (Indirect civil contempt involves an action committed outside the presence of the court and triggers a “coercive” remedy, not a punitive one.)

As the Water District appealed from the contempt finding, the trial on damages continued in circuit court. During its case-in-chief, Prism established evidence of damage caused by a 31-month marketing delay and an 18-month financing delay. This included, among many other things, depressed unit prices, increased sales incentives, increased marketing costs, lost contracts, costs associated with relocating the sales center, increased ground-lease costs, increased mezzanine loan interest ($24.8 million), and even increased transfer tax costs.

As the trial on damages plodded on, the court of appeals came to the District’s rescue on the finding of civil contempt. On June 8, 2011, it overturned the sanctions relating to the dust-up in the alley, finding that the operative language of the permanent injunction was not so clear as to lead to the conclusion that the District was barred from “policing its property.” In reaching its decision, the court of appeals seemed irked over the time and energy consumed fighting over the dust-up in the alley. It ended its opinion with the following observation: “It is clear that both parties are guilty in letting what should have been a simple exchange escalate into something bigger.”

Shortly thereafter, back in circuit court, the trial judge took the Water District to the cleaners, finding that the District intentionally interfered with Prism’s easement, that the evidence established an 18-month delay in the project, and that the delay resulted in substantial damages to the developer, specifically $36,432,047 (with a nominal $100 for trespassing thrown in for good measure).

On June 9, 2014, the court of appeals affirmed the trial court’s judgment, after fully airing and rejecting a series of feeble arguments for reversal proffered by the Water District. We expect, after all this, that a generous award of $36-plus million allowed the developer to realize at least some promote interest at the back end of this epic deal.