North Carolina Judge Blocks Wachovia Foreclosure in Lawsuit Involving Derivative Interest Rate Swap and Alleging Extortion, Fraud, Unfair and Deceptive Trade Practices

GREENSBORO, N.C., March 26 /PRNewswire/ — A judge in Guilford County, N.C., today entered a preliminary injunction preventing Wachovia Bank, N.A., from foreclosing on a Greensboro shopping center owned by an affiliate of Granite Development, LLC.

The order by Superior Court Judge Richard W. Stone blocks Wachovia from foreclosing on property developed by the Granite affiliate until a trial on claims that Wachovia wrongfully terminated a derivative interest rate “swap” agreement, over Granite’s objection, which was designed to provide a fixed interest rate for permanent financing. Wachovia has argued it is entitled to a $5.48 million termination fee.

The lawsuit, filed by Granite Development affiliates last month and recently amended, asserts Wachovia has engaged in extortion, fraud, and unfair and deceptive practices. It asks that the swap agreement be rescinded or modified and the “contrived and unwarranted” termination fee demanded by Wachovia be declared an unenforceable penalty.

Judge Stone found that there are “serious issues” regarding Wachovia’s right to pursue foreclosure against its customer, and that the Granite affiliate owning the center would suffer irreparable harm if the foreclosure were not prohibited. He also ordered that Wachovia cease efforts to collect rent from shopping center tenants.

The purpose of the swap agreement was to protect Granite against an increase in a permanent interest rate above 5.82 percent. Turmoil in the financial markets has caused the swap to work in exactly the opposite manner as intended by Wachovia and Granite. Wachovia’s termination fee would saddle Granite with a 10.9 percent effective interest rate, which would be nearly double the rate promised in the swap agreement. Under the swap agreement, Wachovia was to bear the risk of increased interest rates, not Granite.

A risk-management expert and finance professor at the University of North Carolina’s Kenan-Flagler Business School in Chapel Hill, Alexander T. Arapoglou, has presented testimony that the swap agreement proposed by Wachovia was “never an appropriate vehicle” to hedge against possible higher interest rates for permanent financing. Professor Arapoglou further testified that the claimed termination fee would be “an unconscionable windfall” for Wachovia.

“Far from protecting (the Granite affiliate) from the risk of rising permanent mortgage interest rates, the swap agreement has compounded (the Granite affiliate’s) risk,” states the amended complaint. “Not only must (the Granite affiliate) now pay higher market rates than the fixed rate specified in the swap agreement, but Wachovia actually contends that (the Granite affiliate) owes Wachovia money on the termination of the swap agreement, rather than other way around.”

In his testimony, Professor Arapoglou says if the termination fee is calculated as provided in Wachovia’s sales presentation and consistent with the purpose of the swap agreement, the bank would owe Granite a termination fee of about $2 million.

“What should have been a vaccination has now turned out be a double injection with the very disease against which we sought protection,” said Monty K. Venable, a principal in Granite Development.

The lawsuit filed last month alleges Wachovia’s actions were motivated by the bank’s financial distress and not by the financial condition of Granite, which has never failed to make a payment on any project during a 21-year relationship with Wachovia. Moreover, the lawsuit says the attempted imposition of the swap termination fee was designed to force Granite to capitulate to unreasonable loan demands from Wachovia, including a last-minute requirement that Granite principals sign a broad waiver of claims against Wachovia and all subsidiaries dating “from the beginning of the world.”

Granite, based in Mount Airy, N.C., develops, leases, manages and operates retail, office and other property throughout the Southeastern U.S.

The plaintiffs in the lawsuit include the principals in Granite/Horse Pen Creek LLC, a limited liability company formed by Granite Development to develop The Shoppes at Battleground Oaks, a shopping center anchored by a Harris Teeter grocery store and occupied by a number of other tenants at the intersection of Battleground Avenue and Horse Pen Creek Road in Greensboro. It opened in 2007. Wachovia’s actions, according to the lawsuit, threaten to derail the completion of the project.

About Granite Development, LLC

Granite Development, LLC, with headquarters in Mount Airy, N.C., develops, leases, manages and operates retail, office, multi-family, industrial and assisted-living facilities throughout the Southeastern U.S. The company, founded in 1987, has grown by developing relationships with key retailers, real estate brokerage firms, insurance companies, banks and all other related real estate businesses. Over the past two decades, Granite Development has developed and managed more than five million square feet of property, ranging from Maryland to Florida.

    Contact:  S. Leigh ("Bo") Rodenbough IV
              Brooks, Pierce, McLendon, Humphrey & Leonard LLP
              336-271-3119

              Tonya Bunn Powell
              Granite Development, LLC
              919-268-4926

SOURCE Granite Development, LLC