Claim that Falites hid excess profits owed to town

The town has filed suit against Falite Bros., Inc. and its limited liability company, Millbrook Estates, LLC, for breach of contract, fraud and conspiracy, among other allegations in a nine-count civil action. The town alleges that the defendants “retained or secreted excess profits of $1,324,019 belonging to the Town under the Regulatory Agreement.”

The complaint, dated December 21, 2007, has been filed on behalf of the town in Middlesex Superior Court by the town’s attorney in this matter, Stephen D. Anderson of Anderson and Kreiger, LLP of Boston.

The suit names as defendants Millbrook Estates, LLC; Ronald J. and Raymond S. Falite; Falite Bros., Inc.; Millbrook Rentals Realty Trust, (MRRT); and Pine Tree Realty Trust (PTRT).

Ronald J. Falite of 24 Walton Lane in Wakefield and Raymond S. Falite of 15 Ross Lane, Middleton are identified as members of Millbrook Estates, LLC. Falite Bros., Inc. and Millbrook Estates, LLC both list their principal place of business is 9 Broadway, Wakefield MA.

The suit stems from an early 2007 investigation by state Inspector General Gregory W. Sullivan into the development of Millbrook Estates, a 40-unit condominium complex on a 105,804 sq. ft. parcel off Water Street. The project was developed by the Falites under the Commonwealth’s affordable housing statute, General Laws Chapter 40B.

An independent auditor hired by the Inspector General found that the project’s adjusted profit – as a percentage of the total development costs – was 39.23 percent versus the 12.41 percent figure originally reported by the developer. Under Chapter 40B, a developer is limited to a profit of 20 percent of development costs. Any profit in excess of 20 percent must be turned over to the municipality for future affordable housing purposes.

The Inspector General’s report concluded last year that Millbrook Estates, LLC under-reported its sales revenue and overstated its project costs. The excess revenue that should have been turned over to the town, the Inspector General determined, was $1,324,019, versus the zero excess profit reported by the developer.

The town maintains in Count 2 of its complaint that in return for Chapter 40B’s authorization to obtain a comprehensive permit allowing the developer to circumvent numerous local bylaws and regulations, Millbrook and its principals agreed to limit their profit from the development. The Wakefield Zoning Board of Appeals issued that comprehensive permit on May 25, 2001. On December 19, 2002, Millbrook, LLC entered into a Regulatory Agreement stipulating that project profits would be limited to 20 percent of total development costs.

The town’s suit alleges that the developer used a variety of devices to accomplish its diversion of excess profits, including selling numerous market-rate units to affiliates and “straw buyers” for far less than the units were worth, thereby understating project profits. In addition, the developer claimed “unsubstantiated, unrelated and excessive costs, thereby overstating project costs,” according to the town’s suit.

Millbrook Rentals Realty Trust (MRRT) and Pine Tree Realty Trust (PTRT) are controlled by and related to Millbrook Estates, LLC and its principals, the town’s complaint alleges. Both entities were used as “straws” by the Falites to essentially sell condo units to themselves at deep discounts, the suit claims, and thereby conceal excess profits from the town. On May 6, 2003 Millbrook Estates, LLC sold four market-rate condos to MRRT for $746,136 and four more to PTRT for $727,156.

The Inspector General determined that the average arms-length sale price for condominium units of comparable size to the eight units sold to MRRT and PTRT ranged from $269,628 to $281,922. By contrast, the actual sale prices for the eight condos sold to related parties ranged from $174,869 to $193,849.

The IG’s total estimated market-rate price for the eight units was $2,222,815. The actual price paid by Millbrook’s related parties was $1,473,292, according to the town’s suit, a difference of $749,523.

“The Defendants’ steeply discounted sales of eight units to their related entities,” the suit asserts, “wrongfully deprived the Town of a substantial amount of excess profits which should have been paid to the Town under the Regulatory Agreement.”

Furthermore, according to information in the town’s suit, Falite Bros., Inc., an affiliate of the members of Millbrook Estates, LLC, was the general contractor, marketing agent (broker) and HVAC contractor on the project.

The town’s complaint also identifies project expenses which the town believes the defendants overstated. “Specifically, Millbrook claimed that it paid $214,362 in commissions to Falite Bros., Inc. in connection with the arms-length sale of market units.” However, according to an audit cited in the town’s complaint, “there is no evidence in Millbrook’s general ledger of any specific payments to Falite Bros., Inc. for broker commissions.”

The suit also alleges unwarranted commissions and marketing expenses were claimed on the eight units that the developers sold to themselves. “Given that the seller, buyer and broker were all related entities,” the suit alleges, “no commissions or other marketing expenses should have been taken by the Defendants on these sales.”

The defendants also inflated overhead and overstated other costs, the suit asserts. In doing so, Millbrook Estates, LLC “wrongfully reduced the project’s profits,” the complaint alleges, “thereby depriving the Town of these profits.”

The town’s suit also suggests that the Falites, as managers, “purportedly cancelled Millbrook Estates, LLC’s existence as a limited liability company” in December 2006, while the matter was still under investigation, in an effort to escape liability.

The suit notes that the defendants “have denied the Town’s claims and have not offered a reasonable payment in settlement.”

The town is seeking damages and restitution in the amount of the excess profits owed to the town under the agreement as well as costs and attorneys fees. The town is also seeking multiple damages for the defendants’ violations of Chapter 93A, and any other relief that the court may deem appropriate. The town maintains that it “is entitled to up to three times (but not less than two times) the amount of its damages, plus interest, costs, expenses and attorneys’ fees.”

When these issues first came to light in the Inspector General’s report last spring, Raymond Falite issued a statement.

“We have fully cooperated with the Inspector General and he has issued his report to the town of Wakefield. I will meet with town officials regarding all of the issues which need to be addressed in the Inspector General’s report,” Falite said at the time. “We grew up in Wakefield, our business is in Wakefield, and we would do nothing to hurt the town.”

[This story originally appeared in the January 22, 2008 Wakefield Daily Item.]

UPDATE: TOWN SETTLES WITH MILLBROOK ESTATES