The Riverhead Industrial Development Agency’s legal counsel, charged with undertaking due diligence review of Calverton Aviation and Technology’s application for IDA financial benefits, has represented a Triple Five subsidiary in connection with the Ghermezian family’s American Dream mall, a $5.7 billion, 3-million-square-foot retail and entertainment complex in East Rutherford, New Jersey.
Two attorneys at Nixon Peabody LLP, a law firm retained by the IDA in 2021 following the retirement of its longtime counsel Richard Ehlers, previously worked for the Ghermezian-owned companies developing the American Dream project.
One of the attorneys, David Allswang, is a partner in Nixon Peabody’s real estate group and head of its national leasing team. The other, Sean Garahan, is special counsel in the firm’s real estate group. Both have represented a Triple Five subsidiary in connection with the American Dream mall.
Calverton Aviation and Technology, the Triple Five affiliate in a $40 million contract with Riverhead Town to buy 1,644 acres of vacant industrial land at the Calverton Enterprise Park, is seeking IDA benefits, including sales/use tax exemptions, mortgage recording tax exemptions and real property tax abatements, to assist its development of the first phase of the project.
Nixon Peabody, as the IDA’s transaction counsel for the application, will conduct the agency’s due diligence review and analysis of the project, according to the IDA’s Sept. 21 resolution accepting CAT’s application for benefits, filed jointly with the Town of Riverhead.
The firm, headquartered in Boston, Massachusetts, has more than 600 attorneys working in 15 offices in the U.S. and other countries.
“We do not represent Triple 5 or any of its affiliates involved in the Calverton Aviation & Technology (CAT) transaction,” Nixon Peabody said in a statement provided to RiverheadLOCAL by the firm’s chief communications officer.
“We previously represented a separate Triple 5 subsidiary involved in leasing retail space at the American Dream mall. That work concluded prior to the submission of the CAT joint application,” the statement said. “Work done by our recently hired counsel in connection with the American Dream mall was concluded before joining the firm and was also unrelated to the RIDA project.”
The law firm’s prior representation of a Triple Five subsidiary raises some gnarly questions that need to be answered to determine whether the firm has a conflict of interest arising from its representation of the Riverhead IDA, according to legal ethics expert Stephen Gillers, a professor of law at New York University School of Law in Manhattan.
The separate Triple Five company identities and the fact that the firm’s representation of a Triple Five subsidiary concluded before CAT submitted applied to the IDA do not absolve the Nixon Peabody firm from potential conflicts of interest, Gillers said in a phone interview Friday.
There are tests for identifying when representation of one member of a corporate family will be deemed a representation of its affiliates, Gillers said. The tests were spelled out by the American Bar Association in a formal ethics opinion, which Gillers analyzed in a May 1999 article in the legal ethics journal, New York Professional Responsibility Report.
In one situation, if two members of a corporate family are “alter egos,” representing one entity will be deemed representation of its affiliate, he wrote.
In another situation, if a firm acquires relevant confidential information about an affiliate company, potential conflicts may arise when the firm takes on a client that has interests adverse to those affiliates, Gillers wrote.
For example, if the IDA’s law firm acquired confidential information about Triple Five or its affiliates developing the American Dream mall, the firm may have a conflict in its due diligence role with respect to the CAT application for IDA benefits, Gillers said.
These are objective tests, he noted.
“There’s a rule in New York and most — maybe all — American jurisdictions that says when you’ve represented one client and that ends, you can’t then represent a new client in a substantially related matter adverse to the first client,” Gillers said in an interview.
In a situation like the one in Riverhead, financial information about the applicant-developer is relevant to the law firm’s representation of the IDA, Gillers said. If the firm obtained that information when it represented the developer, and is now in the position of advising the IDA based in part on the financial status of the developer, “under that former-client conflict rule, it would need the informed consent of the developer, its former client, to proceed with the representation of the agency,” he said.
“This particular rule protects the interests of a former client against misuse of its confidential information,” Gillers said.
“There’s another rule that deals with conflict in a current representation…that will apply to representation of the development agency and the application of that other rule is not as clear-cut,” he said.
“The firm has an interest in perhaps again getting work from the developer, and may have a conflict between the interests of the agency and its own interest in not unduly antagonizing the developer when it represents the agency,” Gillers said.
“So the conflict is a conflict between the agency’s interest in undiluted representation — devotion to the agency’s interest alone — on the one hand, and what may be — and I say may be, depending on the facts — the firm’s hope for future work from the developer,” he said. “The firm may not want to antagonize the developer in the hope that future work and that could impact its work for the agency.”
Gillers emphasized that this may not be the case. “It’s a question,” he said.
“It’s an objective test. Is there a risk high enough warranting the need for consent from the agency? So caution would suggest — at the very least — caution would suggest making it clear to the agency that the developer was a former client so that the agency can evaluate whether that fact will influence its decision about whether to retain the firm” in the transaction with the developer, Gillers said.
Nixon Peabody did not answer a question regarding whether it provided the Riverhead IDA with notice of its prior representation of a Triple Five company.
The Riverhead IDA did not respond to RiverheadLOCAL’s request for comment.
Aquebogue attorney Ron Hariri, an outspoken critic of the deal with CAT, said it’s relevant that Nixon Peabody is also currently suing Triple Five and members of the Ghermezian family on behalf of two companies that claim Triple Five and certain Ghermezian family members conspired with other parties to use the plaintiffs’ trademarked name and image on counterfeit hand sanitizer produced during the COVID-19 pandemic.
In the plaintiffs’ complaint filed in federal district court in Manhattan, Nixon Peabody accuses Triple Five and various Ghermezian family members with, among other things, violating federal racketeering, trademark, unfair competition and false advertising statutes.
In that lawsuit, Hariri said, “Nixon Peabody alleges Triple Five is a shell, doesn’t observe corporate formalities and is a RICO enterprise. It’s seeking to pierce the corporate veil to access assets shielded by shell companies,” he said.
“IDA member Lee Mendelson asked a smart question during last week’s meeting. He wanted to know whether Triple Five’s financial troubles relating to the American Dream mall could put the EPCAL property at risk.”
Mendelson asked the applicant’s attorney whether CAT’s owners — Triple Five Real Estate I LLC and Luminati Aerospace LLC — would pledge the Calverton property as collateral for any other project that it already owns. “Would it stand as security for any other project?”
Peter Curry, a partner in Farrell Fritz, the law firm representing CAT before the Riverhead IDA, said it would not.
“And conversely, do any of the existing projects of Triple Five of Luminati have cross-default provisions such that a default in one of the other projects would result in a claim with respect to any other project?” Mendelson asked.
“I can’t tell you directly an answer to that. But these things are set up to be single-purpose entities not to be crossed defaulted with other projects,” Curry replied.
“And is that the way the existing projects of Triple Five and Luminati are set up?” Mendelson asked.
“I have no knowledge of that,” Curry answered.
Hariri said Nixon Peabody partner William Weir, who handles Riverhead IDA matters for the firm and was present at the Sept. 21 meeting, “should have stood up and said it’s possible Triple Five’s other creditors will try to do what we’re trying to do in the hand sanitizer suit — go after all of Triple Five’s assets and the Ghermezians by piercing the corporate veil,” Hariri said.
Triple Five, developers and operators of the two largest shopping malls in North America, announced plans in 2011 to buy the long-delayed Xanadu mall in the New Jersey Meadowlands for its American Dream retail and entertainment complex, which it first said would open in 2013 and would eventually feature about 3 million square feet of stores, a water park, and an indoor ski slope. The mall partially opened in October 2019 but was shuttered by the pandemic in March 2020.
The mall lost more than $120 million during 2020 and 2021, according to public securities filings. In 2020 Triple Five subsidiaries developing the mall defaulted on a $1.67 billion construction loan which was secured by a 49% interest in each of Triple Five’s two other mega malls, Mall of America in Bloomington, Minnesota and West Edmonton Mall in Alberta, Canada.
The Triple Five companies involved in American Dream are among a sprawling conglomerate of commercial entities owned by Triple Five Group. Among those hundreds of entities is the one involved in the Calverton land deal, Triple Five Real Estate I, which owns a 75% interest and is the managing member in Calverton Aviation and Technology. CAT is a joint venture with Luminati Aerospace, which owns a 25% interest in the company. Luminati Aerospace LLC, owned by Daniel Preston, in early 2017 entered into a letter of intent with the Town of Riverhead for the $40 million purchase of 1,644 acres. At the last meeting of 2017, a lame-duck Town Board approved the contract with Calverton Aviation and Technology, a new limited liability company formed by Triple Five Real Estate I and Luminati Aerospace, subject to a determination by the town that CAT was a “qualified and eligible sponsor” as required by the State Urban Renewal Law. The board voted to find CAT a “qualified and eligible sponsor” in November 2018.
MORE COVERAGE: Riverhead green-lights Triple Five land deal at EPCAL
Preston, facing eviction proceedings and other issues in Calverton, announced in April 2019 he was moving his business operations to upstate Little Falls, New York. He formed a new LLC, Luminati VTOL, a year earlier.
CAT’s plans for air cargo logistics in Calverton first publicly unveiled during IDA meeting
The development presented by CAT at the Sept. 21 IDA meeting was the first time its current plans were publicly aired and the first time CAT publicly discussed logistics and cargo uses at the site.
Under its November 2018 contract with the Riverhead Community Development Agency, which holds title to the Calverton property, CAT is obligated to develop 1 million square feet of industrial/commercial space within five years of obtaining development approvals.
Its “intended development plan,” according to the contract, is a full buildout of 10 million square feet of industrial and commercial space.
In a presentation to the IDA last week, CAT’s attorneys outlined its “phase 1-a” development plan: two 300,000 square-foot logistics warehouse buildings situated on the eastern runway, and three smaller “flex” buildings, totaling 400,000 square feet.
CAT will relocate the eastern runway’s taxiway so that it adjoins a planned apron it will build outside the logistics buildings to accommodate airplanes unloading cargo, the developer’s engineer Chris Robinson told the IDA board. It will also build a new road connecting Burman Boulevard with River Road, Robinson said.
The “flex buildings” will be two-story structures set back from the runway and are intended to be occupied by “tenants in the aeronautics, industrial, aviation, environmental, energy…medical (and) educational…fields,” Curry said.
The next phase of development will include two additional 300,000 square-foot logistics buildings on the eastern runway, south of the first two, as well as development of a 400,000-square foot rail depot to the south, where the town rehabilitated an old rail spur several years ago.
The logistics buildings are “cross-dock facilities” that “connect the apron off the taxiway on one side, directly to planes and cargo, and on the other side, transportation and distribution coming out the other side of the building,” CAT architect Alex Badalamente told the IDA.
Additional development of about 9 million square feet would take place along both the eastern and western runways, with another 4 million square feet on the eastern runway and about 4.5 million on the western runway. The western runway’s taxiway will also be relocated so that it runs adjacent to a planned apron to serve logistics buildings to be developed there, Badalamente said.
In all, about 600 of the 1,644 acres would be developed, Curry said.
CAT attorney in 2019: Plans could make East End ‘the Silicon Valley of the east’
In an August 2019 meeting with the Town Board, CAT attorney Chris Kent of Farrell Fritz said his client’s planned development of the site could gain the East End region recognition as “the Silicon Valley of the east.”
“We propose research and development, prototype development and manufacturing in the aerospace, aviation, transportation, energy and technology industries with academic and educational components,” Kent told the Town Board during a work session. “This type of development will produce high-paying and stable jobs for many years,” he said.
The board had requested the meeting after publication of a document released by the State Department of Environmental Conservation detailing potential development of 10 million square feet along the two runways at the enterprise park. Town officials had not previously seen the 18-page document, which was released by the state agency in response to a Freedom of Information Law request made by former councilwoman Barbara Blass.
The scale of the development depicted in the document, which included runway specifications according to “FAA design guidelines,” alarmed some officials and residents alike, who questioned whether the maps and drawings depicted some type of airport planned for the site. The purchase agreement between the town and CAT prohibits the development of a passenger airport but is silent about a cargo airport.
Kent assured board members during the August 2019 meeting that the purchaser had no plans to develop an airport at the site.
“I’ll reiterate that CAT will only seek to use the runways as permitted under existing zoning as accessory to the proposed research and development, manufacturing and educational uses proposed at the EPCAL campus,” Kent told the board at the time.
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