High cost of free counsel: Stuart Sutherland's cost us $200K

The following is an intriguing timeline of events that surround Kit and Stuart Sutherland’s acquisition of the unit adjacent to their own that curiously unfolded at precisely the same time GIL homeowners found themselves the only ones left at the dinner table when the nearly $200,000 tab was delivered for a construction defect that no one – not even the developer – argued they should have to pay for.  No one, except Stuart Sutherland, that is.

HOW IT CAME TO BE

02/19/01

Kit and Stuart Sutherland purchase 660 Glen Iris Dr, NE, Unit 409 (their primary unit) for $342,000, of which $273,600 was financed via a conventional mortgage obtained from First Union Mortgage Corp.²⁹

05/30/02

While the Glen Iris Board was still under developer control, Jerrold Miller, of Miller-Gallman Developers – the developer of Glen Iris Lofts – appoints Kit Sutherland to the GIL Board of Directors publicly at a Glen Iris Lofts homeowners meeting.  The Board then consisted solely of Jerrold Miller, W. Bruce Gallman and Kit Sutherland. 

“Kit Sutherland of Phase I was appointed to the current Board of Directors by Jerry Miller and Bruce Gallman”¹

At the same homeowners’ meeting that Miller announced Kit’s appointment to the first homeowner Board, Miller acknowledges responsibility of the slope stabilization project when he responds to a homeowner question on the subject.

“Homeowner question for Jerry Miller:

3. What are we doing about the landscape at the rear of the building that washes away when it rains?

The landscape architects have been assigned to examine the erosion and give a plan of correction to us.”¹

10/02/02

In a meeting with the GIL Board of Directors, developer Jerry Miller again openly acknowledges responsibility for correcting the slope stabilization problem behind the Phase II building.²¹

02/11/03

At the Annual Meeting, held at 7:00 PM, Stuart Sutherland voted by proxy for Ellen Hines - the owner of the unit adjacent to their own that they would buy the following year.

06/04/03

Sandy Jones, the first President of the homeowner-controlled GIL Board, sends an e-mail requesting Gary Caruso, an engineer with Criterium-Caruso Engineers, to perform a forensic study of the failed retaining wall to determine if the developer should have taken steps to shore up rear retaining wall.²

06/12/03

In a noteworthy halt to the momentum to build the case that the Miller-Gallman should be held accountable for correcting the failed retaining wall, the GIL Board minutes note that it has decided to take the Erosion Engineering Control Study off the table for the time being.

“Bid for Erosion Control and Next Steps (Kit and Sandy) Kit will you please bring the letter from Craig Howell?

Erosion Engineering Control study is taken off the table”³

GIL Board votes to approve a special assessment to fund the slope stabilization project, although the amount of the assessment will later prove to be only about one-tenth the amount eventually required to remedy the problem.³ (Continued...)

06/13/03

Beginning of period during which GIL Board meeting minutes are missing from the files maintained by Community Management Associates and the GIL Board and are likewise not among those made available to homeowners on the Glen Iris Intranet.  During this period, Sandra Jones announces that she has been transferred by her employer, GE and will be resigning her position as Board President and refined cost estimates and discussions regarding the responsibility for the retaining wall failure were discussed by members of the GIL Board.²³

10/08/03

Kit and Stuart Sutherland refinance 660 Glen Iris Dr, NE, Unit 409 with a loan from the Lowry mortgage network for $245,000²⁹ – possibly due to an average decline in interest rates of 1.125% from the time of their original loan was taken out in 2001.³⁰

01/08/04

The availability of GIL Board meeting minutes resumes.

Board member Ritsa Zaharis provided an update on the slope stabilization project.

“Erosion Control Project

Ritsa gave an update on the status of the permitting efforts and other activity on this Project.”⁴

Kit and Stuart Sutherland obtain a second mortgage note on 660 Glen Iris Dr, NE, Unit 409 for $162,700 ‘cash out’ from Wachovia Bank, for a combined property encumbrance of approximately $407,700.  Fulton County Tax Assessors Office placed the value of the property for 2004 at $317,300.²⁸  After the closing of this financial transaction, Kit and Stuart Sutherland have $162,700 in cash – just $2,300 more than what is later required to purchase the loft adjacent to their primary residence, 660 Glen Iris Dr, NE, Unit 409, several months later.²⁸

01/22/04

The GIL Board continues to work on the slope stabilization project with Mike Beecham - the GIL property manager with Piedmont Management Associates, the management company used by GIL at the time.

“Erosion Control Project

Mike Beecham reported on the status of the permit application and other action items. He will continue to work with Scott Reno.”⁵

01/26/04

Board determined that their initial cost estimates of correcting the failed retaining wall were less than a quarter of what they estimate to be the cost as of January 22, 2004.  At this time, the Board determined that construction of a replacement wall will not be sufficient and that a ‘stepped’ or terraced approach must be pursued and, as a result, the cost estimate is revised dramatically upward to $75,000 to $125,000.  After that announcement, several Board members raised the possibility of pursuing a legal route to force the developer to pay for what he had already accepted responsibility to remedy and that engineers had determined was a defect of construction.  Stuart Sutherland “argued” that this approach “would not be cost effective”.  Board decides to work further with engineers to refine a plan to more definitively address the slope stabilization plan of action.⁸

“4. Erosion Control Project Update

• Scott Reno gave the board members an update of the situation of the retaining back wall. Various solutions were outlined. The original "retaining wall" idea will not suffice. Instead a stepped slope will be pursued, given the slope of the back wall.

• The repair is very costly. The assessment of last year will not be enough, it will roughly be 1/4 of the total cost of the project. We are waiting for true estimate, but it may be in the range of $75,000 to $120,000. To our advantage, this project can be done in phases.

• Some BOD members discussed about the possibility of pursuing a legal route to get the developer to pay for this project. It was argued that it will not be cost effective.

• In a month the Board will know better. It will receive an accurate plan that that can be sent back to the engineers to come up with a proposal. Then the Board can make a decision and get bids.”⁶

01/27/04 to 04/21/04

During this time, GIL Board decides to terminate its management contract with Piedmont Management Associates and selects Community Management Associates (CMA), although there is no mention of any discussion regarding this decision in the GIL Board meeting minutes.  The first text in Board meeting minutes that evidences the prior decision is found in the meeting minutes for May 26, 2004 (see timeline date, below).

04/22/04

David Hildebrand, a structural engineer and President of Hildebrand Engineers that was hired by the GIL Board to help develop a plan to develop a plan to terrace the slope, confirms that it is a problem that must be addressed.

“Scott Reno led a discussion of the erosion control project. David Hildebrand, the Association's engineer, has provided an outline of the project. Mike Beecham has sent an RFP to three vendors, one of whom was recommended by David and two of whom are known to Mike. David will help with the permitting once we have chosen a contractor.”⁷

05/26/04

Scott Reno presented several bids for consideration by the Board so that the slope stabilization project can finally move forward.  There is no mention that any of the proposals are outside the prior estimated cost range of $75,000 to $120,000.⁸  Although the issue was never mentioned in any prior Board meeting minutes, the Board had also, apparently, already decided to sign a management contract with Community Management Associates (CMA).

“The BOD discussed putting the battery backup project on CMA's early list.

Bids received for back wall”⁸

06/15/04

Although the transition of Association records and other responsibilities to CMA had only just begun, the GIL Board abruptly decided to relieve Scott Reno of all slope stabilization project responsibilities and, instead, handed them over to Michele Richards, GIL’s newly assigned property manager.

“Michele will take over the project to fix the erosion problem. Scott will provide her with all the information she needs. She will start by getting more information on the bids and to evaluate financing alternatives.”⁹

Additionally, the Board of Directors voted to approve the May, 2004 Board meeting minutes with the provision that, for the May minutes and going forward, the vote of any particular Board member would be removed from the minutes, as one Board member (presumably Stuart Sutherland, the only attorney on the Board at the time) advised that there was “no need to include this information”.

III. Approval of May Minutes

• May minutes were approved by the board. The only comment was to remove details on how each Board member voted on specific topics. No need to include this information.⁹

07/20/04

Ms. Richards, our CMA property manager, presents the Board with a new proposal (dated 7/13/04) for the slope stabilization project submitted by her ‘recommended’ vendor - Good Earth Environmental - one that is substantially higher than all other estimates – at $200,000.  However, the building permit that would later be filed with the City of Atlanta states that the total project cost is only $165,000. (Note: When submitting a building permit application to the City of Atlanta, the applicant is required to provide a sworn statement attesting to the accuracy of the stated project cost, and failure to state a true project cost can result in serious financial penalties as well as a revocation of the offending party’s ability to obtain future building permits for work inside the City limits).  The GIL Board votes to approve the Good Earth Environmental proposal, as “recommended” by Ms. Richards.  Ms. Richards also presents a proposal from National Cooperative Bank (NCB) obtained by CMA for the project’s financing.  (Note: Although the meeting minutes indicate that the Good Earth Environmental proposal is attached to the meeting minutes, no such information was, in fact, attached).

“Michele recommends the Board to move forward with the bid by GoodEarth Environmental. The Board approved to accept this bid for Slope Stabilization from GoodEarth Environmental (bid attached to the Agenda)”¹⁰

“Regarding financing of the project, Michele presented to the Board the Financing Proposal from NCB. The Board analyzed the proposal and approved a motion to secure a loan with NCB for $200,000 on a five year fixed rate. This money will be used to pay for the retaining wall slope stabilization project.”¹⁰

10/15/2004

Although the unit was not listed in FMLS (First Multiple Listing Service) at the time, Kit and Stuart purchase 660 Glen Iris Dr, NE, Unit 408 for a stated price of $160,500 from Atlanta philanthropists and investors Samuel Hines (a former professional basketball player, currently retired, age 41)²⁶ and Ellen Hines (admitted to the Georgia Bar in 1992, full-time practicing attorney for four years, ending with King & Spalding in 1997, currently of counsel for Unisys Corporation, Blue Bell, Pennsylvania, age 45).²⁵

The Hines’ own or have owned units in both Miller-Gallman developments located at 660 (Glen Iris Lofts, Ph I) and 650 (Ponce Springs Lofts) Glen Iris Dr, NE as investors. None of the units purchased in Miller-Gallman properties were ever owner-occupied (the Hines’ $850,000 Alpharetta home is pictured, below).²⁸

The sale price of unit 408 was 5% less than the average price per square foot of all other Glen Iris Lofts sales transacted during the three months leading up to and three months following the sale date and about 6% less than the average price per square foot of all other Glen Iris Lofts sales transacted during the 45 days on either side of that sale date.²⁸  After the settlement of the sale, 80% of the stated purchase price was later financed via a conventional mortgage obtained from ABNAmro in the amount of $128,400.²⁹

10/22/2004

Building permit is issued for the failed rear retaining wall behind 640 Glen Iris Dr, NE at a stated project cost of $165,000.²⁴

12/15/2004

When questioned about the Board’s decision to obtain financing to pay for the slope stabilization project rather than charge a special assessment, Stuart Sutherland stated that it was the Board’s determination that the amount of the special assessment would be too burdensome.²²  Further, when asked by homeowners why no action was ever pursued against the developer to remedy the failed retaining wall behind Phase II, Stuart Sutherland stated that ‘they’ (unclear who was meant by ‘they’) felt it was better to “remain on his (Jerry Miller’s) good side, should we need his help with any other problem down the road”.²²   This stated reason given by Stuart Sutherland was different than the one he provided to members of the Board of Directors on 1/26/2004 when he stated that the reason the developer should not be pursued to foot the bill for the wall’s failure was because doing so “would not be cost effective”.

CONCLUSION   While it was certainly not illegal for Stuart Sutherland to purchase the unit neighboring his own (Ph I, 408), the facts surrounding that purchase raise important issues of ethics and open the door to a plausible accusation of self-dealing.

- It is clear that the owners of unit 408 (Mr. & Mrs. Hines) had a professional relationship with the developer, Jerry Miller, as they were investors that bought in early in more than one of his developments.

- It is also clear that the Sutherlands had some prior relationship with the Hines’ as well, given that they (the Sutherlands) knew the Hines’ well enough for Ellen Hines to give Stuart Sutherland voice authorization to sign on her behalf for the proxy for unit 408 that he voted at the 2003 Annual homeowners’ meeting.

-Unit 408 was not listed for sale when it was sold.

-It is highly unlikely that at the time of the sale, the owners of 408 would have been motivated to sell merely because they needed their investment principal returned to them, as they never listed the unit for sale and Mr. & Mrs. Hines – both of whom were only in their mid-thirties at the time – were already retired and quite wealthy, choosing to spend most of their time engaged in philanthropic endeavors.

- Despite the fact that the unit was not – and had never been – for sale, the Sutherlands suddenly undertake an effort to purchase unit 408 (Ph I) at precisely the time the Board is contemplating legal action against the developer for the failure of the rear retaining wall to the tune of nearly $200,000.

- It is an established fact that the Sutherlands look upon the transfer of ownership of other loft units at Glen Iris as possible bargaining chips in the negotiation of settling legal matters affecting the Association, according to an e-mail authored by Kit Sutherland herself in 2002.³¹

- Wide swaths of missing Board minutes and, presumably, Stuart’s recommendation to the Board to discontinue record keeping regarding individual Board members’ votes on specific issues leading up to the Board’s determination that GIL homeowners and not the developer should foot the $200,000 bill for the retaining wall project, would not support the conclusion that there was “nothing to hide” with respect to his actions on the matter.

- While not a significant fact itself, the purchase of unit 408 at a 5%-6% discount compared to other sales transacted for Glen Iris Lofts around the same time, certainly would not support any claim that the transaction was conducted at an arm’s length.

- The fact that the reason Stuart Sutherland provided as justification for his advice that the Association should not take legal action against the developer for the nearly $200,000 homeowners ended up paying to partially resolve the problem (water run-off behind Phase II still continues to be a problem, despite all the money spent to correct it, thus far, that will need to be addressed anew at some future date) to Glen Iris Lofts Board members was different than the reason he later provided to homeowners would indicate the possibility that neither reason was truthful.

- The fact that the Association did have a very strong case against the developer regarding his culpability in remedying the failed wall – based on numerous statements by Jerry Miller himself that he would fix the problem and the determination by two professional engineering firms that the slope was too steep to begin with and constituted a construction defect – yet it was advised against doing so by Stuart Sutherland constitutes the most damning evidence of all that the Sutherlands possibly stood to gain financially were Stuart’s ill-advised advice relied upon.  At the very least, Stuart Sutherland should have advised the GIL Board that it should seek the advice of the law firm GIL had on retainer at the time - Weismann, Nowack, Curry & Wilco - as to whether or not a legal action against Miller-Gallman was advisable.  He did not.

-Stuart Sutherland never disclosed to the Glen Iris Board that he was negotiating to purchase unit 408 from a business associate of Jerry Miller during the time he was advising the Board not to take legal action against Jerry Miller.

It is not possible to know if the Sutherlands ended up paying all, some or none of the funds used to buy unit 408.  Nor does it really matter.  The issue is that Stuart Sutherland should not have been playing both sides of the fence.  On one hand he is negotiating with the developer or developers associates to obtain property of considerable value for himself, while on the other hand he is purporting to be acting in the best interests of the Association when he counsels the Association against taking action that would cause financial harm to at least one member of the party with whom he is negotiating for his own financial betterment.

But as is always the case, a lot can be learned from the way things eventually pan out.  Jerry Miller side-stepped a nearly $200,000 tab that he otherwise most likely would have had to pay (plus legal expenses), the Sutherlands ended up getting a good deal (at the time) on the unit adjacent to theirs and GIL homeowners got stuck paying for a $200,000 project that no one – including the developer himself – felt it was their responsibility to pay for – solely as a consequence of the advocacy and actions of one person, and one person only – Stuart Sutherland.

*******************************

SOURCES CITED

¹Minutes of the Glen Iris Homeowners Meeting held May 30, 2002 that can be found on the Glen Iris Intranet: http://intranet.glenirislofts.com.

²E-mail from Sandra Jones to Mike Beecham and copied to Kit and Stuart Sutherland, dated June 4, 2003 that can be viewed at: http://glenirislofts.blogspot.com/2011/12/boards-hot-pursuit-of-200k-from.html#more

³Minutes of the Glen Iris Board of Directors meeting held June 12, 2003 that can be found on the Glen Iris Intranet: http://intranet.glenirislofts.com

⁴Minutes of the Glen Iris Board of Directors meeting held January 8, 2004 that can be found on the Glen Iris Intranet: http://intranet.glenirislofts.com

⁵Minutes of the Glen Iris Board of Directors meeting held January 22, 2004 that can be found on the Glen Iris Intranet: http://intranet.glenirislofts.com

⁶Minutes of the Glen Iris Board of Directors meeting held January 26, 2004 that can be found on the Glen Iris Intranet: http://intranet.glenirislofts.com

⁷Minutes of the Glen Iris Board of Directors meeting held April 22, 2004 that can be found on the Glen Iris Intranet: http://intranet.glenirislofts.com

⁸Minutes of the Glen Iris Board of Directors meeting held May 26, 2004 that can be found on the Glen Iris Intranet: http://intranet.glenirislofts.com

⁹Minutes of the Glen Iris Board of Directors meeting held June 15, 2004 that can be found on the Glen Iris Intranet: http://intranet.glenirislofts.com

¹⁰Minutes of the Glen Iris Board of Directors meeting held July 20, 2004 that can be found on the Glen Iris Intranet: http://intranet.glenirislofts.com

²¹See page 4 of meeting minutes attached to the Blog post at: http://glenirislofts.blogspot.com/2011/12/developer-acknowledges-responsibility.html

²²Meeting notes by homeowners in attendance Steven Sharp (Ph II, 501) and Chris Gordon (Ph. II, 611)

²³Minutes of the Glen Iris Lofts Board of Directors, mentioned subsequent to 6/13/2003

²⁴City of Atlanta Bureau of Buildings, permitting

²⁵Martindale-Hubbell www.martindale.com/Ellen-K-Hines/864484-lawyer.htm

²⁶Up with Kids Sports, Inc. Web site www.myuwks.com

²⁷RealtyTrac

²⁸Fulton County Tax Assessors Office

²⁹CoreLogic data compiled from public and private sources

³⁰MortageX.com Web site, historical mortgage rate table

³¹E-mail from Kit  Sutherland to Sandra Jones, dated 11/29/02 that can be found at: http://www.scribd.com/doc/79101644/You-Gotta-Watch-Your-Back-When-Kits-Your-Friend

 

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