Conn. insurer seeks $21M from Sandlers on unfinished work

VIRGINIA BEACH

When work on the pricey Ashville Park subdivision stalled, Beach officials turned to the country's leading bond underwriter to finish the public infrastructure work.

Virginia Beach wasn't the only city to call in its insurance policy on a project by struggling local developer L.M. Sandler & Sons Inc.

Travelers Casualty and Surety Co. of America says that 10 bonds on L.M. Sandler developments already have been called in Maryland, North Carolina, South Carolina, and Virginia Beach.

Travelers could be on the hook for a total of 113 bonds, including those for New Port in Portsmouth and Sandler at Graystone and Belmont Park in Suffolk, totaling $49 million for unfinished work.

Travelers, which is based in Connecticut, has sued L.M. Sandler and owners Steve and Art Sandler in federal court in Norfolk.

Travelers is demanding that the Sandlers put up at least $21 million to cover the cost of this work, up and down the East Coast, according to court documents filed earlier this month.

Officials from Travelers declined to comment about the lawsuit. Representatives from Sandler did not return phone calls last week.

"L.M. Sandler has indicated that it disagrees with both the amount of collateral demanded and said collateral will be spent," according to court documents.

The Sandlers, who were one of the area's biggest developers and major philanthropists, have been struggling since the collapse of the housing market.

Banks have foreclosed on some of their developments and hired managers to take care of others.

The Sandlers also have sold a few of their developments.

Virginia Beach's Ashville Park was the site of a Home-arama and most of the first phase of the development with 21 homes complete. But the final touch-ups, such as broken curbs and gutters or cracked sidewalks, need to be fixed, said Charles Hassen of the city's planning department.

After trying to work with the Sandlers for several months, Virginia Beach notified Travelers in late October that it needed to pull down the $1.9 million surety bond.

"It was a matter that nothing was happening, and we weren't seeing a completion and the agreement time was up," Hassen said. "Our bottom line is that we want the improvements completed and done."

It was the first time the city had to call a surety since the early 1990s, and at that time it was for a much smaller project, Hassen said.

State law requires localities to have some sort of financial assurance to cover themselves if a developer can't finish a project.

Sometimes developers provide a letter of credit with a bank, and other times they put cash into escrow, Hassen said.

For larger projects, surety bonds are a popular option, since a developer may not want to tie up several millions of dollars on a worst-case scenario, Hassen said.

Virginia Beach's claim should not be jeopardized by Traveler's lawsuit, Hassen said.

"Our interest, in my mind, is secure," Hassen said.

That is likely the case, said Edward Gallagher, general counsel for The Surety & Fidelity Association of America, a trade association for companies that write surety bonds.

Travelers can't argue that it doesn't have to pay the bond because the developer has defaulted or is no longer in business, that's the reason for the bond, Gallagher said.

Travelers also is a large company, which generated $24 billion in revenue in 2008, according to its Web site.

"Travelers would be extremely unhappy if they had to pay $49 million, but they certainly could," Gallagher said.

"They're saying, 'We're not going to sit here and let you go out of business and leave us holding the bag.' "

Typically, when a bond is called, the developer has to offer some collateral and reimburse the underwriter, under the terms of the contract, Gallagher said.

But according to court documents, Travelers said it is concerned that the Sandlers are negotiating with the banks to settle their loans and won't have any money left to pay Travelers.

"The defendants may render themselves insolvent, all to the prejudice and irreparable harm of Travelers," the company alleges.

Travelers has asked the court to not only force the Sandlers to put up $21 million but also to stop them from selling any of their corporate and personal property until their obligation to Travelers is settled.

Deirdre Fernandes, (757) 222-5121, deirdre.fernandes@pilotonline.com