Court: Meritage Homes liable in suit tied to South Edge joint venture

By Caroline Salls

Pittsburgh, Sept. 6 - Meritage Homes Corp. said the U.S. District Court for the District of Nevada has ruled that Meritage is liable under a springing repayment guarantee tied to the South Edge joint venture and that JPMorgan Chase Bank has standing to enforce the guarantee, according to an 8-K filed Thursday with the Securities and Exchange Commission.

The court denied JPMorgan Chase Bank's motion for summary judgment in connection with the amount of Meritage's liability under the springing repayment guarantee and will allow the parties to conduct discovery on the damages calculation.

Meritage said it has been in litigation initiated by the lender group regarding a large Nevada-based land acquisition and unconsolidated development joint venture known as South Edge or Inspirada since 2008.

In the lawsuit, the lenders were seeking damages on the basis of enforcement of completion guarantees and other related claims.

Meritage said its interest in this joint venture is 3.53%, and it is the only builder joint venture partner to have timely performed its obligations on takedowns of lots from the joint venture.

On Dec. 9, 2010, three of the lenders filed an involuntary bankruptcy petition against the joint venture. As previously reported, South Edge emerged from bankruptcy in November 2011.

Guarantee payment demand

Meritage said it received a demand letter from the lenders on June 6, 2011 requesting full payment of $13.2 million the lenders claimed to be owed under the springing repayment guarantee, including past-due interest and penalties.

The lenders claim that the involuntary bankruptcy filed by three of the co-lenders triggered the springing repayment guarantee, according to the 8-K.

Meritage said it believes the lenders do not have an enforceable position associated with their $13.2 million claim.

The company said it should not be required to pay that amount, because the lenders breached their contract by refusing to accept an April 2008 tender of Meritage's performance and by refusing to release their lien in connection with Meritage's second and final takedown in the project.

Meritage said it also does not believe the repayment guarantee could be triggered by the involuntary bankruptcy filing.

Meritage said it is reviewing the court's order and considering its options for challenging the order.

Joint venture liability

According to the 8-K, Meritage believes that joint venture partners and settling builders KB Home, Toll Brothers, Pardee Homes and Beazer Homes are liable to it for any amounts for which Meritage may ultimately be liable to JPMorgan Chase Bank.

Meritage said it intends to seek its available remedies against the settling builders.

As a result of the order, Meritage said it expects to increase its reserves to the JPMorgan lawsuit to approximate its estimated potential exposure. The increase is expected to result in an $8 million to $9 million charge during the third quarter.

Meritage is a Scottsdale, Ariz.-based homebuilder.

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