Kennedy Homes sues lenders for $1.2 billion

As homebuilders across the Chicago area teeter on the brink of bankruptcy, Kennedy Homes is fighting back against its lenders with a lawsuit asking for up to a whopping $1.2 billion.

Kennedy Homes filed the suit Tuesday against some of the Chicago-area's top banks. It seeks $100 million in damages and the rest in punitive compensation.

The suit contends the banks made credit deals with Kennedy Homes that gave it more than it should have received. The banks then called in the loans during the current U.S. housing downturn and credit crunch, the suit alleges, which "resulted in its insolvency."

Kennedy Homes last month laid off a majority of its employees.

Retail analyst Tracy Cross on Tuesday said homebuilders regularly sue banks, but because Kennedy Homes alleges it got too much credit, Cross called the suit a "weird one."

Steven Resnicoff, a DePaul University professor of law, said such cases are "unusual" and the size of the punitive damages may be related to the deep pockets of the banks.

"A large amount will get their attention for sure," Resnicoff said. "But just because you ask for $1.2 billion doesn't mean you're going to get anywhere near it."

The 14-count lawsuit alleges fraud, breach of contract and negligence. Twelve of those counts call for compensation of $100 million.

Among the banks named in the suit are the Bank of Montreal -- the parent of Harris Bank -- LaSalle Bank, Charter One and Bank of America.

Attorney Aldo Botti, a former DuPage County chairman, is representing Kennedy Homes.

"Kennedy Homes, who has enjoyed a reputation of excellence in the homebuilding industry, has filed a lawsuit seeking money damages from various banks, rather than try its lawsuit in the press," Botti's firm, Oak Brook-based Aldo Botti & DeLongis Ltd., said in a statement. "Kennedy Homes will rely upon our excellent courts to render a just and fair decision."

A prominent builder in the West and Northwest suburbs since the 1960s, Kennedy Homes recently laid off 20 of its 32 employees.

A call Tuesday to Kennedy Homes could not confirm if the homebuilder is seeking Chapter 11 bankruptcy protection during its "insolvency."

"We're still in business," Bill Gronow, a partner in the firm and head of sales and marketing, said Tuesday. He declined to elaborate.

Kennedy Homes has said it intends to continue to build homes already under way but did not specify if it will start new ones.

According to court documents, Kennedy Homes traditionally took out loans for its developments on a limited basis, confined to one project at a time.

But in 2003, at the prompting of the Bank of Montreal, it consolidated those debts into a larger single base loan backed by seven banks, each named as defendants.

As a result of the deal, the Bank of Montreal advanced a $40 million line of credit to Kennedy Homes, the documents say. Eight developments were named as collateral, including developments in Poplar Grove, McHenry and Hampshire.

Later, that line of credit was extended and broadened to $75 million.

The lawsuit alleges Kennedy Homes in 2006 began questioning the accuracy of the lending formulas used by Bank of Montreal.

Last year, Bank of Montreal contacted Kennedy Homes representatives and said there were errors in its calculations that exaggerated the amount of money the home builder could safely borrow, according to the suit.

The mistakes inflated Kennedy Homes' available credit by $13 million more than should be allowed, resulting in a negative balance and Kennedy Homes being over-extended, the lawsuit contends.

Later, the bank offered up contradictory reports stating the developer was in the red by only $11 million, the suit alleges.

After the discovery of the errors, the lenders started seeking repayment, according to documents.

Those tactics and Bank of Montreal's accounting led to Kennedy Homes' "insolvency," the lawsuit states.

Harris Bank spokeswoman Amy Yuhn said the bank doesn't comment on pending legislation.

Industry estimates show Kennedy Homes has been building about 150 homes a year in northern Illinois and Wisconsin.

Kennedy Homes generated $214 million in sales in 2006.

Warrenville-based Neumann Homes sought Chapter 11 bankruptcy last fall and Rolling Meadows-based Kimball Hill has warned bankruptcy may be nearing.

The other banks named in the suit include Amalgamated Bank of Chicago, National Bank and Fidelity Bank.