MGT fallout continues with $4 million spat between local developer and insurer

(BizSense file photo)

Left hanging by the collapse and bankruptcy of MGT Construction, a local developer is now suing an insurance company for allegedly not holding up its end of the deal on an apartment rehab in North Carolina.

Richmond-based Clachan Properties, through an LLC, filed suit last month against Hartford Fire Insurance Co., claiming the insurer didn’t help complete the developer’s Hawthorne Mill Lofts project in Charlotte after taking over for MGT as general contractor.

Clachan’s Hawthorne Mill Lofts LLC hired the now-defunct MGT in 2014 to serve as general contractor on the project, which involved converting a 19th-century cotton mill into apartments. The contract between the two sides was worth $15.6 million, according to the lawsuit.

The Hawthorne Mill apartments.

Hartford was the insurer on a performance bond for the project, which requires the insurer to step in as general contractor if MGT wasn’t able to complete the work.

MGT was unable to finish the job “after repeated delays and setbacks,” the lawsuit states, which triggered a default. Hawthorne alleges that it received a notice of default on Feb. 6, 2018. That was just two weeks before MGT fell into bankruptcy on Feb. 21 in the wake of an accounting scheme, owing tens of millions of dollars to hundreds of creditors.

The suit, filed Oct. 17 in Richmond Circuit Court, claims that Hartford has breached the performance bond by failing to perform and complete the contract.

Hawthorne Mill is seeking $4.18 million in damages. While the suit does not specify how that amount was reached, it’s presumably to recoup costs Clachan/Hawthorne spent to complete the project.

Hawthorne Mill Lofts is now open to residents with 149 units and is leasing apartments, according to its website. One-bedroom, 600-square-foot units are advertised for $1,295 a month. Two-bedroom units with 1,000 square feet go for $1,675.

The Hawthorn Mill LLC is represented in the case by Richmond attorneys Vernon Inge and Patrick Houston of Whiteford Taylor & Preston. Inge said the company had no comment on the matter.

Hartford is represented by Richmond attorney Charles Williams of Williams & Skilling. Williams said his client was not ready to comment at this time.

Williams and Hartford have been kept busy by the ongoing MGT bankruptcy liquidation, which continues to play out in Richmond federal court.

Largest creditor

Hartford insured many MGT projects, issuing bonds with a combined face value of $68 million, according to court records. That makes it the largest creditor in MGT’s bankruptcy.

The insurer has faced similar lawsuits as the Hawthorne Mill matter, including the development of Bellevue Mill Apartments in Hillsborough, North Carolina. Clachan was not involved in that project.

Hartford has agreed to pay $2.77 million to settle the lawsuit from Bellevue Mill’s developer, but the agreement had to get the blessing of MGT’s trustee and the bankruptcy court.

Should the dispute between Clachan and Hartford progress toward a settlement, it too likely would need such an approval.

As for the MGT bankruptcy process, the trustee’s camp continues to search for money to be paid back to creditors.

The case, particularly the accounting scheme that toppled the company, earlier this year also caught the attention of federal agencies. As recently as this spring, the FBI, IRS and U.S. Postal Service were questioning former employees of the construction company.

No criminal charges have resulted.

The scam, court records have stated, involved MGT employees allegedly shifting expenses across various construction jobs in order to hide losses, inflate profits and boost bonuses of three main MGT employees from 2013 to 2016.

MGT was founded in the late 1990s as a subsidiary of local real estate giant Thalhimer.

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