Late on Nov. 4, New York-based Coventry Real Estate Advisors announced that it filed a $500 million lawsuit in the New York State Supreme Court against shopping center REIT Developers Diversified Realty (NYSE: DDR).

According to Coventry, the lawsuit accuses DDR of fraud, malfeasance, mismanagement, violation of fiduciary and contractual obligations and self-dealing in 12 retail real estate projects across the country where DDR provided management, leasing and development services and was a co-investor with Coventry and said it is seeking consequential and punitive damages. Coventry also said it terminated DDR as the leasing and management agent for the portfolio because of "DDR’s breaches of contract and fiduciary duties owed to Coventry."

The dispute appears to involve Coventry's assertion that DDR endeavored to generate fees for itself while failing to live up to the fiduciary responsibilities to its partner under their joint-venture agreement.

Among the allegations in the lawsuit, Coventry said DDR "failed to commit adequate and professional resources; left Coventry uninformed on material aspects of the status of the properties; misrepresented opportunities on assets it sold to Coventry; and purposely inflated fees and escalated costs to give credence to even greater fees," which Coventry says "made many of the properties commercially untenable" and "significantly impaired the values of Coventry’s investments." Additionally, Coventry said DDR placed "itself in a position to acquire at distressed prices some of the same properties DDR recommended that Coventry acquire and which it promised to manage, lease and develop for Coventry."

Cleveland, OH-based DDR issued a response shortly following Coventry's statement, saying that it had yet to be served with Coventry's lawsuit, nor had it seen any complaint or received notice of termination of any agreement with Coventry. In response to the allegations in Coventry's press release, DDR said it "vehemently denies the allegations, will vigorously defend itself against such allegations in any legal proceeding, and denies that it has breached any terms of any such agreements" with Coventry.

On July 1, 2003, DDR and Coventry announced the joint acquisition of the first property with Coventry Real Estate Fund II, which Coventry formed with several institutional investors in an investment manager capacity. The Fund and DDR agreed to jointly acquire value-added retail properties in the U.S. and Coventry was seeking to raise up to $250 million of equity to invest exclusively in joint ventures with DDR. Under terms of the joint venture, DDR would co-invest 20% in each joint venture and would be responsible for day-to-day management of the properties, for which it would receive fees for property management, leasing and construction management plus a promoted interest, along with Coventry, above a 10% preferred return after return of capital to investors.

From its commencement through September 5, 2006, DDR and the Coventry Fund had co-invested in a variety of redevelopment projects and joint venture developments, representing approximately $1.2 billion of net project costs.

This article appears in CoStar's Retail News Roundup: Nov. 8 - 14, 2009
This week in the Retail Roundup, CoStar reports on expansions or new concepts at Sports Fan Attic and Bajio Mexican Grill; closings, cutbacks, defaults, or bankruptcy news at Waldenbooks; acquisition, merger, loan, sale, or IPO activity at Crown Acquisitions, Goldman Properties and The Feil Organization, Blackstone and Glimcher, Coventry and DDR, Equity One, Kimco and DRA Advisors, KKR and Dollar General, Iconix and Ecko, and Landry's Restaurants; new retail development news in MD; personnel or corporate announcements at Wal-Mart and ICSC, and Developers Diversified; sustainability and green building news at Food Lion; and more.