2 Developers Square Off in Legal Dispute : Warmington Sued Over Soured $12-Million Deal

Two large real estate developers with different memories of a $12.5-million deal that went sour six years ago began the trial of their multimillion-dollar dispute in Orange County Superior Court Wednesday.

Craig Development Corp. is seeking to force developer James P. Warmington to repay a $3.5-million loan now in default that he used to purchase land in San Clemente for what was planned as a 122-home development.

Warmington, sued individually and through a number of related businesses, claimed that Craig freely agreed to give to a bank, which also lent money for the project, first rights to the property if the development failed.

The deals were made in February, 1981, but aside from some initial grading, work stopped by December as Warmington encountered serious financial problems when interest rates skyrocketed and demand for new homes dropped.

Security Pacific National Bank, which had loaned Warmington $6.8 million for the project, foreclosed in 1983. The sale of the land wiped out Craig’s security for its defaulted loan.

Craig owned the land at the start of the deal. Attorneys for Craig claimed the firm has now lost not only the value of the loan Warmington signed to buy the property to develop, but the land as well.

Lawyers for Craig alleged that an array of eight different firms were all controlled by Warmington. Transfers of the land between several of those firms and Security Pacific were designed to defeat Craig’s attempt to collect on the loan, and were done fraudulently, the firm’s lawyers claimed.

In an out-of-court settlement in January, the bank agreed to pay Craig $100,000, according to Richard S. Ruben, lawyer for Craig.

Damages sought by Craig are $2.2 million for the unpaid note plus 10% interest. In addition, Craig has asked for about $500,000 in damages for the negative effect that Warmington’s failure to develop had on four nearby tracts owned by Craig.

The case turns on state law that prohibits sellers who take notes as part of the purchase price from suing buyers who default. There exist only narrow exceptions to the rule, which requires sellers to look to the property itself as security for the loan.

Lawyers for Warmington claimed that the exception was designed to protect private individuals who lack experience in real estate when they sell their land to large developers.