Embattled Developer Hits Back At Former Partner, Seeks Millions In Repayment And Damages
At first glance, Philadelphia-based U.S. Construction may have seemed like one of hundreds of vendors, creditors and investors seeking payment and resolution in the tangled bankruptcy case of National Realty Investment Advisors.
Now, however, it is facing accusations it was complicit in some of NRIA’s alleged scams.
NRIA filed an adversary complaint Monday alleging U.S. Construction benefited from and participated in a series of fraudulent construction and development contracts orchestrated by former NRIA executive Thomas Nicholas “Nick” Salzano, whose son Dustin is co-owner and chief financial officer of USC.
The lawsuit further claims Nick Salzano directed buyers of NRIA-owned, USC-built rental properties in Philadelphia to retain a property management company also co-owned and run by Dustin Salzano, and in some cases misappropriated NRIA funds to resolve disputes buyers had with the ostensibly independent management company.
NRIA attorneys allege USC was paid for development and construction services that either were performed by other entities, or that could have been performed by NRIA itself, at the behest of Nick Salzano. As a result, USC overcharged by millions despite the fact that it left NRIA without enough funds to cover its debts and payments, according to the complaint.
Per federal Chapter 11 rules, improper withdrawals in the two years before a company declares bankruptcy give creditors the right to claw back those payments from their beneficiaries.
NRIA did not respond to a request for comment.
Hankin Sandman Palladino Weintrob & Bell partner John Palladino, who represents USC, denied the allegations in a phone interview Wednesday. He said that as a development partner, USC used standard business practices to hire subcontractors and vendors, provided all supporting documentation and secured approval not just from NRIA, but from its lenders in the vast majority of cases as well.
“They can say we shot Lincoln in a complaint; that doesn’t make it true,” Palladino said.
For a nearly completed condo project in Delray Beach, Florida, USC has sought a court order compelling NRIA to honor the development contract and allow USC's subcontractors to finish construction. NRIA’s complaint asks the bankruptcy court to void that contract for several reasons, including that it is too vague to be enforceable. As an example, NRIA alleged Nick Salzano unilaterally approved a $9.2M budget increase without any proof of why it was needed.
“To date, U.S. Construction has been unable to provide the supporting documentation to support the $9.2M in change orders,” the complaint read.
While on the phone with Bisnow, Palladino claimed to be holding in his hand documents proving the increase in costs was to pay subcontractors at the construction site, and that NRIA has not asked for proof.
“Show me an email from these guys asking, ‘Where are the documents?’” Palladino said.
The latest legal imbroglio is just one of several for NRIA and its former leadership, which are under investigation by multiple state and federal authorities for allegedly defrauding investors of $630M using multiple gambits. Those include paying earlier investors into a real estate fund with principal from new investors in a Ponzi scheme-type model.
Salzano was arrested last year on federal fraud and forgery charges and is awaiting trial, while NRIA owner and sole member Rey Grabato left the U.S. for his native Philippines and is not responding to NRIA attorney Jason Teele’s attempts to contact him, Teele told the court Monday.
Soon after it began receiving media attention for the investigations last fall, NRIA executive Arthur Scutaro, a longtime associate of Salzano’s, brought in consultant Brian Casey to manage the company and assess the extent of Salzano’s wrongdoing. Casey cut off nearly all contact with USC, stopped paying monthly development fees and construction costs, and sought to terminate what active contracts between NRIA and USC he could.
“We weren’t the money guys; that’s what [NRIA] brought to the table," Palladino said. "How they raised their money? What they did? We had nothing to do with that.”
In March, USC sued NRIA in Pennsylvania for breach of contract on a South Philadelphia development, a case that closed after NRIA filed for Chapter 11 bankruptcy protection in June. Casey resigned as NRIA manager in late July after the U.S. Bankruptcy Trustee and NRIA’s committee of creditors objected to his connections with NRIA’s previous leadership.
But Palladino told Bisnow he suspects Casey is behind NRIA’s legal action, pointing to his belief Casey found the father-son connection inherently corrupt.
“What I think is happening is that this is the last parting shot of the last regime,” Palladino said of Casey. “I don’t think there’s any mistaking how he’s felt about this case from the inception.”
Requests for comment to Casey, Teele and the legal counsel for the creditors committee also went unanswered.
Most of the claims in the complaint NRIA filed against USC on Monday were related to deals the two companies made before NRIA launched the private equity fund that has been the focus of law enforcement investigations.
For at least 12 years starting in 2006, NRIA would recruit investors to purchase properties in Philly with the understanding they would be passive investments, leaving NRIA to coordinate construction and management of the properties as rental units.
On behalf of NRIA and these investors, Nick Salzano would hire USC as general contractor for the construction of the units and Premier Access Property Management for the maintenance and collection of rent. Both companies are nearly 100% co-owned by Dustin Salzano and John Farina, with Salzano controlling a fractionally larger share of each. Farina is USC's co-owner, president and CEO, as well as co-owner of Premier Access Property Management.
To induce investment, the Philly properties were sold with guarantees of delivery timelines, appraised value upon completion and rent collection for five years. In cases when units delivered late, were appraised for lower-than-expected value or saw rent interruptions, NRIA footed the cost of not fulfilling guarantees, the complaint alleges.
In a 2020 email NRIA submitted as evidence, Nick Salzano directed an NRIA staffer to pay an investor for missed rent and apartment turnover expenses at a Premier Access-managed unit when a tenant refused to pay rent in the early months of the pandemic.
“[This] owner is an important investor of ours and so NRIA is going to suck up the cost of dealing with this tenant early lease break,” Salzano’s email read.
NRIA has paid over $5M to investors to satisfy the terms of rent guarantees since 2018, and it paid more than $6M to either buy back units or pay carrying costs to dissatisfied investors when USC-built units missed appraisal guarantees, with another $916K accounting for missed construction completion guarantees, the complaint claimed.
In addition to USC and Dustin Salzano, NRIA also names Farina in its complaint, filed Aug. 8.
A week earlier, NRIA announced a settlement with its creditors committee establishing a three-person management board of bankruptcy law veterans and Turnaround Advisors principal John Fioretti as chief restructuring officer. Bankruptcy judge John Sherwood commended the selections as upstanding choices at an Aug. 9 hearing.
USC has a month to file an objection to NRIA’s adversary complaint.
If the case proceeds, it will be months before arguments are heard in court. At the same time, Fioretti and NRIA’s new board will be working to get up to speed on the company’s business, which includes $250M of property that has potential to be worth $750M more when developed, lawyers for the creditors committee said in court Aug. 9.
“We’re hoping that when the new regime comes in, they take a fresh look at things, without a jaundiced eye like the last team, and we hope that we can come to an agreement,” Palladino said.