VII. BACKGROUND FACTS

23. MSP was formed to develop a large mixed-use retail and office project (the "Mixed-Use Project") in McKinney, Texas. In 2005, MSP representatives traveled to McKinney to identify potential pieces of property for acquisition for the Mixed-Use Project. MSP principals met on numerous occasions with City leaders, including the (former) City Manager Lawrence Robinson ("Robinson") and the President and CEO of MEDC, David Pitstick ("Pitstick") regarding potential development sites and plans. The City and MEDC staff showed the MSP principals several plots of land that could be used for the Mixed-Use Project. Ultimately, three parcels of land were identified as suitable and necessary for the Mixed-Use Project.

24. The three plots of land consisted of portions of a 65 acre parcel that MEDC owned, a 17 acre parcel that was owned by McKinney Blue Diamond, L.P. ("Blue Diamond") and a 10 acre parcel owned by JDN-Real Estate McKinney, L.P. ("JDN"). JDN is a competitor of MSP and owns and operates a retail facility adjacent to the property upon which the Mixed-Use Project was to have been built.

25. The Mixed-Use Project was intended and designed to include a significant retail component. MSP's principals had significant retail contacts and development experience, and knew they could attract large retailers as tenants for the Mixed-Use Project. One of the important attractions to MSP at the time was that the City, MEDC and the McKinney Community Development Corp ("MCDC") were also in the process of developing a hotel/convention center adjacent to the Mixed-Use Project. The hotel/convention center development was something MSP relied upon in developing its marketing campaign for prospective retail tenants.

26. The overall development plan at the time included having non-affiliated developer John Q. Hammons build the hotel on the land adjacent to the Mixed-Use Project. That developer ultimately decided to abandon the hotel project and instead focused on a project in Allen, Texas. MEDC and City officials came to MSP principals for help in developing the hotel property as an essential part of the overall development.

After deliberation, MSP principals determined that they would also undertake the hotel development and formed McKinney Shores Hotel Partners, Inc. rMSHP~) for that purpose. MSHP believed that it could attract a national hotel chain for the hotel portion of the Project. In fact, MSHP and Westin Hotels later entered into a license agreement for the hotel portion of the development. In addition to the hotel, the development plan anticipated that there would be a convention center attached to the hotel (the "Hotel Project") (the overall development, including the Mixed-Use Project and the Hotel Project, is referred to herein as the "Project").

The City and MEDC were well aware at the time that both privately owned parcels were essential to the development. In fact, the City has acknowledged as much in its recent pleadings in the contested JDN condemnation proceedings, in which it repeatedly represents to the court that the JDN tract "is a necessary and essential piece" of the Project and that, even today, the City intends to use that property in conjunction with the "whole" Project, both the retail and the hotel portions.

28. On September 1, 2005, the City and MEDC executed a Memorandum of Understanding ("MOU") regarding the Project and the three land acquisitions necessary for the Project. Transferring the 65 acre parcel (called the "MEDC Net Acreage") was not an issue as MEDC owned that land. Also, by this time, MEDC was a party to a real estate sales contract with Blue Diamond for the acquisition of the 17 acre parcel. The MOU required O&Sl to loan the money to MEDC for the purchase of the 17 acre parcel.

29. Under Section 3 of the MOU, the City agreed to negotiate with JDN on the "9 Acre parcel".2 In the event the City could not get JDN to agree to sell its property, the City committed to obtain an acquisition price for the parcel at the Special Commissioner's hearing in a pending eminent domain proceeding.3 Once that price was determined, O&S agreed to loan to MEDC the purchase amounts for both tracts of land. The MOU was clear.

The City and MEDC represented and agreed that they could and would obtain the 10 acre JDN parcel for the Project, through agreement or condemnation if necessary. In numerous meetings, City officials and MEDC representatives also repeatedly gave the MSP principals oral assurances that the City would obtain the 10 acre plot, one way or the other. Again, all parties agreed that this plot was essential to the Project.

30. Interestingly, on the very day that the City and MEDC executed the MOU, the Governor of Texas signed a law, to become effective on November 18, 2005, that significantly changed and limited the City's eminent domain powers. Specifically, Section 2206.001 (B) of the Texas Government Code states that "A governmental or private entity may not take private property through the use of eminent domain if the taking: (1) confers a private benefit on a particular private party through use of the property; (2) is for a public use that is merely a pretext to confer a private benefit on a particular private party; or (3) is for economic development purpose, unless the economic development is a secondary purpose resulting from O&S Holdings LLC ("O&S"), a California based real estate development company with developments around the United States.

O&S principals formed MSP for the purpose of doing the Mixed-Use Project. MSP became the contracting party under the MDA and loaned the funds to MEDC for the anticipated land acquisitions. The City misquoted the actual size of the property both to O&S and in its resolution approving the condemnation proceeding. The actual size of the property is approximately 10 acres. On July 15, 2005, the City initiated a condemnation action in the County Court of Law NO.5 to acquire JDN's property through eminent domain.

31. The City and MEDC knew about the change in the law and its potential effect. In discussions with MSP. principals, the City and MEDC assured them that the law would not impact the Mixed Use Project as the City was exempt from the new changes because the date of the City resolutions authorizing the condemnation of JDN's property pre-dated the effective date of the new provisions. That statement now appears to have been reckless and false.

32. Over the next few months, the Project proceeded down multiple paths. The City continued with its condemnation efforts on the 10 acre parcel. At the same time, the City, MEDC and MSP/MSHP, negotiated the agreements. MSP was formed to purchase the property and to develop the retail side of the development pursuant to the MDA. MSHP was formed to develop the hotel and convention center on the adjacent twelve and a half acre parcel of land pursuant to a Hotel Development Agreement ("HDA"). MSHP negotiated with MEDC, who owned the property upon which the hotel was to be built, and with MCDC, which was to provide incentives to induce MSHP to build the hotel and convention center. By December 2006, MSHP had negotiated and executed a license agreement with Westin Hotel Management, L.P. for construction and development of a Westin hotel on the property.

33. During this time, the City and MEDC continued to assure MSP that the condemnation was proceeding, that they would deliver the 10 acre parcel, and that MSP and MSHP should complete the MDA and HDA so that development could commence. Three iterations of the development agreement were drafted and executed over a period of 18 months. On December 18, 2007, the Second Amended Master Development Agreement and the HDA were completed. MSP performed its obligations to loan M~DC $4,951,212.17 to purchase the 17 acre parcel and $3,503,361.00 to purchase the 10 acre parcel through condemnation. MSP and MSHP entered into the agreements, loaned millions of dollars to the City, and spent millions more to begin construction and development on the Project in reliance on the representations and assurances from the City and MEDC, including those with respect to the 10 acre parcel.

C.The City Extorts $50,000

34. Pursuant to the HDA, MSHP was obligated to commence construction by the earlier of October 15, 2008 or 229 days following the Required Site Transfer Date of February 28, 2008. In order to timely break ground on the Hotel Project and to be in compliance with the agreements, MSHP needed to finalize certain related agreements with the City, MCDC and MEDC, including a Condominium Agreement regarding ownership of certain portions of the planned hotel and events center.

The ground breaking ceremony was set for February 28, 2008. MSP/MSHP principals traveled to McKinney the day before ground breaking was to occur to try to finalize the agreements, including the Condominium Agreement. While meeting with MEDC and City officials, two McKinney City Councilmen confronted Chris Shane, ("Shane") of MSP/MSHP in the council chambers at City Hall. The Councilmen told Shane that, in order to finalize the agreements and break ground on the Project, MSP/MSHP had to contribute $50,000 to the McKinney Veterans Park Fund. Faced with potential breaches of the timing requirements for the ground breaking the next day, MSP and MSHP principals had no choice but to capitulate to the Councilmens' extortion request. They agreed to write a check to the City and Chris Shane was required to make an announcement about the ugift" at the ground breaking the next day. It is uncertain whether the $50,000 was ever used for the park.

35. Having paid the City's extortion money to assure the Hotel Project could move forward and with City assurances that the 10 acre plot would be secured for the Mixed Use Project, MSHP started the hotel development, including site work and construction on the hotel shell.

36. In the meantime, the City's condemnation proceeding continued to languish. JDN fought the city on numerous grounds. JDN threatened and attempted to bring O&S into the condemnation litigation on the grounds that O&S and the City were acting in concert to wrongfully deprive JDN of its property rights. MSP, on behalf of O&S , was forced to expend significant funds to successfully oppose JDN's efforts to include O&S as a party to the condemnation proceeding.

37. The City and JDN have now spent over two (2) years litigating the condemnation proceeding. The outcome of that proceeding according to the Court, however, "was clear cut." The City's condemnation of the JDN property failed. The Collin County Court at Law No.5, on May 5, 2009, granted JDN's Motion for Partial Summary Judgment, thereby effectively extinguishing the City's purported rights in and to JDN's 10 acres by condemnation. Through discovery in that proceeding, it become disturbingly clear that the City and MEDC made numerous misrepresentations to MSP and MSHP to induce them to enter into the MOA and the HDA.

38. Equally clear and perhaps even more disturbing were the City's representations to the Court at the summary judgment hearing in the condemnation suit on May 5, 2009. The City argued "public use" in opposition to JDN's Motion for Summary Judgment, which was primarily premised on JDN's position that the City's taking was for a private commercial development by JDN's competitor, O&S. The City's attorney on numerous occasions argued that the 10 acre tract was necessary and essential for the Project. He also argued that the resolutions passed by the McKinney City Council plainly reflected that the 10 acre parcel was to be used solely for a public road, public infrastructure, public parking and public utilities.

39. The ultimate admission, however, came in regard to what the City intended to allow MSP to do with the 10 acres parcel. The City's counsel argued that the City could and would insure that the 10 acre parcel would only be used for the four public purposes outlined above. The City's counsel stated that the City would use its plating requirements to control what MSP could do with the 10 acre parcel. The City, of course, never disclosed to MSP this and intent to control the 10 acre parcel when the City and MEDC made repeated representations to induce MSP to agree to take on the Mixed-Use Project. Nor did the City bother to disclose or explain to MSP that, although the price it was paying for the condemned property through its loan to MEDC was based upon commercial use values, the City never intended to allow MSP to use the land for commercial purposes. The City's undisclosed plan is, in fact, in direct contradiction to its representations that, once the City and MEDC had control of the 10 acres, they would transfer title to MSP for commercial uses in connection with the Mixed-Use Project.

40. Moreover, the City's hidden agenda was and is in direct contradiction of the terms of the MDA. In the MDA, the City agreed that "Upon acquisition of legal title by the City to the 10-Acre Parcel, the City shall transfer fee simple title to the 10-acre Parcel to MEDC. Thereafter, and pursuant to and subject to the provisions of this Section 2.2., upon the 10-Acre Transfer Date, Owner (MSP) shall either, at Owner's election (i) acquire the 10-Acre Parcel from MEDC pursuant to the satisfaction of the 10-Acre Loan as set forth in Sections 2.2.4 or 2.2.6 below or (ii) enter into a long-term ground lease with MEDC for the 10-Acre Parcel consistent with the economic terms set forth in this Agreement. (See, Section 2.2 of the MDA). The MDA therefore expressly contemplated that MSP, as owner of the 10 acre tract, would use that property as a necessary part of its commercial Mixed Use Project.

42. The City and MEDC made two fundamental representations to MSP before and after finalizing the MDA. First, the City and MEDC assured MSP that they could transfer the 10 acre parcel to MSP. Second, the City and MEDC assured MSP that once the condemnation was successful, MSP could develop the property and even sell or assign the property. It is now apparent from the City's statements and admissions that neither of those two representations was true.

Thus, the ongoing battle over ownership of the 10 acre tract, the inability to attract tenants to a Mixed-Use Project saddled with land ownership uncertainties and the unanticipated credit crisis rendered impossible MSP's plan and intent to obtain third-party financing for the development. Understandably, MSP was not willing to continue to fund the development with its own money unless or until it could determine whether the City could perform its obligations to fUlly deliver the property.

The City Wrongfully Terminates the Agreement

44. MSP was faced with a "Hobson's Choice." Should it throw more money at the Mixed·Use portion of the Project and risk the chance that the City never completes the transfer of the 10 acre parcel. or should it withhold its obligations until the City could show it could perform? As a result of the discovery that took place in the condemnation proceeding, MSP learned two important facts. First, the City's assurances at the inception of the Project that it could deliver the 10 acre property via agreement or condemnation were false and fraudulent. Second, the City was grossly negligent in its attempt to do so and breached its obligations under the MDA.

45. While MSP tried in good faith to work with the City and MEDC on a variety of solutions, including direct negotiations with JDN over an extended period of time, the City wrongfully demanded performance under the MOA. Although the City and MEDC were in breach of the MDA and MSP was under no further obligation to perform, MSP nevertheless attempted to perform in the hope that the Project could get back on track. By letter dated January 5, 2009, however, the City and MEDC claimed that MSP was in default under the MDA. Thirty days later the City and MEDC notified MSP that they were terminating the MDA. Notwithstanding their prior breaches of the MDA, their own misrepresentations, including the lack of intent to abide by the terms of the MOA, the City and MEDC then unilaterally tendered to an escrow agent the amount of the MSP loan proceeds for the "purchase" of the 17 acre and 10 acre parcels, less $3 million in claimed liquidated damages.Thus, not only did the City and MEDC wrongfully terminate the MDA, but now $3 million of MSP's money is being wrongfully held hostage. F, The City and MEDC Tortuously Interfere with MSP's Business.

46. Throughout the latter part of 2008, MSP and Cabela's were actively negotiating lease terms for Cabela's to locate in the Project. The discussions with Cabela's had progressed to the point that MSP had a fully negotiated Letter of Intent which was to be executed after Cabela's conducted a site visit. By the end of the first week of January, however, Cabela's stopped communicating with MSP. Over the next three weeks, MSP called and emailed Cabela's executives on multiple occasions, with no response. On February 10, 2008, MSP finally was able to talk to the broker on the deal. MSP was informed that Cabela's had been talking to City representatives and that the City told Cabela's that MSP no longer controlled the property. That statement was false when made. As a result of that conversation with City representatives, Cabela's did not visit the site and ceased communications and negotiations with MSP. Upon information and belief, the City and/or MEDC similarly interfered with MSP's attempts to attract other retail tenants.

47. As further proof of the City and MEDC's attempt to deprive MSP of the benefit of the Project, the City also improperly meddled on the hotel side. MSHP had been in discussions and negotiations with a local developer, David Craig ("Craig"), about a joint venture or equity investment arrangement on the hotel property. In April 2009, however, Craig disclosed in a letter that the City told him Beck (the General Contractor) was acquiring the property and would be in control of the Project by the Fall of 2009 That statement was false when made. As a direct result of the City's false statement, Craig ceased communications and negotiations with MSP.

48. Finally, MSP and MSHP were attempting to obtain funding for their projects. With the 10 acre parcel in flux and the City and MEDC making false statements, no one was interested in investing in the project. With tenants being told that MSP was not in control of the project, there was little chance that MSP could attract a sufficient revenue stream to satisfy a lender to loan on the project. Further, by the fall of 2008 the financial markets had dried up at an unprecedented pace and level.

49. As a direct result of the City and MEDC's false representations, negligent conduct and breaches of the agreements, MSP and MSHP lost not only these prospective business relationships, but the benefit of the entire development. MSP and MSHP were caused to incur and lose in excess of $25 million jointly expended on the development Project to date. They have also lost millions more in anticipated profits on the Project.

VIII. CAUSES OF ACTION COUNT 1 BREACH OF CONTRACT AGAINST THE CITY AND MEDC

50. The City, MEDC and MSP entered into the MDA master development agreement). The City and MEDC had an obligation to perform fully under the MDA, including the promise to acquire and transfer the 10 acre parcel to MSP. MSP loaned MEDC the money to purchase the 10 acre parcel via the condemnation proceeding and performed or is excused from performing all conditions precedent under the contract. The City and MEDC have failed to perform under the contract and have wrongfully terminated the MDA. These breaches occurred upon signing the MDA and continue to this day. The wrongful termination of the MDA occurred on February 5, 2009. As a result of these breaches, MSP has been damaged in excess of $15 million for costs invested in the Project as well as additional lost profits on the Project.

51. The City and MEDC repeatedly represented to MSP that they could and would obtain the 10 acre parcel for the Project. The City and MEDC also promised MSP that it could develop the Mixed~Use Project, including the 10 acre portion, for commercial purposes. The City and MEDC knew or should have known that these statements were false when made. Alternatively, the City and MEDC made the representations recklessly as a positive assertion without knowledge of their truth. The false representations made by the City and MEDC were material in that the acquisition and use of the 10 acre parcel was essential to the Project. The City and MEDC intended that MSP rely on these representations. MSP relied on the representations of the City and MEDC in entering into the agreements and proceeding with the Project, believing that the City could deliver the 10 acre parcel as promised. The false representations caused MSP damages in an amount in excess of the $15 million actually expended on the project as well as lost profits.

COUNT 3 NEGLIGENT MISREPRESENTATION

52. The City and MEDC repeatedly represented to MSP that they could and would obtain the 10 acre parcel for the Project. The City and MEDC also promised MSP that it could develop the Mixed~Use Project, including the 10 acre portion, for commercial purposes. The City and MEDC made these representations negligently as positive assertions without knowledge of their truth. The false representations made by the City and MEDC were material in that the acquisition and use of the 10 acre parcel was essential to the Project. The City and MEDC intended that MSP rely on these representations. MSP relied on the representations of the City and MEDC in entering into the agreements and proceeding with the Project, believing that the City could deliver the 10 acre parcel as promised. The false representations caused MSP damages in an amount in excess of the $15 million actually expended on the project, as well as lost profits.

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