Nearly three years after Virginia True was formed for the Fones Cliffs development project, the land remains undeveloped and the prospects have dimmed. In addition to being mired in debt and bankruptcy, the company and its principles are facing lawsuits alleging misconduct and fraud.

One of those cases was filed in Florida by Allen Applestein, the original owner the property, and his company Diatomite Corporation under which it was held before Virginia True acquired it.

The lawsuit alleges that Howard Kleinhendler, the attorney who formed Virginia True, and the law firm Watchel Missry where he’s a partner, are guilty of legal malpractice, breaches of fiduciary duties, elder abuse, fraud, unjust enrichment and conversion.

According to court documents, Applestein and Diatomite were clients of Kleinhendler and Watchel from 2010 to the spring of 2019.

Applestein purchased the Fones Cliff property in 1958.  In 2013, at age 81, he decided he wanted to sell or develop the land and turned to Kleinhendler and Watchel for assistance. 

A prospective buyer, Peter Jarowey, offered to pay $8.3 million for the property, but Kleinhendler came up with an idea of developing the land and convinced Applestein to turn down the deal.

Jarowey later boosted his offer to $12.5 million in cash. Kleinhendler alleged Jarowey was using fraudulent means to get the purchase money and convinced Applestein to also reject that deal. It wasn’t until later that it became clear that Kleinhendler wanted to “scuttle the deal so he could get control of the Fones Cliffs land,” Applestein’s lawsuit alleges.

It adds that “from the time the Watchel firm and Kleinhendler began representing Applestein, Applestein’s physical and mental condition required he have a live-in caregiver” who “worked around the clock.”

And “in 2015, Applestein experienced a steep decline in health and began to succumb to his age and was eventually diagnosed with Alzheimer’s disease.”

Kleinhendler sensed that his client’s deteriorating health and mental capacity presented an opportunity and he “engaged in a yeoman’s effort to ingratiate himself to Applestein. He would visit the elderly man in Florida seeking to foster trust and friendship, but simultaneously, he was attempting to gather information about Applestein’s personal life and financial affairs,” the lawsuit alleges.

Applestein’s chauffer, Jose Jimenez, said Kleinhendler’s questions were suspicious and made him very uncomfortable. Still, Klienhendler continued acting as a concerned friend and attorney, the documents allege.

Meanwhile, in 2015, Kleinhendler convinced the Richmond County Board of Supervisors to rezone Applestein’s property. He peddled the illustrious dream of  developing the land to include 718 homes and townhomes, 18 guest cottages,  an 18-hole golf course,  a 116-room hotel, restaurant, a commercial center, a skeet and trap range, equestrian center with stables, a 10,000 square foot community barn and seven piers along the river.

Robert Smith, a Richmond County native and the attorney that Diatomite hired to work on the rezoning, described the project as “warmly received by local government officials.” With the Fones Cliff vision looking promising from a regulatory standpoimt, Kleinhendler then started working to convince Applestein to sell the land to him.

On March 30, 2017, Kleinhendler formed Virginia True. He “structured the financing for the deal, and drafted all the documents, all the while continuing to represent Applestein.”

Kleinhendler convinced Applestein to sell his Fones Cliff property using a seller-financed transaction. Under the terms, Applestein’s lawsuit alleges that he was supposed to get $5 million at closing and would finance the remaining $7 million through an unsecured loan. 

When Applestein’s representatives asked about a mortgage to secure repayment, “Kleinhendler specifically and repeatedly advised his client that a lien on the Fones Cliffs land was unnecessary and would make the planned development of the land more difficult.” However, Applestein’s family was able to get Kleinhendler to provide a side letter promising not to encumber the land without Applestein’s approval.

By this time, Applestein was suffering from a “major neuro-cognitive disorder.” According to the lawsuit, Klienhendler didn’t mention the conflicts of interest in this arrangement and Applestein didn’t have the mental capacity to gauge them. “He seldom spoke” and “could not even sit still to partake in the discussions.”

But Smith, whose background includes venture capital, real estate development and sales, investment banking, finance and wealth management saw problems with the way the deal was being handled.

Initially, Smith was told the transaction would be a stock deal. “Stock deals to purchase development property are very rare, and in my experience fraught with unfavorable legal and tax consequences. I cautioned Kleinhendler on this strategy and he assured me that his accountants reviewed this strategy,” Smith stated in court documents for another case. 

“In the month before Virginia True closed on the property, the deal structure suddenly changed from a stock purchase to an asset sale. For numerous reasons, the lack of foresight in structuring these acquisition terms troubled me and indicated a lack of business acumen and sophistication… which later proved to be an accurate analysis.

“Just prior to closing, I learned Kleinhendler had become director and officer of Diatomite, and he was also a director and officer of Virginia True. I recognized this as a conflict and suggested a dual representation letter would be appropriate, as Kleinhendler was performing legal services for Diatomite and Virginia True. Kleinhendler ignored my advice,” Smith added.

When the deal was finalized on April 27, 2017, Kleinhendler went to Florida and had lunch with Applestein who displayed “patent inability to feed himself, wipe his face or concentrate for any length of time.” Applestein was “infirm and unaware,” when he signed the documents, his lawsuit claims.

And in addition to proceeding with the deal, Kleinhendler convinced Applestein to lend him $500,000 with nothing more than a promissory note from HK Consulting, a company operating from Kleinhendler’s home address.

Unbeknownst to Applestein, on that same day, Kleinhendler was also working a deal with investors named Domenick and Anthony Cipollone, who paid $5 million for a 32% stake in Virginia True. This is presumably the same $5 million used to pay Applestein.

In addition to Kleinhendler and Watchel Missry, Applestein’s lawsuit also names several John Does. Applestein and Diatomite are seeking compensatory damages in excess of $7.7 million from the defendants.

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