Silver Star REIT Files $50M Suit Against Founder Allen Hartman
Silver Star Properties REIT is suing its former CEO and founder, Al Hartman, for estimated damages of $50M, accusing him of fraud, breach of fiduciary duty and illegal meddling in the attempted sale of Silver Star’s assets.
The suit, filed Dec. 14 in Harris County, includes many of the claims of mismanagement previously detailed by Gerald Haddock, executive chairman of the board and now co-CEO of the company, in a video released to shareholders last month. The transcript of the video is included in an SEC filing.
It also lays out new claims and grievances, including Hartman allegedly taking on unauthorized debt, making suspect payments to family members and allowing political and religious activities to distract from his work responsibilities.
Hartman, who founded the REIT formerly known as Hartman Short Term Income Properties XX, continues to sit on the company's board of directors. He was ousted as its CEO late last year, and after a series of leadership changes, Haddock and David Wheeler now serve as co-CEOs of Silver Star. The REIT changed its name and announced a transition to self-storage around the same time that Hartman exited the CEO role.
Silver Star has since filed suit and moved for Hartman's removal from the board.
According to the suit, Hartman improperly intermingled his personal and familial interests with running the business, fleshing out the “personal, religious and political matters,” Haddock alluded to in the earlier video.
Those conflicts interfered with his business duties, according to the suit, and included allegedly attending the uprising at the U.S. Capitol on Jan. 6, 2021, and supporting former Trump administration national security adviser Michael Flynn’s challenges to the 2020 presidential election, according to the lawsuit.
“It got in the way of the business, company time and productivity,” Haddock said of Hartman’s religious and political preoccupations to The Real Deal. “He was also influencing some employees; we’ve had several complaints about some practices I’d rather not go into.”
Hartman’s political and religious views — which previously led him to ban masks in the company’s office and hand out Make America Great Again hats during a company-sponsored outing — were not the biggest driving force for his ouster, Haddock told the outlet, adding, “but at what point does the straw break the camel’s back?”
Hartman also allegedly gave his daughter, Margaret Hartman, $2M to lead equity-raising activities, allegedly knowing she lacked experience for that role, according to the suit, which further claims those activities did not produce any meaningful return to Silver Star.
In addition to Hartman, the lawsuit names the Hartman Family Protection Trust, Hartman vREIT XXI, Hartman XX Holdings, Hartman’s wife, Lisa Hartman, and Margaret Hartman among the defendants.
No response has been filed to the lawsuit, according to online records. Margaret Hartman responded to a request for comment late Wednesday, linking the press release filed by Allen Hartman and the Hartman Group last week.
Hartman last week issued a press release fighting back against Silver Star’s attempt to remove him from the board. The release, issued the same day Silver Star's lawsuit was filed, denies any wrongdoing.
But the suit alleges Hartman’s favoring of his family members destroyed the morale of seasoned long-term executives and contributed to high employee turnover. It also alleges that Hartman failed to remedy high tenant turnover.
Hartman dubbed those accusations as “FALSE” in his release.
“Mr. Hartman led renewal conversations 30 months in advance to retain all tenants over 10,000 square feet,” the release states. “Aggressive new tenant prospecting was foundational to the business model, requiring a large leasing staff that leased the properties up. Furthermore, occupancy has dropped precipitously since Haddock took over 1 year ago.”
The REIT management company was founded by Hartman in 1983, and Hartman Short Term Properties was formed in 2009 to acquire, develop and own office, retail, industrial and warehouse properties.
During Hartman's tenure, however, the REIT allegedly missed at least 11 annual or quarterly financial statement deadlines, all failures on Hartman’s part, according to the lawsuit.
The REIT's board of directors suspended payment of distributions to stockholders in July 2022, citing difficulty making payments on loans with variable interest rates and the need to “focus on strengthening its balance sheet and preserving cash," according to a Securities and Exchange Commission filing.
That was the same month that Goldman Sachs Mortgage said it would no longer service a $259M loan taken out in October 2018 under Hartman’s direction, according to the lawsuit. Hartman then allegedly thwarted attempts to refinance the loan.
Soon after the pause in payments, Silver Star began shifting away from office, retail and industrial, selling those assets and instead acquiring self-storage properties. Hartman responded by filing an allegedly illegal lis pendens and claiming erroneous title interest on assets being sold by Silver Star to refinance the $259M loan, halting the sale and forcing the subsidiary into bankruptcy, the lawsuit states.
As of Sept. 13, the loan had an outstanding balance of $217M, the lawsuit states. Silver Star has sold several properties in recent months to chip away at the debt.
The lawsuit also alleges that Hartman manipulated company debts and assets to secure large dividend payments while foregoing his salary in an attempt to prove his interests were aligned with investors. From the company’s inception in 2009 until dividend payments were halted in July 2022, Silver Star paid aggregate distributions of $105.7M, the lawsuit states.
During that time, Hartman allegedly borrowed cash from XXI, another one of his companies, to subsidize cash shortfalls in the REIT and support monthly dividend payments to shareholders, according to the lawsuit. That activity was not approved by Silver Star’s board and violated XXI’s charter, the suit alleges.
Though it is leaving a damage amount to the court, the suit estimates Silver Star is owed more than $50M based on increased debt, decreased assets, diminished property values, increased fees, interest costs, lost revenue costs associated with investigating Hartman and his activities, and legal fees.
