The two partners atop a Denver-based real estate firm have had a falling out — and it’s ended up in court.
Adam Hazlett filed a lawsuit against Ben Hrouda in late October. Hrouda formed Flywheel Capital in July 2017, and Hazlett came on as a 50 percent partner in January 2018, according to the lawsuit.
In the lawsuit, Hazlett accuses Hrouda of misappropriating investor funds and filing fraudulent tax returns, among other things.
Hazlett says he wants Hrouda to buy out his stake in Flywheel and its related companies because of Hrouda’s “compromised ethics.” But he says Hrouda has failed to follow the process outlined in the operating agreement for such a situation.
Hrouda deferred comment to his attorney, who said the allegations in the lawsuit “are categorically false.”
“This is a partnership dispute where one side is improperly using the courts to extract a greater settlement,” said Steven Woodrow of Woodrow & Peluso, declining to comment further.
An attorney for Hazlett declined to comment.
Firm both develops and acquires
Flywheel Capital both develops projects and buys existing properties.
The company’s development activity includes converting a former assisted living facility at 4550 W. Colfax Ave. in Denver into condominiums, and building an apartment complex on about 5.5 acres by the I-25/Evans Avenue interchange.
In October, Flywheel purchased the four-building Gateway Centre office campus at the edge of Aurora and Denver for $66.85 million. In March, the company paid $21.07 million for 127,297 square feet of office space in Lakewood.
When Hazlett joined Flywheel in January 2018, he was made a 50 percent member in various Flywheel-related entities, according to the lawsuit. Those entities included Flywheel Capital LLC, the primary entity through which the company raised money from investors, and Park Hamilton Management LLC, which provides property management and brokerage services for Flywheel-owned properties.
According to the lawsuit, the operating agreement for each of those entities provided an option for Hrouda to buy out Hazlett’s stake up until February 2023.
At the time Hazlett joined Flywheel, the firm was invested in two deals with a combined purchase price of $7.35 million. By late 2019, the firm had approximately $100 million in assets under management, the lawsuit claims.
Raising money raises questions
Hazlett says in his lawsuit that he first became concerned about Hrouda’s actions in late 2018, when Flywheel was acquiring various lots for the eventual apartment project at I-25 and Evans Avenue.
Hazlett says he and Hrouda were generally working different aspects of the deal, each operating with autonomy.
Hazlett claims that Hrouda failed to raise enough money from investors to close on one of the needed parcels, so he “instead illicitly withdrew investor funds from a bank account Flywheel maintained as a fiduciary for a different investment … and used those funds without investor knowledge or consent to close on the parcel for the Evans Investment.”
After closing on the purchase, Hrouda then raised additional money for the Evans investment, and used that to replenish the separate pool of investor money, according to the lawsuit.
“When Mr. Hrouda informed Mr. Hazlett about what he had done, Mr. Hrouda expressed extreme remorse, acknowledged that his conduct had been improper, and assured Mr. Hazlett he would never do anything like that again,” Hazlett claims.
Hazlett said investors were never told.
It wouldn’t be the last hiccup with funding. In 2019, according to the lawsuit, a lender referred to as Bear Creek declined to fund Flywheel’s acquisition of a Colorado Springs office complex upon realizing Flywheel had failed to raise $2 million by closing for a reserve account that was supposed to collateralize Bear Creek against possible unexpected losses like tenant defaults, according to the lawsuit.
Bear Creek expressed “that it felt Mr. Hrouda was trying to trick Bear Creek into closing without Flywheel’s satisfaction of this material condition,” the lawsuit reads. Flywheel was still able to find an alternate way to buy the complex, but it came at “significant additional expense.”
Later in 2019, Flywheel borrowed $300,000 from Zach Frisch, a mutual contact of the two men, for a planned investment in Estes Park.
“While the loan documents with Mr. Frisch made clear that the loan was for the Estes Park Investment, unbeknownst to Mr. Hazlett or Mr. Frisch, almost as soon as the loan was funded, Mr. Hrouda diverted at least $100,000 of that money to the Colorado Springs Investment,” the lawsuit reads.
The Estes Park deal fell apart months later because a lender on the project asked for advanced design deals for the project, and Flywheel didn’t have enough money, the lawsuit claims.
Frisch is an investor and entrepreneur whose projects include creating an Airstream glamping site in Empire and filling an RV park in Glenwood Springs with tiny homes, according to past BusinessDen coverage. Contacted regarding the lawsuit, he declined to comment.
Buyout “at a standstill”
By late 2019, Hrouda and Hazlett’s partnership “came to a head,” Hazlett’s lawsuit states.
Hrouda accused Hazlett of “distancing himself from the business.” And Hazlett was “reluctant to continue a partnership with someone of compromised ethics.”
Around early 2020, the pair agreed to work through the process of having Hrouda buy out Hazlett’s stake, as the operating agreements allowed.
But Hazlett accuses Hrouda of “misconduct during the separation process.”
The pair selected two appraisers to value the various entities, and Hazlett says in the lawsuit he shared the same materials to both, as the operating agreements required. But he claims Hrouda “illicitly manipulated the financial information he was providing to his appraiser for both of Flywheel Capital and Park Hamilton in order to artificially reduce the value of those entities.”
Hazlett claims that, around February 2020, Hrouda told him to stop coming to the Flywheel office and by October 2020, he had ceased providing Hazlett with access to Flywheel’s books and records.
“The parties found themselves at a standstill whereby Mr. Hazlett would not consent to move forward with the appraisal process unless Mr. Hrouda would agree to provide accurate company financial information to the appraiser(s); however, Mr. Hrouda would not agree to do so,” the lawsuit reads.
Around the same time, Hrouda formed new versions of the various Flywheel entities, such as Flywheel Capital II LLC and Park Hamilton Management II LLC.
“Upon information and belief, each of the Flywheel II entities is wholly owned by Mr. Hrouda and each engages in the same business as its original Flywheel counterpart,” the lawsuit reads.
Hazlett claims that, since early 2020, Hrouda has failed to pay him his half of distributions related to Flywheel deals. He says that Hrouda has filed fraudulent tax returns to the IRS that indicated Hazlett no longer owns the Flywheel entities.
According to the lawsuit, in late September 2021, Hazlett sent Hrouda a notice seeking to remove him as a manager of the Flywheel entities, citing a provision of the operating agreements. Hrouda “has declined to step down,” the lawsuit reads.
Asked by BusinessDen if Hazlett still has an ownership stake in Flywheel Capital, Hrouda’s attorney said only that he hasn’t been involved in the business since early 2020. Hazlett is not mentioned on the company’s website.
Hazlett’s LinkedIn profile still lists his role at Flywheel, but also says he is managing partner of Victory Investment Partners. That firm’s holdings include two lodging properties in Estes Park, according to the town’s newspaper.
Hazlett is seeking an unspecified amount of damages. He is represented by attorneys Lauren Thompson, Theodore Rosen, Douglas Lambalot and Angela Barnett of Rosen Thompson Rosen.
For all the latest Business News Click Here
For the latest news and updates, follow us on Google News.
