Two partners from a Denver-based real estate firm had a falling out and the case ended in court.
Adam Hazlett filed a lawsuit against Ben Hrud in late October. According to the lawsuit, Hruda founded Flywheel Capital in July 2017 and Hazlett became a 50 percent partner in January 2018.
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 related companies because of Hrouda’s “compromised ethics”. But he says Hrouda did not follow the process outlined in the operating agreement for such a situation.
Hruda deferred comment from his lawyer, who said the charges in the suit were “categorically false.”
“This is a partnership dispute in which one party improperly uses the courts to reach a larger settlement,” said Stephen Woodrow of Woodrow & Peluso, declining to comment further.
Attorney Hazlett declined to comment.
The company develops and acquires
Flywheel Capital not only develops projects, but also buys existing properties.
The company’s development activities include the conversion of a former residential building at 4550 W. Colfax Ave. in Denver in condominiums and a 5.5-acre residential complex off I-25 / Evans Avenue.
In October, Flywheel acquired the Gateway Center office town of four buildings on the outskirts 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.
According to the lawsuit, when Hazlett joined Flywheel in January 2018, he became a 50 percent member of various Flywheel-related structures. These entities include Flywheel Capital LLC, the main organization 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 these companies gave Hrouda the option to buy back Hazlett’s stake through February 2023.
When Hazlett joined Flywheel, the company was involved in two deals totaling $ 7.35 million. The lawsuit alleges that by the end of 2019, the firm had approximately $ 100 million in assets under management.
Fundraising raises questions
Hazlett says in his lawsuit that he first became concerned about Hrud’s actions in late 2018, when Flywheel acquired various plots for a future apartment project at I-25 and Evans Avenue.
Hazlett says he and Hruda usually worked on different aspects of the deal, each of which operated autonomously.
Hazlett claims that Hruda was unable to raise enough money from investors to close one of the required plots, so he “instead illegally took investors’ funds from a bank account that Flywheel was in trust for other investments … and used those funds without the investor’s knowledge or consent to the closure of the site for Evans Investment. “
After completing the purchase, Hruda raised additional money for Evans’ investment and used it to fund a separate pool of investor money, according to the lawsuit.
“When Mr. Hrouda informed Mr. Hazlett of what he had done, Mr. Hruda expressed extreme remorse, admitted that his behavior was inappropriate, and assured Mr. Hazlett that he would never do anything like this again.” Hazlett says.
Hazlett said investors were never informed.
This will not be the last funding problem. In 2019, according to the lawsuit, a lender named Bear Creek refused to finance Flywheel’s acquisition of an office complex in Colorado Springs after realizing that Flywheel was unable to raise $ 2 million due to the closure of a reserve account that Bear Creek was supposed to provide. in case of possible losses. unexpected damages, such as default by tenants, according to the claim.
Bear Creek stated that “he felt that Mr. Hruda was trying to trick Bear Creek into shutting down without satisfying this financial position,” the lawsuit said. The company “Flywheel” was still able to find an alternative way to buy the complex, but this required “significant additional costs.”
Later in 2019, Flywheel borrowed $ 300,000 from Zach Frisch, a mutual contact of the two men, for a planned investment in Estes Park.
“Although the loan documents with Mr Frisch clearly stated that the loan was made to Estes Park Investment, without the knowledge of Mr Hazlett or Mr Frisch, almost immediately after the loan was financed, Mr Hruda diverted at least $ 100,000 from that money. at Colorado Springs Investment, ”the lawsuit says.
The Estes Park deal fell apart a few months later because the project’s lender asked for a preliminary design for the project and Flywheel didn’t have enough money, the lawsuit said.
Frisch is an investor and entrepreneur whose projects include building an Airstream glamping in Empire and filling a RV fleet in Glenwood Springs with tiny homes, according to past BusinessDen publications. In connection with the lawsuit, he declined to comment.
By the end of 2019, Hroda’s and Hazlett’s partnership had “reached a climax,” Hazlett’s suit said.
Hroud accused Hazlett of “distancing himself from business.” And Hazlett “did not want to continue to partner with someone who adhered to a compromised ethic.”
Around early 2020, the couple agreed to work through Hrouda’s buyout of Hazlett’s stake, as the operating agreements allowed.
But Hazlett accuses Hruda of “misconduct during the separation process.”
The couple selected two evaluators to evaluate different organizations, and Hazlett says he shared the same material with both in the lawsuit, as required by the operating agreements. But he claims that Hroud “illegally manipulated the financial information he provided to his appraiser for Flywheel Capital and Park Hamilton in order to artificially reduce the value of these companies.”
Hruda claims that around February 2020, Hruda told him to stop coming to the Flywheel office, and by October 2020, he stopped giving Hazlett access to Flywheel’s books and records.
“The parties were at an impasse that Mr. Hazlett would not have agreed to move forward with the appraisal process if Mr. Hroud did not agree to provide accurate financial information of the company to the appraisers; however, Mr. Hroud did not agree to this, ”the lawsuit says.
Around the same time, Hruda formed new versions of various Flywheel structures such as Flywheel Capital II LLC and Park Hamilton Management II LLC.
“According to the information and assumptions available, each of the Flywheel II divisions is wholly owned by Mr. Hroud, and each of them is engaged in the same business as its original Flywheel counterpart,” the lawsuit says.
Hazlett claims that since early 2020, Hruda has not paid him half of the distributions associated with the Flywheel deals. He says Hrouda filed fake tax returns with the IRS stating that Hazlett no longer owns Flywheel businesses.
According to the lawsuit, at the end of September 2021, Hazlett sent a notice to Hrud asking him to remove him from his position as manager of Flywheel companies, citing the provision of operating agreements. The lawsuit says that Khruda “refused to resign.”
When asked by BusinessDen if Hazlett still has a stake in Flywheel Capital, Hroda’s lawyer replied only that he has not been involved in this business since the beginning of 2020. Hazlett is not listed on the company’s website.
Hazlett’s LinkedIn profile still lists his role at Flywheel, but also states that he is the managing partner of Victory Investment Partners. According to the city newspaper, the firm’s holdings include two residential properties in Estes Park.
Hazlett claims an unspecified amount of damages. It is represented by attorneys Lauren Thompson, Theodore Rosen, Douglas Lambalo and Angela Barnett of Rosen Thompson Rosen.