SCRANTON - Current and former Honesdale Borough council members are being sued for more than $2.5 million in connection with the defunct renovation project at Sullum's Anchor Building.

The lawsuit was filed this week in U.S. District Court in Scranton by Smith & Morris Holdings LLC (SMH).

Named in the suit are current council members Scott J. Smith, James Brennan, Juanita Pisano, Carolyn Lorent, Bill Canfield and Robert Jennings, as well as former members Tiffany Kominski, Harry DeVrieze and F.J. Monaghan.

The suit says inaction by council has resulted in the renovation project being delayed for more than a year and a half and is over-budget by hundreds of thousands of dollars.

One councilman reached Tuesday disputed some of the claims.

SMH is being represented by Wilkes-Barre attorney Andrew J. Katsock III.

According to the suit:

In May 2011, SMH and the borough entered into negotiations to seek a Keystone Communities Program Grant from the state Department of Community & Economic Development (DCED) pursuant to the Keystone Main Streets program for funding and technical assistance for the borough's downtown revitalization and the Keystone Communities Development project that provides grants and grants-to-loans for physical improvements to the community.

SMH invested substantial time, expertise and funds in assisting the borough in applying for the DCED grants and grants-to-loans for improvements to Sullum's Anchor Building at 552-560 Main Street. The building is owned by SMH.

The building's renovation project was approved by the DCED and a $255,076 grant was awarded to the borough because DCED determined the project would result in a "true and measurable" benefit to Honesdale and Wayne County.

SMH was to act as the contractor for the renovation project.

Bridge loan breakdown

As part of the understanding between SMH and the borough, The Dime Bank of Honesdale was to provide "bridge loan" to commence the construction, based upon the commitment of the grant from DCED.

As part of the closing of the loan with the bank, council required SMH to execute certain documents, including:

• A promissory note, dated April 25, 2013, to the borough for $255,076

• A mortgage and security agreement, dated April 25, 2013, to the borough for $255,076 providing the real estate of the anchor building

• A construction loan agreement, dated the same, with the borough

• An assignment of leases and rents to the borough.

The owners of SMH, Michael C. Morris and Stephen Smith, although not required to do so by the bank, were required by the borough to execute personal guaranty and suretyship agreements in favor of the borough, personally guaranteeing the obligations of SMH under the promissory note, construction loan agreement and other agreements related to the building loan.

"Although the Commonwealth of Pennsylvania has confirmed that this is not a State requirement Honesdale Borough represented to (SMH) that it was a State requirement," according to the suit.

The construction loan agreement provides for the borough to make disbursements to SMH pursuant to the schedule of progress payments set forth in the agreement.

SMH submitted for payment "in a timely and professional manner" construction progress payment authorizations and qualified invoices, as well as other documents required by the DCED. The paperwork was given to Councilman Scott J. Smith, who is the borough's finance committee chairman.

Numerous requisitions for progress payments were presented by SMH to the borough and from the bank, but council failed to follow through in a "reasonably diligent manner" to complete the obligations to the DCED under the grant agreement.

"(Council) intentionally and/or recklessly acted in a noncompliant manner ... to cause unnecessary and unreasonable delays in Smith & Morris Holdings receiving the approved progress payments, which caused contractors and suppliers to go unpaid and/or walk off the job," the suit states.

Councilman Scott Smith, however, said that SMH received all but $5,000 of the $255,076 grant.

"They picked up two checks," the councilman said Tuesday.

Scott Smith also said, despite opposing claims in the lawsuit, that council had difficulties in receiving the proper paperwork from SMH and couldn't distribute funds until it received the paperwork.

SMH claims council's "unreasonable" procrastination totaled over 18 months of delays and associated carrying costs, additional costs to vendors that demanded up-front payment and inflated quotes to finish the work they started. The result was increased project costs by an average of 30 percent above industry standards, the suit says.

The borough's lack of follow-through to complete its obligations to the DCED also resulted in The Dime Bank freezing and placing SMH's bank accounts into default.

The bank, according to the suit, told SMH that no additional "bridge loan" funds would be available since requests for funding from the grant money were not timely completed by the defendants.

On Jan. 11, 2014, the bank demanded a balloon payment of over $255,000.

"Because of the intentional and/or reckless actions by Honesdale Borough, the money was not available to satisfy the default," according to the suit.

SMH, through "no fault of its own," couldn't do business due to its accounts being frozen.

Morris also was forced to place an additional $100,000 of equity from his home to cover a new loan in part to avoid foreclosure on other loans associated with the project.

Since SMH couldn't operate, the Sullum building suffered harm including water damages due to a contractor not finishing work on sealing windows.

"The actions of the defendants have put the plaintiffs' in jeopardy of default on the investment in excess of $2 million in time and money invested into this project by the principals and their investors," the suit states.

According to meeting minutes from a 2013 public session, a divided council voted to adopt a resolution to enter an agreement for the anchor building project and revolving loan fund.

Voting in favor of the project were Juanita Pisano, F.J. Monaghan, Michael Slish, Scott Smith and James Brennan.

Robert Jennings abstained and Harry DeVrieze voted no.

SHM's attorney and the borough's solicitor, Richard Henry, could not be reached Tuesday.