KB Home has filed suit against San Francisco-based MacFarlane Partners for failing to make payments related to three residential projects in California. The suit marks another joint venture gone bad for KB Home and heaps more misery on MacFarlane Partners, which has been embroiled in a battle to keep its LandSource Communities Development joint venture out of bankruptcy, a battle it lost over the weekend.

KB Home filed the suit on May 30 in Los Angeles County Superior Court, alleging that it has suffered roughly $52 million in damages because MacFarlane failed to turn over funds to cover its portion of the projects' costs. The suit stated that, in January, MacFarlane announced that it would no longer participate in or provide funds to the three urban projects. Consequently, KB accused MacFarlane of breach of contract, breach of fiduciary duty, and contract interference.

KB Home spokesperson Lindsay Stephenson said that the company was still committed to the finishing the three projects--Anavia in Anaheim, Irvine in Orange Co., and Warner Center in Woodland Hills--which are in various phases of construction.

"We definitely want to move forward with them," she said. "We're just trying to figure out the logistics."

But the suit is a sign of stress for KB's urban division, which was launched in 2005. The division was a pet project of former CEO Bruce Karatz and included a leadership team headed up by Jeffrey Gault. Today, neither Karatz nor Gault is in place to shepherd the fledgling division, and its strategic importance to the company is being challenged by CEO Jeffrey Mezger's push to reintroduce the company to its former bread and butter, the entry-level buyer.

"We branched out to take advantage of opportunities in higher-priced product--not our business," Mezger told Big Builder in an interview last year. "It's very difficult to be good at the high end and good at the entry-level and first-time [move up]. I don't think you can be all things to all people. We had strayed a little bit from our core business mode."

The lawsuit also heightens concern over KB's exposure to joint ventures.

In the company's first-quarter earnings call in late March, CFO Dom Cecere tried to quell investors' fears over the company's JV activity after two Las Vegas JVs--Kyle Canyon and Inspirada, where KB had a 48.8% stake--went into default. Cecere said the company was "winding down" its investment in the off-balance sheet vehicles; the company's total investment in JVs at the end of the quarter was approximately $281 million, down from $413 million a year ago.

He went on to detail that out of the company's 38 JVs, only 10 had investments that topped $50 million. However, when asked whether any of the JVs would be subject to any re-margin obligations, Cecere said there would always be some degree of that, although "the majority of JVs are still performing."

For MacFarlane, KB's legal action came one month after Standard & Poor's reported that a bankruptcy was imminent for LandSource Communities Development, a major California-based land development company owned by Lennar Corp., LNR Properties, and MW Housing Partners, an entity co-managed by Weyerhaeuser and MacFarlane Partners, on behalf of pension fund giant CalPers.

After missing a deadline to remargin loans to account for plummeting land values, LandSource received a notice of default on a $1 billion first lien on the company in April.

Just over a year ago, LandSource took out $1.3 billion in loans arranged by Barclays to buy 68% of LandSource from Lennar and LNR. MW Housing got 50% voting rights, while Lennar and LNR retained 16% ownership each and a combined 50% voting rights.

Learn more about markets featured in this article: Los Angeles, CA.