The developers of the long-stalled Best Western Peppertree Inn project at the northwest corner of Division Street and Third Avenue are suing Colfax-based Bank of Whitman, alleging it breached a contract to provide $11.7 million in construction financing, court documents say.

The Bank of Whitman rescinded the construction loan after assurances that it had been approved, says a complaint for damages filed last month in Spokane County Superior Court. The bank had earlier loaned hoteliers Rita and John Santillanes $2.4 million to buy the property at 2 W. Third and break ground there.

The hoteliers still hope to develop a 115-room hotel with a connected parking structure at the site, Rita Santillanes says.

"We spent a lot personally when we continued with our own money, being told by the bank that they were going to extend the loan," Santillanes says.

Based on the written loan assurance, the developers spent $2.7 million on permits, appraisals, studies, and other project-related expenses, the lawsuit says.

The project is at a standstill, with an exposed foundation that has become overgrown with weeds since construction stopped more than two years ago.

Meantime, federal regulators determined the Bank of Whitman was undercapitalized and ordered it in February to raise capital, be acquired, merge with another institution, or shut down.

Greg Tracy, Bank of Whitman's Spokane-based regional vice president, declines to comment on the lawsuit.

Robert Dunn, of the Spokane law firm Dunn & Black PS, who is representing the Santillaneses, says he hasn't received a response from the bank since the June 28 filing, and he hasn't heard who will represent the bank.

No court dates concerning the suit have been scheduled yet.

He contends that even if the bank is no longer capable of issuing such a loan, it can be held accountable for its prior commitments.

"The bank still has insurance for breach of contract, and we're satisfied it'sa good suit," Dunn says.

The Santillaneses bought the property in 2007 for $1.9 million, with Bank of Whitman providing a $1.4 million real estate loan.

In the summer of 2008, the bank notified the Santillaneses that it had approved an $11.7 million construction loan, and by the following March had issued two draws for construction expenses totaling nearly $1 million, the lawsuit says.

The bank then backed out of the construction loan because two other banks reneged on verbal commitments to participate in a long-term commercial mortgage, the suit claims.

A construction loan is a short-term loan that allows borrowers to draw funds for a construction project. Such a loan usually is converted to long-term financing when construction is completed.

Knowing the Santillaneses couldn't proceed with construction, the bank forced them under threat of foreclosure to add the construction draws to their real estate loan, the complaint alleges. The bank also required them to put up other property as collateral, including their Best Western Peppertree Airport Inn at 3711 S. Geiger Blvd., it says.

"It's kind of like what Lucy did by pulling the football out from under Charlie Brown," Dunn says.

The lawsuit asks the court to bind the bank to the original loan approval, convert $1 million in the real estate loan to the original terms of the construction loan, and invalidate the terms that tie the Best Western Peppertree Airport Inn as collateral to the real estate loan.

"Injustice to the plaintiffs can only be avoided by enforcement of the bank's promises to fund construction of the project," the lawsuit says.

The Santillaneses also own Best Western Peppertree Inns in Liberty Lake, Omak, and Auburn, Wash., all of which they developed.