Heritage Oaks Bank versus the investors

April 4, 2009

By KAREN VELIE and DANIEL BLACKBURN

Heritage Oaks Bank is battling with Estate Financial Inc. and Hurst Financial investors over first place in the quest for financial compensation.

Attorneys for the bank are chasing first position in the pursuit for assets of fraud suspects Karen Guth and Josh Yaguda Estate Financial Inc. (EFI), and Hurst Financial, and in some cases, trying to supplant individual investors. Bank officials have attempted to foreclose on properties in which hundreds of investors, primarily retired locals, already have a prior financial stake.

In addition, a large, unsecured loan made by Heritage Oaks Bank to Guth, Yaguda, and high-rolling developers created a false air of credibility that may have duped some hard-money investors.

The bank’s actions on a large Paso Robles development that never left the launching pad provide an example. Attorney Pete Josserand has filed a complaint against the bank on behalf of Gary Luttrell, for attempting to foreclose on developer Kelly Gearhart’s Vista del Hombre property near The Links golf course in Paso Robles.

Despite the fact that 326 investors were listed on deeds of trust prior to the bank’s doling out a loan to Gearhart, the bank claimed a priority interest in an attempt to foreclose on the land ahead of investors.

Gearhart got his first loan for Vista del Hombre’s purchase and initial infrastructure construction in May 2006 from Hurst Financial, in the amount of $15 million. That initial loan was slated to mature in late 2006, but Hurst has not reimbursed investors and ceased providing interest payments in 2008.

By then, Hurst had already lent Gearhart another $11,850,000 for the Vista del Hombre development. That pact was inked June 22, 2007, after Hurst attracted more than 100 investors with the promise of high returns. These investors received interest payments for only six months before the payments abruptly ceased.

Relying on a faulty Cuesta Title report that incorrectly suggested the property was unencumbered, HOB lent Gearhart $1 million secured by a lien on Vista del Hombre on January 20, 2008. One month later Gearhart secured a $500,000 loan from the bank, further encumbering the property.

The bank’s own appraisal – performed almost two months after Heritage Oaks provided Gearhart the loans on the property – was based on “erroneous” and questionable claims, according to the appraisal. That appraisal valued the property at $4.5 million.

Luttrell and a bank insider claim Heritage Oaks officials were aware the Cuesta Title report was inaccurate, but chose to ignore the issue.

“They subordinated us so we wouldn’t get anything at all,” Luttrell added. “They (bank officials) admitted they knew Gearhart and (Jay) Miller subordinated the loans and left them a clear field.”

An additional HOB loan on the property, for $250,000, was made on June 12, 2008, at a time when bank officials were aware of the property’s true value, and also that hundreds of investors stood ahead of them, according to county title reports.

In response to Josserand’s March 30 filing, the bank agreed to postpone the sale for 30 days, according to an e-mail to from HOB attorney William Raver to Josserand.

“If we don’t have an agreement by May, Raver will postpone the sale for an additional 30 days providing us time to stop the sale” Josserand said. “I believe HOB is trying to foreclose on deeds of trust in third and fourth position on this property. I believe Hurst investors’ deed of trust has priority over HOB.”

Arguing Wednesday at an asset hearing for Heritage Oaks Bank, Raver asserted the bank has rights to the assets of EFI principles Yaguda and Guth ahead of investors due to an outstanding loan of more than $5 million and an older, smaller loan. Raver asked Judge Jac Crawford to allow the bank to pay off these notes as assets of Guth and Yaguda are sold.

Crawford agreed that the bank’s first loan on the property, made in 1998 for around $300,000, was valid, and could be repaid through the impending sale of two gas stations partially owned by Guth. But the judge voiced concern over validity of the bank’s request to collect on the lien for $5 million placed on the property to secure a previously unsecured line of credit.

“You loaned large sums of money when crimes were being committed,” Crawford noted.

Guth’s attorney, Steven Smith, claimed the revolving line of credit was paid to investors as interest payments during a time the lender was in serious financial trouble.

Investor and real estate broker Jeri Kirkpatrick said she wonders how many people were defrauded during the period in which Heritage Oaks Bank’s loan was being used to pump up EFI’s financial reputation.

“If Heritage Oaks hadn’t provided an unencumbered line of credit to Guth, many of the injured investors might not have been robbed of their retirements,” Kirkpatrick said.