Fraud lawsuit filed against Gearhart, Hurst
May 6, 2008
By KAREN VELIE and DANIEL BLACKBURN
Local investors are alleging they were bilked out of millions by Hurst Financial and developer Kelly Gearhart.
David Rios and Murray Powell filed an 11-count lawsuit Tuesday in San Luis Obispo County Superior Court. Allegations include fraud and civil conspiracy by Hurst Financial president Jay Hurst Miller, Hurst loan officer Courtney Brard, and Gearhart, and claims they misled investors and misappropriated funds.
Gearhart is alleged by investors and others to have co-mingled finances, paying from one investment fund to construct another.
The complaint revolves around a construction loan by hard money lender Hurst Financial to Gearhart for the erection of a commercial building at 5730 El Camino Real in Atascadero. On Oct. 12, 2006, Gearhart, through Hurst Financial, received $2 million from 17 investors to finish the project. That loan had an April 12, 2008, loan maturation date. The property is currently a vacant lot.
Miller and Gearhart did not respond to UncoveredSLO.com’s requests for comment.
Hard money lenders specialize in short term, high interest construction loans that are often used as bridges to help a developer finish a project. Loans are based on the value of the underlying asset rather then the borrower’s credit rating. These kinds of loans are primarily funded through private investors.
Lenders lure investors with promises of high interest, low loan to value rates, and assurances that funds are placed into secured accounts with payments provided to developers as the work progresses.
According to the claim, Hurst wrongly asserted funds would be disbursed as improvements were made to the project. Hurst doled out the entire construction fund to Gearhart even though no work had been done on the property.
Miller admitted this in an April 18 e-mail to Powell regarding the project:
“After reviewing this loan within our escrow trust account, all net proceeds from Cuesta Title Co. after the purchase of the property and points paid to Hurst Financial went to Morro Road Homes LLC (Gearhart), in good faith,” Miller wrote in the e-mail obtained by UncoveredSLO.com. “After doing business with Gearhart Development for 23 years, I have done many of my loans in the same nature. I obviously know we are under-secured at this time, due to the building not being constructed.”
Rios and Powell are seeking recovery for all investors in the loan for damages of $2 million, interest fees, cost of the suit, and unspecified punitive damages.
Tags:, Atascadero, fraud, Gearhart, Hurst Financial, lawsuit