EFI forced into Chapter 11

June 25, 2008

By KAREN VELIE and DANIEL BLACKBURN

Creditors forced hard money lender Estate Financial Inc. (EFI) into Chapter 11 bankruptcy proceedings Wednesday in Santa Barbara’s Central District of California United States Bankruptcy Court.

Five petitioners listed more than $6.9 million in debt owed by EFI as the catalyst for their action. The petitioning group includes builders who claim EFI failed to follow through on agreements to fund projects. They further contend the lender did not defend against a lawsuit as agreed.

Some investors allege EFI failed to return their investment after the sale of secured property, and failed to record their names on deeds of trust.

“The purpose of their [the petitioner’s] action was to protect fractionalized interest holders and builders,” said Ron Cooper, a Los Angeles developer who was instrumental in starting the action.

The court’s ruling means that, as of Thursday, all EFI financial transactions will fall under review by the U.S. Bankruptcy Court. The action also requires EFI owners Karen Guth and Joshua Yaguda to provide to the court monthly reports incorporating all purchases, expenditures, and company actions.

“She is under one hell of a scrutiny right now,” Cooper said. “I feel great about this.”

The court plans to serve Guth, EFI’s president, with papers on Thursday.

Asked if she was aware of the Chapter 11 bankruptcy proceedings, Guth said, “Who did it?” She then refused further comment.

Guth will have 20 days to respond, by either filing a motion disputing creditor claims, or by demonstrating to the court that all EFI’s debts are current.

“There are 1,339 defaulted loans listed on her Web site,” Cooper added. “How could Guth, with a straight face, make a plea to a bankruptcy judge that she is paying her debts current?”

In approximately a week, the group plans to ask the judge to appoint a trustee to manage Estate Financial’s investments.

“Karen Guth stated at the Madonna Inn meeting [on June 17] that EFI will take in $4 million in the next few years,” Cooper said. “She plans for $2 million of that to go towards management fees. We don’t want that to happen.”

One of the petitioners, Steve Gardility of Encinitas, a builder who did significant business with Guth, claims losses of more than $6.26 million due to EFI’s negligence or fraud. He wrote in an e-mail to UncoveredSLO.com that he encountered serious problems in getting EFI to make construction loan payments when due. That in turn caused him problems with his subcontractors.

“I received many threats from some subs for non-payment, and worthless vouchers issued by me,” Gardility wrote. “I have used all my funds, personal loans, substantial credit lines, trying to complete my projects. It is still a mystery why EFI didn’t have the funds available when each contract called for the funds to be segregated and paid within two weeks after submittal of vouchers.”

E-mail comments or questions regarding this action to estatebk@ymail.com . A meeting for creditors hosted by the petitioning creditors is slated for July 8 at 6 p.m. at a site to be announced on UncoveredSLO.com.