DUMPSTER CHRONICLES: Lender Hurst in a can
September 9, 2008
FIRST IN A SERIES
By KAREN VELIE and DANIEL BLACKBURN
Atascadero lender Hurst Financial Corp. (HFC) is fielding accusations of fraud from a second state agency, but the company’s bigger problem might already be in the bag.
Hurst’s president, James Hurst Miller Jr., and his daughter, HFC employee Courtney Lee Brard, are similarly accused by both the departments of Real Estate and Corporations, and already have had their permits to operate either suspended, revoked or threatened.
But in the end, eight bags of trash might weigh in more heavily than mere allegations.
The state agencies’ actions against HFC follow an avalanche of complaints from worried investors and a continuing series of revealing articles by UncoveredSLO about questionable business transactions between HFC and prominent North County developer Kelly Gearhart.
In what might have been an effort to avoid using traceable e-mails to communicate, Miller and Brard often traded data, ideas, comments and musings in handwritten notes to one another
These often would end up intact in the office trash, taken to the curb by an HFC employee every Monday evening for pickup the following morning.
Before pickup could occur, however, one investor, worried about the manner in which Miller was conducting business and disbursing development funds, began to retrieve every piece of paper that appeared to be pertinent to HFC’s daily business activities. The investor then would bag and save the resulting pile.
In about six months, the investor had collected materials that filled eight paper grocery bags.
In an age when identity theft and related crimes are commonplace, often made possible by victims’ careless disposal of vital personal information, it was nearly inconceivable that such a treasure trove of puzzle pieces and potentially incriminating information would be so cavalierly discarded.
But there it was, a virtually unending trail of notes, envelopes, Post-It scribbling, office bills, odd doodles, many replete with intriguing commentary and spilled coffee stains.
The investor would subsequently report that the bags were filled with no expectation that they would contain any information that might be needed.
“I just thought it might help in the future,” the investor said when turning the bags over to UncovererSLO.
In an action filed August 27, the state Department of Real Estate’s deputy commissioner, Charles W. Koenig, accused Miller and Brard of “working with or under the direction of Gearhart” to pay off two of 16 investors in the so-called Montecito Plaza II on El Camino Real in Atascadero. The accusations filed by the state allege that Miller did not notify any investors in the project except the two who were paid, Marian Frances Warkentin and Gary Luttrell.
The history of the Tastee Freeze property provides insight into the inner workings of HFC’s relationship with Gearhart.
In 2004, the first of four loans was taken out on the project for $500,000 through HFC to Morro Road homes, a Gearhart LLC. Gearhart then split the property into three different parcels.
In 2006, Miller doled out an additional $1.5 million loan on one parcel that was shortly split into three lots. Gearhart eventually placed the K-Man Cycle and Run lot into escrow, and subsequently developed the Tastee Freeze project under Morro Roads Homes. Miller then filed a reconveyance, paying off only two of the loan’s investors without the consent of the remaining 14. (It is a crime to reconvey a lot and not alert all the investors.)
Miller again solicited investors to fund construction on a third lot located between the Tastee Freeze site and bike shop, to the tune of $975,000. A few months later, Gearhart received a private loan for $600,000 from Marion Louise Warner.
The property currently is an empty lot, even though — according to a First American Title report — two construction companies placed liens for non-payment on the property in mid-2008.
According to a pencil-written document from the dumpster trove, with handwriting appearing to match known samples from Miller, HFC planned to “partially reconvey Tastee Freeze lot and put additional loan on lot.”
Documents also outline the partial reconveyance of a portion of Gearhart’s Vista Del Hombre project in Paso Robles, in what was described as an attempt allow Gearhart to procure a $1.5 million loan from Heritage Oaks Bank:
“Jay partially reconveyed some VDH lots to Kelly in January in hopes he would obtain a loan through Heritage Oaks Bank for paying off investors,” one particular note read. “DA [district attorney] is now questioning DRE [Department of Real Estate] about the reconveyance Jay did due to investor complaints. FRAUD. Still have not received anything from Kelly. We think he is stalling.”
However, according to the dumpster data, Gearhart did not follow through with disbursing loan proceeds loan to pay investors’ interest. Miller then started hatching plans to throw the blame on developers… and then “possibly close doors….”
“Should we propose to join with investors to go against borrower [Gearhart],” reads one document. “With no income and no solutions to this mess, when do we ultimately close our doors or what is left of our options? At what point do we throw the towel in and turn over to a receiver?”
More than 1,200 investors, primarily seniors, have invested nearly $100 million with Miller for making loans. According to the DRE, Miller failed in his contractual agreement to protect investors by funding projects only as work was completed, with progressive payments. Instead, he paid Gearhart in lump sums “without any monitoring of the construction.”
Nevertheless, in some cases, Miller paid from one construction account to pay interest to a variety of other investors for previous loans for unrelated projects. As additional investment money came into the funds, additional interest payments were made by Miller to, among others, developers on HFC-projects like David Graves, Royce Eddings, and Gearhart himself, on many different projects.
Those payment procedures often came close to depleting the funds. Reports dated as far back as 2004 show Miller had begun his Ponzi-like scheme long before the beginning of the decline in the real estate market.
This week, the Phoenix Recovery Group — working on behalf of a group of investors wanting to take over the property — plans to file a judicial complaint against Gearhart alleging he borrowed funds and failed to pay investors.
That action will add to problems already plaguing HFC, Miller and Brard.