DUMPSTER CHRONICLES: Web of deceit
December 22, 2008
(EDITORS‘ NOTE: For months, a concerned investor sifted through Hurst Financial Inc.’s trash, tirelessly collecting eight bags of “Post-it” notes, hand-written letters, and typed documents from the imploding lending company. The investor then shared that trash with us. Part I of the Dumpster Chronicles revealed how Hurst Financial Inc. principals knowingly defrauded investors. Part II explained how district attorney’s officials only grudgingly investigated the lender.)
By KAREN VELIE and DANIEL BLACKBURN
Investors and creditors who have lost millions of dollars to local hard money lenders may find financial reprieve through a plethora of entities with dirty hands.
Sources contend those entities were either culpable in assisting the allegedly fraudulent lenders, or failed in performing a fiduciary duty to report suspected fraud. And as a result, many traumatized Central Coast investors might eventually recover more of their investment than originally believed.
Information plucked from the Dumpster paints a picture of twisted relationships forged between hard money lenders, developers, appraisers, accountants, and bankers working together to facilitate the alleged Ponzi scheme.
Hurst Financial Inc. (HFI) is one of at least four San Luis Obispo County hard money lenders participating in lending schemes and inappropriate management practices that may have already cost thousands of investors, primarily seniors, more than $500 million in non-returned investments.
Hard money loans are based on the value of the underlying asset, rather than borrowers’ credit rating. The concept works if the lender finances no more than 60 to 70 percent of the project and makes payments to contractors as the work progresses. HFI principals James Miller and his daughter Courtney Brard failed to follow through on these promises, and utilized incoming investor money to cover expenses and existing loan interest payments.
HFI funded, in their entirety, numerous developments never constructed. One of those is the Vista del Hombe project. Located six miles east of downtown Paso Robles, the “new” Vista del Hombre project is on the site of The Links Golf Course, a flat, dust-blown, tree-bereft expanse of land situated a stone’s throw from the airport.
In January, prominent developer Kelly Gearhart secured a million-dollar loan from Heritage Oaks Bank on his Vista del Hombre property — already over-encumbered by more than $27 million in loans through HFI. The bank’s own appraisal showed the loan had been based on erroneous claims about Vista del Hombre’s value.
That appraisal was not received by bank officials until nearly two months after the loan proceeds had been paid to Gearhart. Relying on a Cuesta Title report, the appraisal claims the property is free and clear of all liens and encumbrances not listed in the report.
Numerous attorneys retained by investors are looking toward Cuesta Title for financial restitution for alleged negligence, and in some cases fraud. Numerous Cuesta Title reports are rife with errors and at the minimum show sloppy work, sources said.
Banks officials have a fiduciary duty to report fraud. There have been instances where banks have been found to be financially liable for frauds they did not perpetrate, because of their failure to disclose.
In an odd twist, Melanie Schneider, an ex-employee of Cuesta Title who was a key person in the majority of HFI transactions, reportedly moved to Colorado with Kelly Gearhart’s brother, Doug Gearhart, shortly after the fall of HFI, sources said.
Additionally, Heritage Oaks Bank Assistant Vice President Greg Porter, whose name is listed on the appraisal as the bank’s contact for the proposed development, reportedly had his house in Atascadero remodeled — including a room addition by Gearhart — prior to the loan’s approval. (Gearhart Construction built commercial and residential properties. The development company did not have a remodeling division.)
One scribbled note discovered in the HFI Dumpster reads: “We even gave Porter with Heritage Oaks Bank….” The last two words of the note, which discusses the specific fraudulent reconveyance that eventually would cost HFI its real estate license, are unreadable because of stains.
Porter, asked if the Gearhart remodeling job influenced Heritage Oaks Bank’s loan approval prior to an appraisal, declined comment, as did bank Vice President Williams Raver.
Nevertheless, documents from the Dumpster confirm that HFI relied on the bank for additional funding.
Another page retrieved reads, “Kelly Gearhart sufficient collateral – Heritage Oaks Bank – (Links) golf course $10 million.”
The bank’s own appraisal says the property is worth approximately $4.3 million as is. The property would increase in value if “an extraordinary assumption” is made that Gearhart would ever complete the 32 commercial and residential buildings as proposed. In that instance, according to the bank’s appraisal, the estimated value would swell to $21.8 million.
Hurst’s appraiser, Terry L. Pippin, claims the property’s worth — if finished — is more than four times the bank’s appraisal.
“My opinion is it is worth around $100 million finished,” Pippin reported. “I do know what I am doing. I have been doing this for 18 years.”
Many investors claim they were wooed by talk of accurate property appraisals, only to find out later that many projects had been given alleged inflated values. Pippin is licensed only as a “certified residential” appraiser, licensed to appraise residential property from one to four units, each with a maximum market value of $250,000; or commercial properties valued at no more than $250,000.
According to one item tossed in the Dumpster, HFI officials knew the truth: “Pippin is not licensed to do commercial!”
Pippin told a reporter that because these appraisals were not secured with federally insured loans, anyone, licensed or not, can appraise properties regardless of the value.
“Under my license, I am able to do any private appraisals,” Pippin added. “For federally related transactions, I can do commercial up to $250,000. It is private money so there are no regulations on that.”
Paul Ketchum, an official with the Office of Real Estate Appraisers Enforcement Division, disagreed with Pippin’s assertions that he does not have to follow usual guidelines when making hard money lending appraisals.
“For licensees of our office, regardless of federally regulated transactions or not, these persons must conform to Uniform Standards of Professional Appraisal Practices,” Ketchum added. Ketchum then request a copy of Pippin’s appraisal, along with the opposing Heritage Oaks Bank appraisal.
According to HFI detail reports, Miller paid Pippin $300 to $500 per appraisal that tout Pippin as a state certified real estate appraiser. A commercial appraisal typically costs between $3,000 and $7,000.
A gaggle of local banks provided hard money lenders unsecured commercial loans, often for millions of dollars. According to the Dumpster documents, Santa Lucia Bank and San Luis Trust Bank made unsecured loans to either Gearhart or Miller.
Following reports on this Web site that HFI and Gearhart were in serious financial distress, San Luis Trust Bank placed liens on 13 properties in Wadsworth, Ohio, owned jointly by Gearhart, his wife Tamara Gearhart, Fred Russell, and Habib Tavassoli.
Russell and Tavassoli are co-owners of a string of bars in San Luis Obispo, including McCarthy’s Irish Pub. Neither Russell nor Tavassoli responded to requests for comment.
Gearhart moved from Wadsworth as a child. In 2005, Gearhart told a reporter he planned to move back to his roots, which he did a little over a month ago.
Another possible avenue for investors hungry to recoup losses could be money that appears to have been funneled to Miller’s wife, Laurel Miller, and relatives earlier this year.
One concerned investor sent Miller an e-mail asking why Miller had transferred his home into his wife’s trust account in March. “Sounds awfully suspicious… especially since it was the same week Gearhart stopped paying (interest payments),” the investor wrote.
A stack of Dumpster documents portray HFI principals attempting to protect assets through family ties.
“One year hold house from date of grant deed – Laurel not sued for performance. Defalcation – Broker uses money for his own use. Laurel make payment on house! Her checking account. Collateral estoppel?” reads one page from the Dumpster.
It appears Miller and Brard were also looking at using the Homestead Act to protect assets from investors.
“Ask about irrevocable trust with kids, Homestead Act. If two take half, can I buy a home and have it secure,” was found scribbled on a piece of yellow-lined paper stained with coffee.
Editors’ postscript: After CalCoastNews made copies of pertinent documents from the Dumpster, all the bags were turned over to the proper authorities.