Heritage Oaks Bank makes out while investors lose

March 10, 2011

By KAREN VELIE

After battling for a cut of developer Kelly Gearhart’s Vista del Hombre property, Heritage Oaks Bank in San Luis Obispo walked away with most of the controversial developer’s land in Paso Robles.

At the same time, a federal bankruptcy court in Ohio, that is handling Gearhart’s tangled financial holdings, has dubbed investors in the Vista del Hombre project as unsecured creditors.

Hundreds of local investors put approximately $28 million in cash into Vista del Hombre through hard-money loans secured by Hurst Financial, Inc. (HFI). Gearhart and HFI president Jay Miller lured investors with promises of high-interest monthly payments on construction projects secured by property.

CalCoastNews exclusively reported in 2008 that Hurst had illegally promised deeds of trust with an unheard of ownership of 8,000 per cent in the planned 32-building development to hundreds of local investors. Miller promised that investors would have more than 200 percent interest in each structure.

In fact, the highest percentage of interest in any property is 100 percent.

HFI filed deeds of trust with Cuesta Title, that did not accurately describe the properties, secured by lots that had not been legally subdivided and had more than 100 percent ownership, documents show.

The bankruptcy court in Ohio said that it questions the validity of the investors’ liens, according to a judgment filed in February by a federal bankruptcy court in the Northern District of Ohio.

Nevertheless, following fraudulent filings with the County Clerk Recorder’s Office in San Luis Obispo that claimed that loans had been repaid, Heritage Oaks Bank was able to procure clean titles to most of the Vista del Hombre properties.

It also appears to have made a profit by foreclosing on the properties.

In a twisted web of loans and reconveyences, Gearhart, Miller, bank officials and Joey Scolari, the founder of Scolari Markets, were able to transfer properties out of the hands of the investors, according to documents filed in San Luis Obispo.

Located six miles east of downtown Paso Robles, the Vista del Hombre property 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.

To date, little of the development’s plans have been completed.

HFI provided Gearhart his first loan of $15 million for Vista del Hombre’s purchase and initial infrastructure construction in May, 2006. The investors — primarily seniors — were told they would receive interest on their monies until the property was developed and sold.

At that time, Miller said their investments would be returned.

Miller assured investors he would dole out money to Gearhart in progress payments as the property was developed. However, Miller provided Gearhart his loans upfront and without any oversight.

Gearhart, in turn, did not fund the project and instead co-mingled the funds with his personal assets, according to the bankruptcy court’s February filing.

In June 2007, Hurst lent Gearhart another $11.8 million on the same development – escalating Gearhart’s annual interest payments to $4 million a year. Miller persuaded more than 100 investors with the same loan-to-value promise to put a second loan on the same properties, according to the loan documents.

These investors received interest payments for only six months before Gearhart abruptly stopped payments to the investors in late 2007.

On Jan. 7, 2008, Miller filed paperwork with the county that claimed that the investors had been paid back.

The investors insist they never got any of their investments back.

Less than two weeks later, Heritage Oaks Bank loaned Gearhart $1 million on the same land relying on a Cuesta Title report that claimed the property was free of liens and encumbrances.

On Feb. 20, 2008, Heritage Oaks bank modified the loan, increasing the amount to $1.5 million.

In March, 2008, two months after lending Gearhart money secured by the proposed Vista del Hombre development, bank officials had the property appraised as required by law. The law, however, does not say when the appraisal is required to be done.

The bank’s own appraisal, a copy of which was obtained by CalCoastNews, says the loan was based on erroneous and questionable claims. The bank’s appraiser, Market Dynamics’ Dennis Greene, said in his report that the property is worth approximately $4.3 million.

Meanwhile, Scolari, concerned that he was no longer receiving interest on a $1 million personal loan that he gave Gearhart, said he told Gearhart that he needed to secure his loan.

“I knew he was in trouble, he couldn’t pay interest.  So I threatened to foreclose,” Scolari said. “It was personal.”

Then in the middle of April, 2008, Heritage Oaks Bank filed paperwork to take its name off of the dead of trust on one of 14 lots that make up a majority of the Vista del Hombre project.  The action removed the bank as a lien holder for the property, giving Gearhart clear title to it.

Eleven days later, Gearhart filed a deed of trust securing Scolari’s loan through the lot, using Cuesta Title — the same title company that filed the alleged fraudulent reconveyences.

Both Heritage Oaks Bank and Scolari foreclosed on Gearhart and took ownership of  the lots. “I have a clear title to the property,” Scolari said. “I grabbed the property when I could.”

Three of the 17 lots that make up Vista del Hombre were not secured by loans to the bank or Scolari and have become part of the bankruptcy court’s proceedings.

Gearhart fled to Wadsworth, Ohio, in November, 2008 after the FBI had began an investigation into Miller and Gearhart’s activities. A few months later, he filed a bankruptcy petition in Ohio, claiming more than $45 million in personal debt.

The court determined last month that because Gearhart illegally co-mingled funds invested into Vista del Hombre with his personal assets. Vista del Hombre is an alter ego of his.

Bankruptcy trustee Harold Corzin has filed a request with the court in Ohio to allow him to sell the remaining three lots free and clear of any liens.

Several lawsuits have been filed against Heritage Oaks Bank and Cuesta Title on behalf of more than 300 investors, who claim the bank and the title company aided and abetted and/or conspired with HFI in defrauding people through illegal investment schemes.

Repeatedly asked by CalCoastNews for comment about the investors’ lawsuits, officials from Heritage Oaks Bank and the parent company of the now-defunct Cuesta Title declined comment, saying they could not discuss the issue because of financial privacy laws.

It has been more than three years since Gearhart stopped paying interest payments to more than 1,000 investors. Several investors have passed away, others have lost their homes and some have been forced out of retirement in order to survive.