EFI sues Bryan Cave attorneys $100 million for malpractice

May 3, 2011

By KAREN VELIE and LISA RIZZO

A bankruptcy trustee filed suit Friday against Estate Financial Inc.’s (EFI) former attorney and her employing firm, Bryan Cave LLP, alleging a cover up which led to the swindling of more than $100 million from more than 1,500 San Luis Obispo County investors.

The complaint claims Bryan Cave LLP, an internationally renowned law firm with 1,000 plus lawyers, and one of its attorneys, Katherine Windler, discovered in 2006 that EFI was breaking “countless real estate, securities and corporate laws, rules and regulations” but failed to advise her client to conform to California and federal laws in an attempt to garner huge legal fees.

The bankruptcy trustee alleges that despite being retained to advise and help the Paso Robles company address its “legal deficiencies,” Windler informed EFI principals Karen Guth and her son Josh Yaguda that they were not in compliance with security laws but they should continue to do “business as usual,” allowing for the theft of more than $100 million from investors before the pair was arrested for running a Ponzi scheme.

The advice “led directly to the destruction of EFI/EFMF’s [Estate Financial Mortgage Fund LLC] business, and to the incarceration of EFI’s officers and directors, all principally because they reasonably and justifiably relied on the advice,” the complaint says.

On Dec. 7, 2009, San Luis Obispo County Superior Court Judge Jac Crawford sentenced Guth to 12 years in prison and Yaguda to eight years after they plead guilty to 26 felony counts including fraudulently selling securities without the proper licenses, lying to investors and stealing or destroying property worth $3.2 million.

Emails, documents, and exhibits in the more than 600-page suit filed by chapter 11 bankruptcy trustee Thomas P. Jeremiassen and reviewed by CalCoastNews, appear to support the trustee’s allegations that claim both the case attorney and the law firm were aware of Guth and Yaguda’s illegal activities, and provided advice that amounted to legal malpractice.

Jeremiassen charges the defendants breached their fiduciary duty and aided and abetted the EFI felons in their illegal acts.

The claim is based on the allegation that the law firm was knowledgeable of EFIs crimes as evidenced by a November 2006 internal email from John Amberg, senior partner with Bryan Cave, LLP, to Santa Monica based Windler.

“I agree that you and Guy [Puccio] need to address the regulatory requirements immediately,” Amberg said. “I understand that the way to get the Department of Real Estate (DRE) to go easy on our clients is for them to admit error and cooperate fully.

“There is a risk if they do since the DRE could still sanction them, but a greater risk if they don’t. These risks, from what you’ve [Windler] told me, include losing broker licenses and criminal penalties.”

The suit says that the attorneys could have prevented millions of investor losses by advising EFI to cease its business operations in December 2006, once they realized the company’s business conduct was illegal and risked the retirement portfolios of thousand of investors.

Instead, Windler advised EFI to maintain the status quo as detailed in a December 2006 email to EFI principal Guth.

“If you don’t have any investors right now who are complaining . . . we are fairly confident right now that the Department of Corporations (DOC) or DRE won’t look at you while you are in the process of fixing things up – even if you conduct business as usual until then,” Windler said.

The company continued to sell membership interests in Estate Financial Mortgage Fund LLC (EFMF) under restricted or expired permits some of which were obtained fraudulently.

In early 2008, shortly after the DOC had restricted EFI’s permit, Windler sent an email to Guth and Yaguda which included several options for getting around the DOC action.

“I am not sure where to even start with this,” Windler said. “This is rife with securities violations and fiduciary duty issues.”

Since December 2006, when the firm became aware of Guth and Yaguda’s illegal business practices were harming investors, until June 2008, EFI wooed more than a thousand people into investing more than $95 million into her hard money lending business.

“Had the Firm properly advised EFI, EFI would not have been able to solicit investors after November 2006 through 2008 for EFI or for EFMF, during which time and EFMF members placed over $95 million with EFI,” the complaint says.

Trustees say the law firm was bilking EFI by offering service for the creation of a new business plan, LLC, line of credit and license application in order to generate legal fee revenue.

“It appears that one of Windler’s over-riding concerns was to continue to represent EFI so that she could continue to generate billings and create new business opportunities from this representation, contrary to the interests of EFI and its investors, and was given with a goal of keeping Guth and Yaguda in control of EFI and EFMF and Windler in control of the legal relationship and the legal fees that would be generated as a result,” the complaint says.

The firm billed EFI more than $800,000 for services rendered and received payment for about $500,000.

When reached for a response to the lawsuit claims, Windler refused to comment and directed questions to Bryan Cave LLP’s Mark Thompson who provided the following statement:

“These lawsuits are nothing more than an unfortunate and misguided attempt by the bankruptcy trustees to hold Bryan Cave liable for events that occurred solely at EFI and EFMF and which apparently began long before the firm was retained.  The cases are without merit and we intend to vigorously defend against them.”

In an interesting twist, Windler and Guth were almost successful in getting the bankruptcy court to appoint an attorney they were working with to serve as the EFI bankruptcy trustee.

On May 10, 2008, after a year and a half of representing EFI, Windler sent an email to attorney David Gould discussing what his role in a planned bankruptcy would be.

“This is a highly confidential document because it [sic] it fell into the hands of an investor, it would be the road map on how to attack EFI and the Fund for all contractual and securities issues,” Windler said in the email.

An attachment to the email, titled “notes for winding down plan,” tells Gould – Guth’s choice for trustee – that the bankruptcy plan should allow Guth and Yaguda control while bringing in new investors to provide monies for already funded uncompleted projects.

Even so, several creditors pushed EFI into involuntary bankruptcy before Guth’s attorneys could file voluntary bankruptcy. Guth battled to have Gould remain as the Bankruptcy trustee while several investors said they wanted him tossed out because of his relationship to EFI.

And even though Gould told the courts he was not compromised, in the end, federal bankruptcy court Judge Robin Riblet noted DRE allegations of fraud and mismanagement as a compelling reason to prohibit those “tainted” by Guth from having authority over EFI.

EFI made short-term “bridge” loans to contractors. Investors, during good times, were promised 12 percent on their money in monthly interest payments, with their entire principal returned upon maturation of the loan.

At the onset of the bankruptcy in 2008, EFI’s portfolio consisted of 500 active loans and more than $317 million in unpaid principle. Only $21,000 was held free and clear, according to court documents.