Foreclosures, lawsuits and filings

May 4, 2011

By LISA RIZZO and KAREN VELIE

(Editor’s note: This is the third in a three-part series about the history behind developer John King’s start in San Luis Obispo County and the financial challenges he is currently facing. Part one is “The life and times of John King.” Part two is “Princess Palms and beheadings: high times turn hairy.”)

San Luis Obispo County developer John King’s lifelong climb to success has been clouded in recent years by a series of financial challenges which according to the King Ventures head were brought on by the collapse of the banking industry and were also plaguing several of his former business partners.

Rob Rossi, local businessman and sometime partner in King projects, said that while many of the big financial institutions were bailed out by the federal government, “it put small banks under extreme pressure. It (the financial fallout) made good projects undoable when bad projects had been financeable.”

Developers, like King and Rossi, were forced to sell properties when banks facing federal scrutiny began asking them to make giant principal reductions on loans or in many cases refused to rollover loans that were up for renewal, partly because new federally required appraisals came back with plummeted property values in light of the bursting real estate bubble.

Rossi said this happened even when payments were being made to lenders on time.

“When a mortgage comes up there is nowhere to replace it,” Rossi said. “We’ve had to sell properties we never thought we would sell. I sold a bank building I owned since 1977; I thought I would leave it to my kids.”

One of the terms of some bank loan agreements King made that created disastrous results for him was the Gradsky waiver. The waiver allows a lender to get a personal judgment for the full principal of the loan while also having the ability to foreclose on the property, in some cases essentially giving the lender a double repayment.

King said it was an action that was unclear at the time and proved devastating on multi-million dollar loans.

Due to their financial challenges in recent years, King and Rossi, have been forced to lay off hundreds of employees. Rossi reports 40 percent of his employees were let go.

King’s workforce of less than 800 is half of what it was in 2008 when he employed about 1,600 people.

Many of King’s financial problems can be traced back to banks failing or facing regulatory actions.

For a recent example, the financial institution that provided King and Rossi a loan for the Motel Inn on Monterey Street in San Luis Obispo was seized and taken over by the FDIC. As a result, even though King and Rossi had been making their payments when the loan became due, the FDIC refused to roll over the loan and demanded the partners pay the loan in full or face foreclosure.

In another current instance of a bank refusing to roll over a loan when it matured and the principal became due, Farmers Insurance Group attempted to get a receivership for the Apple Farm Inn in San Luis Obispo while Rossi and King attempted to work out a new loan agreement, according to court documents.

In this case the judge refused to allow a receivership. The parties appear to be working out a payment plan, according to court documents.

Another lender facing regulatory issues, Textron Financial Corp., filed a lawsuit against King in 2009 after the bank refused to roll over a loan that matured in 2008. King was unable to pay off the loan and the bank foreclosed on both his 490-acre Spanish Springs property in Price Canyon and the 490-acre Vaquero de Los Robles project in Paso Robles.

King fired back claiming that he was fraudulently induced into signing the loan agreement with the properties being cross collateralized.

The court noted that a Textron official told King on several occasions that the “cross collateralization problem would be worked out.” However, the judge said King should have known that the Textron employee “had no authority to bind Textron Financial,” according to the court’s decision.

The court ruled in favor of Textron and ordered King to pay the loan’s principal, accrued costs and attorneys fees.

Shortly afterwards, King filed an appeal of the judge’s decision. At the same time he was attempting to sell properties and raise capital.

Adding salt to the wound, Textron slapped King with a civil lawsuit alleging fraudulent transfers in a July 2010 filing because he had placed seven properties worth millions of dollars in an LLC the day before a hearing on Textron’s recovery of the debt.

A fraudulent transfer occurs when someone tries to hide ownership of a property by placing it another’s name during a collection action.

King told CalCoastNews he was not trying to defraud the lender but was attempting to buy time to work out a payment agreement; after all he was the principal of the LLC.

In February, the parties struck a deal for a payment plan as King said he had hoped, so he voluntarily dismissed his appeal.

It was just among the tribulations in 2010 brought on by the spiraling economy and the inability to rollover several large loans which resulted in the loss of several hotels and large property developments.

Within months of his battle with Textron, King continued to stumble toward insolvency.

One of King’s former marquee holdings became a thorn in his side. The 98-room Inn at Morro Bay was relinquished to Wells Fargo last year following an unsuccessful public auction on the steps of the county courthouse.

King faced foreclosure on the coastal property after defaulting on nearly $15 million in loans. San Diego based Pacific Host Hotels acquired the Morro Bay hotel in March in a $9 million deal with the bank.

And while a few months ago, King said he was contemplating further financial difficulties, he has since been successful in selling several assets and is hopeful for his future and that of King Ventures.

“You have to remember that John King has been both very successful and resilient for 40 years,” said one of his former partners Cliff Branch. “He is smart, very creative and he has always worked harder than anyone I know.

“I would by no means count him out of the game.”

(Over several months, CalCoastNews investigated a series of claims of wrongdoing by King alleged by several people. In most cases the claims were verified through court documents to be untrue. Other allegations of unsavory business practices were either unfounded or proved to be mere rumors as no one has been willing to stand by their claim and go on the record. What remained clear throughout the investigation is that King is a man loved and hated by many, each having their own very personal reasons.)