Heritage Oaks Bank loans ‘fed the monster’

September 23, 2011

By KAREN VELIE

An appellate court denied Heritage Oaks Bank’s latest attempt to obtain assets of Estate Financial Principal Karen Guth, noting that the bank’s actions had harmed investors.

Earlier this month, the Second District Court of Appeals upheld a San Luis Obispo County Superior Court ruling rejecting Heritage Oak Bank’s claim to Guth’s assets because the bank “tried to put itself above everybody else in the priority line with this conversion of an unsecured loan to a secured loan at the time when the Estate Financial Inc. house was caving in.”

The court said the bank’s actions “fed the monster” and “but for Heritage Oaks Bank’s willingness to continue its business with defendant Guth and Estate Financial Inc. the defendant’s crimes most certainty would have been detected far earlier.”

In 2008, Guth and her son Joshua Yaguda were arrested on multiple counts of securities fraud involving thousands of investors and more than $300 million in losses.

Guth and Yaguda fraudulently sold securities without the proper licenses, lied to investors, and operated a Ponzi scheme as they took more than $300 million from people, companies and non-profits such as Meals on Wheels.

The fraud was uncovered, the two were arrested and eventually pled guilty. Part of the process in San Luis Obispo Superior Court Judge Jac Crawford’s court was to look for and recover money and other assets that could be used to reimburse the victims.

Properties to be sold to reimburse the victims included a Morro Bay gas station, a Templeton gas station, an office building in Paso Robles and the Pasolivo Vineyard Drive in Paso Robles, property that includes a business, olive orchards and residences.

On November 17, 2008, Heritage Oaks Bank filed a third party claim to the properties claiming they had trust deeds on the assets.

In 2006, Heritage Oaks Bank lent Guth a $5 million unsecured loan. Following reports of possible fraud by EFI on CalCoastNews, the bank placed liens on numerous properties, collateralizing their loans to Guth.

By February 2007, Estate Financial had stopped making payments on the loan and Heritage Oaks Bank extended the loan maturity date three times.

In April 2008, less than 90 days before the Estate Financial Inc. bankruptcy, Heritage Oaks Bank advanced $1.1 million on the open line of credit, increasing the loan balance to $5,866,100. At that time, Guth gave the bank a $5,866,100 deed of trust on the Vineyard Drive property.

On November 17, 2008, Heritage Oaks Bank filed a third party claim to the gas stations, the office and the Vineyard Drive property claiming they had trust deeds on the assets.

However, Judge Crawford denied their claim and voiced his concerns about the bank’s actions.

“You loaned large sums of money when crimes were being committed,” Crawford said.

In another twist, an entity owned by one of the bank’s board member’s husband John Lacey was the single largest investor in Estate Financial Inc., with more than $3 million invested in Guth’s company.

Dee Lacey, is a shareholder and sits on the board of directors of Heritage Oaks Bank.

A former federal bank examiner said that federal banking rules prohibit board members from voting to lend monies to companies in which they are invested in, or in some cases investing in companies in which the bank is involved.

An ex-employee of Estate Financial Inc. told CalCoastNews that Guth and Yaguda used the bank loan to fund escrows, and to make interest payments to extend the life of their Ponzi scheme.

The appellate court agreed that “Heritage Oaks Bank third party claim did not pass the smell test. The same smell lingers on appeal. Heritage Oaks Bank makes no showing that it had clean hands when it attempted to collateralize the EFI loan, that the trust deeds are legitimately acquired security interests, or that the trial court abused its discretion in denying the third party claim.”