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December 19, 2014

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Investors accuse lender of mismanaging funds

In separate suit, lender alleges bank didn’t provide promised funding

Hard Money and Hard Times

Hard Money and Hard Times, seg. 2

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  • Hard Money and Hard Times, seg. 1

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Las Vegas hard-money lender Jeff Guinn, son of former Gov. Kenny Guinn, and his company, Aspen Financial Services, are on both the receiving and delivering ends of newly filed lawsuits involving unhappy real estate investors.

In one case, a group of Aspen investors last week sued the real estate lender and Guinn, claiming their investments were mismanaged and that Aspen failed to make key disclosures that would have influenced their investment decisions. This is now the second such suit pending against Aspen in Clark County District Court.

Aspen and other so-called hard-money lenders pool money from investors and lend it to developers who can't or don't want to obtain bank financing. Unlike money deposited in an insured savings or checking account at a bank, these investments can be risky and are not guaranteed.

In an unrelated case, Jeff Guinn and several investor associates are suing a local bank on allegations it has failed to provide funding they say it promised -- funding the investors say they need to build out space for tenants at a new Henderson shopping center.

In the first of the two cases filed by investors against Aspen, the legal fireworks started in November. That's when investors who said they had entrusted Aspen with more than $4 million in investments through 26 first-position loans sued Aspen in Clark County District Court seeking an accounting of the company's books as they relate to their loans and the appointment of a receiver to manage their investments.

“As a result of Aspen’s wrongful actions and omissions, plaintiffs are in danger of losing the entirety of their investments with Aspen,” charged the suit.

The investors claim they were cheated when:

-- Without their permission, Aspen offered the borrowers on their first-position loans the opportunity to borrow more money through second-position loans, encumbering the same properties with additional trust deeds.

-- Without their knowledge, Aspen then serviced these second-position loans, on top of servicing the first-position loans.

-- Aspen gave preference to lenders on second-position loans over lenders on first-position loans, because Aspen’s business associates, family members and employees were lenders on second-position loans.

-- Aspen and/or Jeff Guinn acted as a lender, borrower and/or guarantor on some of the same loans that it made, brokered and serviced. This allegedly created a conflict of interest between Aspen and the first-position and second-position lenders.

“The predictable consequences of the aforesaid conflicts of interest have come to fruition as Aspen has wrongfully placed its interests, and the interests of its principals (including Guinn), the lenders of the second-position loans, the borrowers and the guarantors ahead of the interests of plaintiffs as lenders of the first-position loans,'' the suit charges. “Specifically, although many of plaintiffs’ first-position loans have fallen into default, Aspen has forestalled foreclosure on the first-trust deeds and has refused to pursue the guarantors despite being directed to do so by the lenders on the first-position loans, thereby protecting the interests of itself, Guinn, the second-trust deeds holders, the borrowers and the guarantors, all to plaintiffs’ detriment and injury.''

The suit claims Aspen has sought, in some instances, to further its “wrongful actions, omissions and schemes by deceitfully seeking to form irrevocable trusts designed to limit Aspen’s contractual and fiduciary obligations owed to plaintiffs.”

Also, the suit said, Aspen has to receive approval from more than 50 percent of the lenders in each loan before modifying terms of the note, forgiving any debt or choosing not to foreclose -- but has failed to do so in some cases and is using the irrevocable trusts to avoid living up to its contractual terms with the lenders.

The plaintiffs claim Aspen failed to act in good faith as their agent in servicing first-position loans by “failing to protect and enforce plaintiffs’ interests in plaintiffs’ first-position liens, failing to follow the procedures set forth in the servicing agreements in the event of default by a borrower; and foreclosing on the property that secured plaintiffs’ first-trust deeds on behalf of the second-position lien lenders without prior written consent from plaintiffs.''

In denying the allegations, Aspen said in court papers: “Plaintiffs’ petition for the appointment of a receiver is premised on the preposterous belief that 14 lenders out of approximately 3,500 know what is best for each and every lender.''

“Fourteen lenders out of approximately 3,500 want to dictate the servicing of each and every loan, as well as each and every action the collective group undertakes. These 14 lenders — despite controlling less than 1 percent of the interest on several of the loans at issue — would have the court controvert the will of the majority of lenders, vitiate the 51 percent voting requirement set forth in the servicing agreements, and allow these 14 minority lenders to control and decide each and every action related to these multiple multi-million dollar investments. Plaintiffs’ request for a receiver is merely an attempt by an extreme minority group of lenders to usurp control of the majority merely because they are unhappy with the voting results,'' Aspen said.

Aspen's lawyers said the actions at issue work to the benefit of the first-position lien holders.

In one instance, “Aspen presented this vote to the first-position lien holders because it allowed them to save the expense of completing their foreclosure and to reap the benefits of the second-position lien holders having paid to obtain title to the property through their foreclosure.

“The second-position lien holders were required to forward every single offer for sale to the first-position lien holders for approval, essentially meaning that the first position was still dictating the sale of the property,'' Aspen's response said.

“The reality is that it is commonplace in the mortgage industry for a company like Aspen to service first- and second-position loans simultaneously, and other loan servicing companies do this on an everyday basis. The reason it does not create an ‘irreconcilable conflict of interest’ is because the presence of a second-position lien holder has absolutely no effect on the first-position lien holder. The loan servicer has absolutely no ability or authority to unilaterally subordinate the first position’s priority lien, and once the property is sold, the proceeds from the sale will always satisfy the first position before the second position,'' the response said.

Aspen also pointed out that all of its investors must fill out a questionnaire so Aspen can certify they are sophisticated and suitable investors. It noted that despite their complaints about Aspen servicing second-position loans, several of the plaintiffs are themselves investors in such loans.

Aspen said the trusts the plaintiffs complained about were created because of expected multiple defaults by borrowers and the need to facilitate multiple foreclosures and lawsuits against those who guaranteed the loans.

During oral arguments in February, a request for a receiver to oversee six of the loans and an accounting of those six loans was rejected by District Judge Elizabeth Gonzalez, but she ordered discovery to proceed with Aspen required to turn over voting records and disclosures it made to the first-priority and second-priority lenders in the loans at issue.

During that hearing, one of Aspen's attorneys, John Bailey of the firm Bailey+Kennedy, said if the plaintiffs wanted to complain about Aspen or seek a receiver, they should have done so with state regulators.

“Aspen is highly regulated and monitored by the Nevada Division of Mortgage Lending, which as recently as a few months ago conducted a thorough investigation of Aspen. Now, when I say a thorough investigation I don’t mean somebody stopped in at 2 o’clock in the afternoon and left at 4. Their investigation consisted of 145 hours at Aspen looking over everything that Aspen does. When they finished that investigation, they concluded that Aspen was in substantial compliance with all laws and regulations,'' he said.

Aspen is also represented in that case by attorneys Joshua Dickey and Joseph Liebman of Bailey+Kennedy.

The plaintiffs in that case are Lois Levy as trustee for a trust, James R. Zellers as trustee for a trust, Linda and Rodney Reber along with a Reber trust, Charles E. Thompson as trustee for a trust, Daniel and Jodi Pick, Peggy Beth Hart, Clinton Clausen, David Willden as trustee for a trust, Kenneth R. and Yvonne R. Gragson as trustees for a trust, Jean Willden, Connie Laverne Thompson as a trustee, and Kira John-MacDonald.

That suit was filed by attorneys Joseph Kistler and Jeffrey Hulet of the firm Gordon Silver.

***

A lawsuit against Guinn and Aspen by a second set of investors was filed April 14 in Clark County District Court. Aspen has not yet responded to the allegations in that suit and Guinn declined comment, citing a policy of not commenting on pending litigation.

These investors say they invested in 26 loans between 2001 and 2007 and recently discovered cases in which they say Aspen mismanaged loans, did not look after their interests and failed to send them their share of loan fees.

They claim Aspen has refused to turn over detailed information on many of the loans and breached a duty to the investors to provide full disclosure, perform due diligence, be fair, be loyal, avoid self-dealing and failed to adequately “protect, service and collect plaintiffs' share of the Aspen loans.”

The plaintiffs are seeking a full accounting of all transactions that affected their interests and appointment of a receiver to oversee their loans at Aspen, which they claim made “material misrepresentations with fraudulent intent'' and has “wrongfully exercised ownership and dominion over plaintiffs' assets.”

One of the loans at issue in that case, the plaintiffs say, was for Milano Residences LLC, which involved the development of 100 condominiums near Cactus Avenue and Bermuda Road -- a development initially projected a few years ago to be worth $30.3 million. The plaintiffs say Milano is owned by Susan Mardian, who the plaintiffs say is a friend of Guinn's and a partner with him in other business transactions.

The lawsuit charges that the condominium project now sits half finished, is currently worth only $3.8 million and needs another $9 million to be completed.

It says Aspen mismanaged investors' loans to the project at the beginning by saying the project was under construction when in fact construction had not started.

It claims the mismanagement continued when Aspen failed to disclose a Mardian company, Joshua Tree LLC, had apparently continuously filed and re-filed third-position deeds against it, getting paid as much as $11.5 million from Aspen loan proceeds as the deeds were extinguished, all to the detriment of the higher-priority deed holders.

The suit claims loan proceeds for these third-party deeds were not for their intended purpose of buying the property and paying for improvements on it, that Mardian paid a loan extension fee for which the plaintiffs did not receive their share, that Aspen failed to monitor the property for liens and liens were filed against it, and that Aspen continued to fund the project even after its loan-to-value ratio exceeded the amount initially disclosed, 91 percent.

The plaintiffs in that case are Donna Ruthe, individually and for Charles Ruthe; and two companies she is involved with: Today's Realty Inc. and CDR Investments LLC; Calogero Granieri as trustee for a Richard Acovino trust; Frank Granieri and Richard Acovino.

That suit was filed by attorneys Mark Solomon, Alan Freer and Robert Simpson of the firm Solomon Dwiggins & Freer.

***

Coronado Canyons

Separately, in an April 9 lawsuit, Aspen, Jeff Guinn and other investors in a Henderson retail center development sued Community Bank of Nevada in Clark County District Court over a $29 million loan, saying the bank is threatening to declare the loan in default. The development is called Coronado Canyons and, the lawsuit says, consists of five buildings on 10 acres at Green Valley Parkway and Horizon Ridge in Henderson. The new shopping center is mostly vacant.

The Guinn investors allege fraud, breach of contract and failure of the bank to deal fairly and in good faith.

They claim that in addition to the $29 million, the bank promised to fund $2.8 million in tenant improvements for the project, but then failed to do so, preventing the center from leasing space to potential tenants.

The plaintiffs say they submitted letters of intent from would-be tenants to the bank as they sought build-out financing for tenants. The suit doesn't say whether leases -- as opposed to nonbinding letters of intent -- were submitted to the bank.

Larry Scott, chief executive of the bank, said the claims are without merit and the bank would vigorously defend itself against the suit. He declined comment on the specific allegations in the suit, citing a bank policy of not commenting on pending litigation.

Guinn and Aspen also allege the bank, in order to leverage its position on the Coronado Canyons loan, required Jeff Guinn to put his home in Del Mar, Calif., up as collateral for lines of credit totaling $3.358 million for him personally and for Aspen; and also refused to negotiate new terms on other loans until the investors showed progress in performing on the Coronado Canyons loan by leasing the center's shop space to retailers.

The additional loans included a line of credit for an unspecified amount to Jeff Guinn, Coronado Canyons manager R. Kent Barry and Sean P. Corrigan, president of Aspen; and a $5.68 million loan secured by an airplane.

There's also a loan to a company called Coronado Aspen II in which former Gov. Kenny Guinn is involved. The suit said Kenny Guinn -- Jeff's father -- is a principal in that company and that in February, Kenny Guinn participated in a meeting with Edward Jamison, chairman and chief executive of the bank's parent company, Community Bancorp; bank CEO Larry Scott and other bank officials to discuss various loans involving Jeff Guinn, Barry and Corrigan.

A loan for Coronado Aspen II was cited in the lawsuit as being one that Community Bank refused to renegotiate until the problems with the Coronado Canyons loan were resolved. The suit says that loan was made in June 2004 for $4.72 million and was secured by real estate that was not further identified.

That loan was guaranteed by Jeff Guinn, Monica Guinn, Kenny Guinn, Mark Brown, Michele M. Brown and Guinn family trusts involving Jeff, Monica and Steve Guinn.

The suit doesn't say if that loan is delinquent.

“For the past several months, due to changing market conditions, (Jeff) Guinn had been attempting to negotiate with the bank regarding the terms of the Coronado Aspen II Loan. However, the bank refused to negotiate in good faith and conditioned any negotiations on the performance of the Coronado Canyons loan,'' the lawsuit charges.

The plaintiffs also allege that at the request of the bank, and with the understanding the bank would renew unsecured lines of credit for Aspen and Jeff Guinn, Aspen in March 2008 agreed to a subordination request regarding an unrelated $4 million loan to McCormick Investments LLC for a commercial/residential project called Astoria at Fort Apache and Warm Springs roads.

Aspen held a second deed of trust for its $4 million loan, the lawsuit said. The plaintiffs say this subordination came at the request of the bank because McCormick Investments could not make an interest payment. The plaintiffs say the subordination by Aspen allowed the bank to add $1 million to its first deed of trust covering its $31.6 million loan to McCormick, and $1 million to the loan's interest reserve. The plaintiffs say Scott told Guinn and Corrigan the subordination was needed so the bank would not have to report the McCormick loan as delinquent in its annual financial report.

The plaintiffs also assert the bank last month -- over the objections of the borrowers -- used money in the interest reserve on the Coronado Canyons loan to cover past-due payments, “presumably” so it would not have to declare the loan in default in its first quarter financial report.

The plaintiffs in the case against Community Bank are Jeff Guinn individually and as trustee of a trust; Coronado Aspen II; Monica Guinn, R. Kent Barry, individually and as trustee of a trust; Mary Sunshine Barry; Sean P. Corrigan, individually and as trustee of a trust; Lisa D. Corrigan; and several companies managed by Jeff Guinn or Barry: Coronado Canyons LLC; Pacific Sunset Development LLC; Coronado Bay Investments LLC; Aspen Financial Services; and Coronado Nevada LLC.

The suit was filed by attorneys Dennis Kennedy and Kimberly McGhee of the firm Bailey+Kennedy.

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