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Meltdown in SLO – Problems drain $120M from troubled county businesses

By   /   Friday, February 20th, 2009  /   Comments Off on Meltdown in SLO – Problems drain $120M from troubled county businesses

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Scandals, shady dealings and projects gone wrong have swamped San Luis Obispo County.

In the last year, major homebuilders in the county and their financiers have gone belly up, triggering a flurry of criminal investigations. Bankruptcy filings say thousands of creditors — many of them small-time investors who put up their savings — are on the hook for at least $120 million.

For the most part, the scandals and deals gone wrong center on real estate development and lenders who gathered investors’ money to fund it. Some don’t involve any allegations of wrongdoing but still promise to leave hundreds of creditors, many of them small subcontractors, wiped out once bankruptcy courts divvy up assets.

Here’s a closer look at some of the largest debacles.

Estate Financial

The most dramatic of the scandals concerns Paso Robles-based Estate Financial. The lender gathered investors to fund real estate development and owned a purported $340 million real estate portfolio, most of it in SLO County, according to court filings.

Last summer, the firm’s investors filed to force it into Chapter 7 bankruptcy, and a fund connected to it filed shortly afterward. The debts are $28 million, according to court filings.

On Oct. 16, a bevy of county, state and federal law enforcement officials arrested two of the firm’s higher-ups, Josh Yaguda and Karen Guth. They were charged with 26 felony counts, mostly relating to misleading and bilking thousands of investors, according to the SLO County District Attorney’s Office.

“We have alleged that they have taken at least $3.2 million,” SLO County Deputy District Attorney Steve van Dohlen told the Business Times, “although in our statement of probable cause for bail we’ve alleged more than that – $13. 5 million.”

Since their arrest, Guth and Yaguda have been in county jail in lieu of $5 million bail each. The SLO County Superior Court also froze their assets, according to the DA’s office, including the Pasolivo olive oil ranch. The ranch won national awards for its offerings and is still in business.

Guth and Yaguda have yet to enter pleas, and another hearing on the matter was set for Feb. 20 as the Business Times went to press.

Kelly Gearhart

North SLO County developer Kelly Gearhart filed for Chapter 7 bankruptcy Feb. 11, listing at least $45 million in debts, much of it to thousands of small-time and mainly local investors, according to bankruptcy filings. Federal, state and county officials are also conducting a criminal investigation, though van Dohlen of the DA’s office told the Business Times he couldn’t release any details.

Hurst Financial financed many of Gearhart’s projects, and it has also run into legal troubles. Last month, the firm agreed to hand over its lender’s license after state regulators accused it of failing to pay back investors as promised, among other allegations, according to records from the state’s Department of Corporations.

Hurst Financial and Gearhart are also the target of a number of lawsuits in SLO County that allege the developer took investors’ money but never built homes as promised, according to court filings.
After Hurst Financial ran into trouble, Gearhart appeared to vanish. The San Luis Obispo Tribune traced Gearhart to a small town in Ohio, which is where he eventually filed for bankruptcy.

R.W. Hertel & Sons

Creditors to R.W. Hertel & Sons, a Ventura-based developer that built more than 600 homes in SLO County, filed to force it into Chapter 7 bankruptcy. The three who filed say they are owed $42,000, but that total could balloon in coming weeks as the firm says what it has and what it owes.

Hertel & Sons came unraveled as financing for four major developments collapsed along with the housing market. One of its former partners, Bob Fowler, has told the Business Times he’s buried under millions in debt of his own and has had a nearly $300,000 state tax lien filed against him.

The Hertel & Sons bankruptcy stayed lawsuits against the firm alleging construction defects. Fowler and Ron W. Hertel also face a lawsuit in Los Angeles County seeking to repossess a 67-foot yacht they own, according to court records.

Maria Vista Estates

Maria Vista Estates – a 77-home development near Nipomo – died in a haze of lawsuits over the fees owed to the county. The developers filed for bankruptcy listing debts of about $35 million.

But late last year, the development’s largest creditor – Security Pacific Bank – went under and got taken over by federal regulators. The Federal Deposit Insurance Corp. is now the largest player in the bankruptcy and is owed about $26 million, according to court filings.

Maria Vista Estates’ bankruptcy trustee earlier this year moved to settle some of the legal matters with the county for as little as $100,000 – what some of the firm’s creditors criticized as a “take the money and run” approach.

Cameron Financial

San Luis Obispo-based lender Cameron Financial Group made so-called jumbo loans to borrowers with “bruised credit” for home buying and home repairs, according to the firm’s former Web site, which has been down for nearly a year.

The firm filed for Chapter 7 bankruptcy in February 2008, listing $28 million in debts.

A Business Times investigation revealed that the firm left the renters of some of its condos in Morro Bay stuck with unpaid water bills and facing eviction notices because of foreclosure. It also revealed that some assets might have been transferred away from Cameron Financial Group shortly before it filed for bankruptcy – a move that could be undone by the court.

Bankruptcy trustee Jerry Namba is still hunting for possible assets in the case, according to bankruptcy court filings.

Steven McPherson

Steven McPherson, the former owner of the SLO Blues baseball team, faces charges in SLO County for allegedly writing about $11,000 in bad checks to the city of San Luis Obispo and vendors to rent out Sinsheimer Stadium for the team, Chief Deputy District Attorney Jerret Gran told the Business Times.

Gran said McPherson bounced a total of about $30,000 in checks in San Luis Obispo county. Charges were only filed for a few of them, Gran said.

“Our investigation revealed money coming in and money coming out, and it was difficult to prove that there were insufficient funds at the time,” Gran said.

McPherson is in jail in Clark County, Nev., where he faces revocation of his probation for an earlier bad-check offense, that county’s records show.

Business Times illustration by Emily Rancer.

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