Thursday, December 2, 2010

Lubert-Adler Partners, Ginn Development Company et al Charged with Fraud




Lubert-Adler Partners

Lubert-Adler, a nationally known real estate private equity firm, aligned with Bobby Ginn in 1997 to purchase, promote and sell property in various residential venues. The financial relationship between the two is not publicly acknowledged, but court documents reveal that:
The JV has acquired each of 23 residential resort communities in separate entities, which are owned 80% by the investing Lubert-Adler Fund and 20% by Bobby Ginn. Lubert-Adler provides 100% of the investor capital, and receives a compounded priority return of 10% and its capital back prior to any distribution to Bobby Ginn.
Lubert-Adler began marketing funds to institutional investors in 1997 with the goal “of providing participants with compounded annual returns of 20% (net of all fees and expenses) and an equity multiple of 2x over the life of the Fund.”

Under Scrutiny: June 2006 Credit Suisse Loan Package

In June 2006 Lubert-Adler/Ginn parlayed a deal with Credit Suisse to borrow $675 million. The loan was predicated on the future value (appraisals provided by Cushman & Wakefield) of five Lubert-Adler/Ginn owned, planned or under development, properties. Collateral offered: Laurelmor, Tesoro, Quail West, Hammock Beach River Club and Grand Bahamas-West End (aka Ginn Sur-Mer and Versailles Sur Mer). Legal documents refer to these debt-laden subdivisions as Project Entities. The Credit Suisse/Cushman & Wakefield method of valuation is the subject of several lawsuits.

Lubert-Adler/Ginn: Credit Suisse Loan Default June 2008

Unable to meet debt obligations in June 2008, Lubert-Adler/Ginn entered into a restructure understanding with the Credit Suisse-led lien holders regarding the cross-collateralized projects: Laurelmor was passed to a Lubert-Adler connected entity, Tesoro and Quail West entered Chapter 7 bankruptcy protection, Hammock Beach was removed, and Ginn Sur Mer went into foreclosure.

Drew Dillworth Complaint

Lubert-Adler et al are being sued by Drew Dillworth, the trustee handling the Tesoro and Quail West bankruptcies.

In his complaint, Bankruptcy Trustee Dillworth noted that each of the “Debtors was jointly and severally liable with the Other Project Entities for loan principal and interest totaling $715,986,962.07, with liens on substantially all of their assets, and no hope of recovery.”

Fraudulent Conveyance Claims re Distribution of Credit Suisse Loan Proceeds to Lubert-Adler Funds III and IV Investors and Ginn Clubs and Resorts

Trustee Dillworth alleges that the purpose of the Credit Suisse Loan was:
"The removal of all guarantee exposure to Bobby Ginn, Lubert-Adler Fund III and LA Fund IV” by paying off all existing recourse debt and replacing it with debt that was recourse only at the Project level; and "[The funding of] an immediate dividend" of more than $325,000,000, which would enable (i) "[T]he immediate mitigation of 100% of the capitol risk, through the repayment of all invested equity and bridge fundings," and (ii) "the harvesting of profits” on an “accelerated” basis.
Dillworth offers the following evidence to support his reasoning:
April 24, 2006 draft "Memo" from Lubert-Adler Partners, L. P. to the Lubert-Adler Fund III and IV Advisory Boards

Lubert-Adler Funds III and IV will be asked to "pool" their respective investments in Tesoro, Hammock Beach River Club, Quail West, Laurelmor and Grand-Bahamas-West End (collectively the "Projects" so as to provide Credit Suisse with a package of cross-collateralized assets as security for its loans. However the principal risk of any cross-collateralized financing is that Project A (e.g., Tesoro) though highly successful on its own, could nevertheless be lost to foreclosure in the event that Project B (e.g., Laurelmor) or Project C (e.g., Grand Bahamas-West End do not perform well, thereby causing the Credit Suisse loan to go into default. Lubert-Adler Funds III and IV, and Ginn Clubs and Resorts, have obtained a term sheet from Credit Suisse Securities (USA) LLC, for three facilities totaling $675,000,000. The proceeds of the loans made under the First Lien Facility and the Second Lien Facility, along with cash contributed by the Borrower will be used by Borrower,

1. To repay certain existing indebtedness of Borrower in the approximate amount of $160,000,000 (the "Existing Debt");

2. To fund a one-time distribution in the approximate amount of $333,125,000; and

3. To pay a portion of the development and construction costs associated with the completion of the projects commonly known as Quail West, Tesoro, Hammock Beach River Club, Laurelmor and Grand Bahama (West End), collectively, (the "Projects" ).
Supp. Ex.2 Email Stearns, 4/29/08

Similarly, later that same year, Ginn-La "restructuring" counsel strongly advised against any pre-packaged reorganization plan which did not include a formal "release" broad enough to cover a "fraudulent conveyance claim" relating to the Credit Suisse loan proceeds "dividend." For in counsel's words: (A) the Borrowing Parties were "left insolvent by [the] dividend"; (B) a Trustee would, therefore, have a "fraudulent conveyance claim" with respect to the "dividend";(C) "nonrecourse [does] not mean cannot sue"; and (D) Trustees can "file complaints that are horrible." Supp. Ex. 3 Notes of Telephone Conference, 10/2/08
Parties who owned or were purchasing property in the above named developments were not privy to the risks posed by the cross-collateralized Credit Suisse 2006 lien, subsequent Lubert-Adler/Ginn 2007-2008 defaults/restructures, and the HUD September 2008 suspension. ( HUD suspensions under the Interstate Land Sales Full Disclosure Act prohibit developers from selling lots in their subdivisions for two years.)

Complaint for Avoidance and Recovery of Fraudulent Transfers

Trustee Dillworth in his Second Amended Complaint August 10, 2010 adds Lubert-Adler investors as defendants. The list contains numerous employee retirement plans including Duke University.

Fraudulent Appraisals

The most relevant and common issue in pending lawsuits (Dillworth Complaint and others) is the question of whether appraisals were in compliance with the Financial Institutions Recovery Reform Act. This law was passed in 1989 to correct abusive practices that caused the collapse of the savings and loan industry.

Trustee Dillworth explains:
As a consequence, the Credit Suisse loans did not comply with U.S. banking laws, such as the Financial Institutions Recovery Reform Act of 1989, which provides that, before a regulated financial institution may make or invest in a loan secured by real estate, the loan must be supported by an appraisal reflecting a traditional market valuation of the proposed collateral.
57. To circumvent that requirement, Credit Suisse coordinated the loans through its “Cayman Islands Branch,” an off-shore “affiliate” with no physical presence in the Cayman Islands, and syndicated the loan product to non-regulated entities, such as hedge funds.
On November 9, 2010, Trustee Dillworth was successful in his motion to compel release of Credit Suisse loan documents.

Related Litigation re Credit Suisse and Cushman & Wakefield

Thousands of property owners in four developments are expected to join a $24 billion class-action lawsuit filed against Credit Suisse and appraiser Cushman & Wakefield.

Bloomberg: “Credit Suisse Resort Loans Default From Beverly Hills to Idaho.”
Bloomberg: “Yellowstone Club Bankruptcy Reorganization Overturned”

Related Litigation re Lubert-Adler Partners and Ginn Development Company

In another lawsuit, Case No: 3:09-CV-00446-TJC-HTS, plaintiffs allege that Lubert-Adler and Ginn worked in concert with various Preferred Lenders ( SunTrust, Fifth Third Bankcorp, Ginn Financial Services and Wachovia) to fraudulently inflate property values in nineteen residential communities.

(a) Hammock Beach in Palm Coast, Florida;
(b) Tesoro Preserve in Port St. Lucie, Florida;
(c) Reunion Resort in Orlando, Florida;
(d) Bella Collina in Montverde, Florida;
(e) Yacht Harbor Village at Hammock Beach, in Palm Coast, Florida;
(f) Conservatory at Hammock Beach in Palm Coast, Florida;
(g) Quail West in Naples, Florida;
(h) Cobblestone Park in Blythewood, South Carolina;
(i) The BriarRose in Hancock County, Georgia;
(j) Laurelmor in Boone, North Carolina;
(k) Burke Mountain in East Burke, Vermont;
(l) Ginn Sur Mer, Bahamas;
(m) Mahogany Run in the Virgin Islands;
(n) Tesoro Club;
(o) Tesoro Beach Club;
(p) Admirals Cove Condominiums;
(q) Hammock Beach Club Villas;
(r) Hammock Beach Club; and
(s) The Towers at Hammock Beach

Second Amended Class Action Complaint filed November 5, 2010.

Laurelmor, the North Carolina Lubert-Adler Connection

Lubert-Adler/Ginn purchased the Laurelmor tract in April 2005 for $57 million. On November 11, 2006, the partners commenced sales with lots in the undeveloped subdivision priced from $500,000 to $1.2 million. According to Ginn company spokesman V.P. Bobby Masters, 200 Laurelmor lots had been sold at the time of the June 2008 default.

The Laurelmor liens (approximately $30 million) were settled by Reynolds Capitol Group in December 2008. Deeds show that BR Development Group LLC and Blowing Rock Resort Venture LLC own the Laurelmor project. These specially created entities obscure the fact that Lubert-Adler Partners, Inc. controls the project.

Reynolds Blue Ridge Real Estate

The Laurelmor name was retired in 2009 and replaced with Reynolds Blue Ridge. This unfinished project is currently listed as a Reynolds Signature Communities endeavor with lots priced at $150,000. These valuations are questionable since most of Reynolds Blue Ridge planned building sites (roads and homes) are subject to soil slippage and landslides.

In violation of the May 2010 North Carolina Real Estate Commission material fact ruling, Reynolds Signature Communities has failed to reference Watauga County landslide hazard maps on property listings and in sales contracts.






Watauga County Landslide Hazard Maps—North Carolina Geological Survey

Western North Carolina Fraudulent Appraisal Complaints

Village of Penland—Spruce Pine, North Carolina

The question of fraudulent real estate appraisal practices was pursued by Attorney General Roy Cooper after the FBI opened its Village of Penland investigation. Lots in this proposed subdivision had been appraised and sold for $125,000, whereas tax records showed values of $20,000. Amy Stroupe, a Corporate Investigator for BB&T, was the party responsible for notifying federal authorities of the Village of Penland appraisal irregularities. BB&T fired Ms. Stroupe for her actions.

Lenders involved with the Village of Penland development: Branch Banking & Trust, United Community Bank, Carolina First Bank and First Charter Bank.

In the matter of BB&T, investigators found that... "BB&T was not just a victim of fraud committed by others; it was aiding Peerless (the developer) in committing the fraud." BB&T mortgage losses in the Village of Penland loan portfolio: $20 million. The Village of Penland scheme cost underwriters more than $100 million.

Grey Rock at Lake Lure—Rutherford County, North Carolina

Grey Rock at Lake Lure property owners filed a lawsuit against Land Resource, LLC and various developer-chosen lenders for inflating land values. The subdivision's 900 lots were appraised for $200,000-$700,000. Without regard to hazardous-land conditions, Grey Rock home sites and roads were platted on clearly-identified unstable soils. Banks listed as defendants: Bank of America, Branch Banking & Trust and Wachovia.

Land Resource, LLC filed for bankruptcy protection in 2008.

Leigh Meininger, the trustee handling Land Resource's liquidation proceedings, claims that the company and its subsidiaries grossed $250 million in 2005-2006 but failed to complete promised infrastructure in many of its developments. Court documents note that Bob Ward, founder and president of Land Resource, received $21 million in compensation in 2005.

Trustee Meininger alleges in her October 2010 filing that millions of dollars of company funds were "fraudulently transferred" to J. Robert Ward, his family, various trusts and partners prior to entering bankruptcy protection.

Federal Response

Other than the Village of Penland, there has been no federal effort to examine the evidence of fraud in these cited civil actions.

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