One case filed by the plaintiffs in Contra Costa County, CA comes to mind. Greedy real estate investors thought that collecting 12% on their real estate investment in the 4% interest rate economic climate (also known as “predatory lending”) was too good to be true. Yet, greed overpowered their common sense.The civil case that arose from this shady “investment” was filed on 01/23/2006 by Harold M. Jaffe, Esq. the council for the plaintiff, John and Bernadette Shramek, individually and as Trustees of the John S. Sramek, Jr. and Bernadette D. Sramek Revocable Living Trust. The case summary is as follows:
This case concerns two parcels of real property located in an unincorporated area of Contra Costa County, California, adjacent to the incorporated city of Walnut Creek, California, which are commonly described as Assessor Parcel Nos. 189-051-037 and 189-820-006.
If you want to read the real case, it was filed in Contra Costa County, CA, Martinez branch; CASE NO. C06-00162; Case Name Shramek v. Jacobsen at al.
The original complaint as I am documenting this story is not existent on the Contra Costa County Court website, thus the first complaint that can be found in online records is the First amended complaint. Causes of action are as follows:
1) BREACH OF CONTRACT;
2) FRAUD;
3) VIOLATION OF UNFAIR BUSINESS PRACTICES ACT [BUS. & PROF. CODE §§17200, ET SEQ.;
4) BREACH OF FIDUCIARY DUTY AND/OR CONFIDENTIAL RELATIONSHIP;
5) UNJUST ENRICHMENT AND RESTITUTION;
6) BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING;
7) NEGLIGENT OMISSION;
8) FRAUDULENT OMISSION;
9) FRAUDULENT MISREPRESENTATION;
10) NEGLIGENT MISREPRESENTATION;
11) ALTER EGO [REJ/JACOBSEN];
12) ALTER EGO [OSPREY ALBERSON];
13) ALTER EGO [REJ/OSPREY];
14) AIDING AND ABETTING;
15) FRAUDULENT TRANSFER
16) NEGLIGENT MISREPRESENTATION;
17) BREACH OF INSURANCE CONTRACT;
18) BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING; AND
19) DECLARATORY RELIEF
The plaintiffs’ GENERAL ALLEGATIONS are as follows:
On or about July 23, 2003, JACOBSEN, a Licensed Real Estate broker, through his corporation REJ purchased the Property from David and Linda Gates for $145,000.00, with a down payment of $5,000.00 and with Gates carrying a deed of trust in the sum of $140,000. After purchasing the property, JACOBSEN sought an easement across the adjacent parcel owned by Larry and Judith Carre at 281 Castle Hill Ranch Road. Carre and JACOBSEN negotiated an agreement, which provided inter alia that Carre would provide an easement to JACOBSEN in exchange for cash, and a lot line adjustment giving Carre additional land, the square footage of which is unknown to plaintiffs but which was approximately 2,600 square feet.
On or about September 8, 2003, Carre and JACOBSEN submitted an application to the County of Contra Costa for a lot line adjustment. In or about October 2003, Carre and JACOBSEN met with Contra Costa County planners. During this October 2003 meeting, Contra Costa County planners rejected the lot line adjustment and informed JACOBSEN that the Property was designated open space.
After acquiring the Property through REJ, JACOBSEN caused an appraisal of one of the parcels to be performed, which parcel (APN 189-051-037) was appraised for $1,700,000 contingent satisfactory completion of the lot line adjustment application with the county. The appraisal report stated that the appraiser is not aware of any legal complications on the property and is not liable in the event such complications may exist. The appraisal was said to be for the refinance purposes only (“for mortgage loan purposes only”) and was prepared for REJ, which was intended to be the lender for the loan on the property.
On or about October 29, 2003, REJ executed a promissory note in favor of an entity called OSPREY. The promissory note was in the principal sum of $1,250,000.00, together with interest at the rate of seven percent (7%) per annum, all due and payable on December 31, 2004.
Said note was secured by a deed of trust against the property, dated and recorded on October 29, 2003, as Document No. 2003-0536389, Official Records of Contra Costa County. The principal of OSPREY, whether before or after its February 5, 2004 incorporation was ALBERSON whom JACOBSEN has known for over thirty years, having met him while they were in college.
On or about February 3, 2004, a new first deed of trust was placed on the Property in the principal sum of $650,000 to secure a loan to REJ from the Lafayette Capital Group, Inc. Said note was secured by a deed of trust dated January 29, 2004, and recorded on February 10, 2004, as Instrument No. 2004-043205, Official Records of Contra Costa County Recorder.
At for about the time the new first deed of trust in the amount of $650,000 was obtained by REJ from Lafayette Capital, defendants ALBERSON and JACOBSEN caused the aforementioned $1,250,000 note from REJ to OSPREY to be re-conveyed. Subsequent to the close of the Lafayette Capital loan on February 10, 2004, a new $1,250,000 deed of trust dated October 29, 2003, was recorded on
February 10, 2004, with the statement “this deed of trust is junior and subordinate to the deed of trust in favor of Lafayette Capital Group in the amount of $650,000 recorded currently herewith.”Simultaneously, title insurance was provided by a title insurance company to OSPREY. This title policy was dated February 10, 2004. To make the note more marketable, ALBERSON and JACOBSEN modified the note increasing the interest rate on the promissory note from REJ to OSPREY from 7% to 12% from and after January 1, 2005, and extended the term of the note to January 31, 2006.
JACOBSEN, in order to market the second trust deed, placed advertisements in local newspapers in or about Contra Costa County, and the San Francisco Chronicle, and prepared a write up about the Property which included statements “8 home sites, all hilltop,” “all utilities are available,” “value of the property as it sits is estimated to be $3,500,000.00.”
On or about May 19, 2004, said note and deed of trust were assigned by OSPREY to plaintiffs herein for $1,000,000. This assignment of deed of trust was recorded on May 21, 2004, in the Office of the Contra Costa County Recorder.
Upon OSPREY’s receipt of the $1,000,000 in sale proceeds from the assignment of the promissory note and deed of trust to the plaintiffs, ALBERSON caused OSPREY to transfer the $1,000,000 proceeds, less a small “commission” paid to himself of $10,000, to REJ.
After REJ’s receipt in June 2004 of $990,000 of the $1,000,000 in sale proceeds from the assignment of the promissory note and deed of trust by OSPREY to the SRAMEKS ($1,000,000 less ALBERSON’s $10,000 commission), JACOBSEN, during the period commencing June 2004 through May 2005, caused said proceeds (approximately $990,000) to be transferred from REJ, without consideration, to the benefit of JACOBSEN, individually, and others such as MALIKYAR.
When REJ failed to make payments under the Lafayette Capital deed of trust, other than the one year’s interest payments taken out of the loan proceeds themselves as an interest reserve at the time of the closing of the Lafayette Capital loan in January 2004, Lafayette Capital caused to be recorded on April 22, 2005, a Notice of Default and Election to Sell Under Deed of Trust.
On May 5, 2005, JACOBSEN “sold” REJ to a John Brosnan, pursuant to a document entitled Agreement for Purchase and Sale of Ownership of REJ Properties. On or about May 5, 2005, the only asset of REJ other than $1.50 in a Wells Fargo Bank checking account, was the property, which was subject to the aforementioned notice of default.
On July 29, 2005, recorded a Notice of Trustee’s Sale was recorded against the property, and on November 28, 2005, a trustee’s sale was held in Contra Costa County, California. At the time of the trustee’s sale, the unpaid debt owed Lafayette Capital by REJ, together with costs, was $761,942.64, and the credit bid at the trustee’s sale by Lafayette Capital was $402,000.00.
Basically, here is what the plaintiffs allege. A note that was executed by REJ on October 29, 2003 in favor of OSPREY in the principal sum of $1,250,000. Subsequently, REJ borrowed $650,000 from Lafayette Capital and REJ and OSPREY, acting through ALBERSON and JACOBSEN, caused the deed of trust securing the $1,250,000 to be subordinated to the new $650,000 loan from Lafayette Capital. After that, REJ made no payments other than those provided for in the initial interest reserve to Lafayette Capital, causing Lafayette Capital to record a notice of default and subsequently on November 28, 2005, the property was sold at a trustee’s sale. REJ thereby allowed the senior lien with Lafayette Capital to become delinquent and to allow the senior lien to foreclose. As a result of said foreclosure, plaintiffs have been deprived of their collateral and are now “a sold out junior.”
Plaintiffs have requested the following damages:
$1,250,000 plus interest at the rate of seven percent (7%) per annum from October 29, 2003 to December 31, 2004, and at the rate of twelve percent (12%) per annum thereafter. As of October 31, 2006, the balance owed on said promissory note, was $1,627,536.68 (principal - $1,250,000 + interest - $377,536.68). Interest, as the plaintiffs requested shall continue to accrue from and after October 31, 2006, at the rate of $410.96 per day.
Do you see the multiple mistakes that the greedy investors made? First of all, they didn’t do any research whatsoever, which ultimately would have revealed that at the time they invested in the property, the parcel of land was already assigned open space. Second mistake, they relied on the outdated appraisal, which appraisal when presented to a financial institution AKA a lender is required to be renewed or another appraisal is required to be performed. Generally, when an appraisal is performed at the request of a lender, the lending institution’s name is placed on the appraisal. If a loan does not go through with a chosen lender, and a loan application is taken to another lender, such lender will never accept an appraisal that has a different lender’s name on the appraisal report. Moreover, the life of the appraisal report is three months, and the appraisal states that the appraisal value is an estimate and the appraiser’s opinion of what the property could sell for in the open market on the day the appraisal is performed. Additionally, the appraiser relies on the information available to him on the date he prepares the report, and not on the information that changes daily and that is two years outdated, before the property became “open space”.
If you are looking for 12% annual interest on your investment in the 4% lending market, perhaps you should re-read Donald Trump’s famous quote, when it comes to investing in real estate, if it sounds too good to be true, it probably is.
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