Field of Schemes-2

FIELD OF SCHEMES

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A COMBUSTIBLE COMBINATION
How could this happen? Christopher Peterson, associate law professor
at the University of Florida, Levin College of Law, notes that, "Real
estate scams have just been chronic in Florida." Meanwhile, on a
nationwide level, changing the terms of a loan, without informing the
consumer prior to closing, has "almost become part of the real estate
closing ritual," says Peterson.

Mix together a shaky Florida real estate deal, a cooling market, and a
slippery lending scheme, and the effect on the consumer's finances can
be the equivalent of a Molotov cocktail.

"It's a testament to the change that needs to take place in the way
that the courts and the legal system think about contracts that
involve residential real estate closings," says Peterson. "And it's
also a testament to the fact that the public needs to educate itself
about how truly dangerous residential real estate closings can be for
them financially…Their life savings, their fortunes, their dreams, can
all slip through their fingers if they're not extremely careful."

Alan Tannenbaum, a real estate attorney in Sarasota, Florida, who
represents about 250 clients who allege they've been ripped off by CCI
and about a dozen other builders, blames the banks that financed the
projects as much as the contractors.

"You had small builders, who probably were qualified to build 12 to 15
homes a year, all of a sudden getting 50 contracts, 75 contracts, and
in the case of CCI, 500 contracts," Tannenbaum says.

Although a bank's underwriters ordinarily assess the wherewithal of
the general contractor, before the institution agrees to lend
construction money, "I think the attitude was, we now have a
home-owner to look to and, if the builder defaults, the note is
payable by the eventual homeowner," says Tannenbaum.

HOUSE OF CARDS
While CCI's 500 abandoned projects grabbed the headlines in southwest
Florida, hundreds of home buyers, who contracted with numerous other
small builders throughout the area, tell similar stories. Their
builders closed up shop once the boom fizzled, leaving unfinished
houses and mountains of bills.

What too many prospective homeowners don't realize is, in Florida and
most other states, when a general contractor defaults on paying
construction invoices, building suppliers and sub-contractors can
place liens on the property. If the lien goes unpaid, these creditors
can and often do sue the homeowner for foreclosure.

That's what happened to customers of Avalon Homes, another small
builder operating in North Port. Avalon shuttered operations in July
2006, leaving about 50 would-be homeowners with unfinished houses on
which liens had been filed by unpaid sub-contractors.

Avalon Homes' owner Joseph Pufta has been indicted on criminal
charges: 20 felony counts; one for grand theft and 19 for
misappropriating construction funds.

Pufta's attorney, Henry Lee, claims his client was trying to complete
the homes but was stymied when the market dropped off and "new home
sales fell to zero."

Lee suggested that Pufta had been unfairly singled out for what's
become a common practice among some Florida builders. "Builders would
take funds from House A to finish House B, and then they'd sell the
new house and use those funds to finish House A," says Lee. "It was
the only way they could keep their cash flow going."

"A thin justification," is how law professor Christopher Peterson
described Lee's rationale. "If you're conducting business that way, as
soon as there's any shock to the system, then the house of cards is
going to fall down."

Just south of North Port, in Punta Gorda, State Representative Paige
Kreegel has been hearing from constituents who have been threatened
with foreclosure due to such practices by yet another company. Some
are retirees who were trying to rebuild the homes they lost to
Hurricane Charley. Others are out-of-staters, planning to move to
Florida.

"Construction companies are vastly more stable in a place where
there's not a chronic boom and bust cycle," says Kreegel. During a
boom, Kreegel says, new builders enter the home construction business,
and established ones expand. "Some of them just get in over their
heads. And others enter with the intent of taking people's money and
running."

In one respect, Chaignet, the CCI customer who faces foreclosure for a
deal gone bad, is among the luckier victims. Because work never began
on her property she won't get hit with the liens from sub-contractors
and suppliers that piled on financial problems for so many others.
Numerous sub-contractors who worked on CCI properties claim they were
never paid, although CCI withdrew money from investors' construction
accounts, supposedly to cover their invoices.

EVERYBODY LOSES
CCI, more than $2 million in debt by the end of July 2005, the first
year of the no-money-down building program, was more than $6 million
in debt by the time it closed in November 2006.

In bankruptcy hearing testimony, Jesse Battle, owner of CCI, admitted that he used more
than $2 million that Coast Bank released to the builder to pay
sub-contractors to, instead, cover other CCI operating expenses.
Battle insisted however that any mistakes he made were
innocent ones. Between building permit delays, the many people taking
cuts off the top, and the inability of CCI to deliver on its
home-building commitments, costs rapidly grew greater than returns.
Add a cooling market — and everything collapsed.

In its SEC filings, Coast Bank reported $66.9 million in outstanding
loans were "impaired" as a result of its dealings with CCI and its
affiliated companies. The FDIC ordered Coast Bank to "cease and
desist…unsafe and unsound banking practices and violations of laws
and/or regulation" including "following hazardous lending practices
and operating with an inadequate loan policy." It also directed the
bank to fire its president.

When asked how Coast's underwriters could have approved almost 500
construction loans involving a shaky builder, Tramm Hudson, an adviser
to the board of Coast, abruptly terminated an interview. A
representative of American Mortgage Link hung up on this reporter when
asked to comment. Phones for CCI and owner, Jesse Battle, have been
disconnected. Battle's lawyer never talks to reporters, according to
the employee who answered his phone.

Gloria Chaignet has had no better luck getting answers. Until the bank
demanded payment, she hadn't been told how much CCI withdrew from her
account. Now severely in debt, and worried about her kids' future,
she has filed a lawsuit against Coast, asking that the bank take the
lot in exchange for the money it claims she owes. She's one of more
than125 Coast-CCI-AML customers who have done so.

Those whose lives have been upended by the tsunami of Florida builder
defaults have almost no hope of reversing their losses in the short
term. Some dig into their savings to complete building their homes on
their own. Others are resigned to bankruptcy. In a situation where
almost everyone loses something, the lawyers may be the sole players
to come out in the black.

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~AB~

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