Bankruptcy trustee sues investors, Cedar Funding creditors cry foul.
Thursday, August 28, 2008
Frustrated Cedar Funding investors lashed out at bankruptcy trustee staff Aug. 21 for suing creditors. Trustee Todd Neilson is suing investors on 11 different properties because David Nilsen allegedly assigned the deeds of trust within 90 days before filing bankruptcy for his real estate loan company, Cedar Funding Inc. Neilson wants to void these transfers and recover the property for the benefit of Cedar Funding’s estimated 1,500 investors.
But during the creditors’ meeting at the Monterey Conference Center, Marvin Spott, an investor in a Santa Cruz property, took issue with the lawsuit. “Why are you suing me over this property because I am an investor?” he asked. “My name is not Nilsen.”
Cecily Dumas, the trustees’ attorney, said she is required under bankruptcy code to sue so that no investor is given preference in receiving Cedar Funding assets. Dumas said no competent bankruptcy attorney would have advised investors that they could stake out interest in deeds of trust so close to impending bankruptcy.
Dumas would rather not spend her time setting aside deed preferences: “I want to bring money in, and having to spend money to set aside these preferences doesn’t get you any money.”
The prospect of investors getting any money back, however, looks grim.
In his opening presentation, Neilson described Cedar Funding as “an unadulterated mess” that ran a Ponzi scheme by paying old investors with new money. Deeds of trusts were, for the most part, not recorded in investors’ names, he said.
Cedar Funding has 168 loans totaling $183 million, but the bulk of the loans– nearly $113 million– are a second loan on a property, according to Neilson. In March 2008, when Cedar Funding stopped making interest payments to investors, only 1.6 percent of loan payments were coming in.
“This went on way, way too long,” Neilson said. “It was like a boat sinking. The holes in the boat were getting bigger, $34,000 coming in, $2 million going out to all investors. The hole was getting too big and it sunk.”
To make his point, Neilson highlighted three struggling properties. Cedar Funding has invested more than $22 million in Lake Elizabeth, a Southern California golf course and RV park, when the property is worth between just $5 million and $7.5 million. Neilson said investors were looking at a $10 million loss on a Carmel Valley home at 72 Chaparral Road, and at least a $3.5 million loss on a Pebble Beach property at 3101 Hermitage Road. “You add those up on these three projects,” Neilson said. “Those are huge losses.”