Paso lender falls into bankruptcy

A pricey lawsuit over a construction loan shutters hard-money and foreclosure services company

jlynem@thetribunenews.comNovember 1, 2009 

Faced with legal trouble, the owners of a Paso Robles lending and foreclosure services company have closed for business and filed for Chapter 7 bankruptcy.

Candy L. Wells and Ronald Wells had operated Heritage Lending and HL Foreclosure Services LLC since 1999, but Candy Wells said in a recent letter to investors that the firm shut down Oct. 16 because of a potentially costly lawsuit.

The suit, filed last month in San Luis Obispo Superior Court, alleges that Heritage Lending and HL Foreclosure Services engaged in breach of contract, fraud and negligence in overseeing a construction loan that went into default.

Company president Candy Wells explained in the letter that the company filed for bankruptcy after it was sued. The company’s attorney felt it could win the lawsuit, but there wasn’t enough money for a defense. “So we had no choice but to file bankruptcy,” she said. “This was one of the hardest decisions I ever had to make.”

Heritage Lending Inc. was a hard-money lender, or firm that pools money from investors and then lends that money to real estate developers and builders in high-interest loans. Hard-money lending has the potential for big rewards — offering high returns for investors — but it is considered risky because it’s often a last resort for those who cannot obtain financing through traditional means.

In the past year, several such lenders in San Luis Obispo County have unraveled because of the collapse of the real estate market and have been under the scrutiny of regulators and investigators for their practices.

A review of Heritage Lending’s status with the state’s Department of Real Estate and Department of Corporations found no disciplinary actions.

Since 2007, Heritage had arranged at least 669 loans totaling about $136 million on behalf of institutional lenders — larger entities that pool money together for investment — and originated at least 32 loans of about $10 million for other private investors, according to documents filed last year with the California Department of Corporations.

Heritage had foreclosed on only one loan since 2007, according to the Department of Corporation’s documents, and the property securing that loan was resold with all principal recovered and some investor interest.

Heritage’s second line of business included servicing and administration of loans, which involved collecting monthly payments, processing payments and distributing lender and investors’ monthly returns.

In the case of construction projects, it also was responsible for monitoring the construction and disbursements of funds from the loan escrow to a construction hold-back account. A percentage of payments to contractors is held back in such accounts to ensure there’s enough money to pay liens.

HL Foreclosure Service last year handled the foreclosure of property once owned by Paso Robles businessman David Weyrich.

Bankruptcy filing

As for Heritage’s financial problems, the Wellses filed for Chapter 7 bankruptcy protection on Oct. 16 and listed total assets of $854,843 and liabilities of nearly $3.8 million, according to documents in U.S. Bankruptcy Court in Santa Barbara. Chapter 7 allows a company to operate under the direction of a court trustee until the case is settled. While it usually leads to liquidation of a company, a firm may resolve its problems and settle with creditors, avoiding liquidation.

In her letter, Candy Wells cited a lawsuit as the reason behind the decision to file bankruptcy. In September, San Luis Obispo County resident Henrik Nielsen filed suit alleging that Heritage Lending failed, as part of their agreement, to monitor a construction project by South County builder and borrower Tony Crowe. Nielsen claims that the company failed to collect payments on the loan and made unauthorized payments and advances to Crowe. The suit alleges that Heritage did not protect his interest in two loans — one for $1.6 million and another totaling $700,000.

Nielsen is seeking $2.1 million in damages. His attorney, Clayton Hall, did not return a call from The Tribune. Calls to Heritage Lending offices, Candy Wells and William Beall, the Santa Barbara attorney representing the Wellses, also were not returned.

While the lawsuit and bankruptcy play out, investors wonder what will happen next. According to one local resident, investors with Heritage Lending used to count on 11 percent to 12 percent returns. Many of the projects were single-family homes in the North County, he said. The letter from Wells said investors would be contacted soon about their files and that borrowers were still expected to make their payments.

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