Biz Buzz: Defrauded investors get OK to pursue claims

More than 400 investors alleging fraud and elder abuse by North County title company Cuesta Title Co., its parent company Stewart Title and Heritage Oaks Bank were granted permission Thursday in San Luis Obispo Superior Court to pursue their claims against the companies.

The allegations stem from Cuesta Title and Heritage Oaks Bank’s alleged collusion with James Hurst Miller, president of failed nonbank lender Hurst Financial, and former Atascadero real estate developer Kelly Gearhart to further a Ponzi scheme that defrauded investors by as much as $80 million, according to court records.

Cuesta Title, a real estate title insurer in San Luis Obispo County since 1965, closed its offices in San Luis Obispo, Atascadero, Paso Robles and Pismo Beach in late 2008 in the wake of fraud allegations and collusion with Gearhart and Miller.

The two filed for bankruptcy protection along with Miller’s company, Hurst Financial, last year.

While this lawsuit is the largest in the county involving Cuesta Title’s alleged collusion to defraud people, it is not the only case. At least 12 lawsuits have been filed against the company since 2008.

The first, filed by Murray Powell and David Rios in May 2008, alleges Cuesta Title conspired with Hurst Financial and Gearhart to steal more than $2 million from them, after Hurst and Gearhart falsely promised it was going to be invested in the construction of a commercial building.

Plaintiffs in some of the other cases include former UFC champion Chuck Liddell of San Luis Obispo — who lent Gearhart more than $2 million through Cuesta Title’s services — and another lending company, Stinchfield Financial, which collected private investors to back real estate loans.

Judge Charles Crandall issued tentative rulings on both the 400-plus investor case as well as the Stinchfield suit.

In the first case, Crandall agreed the plaintiffs had sufficient specific evidence for fraud allegedly committed by Cuesta Title officer Melanie Schneider.

The allegations include that Schneider knew money deposited in escrow accounts was less than the stated loan amount; that she improperly transferred escrow funds to other escrows; that she improperly used escrow funds other than for their stated purposes; and that she improperly gave Hurst escrow funds that she improperly identified as “overpayments.”

Crandall also agreed with the plaintiffs that Cuesta Title had a duty to disclose such information to the investors as part of its general duties; therefore, it is potentially liable as an escrow agent.

Heritage Oaks Bank was named in the suit for allegedly helping to perpetuate the fraud by accepting the “cleaned-up” title report and giving Gearhart more loans that the bank wanted to be secured with a Vista Del Hombre project on Gearhart’s Links Golf Course of Paso Robles.

Molly Baier, the attorney defending the bank, had told the court previously the bank was unaware of Gearhart and Hurst Financial’s alleged wrongdoing at the time of the transaction.

Although bank officials saw a preliminary title report showing Hurst Financial investors on the Vista Del Hombre deed, they believed Gearhart when he told them the report was a mistake.

Crandall’s tentative ruling found “sufficient specificity of Heritage Oaks’ knowledge of alleged improprieties in this loan transaction, and there are sufficient allegations of its participation in the transaction to establish potential liability,” according to court records.

Stinchfield alleges in its lawsuit that Gearhart borrowed about $3 million from a number of investors through Stinchfield Financial Loan Services for construction of a 60-unit senior condominium development in Atascadero.

However, Stinchfield wasn’t aware that a large percentage of the lots were to be used for low-income housing, which lowered their market value.

Stinchfield will also be allowed to pursue its allegations regarding “improprieties in various transactions and its intentional suppression of material information,” according to Judge Crandall’s tentative ruling Wednesday.

— Melanie Cleveland