U.S. District Judge Robert Jones of Reno started jury selection Tuesday for a trial over allegations that New York companies defrauded 36 hard-money loan investors, took some of their money, violated state civil laws and breached their fiduciary duty.
The case, which seeks a judgment of more than $375,000, stems from the 2006 collapse of USA Capital, a hard-money lender that about 6,000 investors entrusted with $962 million in assets.
USA Capital solicited money from individual investors for short-term loans to developers. Investors earned double-digit interest rates on the loans and enjoyed the security of having real estate for collateral. However, many investors lost money at USA Capital as real estate values plunged. In addition, a key USA Capital officer pleaded guilty to wire fraud.
Bankruptcy Judge Linda Riegle in 2007 accepted a bid of $67 million from Compass Partners to take over servicing of loans originated by USA Capital and to purchase the assets of a hard-money loan investment fund at USA Capital.
Silar Advisors, in an alleged foreclosure, took over the assets from Compass and began servicing the loans, the lawsuit said. Compass became a subservicer of the loans, according to court papers.
The lawsuit said that the plaintiffs have a direct interest in loans with a total unpaid principal balance of $485 million. Compass received servicing fees and default interest fees of 10 percent yearly on those loans, the court papers said.
"The defendants failed to operate the loan portfolio in the best interest of the lenders," said Bill Brewer, a Dallas attorney representing the plaintiffs. "In many cases, (Compass and Silar) operated in their own interests even when that wasn't in the best interest of the lenders."
Silar and attorneys for the defendants didn't respond to requests for comment.
Compass and Silar have negotiated with borrowers who made payments, but the investors didn't receive their full principal and interest payments under those settlements, according to the lawsuit.
In the case of one loan, the borrower offered to pay all of the principal and interest due plus an exit fee of $325,000 to Compass, the lawsuit said. However, Compass negotiated another deal less favorable to investors, the papers said.
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