Sunday, February 6, 2011

Blood From a Turnip

Abatemarco et al v. LEGASUS OF NORTH CAROLINA, LLC et al was filed in Western District Court, Asheville, NC, February 4, 2011

Excerpts follow. For the entire document, go to http://www.scribd.com/doc/48258805.

This case involves a real estate development marketed and sold to the Plaintiffs by the Defendants through an elaborate scheme designed to artificially inflate the value of lots in the River Rock subdivision. The Defendants accomplished this scheme through various negligent and/or intentional misrepresentations…

Legasus, through its agents, represented to Plaintiffs that the River Rock subdivision in Jackson County, North Carolina ("River Rock") would be a luxury resort community with numerous amenities, as well as roads and utilities to serve the lots in the subdivision…

James R. Pitts, Theodore C. Morlok, and Robert A. Corliss, directly or indirectly through one or more intermediaries, controlled Legasus…

At the same time that the Legasus Defendants were making representations concerning the numerous amenities that would be built in the community, as well as the timing of those amenities, they knew or should have known that developing the community was impossible because, among other reasons, they were negligently or intentionally permitting or causing the distribution of funds needed to construct the required infrastructure to themselves and to other entities, without consideration, thus rendering Legasus insolvent and unable to meet its financial obligations.

The Legasus Defendants, through their agents, offered significant concessions to induce Plaintiffs to purchase lots in the River Rock subdivision that were in fact extraordinary, including one hundred percent financing for raw land, ten percent down at closing that was transferred to the National Bank of South Carolina for payment on each Plaintiff‟s loan, no payments for almost two years, two thousand dollars ($2,000) in closing costs and a free Club Membership that was represented to the Plaintiffs to be worth between thirty thousand dollars ($30,000) and fifty thousand dollars ($50,000).

The Legasus Defendants developed this scheme to induce the Plaintiffs and other buyers to purchase lots in the River Rock subdivision. They travelled across the country to find unwitting buyers who largely came from New Jersey, California, and other states where buyers had no knowledge of real estate values in Western North Carolina…

Upon information and belief, the Legasus Defendants used straw purchasers, including their own employees, friends and family members to purchase the first group of lots in the River Rock subdivision at artificially inflated prices as part of their scheme…

Upon information and belief, the Legasus Defendants and NBSC hand-selected Marilyn McCoy Woods to appraise lots in River Rock because they knew that they could persuade Marilyn McCoy Woods to provide inflated values in her appraisals to reach pre-determined values of lots based on each buyer’s contract purchase price.

From August of 2005 through December of 2005, the Jackson County, North Carolina average raw land sales price for lots between zero and four acres was one hundred and thirty six thousand eight hundred and thirty seven dollars ($136,837), with most of these lots being in established communities with amenities.

From August of 2005 through December of 2005, the average sale price for raw lots in River Rock with no amenities was three hundred and thirteen thousand two hundred and seventy-six dollars ($313,276).

Upon information and belief, Legasus collected over seventy-five million dollars ($75,000,000) in proceeds from lot sales in the River Rock subdivision from January 1, 2005 through December 31, 2007.

Upon information and belief, Legasus’ business model was to sell lots first and build infrastructure later, or not at all.

During the period from 2004 to 2008, while simultaneously and actively promoting the sale of lots at River Rock and despite massive contractual liabilities to construct roads, utilities, and amenities for the community, Defendants, James R. Pitts, Theodore C. Morlok and Robert A. Corliss negligently or intentionally caused Legasus to disburse millions of dollars from the limited liability company, leaving it without sufficient funds to construct the promised infrastructure and amenities.

Upon information and belief, Legasus was operated as a sham entity and as an alter ego of the Defendants, James R. Pitts, Theodore C. Morlok and Robert A. Corliss, who profited or allowed others to profit from these payments and distributions, while failing to insure that sufficient funds were left in Legasus‟ possession to fulfill its contractual obligations.

NBSC was enriched by this scheme to sell lots at inflated prices to the Plaintiffs because a portion of the proceeds of lots sales to the Plaintiffs went directly to NBSC to pay down its development loans to Legasus.

Upon information and belief, Marilyn McCoy Woods violated the ethical standards as set forth in the Uniform Standards of Professional Appraisal Practice by appraising several of the Plaintiffs' lots at the direction of one or more of the Defendants to obtain a predetermined result, which was the attainment of a specific value for each lot as necessary to complete the purchase and loan transaction on each of the Plaintiffs' lots she appraised in the River Rock subdivision.

In April of 2006, Lee Boyd, acting as a sales agent on behalf of Legasus, sent the owners of lots in the River Rock subdivision a letter stating that the Tuckasegee Lodge, which was represented to be a residential lodge with common areas that would include The Erie Restaurant and Bistro, a seminar and continuing education room and a theatre to seat between fifteen and twenty-five people, as well as a reading room and game room, would be completed in the River Rock subdivision.

In May of 2006, Lee Boyd, acting in his capacity as an employee and agent of Legasus, stated to Paul Taffe and Tonya Taffe that the Webster Creek Golf Course, which was to be a signature golf venue for all of the club members and would be Phil Mickelson golf course, would be completed in the River Rock subdivision.

Upon information and belief, Legasus and Jim Pitts both knew in 2007 that Legasus would not be able to provide sufficient utilities to service the lots in the River Rock subdivision and that it would not be able to provide utilities through Duke Power, Acqua America and Balsam West.

The August 2008 Progress Summary stated, among other things, that, “Legasus is working with the Corp of Engineers on agency approval for both golf courses at Webster Creek and are excited to launch the construction of the River Rock Golf Course, designed by Phil Mickelson and the King's Grant Golf Course, designed by Rick Smith, as soon as the permitting process is complete. The tee boxes, greens and fairways have been surveyed and the centerline clearing for the River Rock golf course has been completed.” Upon information and belief, Legasus had neither completed the activities set forth above, nor had any intention to complete the activities set forth above.

In the August 2008 Progress Summary Report, Legasus stated that, “[a]s mentioned previously, stayed [sic] tuned for the announcement of the start of the Webster Creek Parkway to the Phil Mickelson Golf Course in the next few weeks!” Upon information and belief, Legasus made this statement even though it had no intention to construct the Webster Creek Parkway, nor did it have a deal in place with Phil Mickelson for a golf course.

Upon information and belief, the Sneak Peek advertising brochure contained numerous false statements designed to mislead the Plaintiffs and others to purchase lots in the River Rock subdivision, including, but not limited to, the statement that, “Pioneering Mountain Golf lives at Webster Creek on a signature 18-hole golf course by Phil Mickelson Design. . . ,” even though, upon information and belief, Tony Corliss and others at Legasus knew that there would not be a Phil Mickelson Golf Course at Webster Creek or at any other location in the River Rock subdivision.

The Sneak Peek advertising brochure contained numerous false statements that, upon information and belief, were designed to mislead the Plaintiffs and others to purchase lots at the River Rock subdivision, including, but not limited to, Legasus' statements regarding amenities in the River Rock subdivision. The Sneak Peak advertising brochure represented that Tucksasegee at River Rock would have the Orion Spa, which was advertised as a full service spa for the exclusive use of River Rock members, as well as the Grand Tuckasegee Lodge, which was to have an infinity pool, fusion restaurant, culinary school, wine cellar, cinema, games room, terrace, lounge and library. Upon information and belief, Legasus and Tony Corliss made these statements regarding amenities, even though they knew that these amenities would never be provided in the River Rock subdivision.

Legasus, through James R. Pitts, sent Michael Troiano and Audrey Troiano a Sports Membership Certificate dated October 16, 2006 stating that this membership was worth fifty thousand dollars ($50,000), but that charter members like the Troianos would be joining for free. This Sports Membership Certificate purportedly entitled owners to use, “RiverRock's equestrian complex, tennis center, nature trails, proposed Par 3 golf short course, chipping and putting greens, organic gardens, fly fishing, coffeehouses, bowling, movie theaters, special events, festivals and programs, and much more.”

During Donald Hill and Tricia Hill's visit to the River Rock subdivision in November of 2006, Matthew Mull of Legasus made statements to Donald Hill and Tricia Hill promising certain amenities would be built in the River Rock subdivision, including, but not limited to amenities such as River Bend Park, West Fork Pavilion, Mother Jones Overlook Pavilion, Hot Tub Hunter Jim Park, Great Lawn Pavilion, Wolf Knob Pavilion, Cherry Knob Overlook, Park Horse Meadow Pavilion, Rock Chute Climb Park, Boulders Park and Bell Coney Mountain Sunset Pavilion.

On September 22, 2006, Matthew Mull of Legasus sent Donald Hill and Tricia Hill an interstate electronic mail communication stating that, “I think it's great that you guys were able to get into the Phase One offering and I look forward to showing you guys the property soon. We are taking Reservations daily for the next release and this is just the beginning. After our official announcement of the PGA Pro that's designing the Golf Course it's going to get even crazier around here.”

In the July 2009 Legasus Update, Legasus, through James R. Pitts, stated to the Plaintiffs that they may have noticed, “an increase in banking and legal activity around the River Rock project, namely a foreclosure sale of the Lacy tract in the Webster Creek neighborhood and the sale of the Summer Sail neighborhood and Cherry Knob tract at Webster Creek. . . . Legasus' responses to these actions are structured to provide much needed short-term financial relief. Specifically, the Summer Sail neighborhood and Cherry Knob tract were sold to a cooperative investor as a land banking strategy.” Jim Pitts further wrote in the 2009 Legasus Update that this sale was a way of “creating a future opportunity to repurchase the land holdings once the recapitalization is in place.”

In the July 2009 Legasus Update, James R. Pitts wrote to the Plaintiffs that, “[w]hile the Lacy tract makes up part of the River Rock golf course there are alternate routing plans that can be used if needed. We remain in contact with Phil Mickelson Design and his management company and they continue to be very active partners.” Upon information and belief, Legasus and James R. Pitts made this statement, even though they knew that Phil Mickelson Design would not be designing a golf course in the River Rock subdivision.

Upon information and belief, the Legasus Defendants developed their scheme to defraud the Plaintiffs for the purpose of enriching themselves by utilizing the proceeds from lot sales to enrich themselves, as they had no intention of ever building the utilities and infrastructure that they promised Plaintiffs that they would build.

On July 15, 2006, Legasus and Michael Wolf stated to Michael Troiano that the Grand Opening Sales event dinner was held for the first one hundred (100) buyers in the River Rock subdivision. On July 15, 2006, Michael Wolf stated to Michael Troiano that if the Troianos decided to sell the lot at a later date, they could pretty much name their price on the lot because subsequent phases of the development would be released at higher selling prices…

In 2005-2007, the National Bank of South Carolina was attempting to take advantage of the rapid increase in inflation adjusted real estate prices that occurred in the United States from 2003 through 2006, which time period has been widely described as a real estate boom (the “Real Estate Boom”), by rapidly increasing the number of loans that it made to borrowers to increase its short term profitability through the collection of interest payments and fees….

The National Bank of South Carolina‟s use of inflated appraisals caused higher sales prices for lots in the River Rock subdivision which generated higher interest payments to the National Bank of South Carolina on loans that it made in the River Rock subdivision and higher fees to the National Bank of South Carolina than it would have yielded if the lots in the River Rock subdivision would have been appraised at their true values.

As set forth more fully above, Defendants, as co-developers of the subdivision, made use of instrumentalities of interstate commerce including telephone communications, mailing, electronic mail, and internet communications to the Plaintiffs and others in furtherance of the scheme to defraud.

By using appraisals that it knew or should have known were materially false, concealing material facts related to the appraisals on the Bank Plaintiffs’ lots, participating in sales presentations with Legasus for lots at the River Rock subdivision, directing Bank Plaintiffs to use James S. Price & Associates, P.A. to conduct the closing on each Bank Plaintiff’s purchase of each Bank Plaintiff’s lot and making false statements to each of the Bank Plaintiffs in connection with the making of a mortgage loan, the Bank has engaged in practices, or courses of business that are not in good faith or fair dealing, or that constitute fraud upon each of the Bank Plaintiffs in connection with the brokering, making, purchase or sale of mortgage loans in violation of N.C. General Statute 53.243.11(8).

Legasus’ negligent misrepresentations, made or caused to be made at the direction of Defendants, Pitts, Morlok and Corliss, proximately and legally caused and continue to cause the Plaintiffs damages in an amount to be determined at trial.

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