Lawsuits accuse Carinalli of fraud

Clem Carinalli, Sonoma County’s most prominent land investor, is facing allegations that he defrauded lenders by using loan documents that inflated the value of properties and overstated his own fortune, increasing the amount of money he was able to borrow.

When Carinalli was unable to repay the loans, it left a Napa bank and the pension fund of a Santa Rosa lumber company holding rights to land that is now worth only a fraction of its value at the time Carinalli borrowed the money.

Two lawsuits — one by Napa Community Bank and the other by a group of investors, including Mead Clark Lumber Co. — claim lenders were intentionally misled when they sank a combined $5 million into two land deals in 2006 and 2007.

In response, Carinalli said in a brief interview, “I don’t believe I’ve created any fraud or done anything wrong.”

Carinalli orchestrated the deals at a time when the once-booming real estate market was sinking into a deep downturn, a slide that would leave him unable to repay $196 million in debt and trigger the largest personal bankruptcy in Sonoma County history.

In a third case, state regulators are investigating a 2004 appraisal — but not Carinalli himself — to determine whether it used questionable assumptions to value 10.4 acres outside Windsor. The report was used by Carinalli to borrow $1.25 million from the Sonoma State University Academic Foundation, which decided to foreclose on the property when Carinalli stopped making payments on the loan.

All three cases focus on the integrity of loan documents that played a critical role in determining how much money Carinalli was able to borrow from lenders.

Carinalli often turned to close business associates to prepare these documents, which were used by investors to evaluate the safety of their money. Some of these associates had bought and sold property with Carinalli over the years, intermingling their financial interests.

Carinalli, who is largely shielded from lender lawsuits while he tries to restructure his debt under the protection of U.S. Bankruptcy Court, denied any wrongdoing.

For years, Carinalli operated like an investment bank but on a smaller, community level. His firm, Sonoma Mortgage & Investment Co., attracted millions of dollars in investments from banks, company retirement funds and local retirees. He then would lend their money back out to developers and other local businesses that needed capital, including himself.

Carinalli often secured investors’ money with a deed that allowed them to seize the land used as collateral if the borrower defaulted. Or he provided a personal guarantee, which gave lenders the legal right to recoup losses from Carinalli’s personal assets if the loan went bad. In some cases, he provided both a deed of trust and a personal guarantee.

For years, Carinalli assuaged investors by providing a balance sheet that few in Sonoma County could match. In late 2007, he claimed his assets were worth $466 million, while his debts totaled $76 million, according to documents given to investors in a land deal not covered by the lawsuits. Today, the value of his assets has dropped to $180 million, while his debts have grown to $196 million, according to bankruptcy documents he filed last week.

Now, Napa Community Bank and the trustee for Mead Clark’s pension fund are accusing Carinalli and his company of inflating the values of the properties used to secure their investments, and even of overstating his net worth, to make his deals appear safer than they turned out to be.

The first lawsuit filed against Carinalli stemmed from a stalled residential subdivision he planned to build on pasture land dotted with small farmhouses behind Elsie Allen High School in southwest Santa Rosa.

Problems arose last May when Carinalli stopped paying Napa Community Bank for a $3.2 million loan he received in 2006 to fund the project.

As the bank considered foreclosing on the farmland, its employees concluded the property was worth significantly less that its loan officers had been led to believe by Carinalli and his associates, according to the lawsuit filed Sept. 3 in Sonoma County Superior Court.

The bank claims Carinalli and Santa Rosa civil engineer Charlie Traboulsi defrauded the bank of $1.6 million by providing false loan documents that overvalued the two adjoining parcels off Stony Point Road and Bellevue Avenue.

The suit contends Carinalli and Traboulsi had a “secret agreement” to make the bank believe they had resolved environmental concerns over protected wetlands on the property.

The land is in an area where development is tightly restricted to protect the endangered California tiger salamander. To develop the property, Carinalli would need to set aside salamander habitat in another part of the region by buying “mitigation credits,” which are sold by organizations that establish wetland preserves.

The lawsuit alleges Carinalli and Traboulsi told a bank executive they had acquired mitigation credits for the two parcels, which would increase the value of the land by removing a key barrier to development.

Traboulsi wrote a letter to the bank in 2006 and again in 2008 stating Carinalli had acquired mitigation credits for the two parcels at 2960 Stony Point Road and 707 Bellevue Ave., according to the lawsuit.

But Carinalli had not acquired those credits for the property, according to the lawsuit.

Without the credits, the property is worth $1.6 million less, the bank alleges. If the bank forecloses, it would only recover about one-third of the $3.2 million outstanding on its loan to Carinalli, according to the lawsuit.

In a brief interview, Carinalli said he does own mitigation credits but never told the bank they were to be used for the adjoining properties. Carinalli said he was unaware of the Traboulsi letter.

Traboulsi and Carinalli were business partners before working together on the Napa Community Bank deal. In 2004, Carinalli loaned Traboulsi about $250,000. A year later, Carinalli sold 59 acres of land south of Santa Rosa to Traboulsi, who transformed it into wetlands for the creation of mitigation credits. In 2008, Carinalli or his family members sold three properties to Traboulsi worth about $1.3 million.

Carinalli said he never was served the lawsuit and hadn’t seen a copy of it.

Patricia Lyon, a San Francisco attorney representing the bank, said Carinalli was never served because he entered bankruptcy protection less than two weeks after the suit was filed. Now the bank would need to refile the suit in bankruptcy court, and it has not decided if it will do that, Lyon said.

“The lawsuit against Mr. Carinalli is on hold,” she said.

Lyon said the bank might continue pursuing its suit against Traboulsi and the other defendants named in the suit: His company, T.D.G. Consulting Civil Engineers, and Ilan Silberstein, who is trustee of the Hale Mitigation Bank, a Santa Rosa firm that sold Carinalli mitigation credits.

Traboulsi did not return phone calls seeking comment. Silberstein could not be located for comment.

In late 2007, Mead Clark Lumber Co. invested $950,000 from its employee retirement fund with a group of investors who made a $1.75 million loan to Carinalli.

Last month, Mead Clark and some of those investors filed a lawsuit accusing Carinalli’s company of enticing investors into that loan by using misleading financial statements, including a fraudulent appraisal.

As with the bank lawsuit, these investors concluded after Carinalli stopped repaying them in May that they had been defrauded, and they decided to take a closer look at the asset securing their investment.

The group of investors includes Randy Destruel, co-owner of Mead Clark and the trustee for the company’s 401(k) retirement fund. Their lawsuit claims they were tricked into believing the loan made to Carinalli in November 2007 was adequately secured.

They are suing Carinalli’s company, Sonoma Mortgage & Investment Co.; his in-house mortgage broker, Ira Stone; and a Sonoma appraiser hired by the company for the deal.

The investors claim Stone overstated Carinalli’s ability to repay the loan, making the deal seem less risky by providing false statements of Carinalli’s income, expenses and ownership of other property and assets.

They also contend the appraiser hired by the company, Shannon Foulk, inflated the value of land that Carinalli used to secure the loan.

“The true facts were that the subject property was worth far less than the amount represented and that the borrower, Carinalli, was in debt and did not have adequate funds with which to repay the subject loan,” according to the lawsuit.

The property Carinalli mortgaged to the investors is 83 acres of undeveloped land covered in chaparral along Sage Canyon Road in the hills about 8 miles east of St. Helena. Foulk appraised its value at $3.5 million in 2007.

After Carinalli stopped repaying the investors in May, they hired an appraiser to conduct a new assessment that calculated the land’s value at $415,000 — a nearly tenfold difference in price.

“I question the quality of that original appraisal,” said Robert Scheibel, a retired Santa Rosa doctor who loaned Carinalli $200,008 in the deal. “I should have gone through the expense of getting an appraisal done myself.”

Scheibel said he had invested with Carinalli for decades and did not drive out to the property or question the appraisal in 2007. Instead, he relied on information provided by Carinalli, Stone and Foulk.

“I didn’t do my own due diligence,” he said. “I should have driven out there and looked at that property.”

Randy Destruel issued a brief statement through his attorney stating he had also relied on the information provided by Carinalli’s associates, and he was now taking all necessary steps to protect the retirement fund.

Scheibel, Destruel and the other four investors might own the land if they are forced to foreclose in lieu of repayment — a decision that could be made for them in bankruptcy court.

Carinalli had acquired the land through foreclosure five months before mortgaging it to Scheibel, Mead Clark and the others. It was one of three 83-acre plots Carinalli foreclosed on along Sage Canyon Road after a borrower defaulted on a loan from him, according to land records.

Carinalli is not named as a defendant in the Oct. 22 lawsuit filed in Sonoma County Superior Court. He is largely protected from being sued while in bankruptcy protection.

He denied any wrongdoing in the deal. “There was no collusion between me and any appraiser,” he said.

Stone declined comment and Foulk did not return phone calls seeking comment.

The lawsuit was filed by Destruel, Scheibel and a third investor, Jolene Heckerman of Pacifica, who loaned $200,008 in the deal. In total, they’re suing for about $1.4 million, alleging fraud, negligence and intentional misrepresentation.

Three investors that put a combined $400,000 into the deal are not participating in the suit. They include Keegan & Coppin Co., the North Bay’s largest commercial real estate firm; Bill and Therese Geary, a retired attorney and his wife; and Keven Brown, who runs Corrick’s stationery store in downtown Santa Rosa, and his wife, Jeri, according to Napa County land records.

A key document submitted by Carinalli in a third land deal is being investigated by the state Office of Real Estate Appraisers.

The regulators are reviewing a 2004 appraisal conducted for Carinalli that helped him obtain a $1.25 million loan from the Sonoma State University Academic Foundation.

Investigators have expressed concerns about assumptions made within the appraisal that would have inflated the value of the property, enabling Carinalli to obtain a larger mortgage loan from the SSU foundation.

One of the co-authors of the appraisal continued to determine land values for Carinalli’s company even after she lost her license in 2006 for forging more than 300 documents related to other appraisals.

Carinalli is not being directly investigated by the state agency. He said he did not know the appraiser in the forgery case, and he distanced himself from the process of valuing land.

“I just got an appraisal from somebody. It’s not me doing the appraisal,” Carinalli said.

The senior appraiser on the project was Dennis De La Montanya, a close business associate of Carinalli. They jointly own the land and buildings that are home to De La Montanya Winery, a Dry Creek Valley winery operated by the De La Montanya family.

“I staunchly stand behind my appraisal report,” said De La Montanya, who was notified this summer by regulators that his 2004 appraisal was being investigated.

De La Montanya co-authored the appraisal with trainee Anna “Nicole” Griffith, valuing the 10.4-acre parcel just outside Windsor town limits at $2.5 million in 2004.

Carinalli submitted the appraisal to get the $1.25 million loan from the SSU foundation. Five years later, the value of the property had dropped below $1.25 million, a decline of more than 50 percent, according to a June letter by an attorney for the SSU foundation.

Carinalli stopped payments on the loan in May, and SSU executives said they will take ownership of the property as part of their repayment, although how their plans will be affected in bankruptcy court remains to be seen.

State regulators have questioned several assumptions in the appraisal that may have overstated its development potential, which would have increased the value of the property on Los Amigos Road.

The property was appraised as if it was within the Windsor town limits and zoned for commercial and urban residential use. A property of that size and zoning within town limits could accommodate a strip mall and up to 50 homes, according to the city’s general plan.

However, the property is just outside town in an unincorporated area of the county. It is zoned for rural residential and agricultural use, which limits its development potential.

“That is a major concern,” Bob Clark, director of the Office of Real Estate Appraisers, said in July.

Clark received a copy of the appraisal from The Press Democrat in seeking his comment about the document’s accuracy. After examining the appraisal, the state agency opened its inquiry this summer and since has declined to comment, citing a policy regarding open investigations.

In their appraisal, De La Montanya and Griffith concluded it was appropriate to value the property as if it was within the town because it is within Windsor’s so-called sphere of influence, meaning it could be annexed to the town someday.

But Windsor officials have no plans to annex the land, nor did they in 2004 when the appraisal was conducted, said Peter Chamberlin, director of the Windsor Planning and Building Department.

“We were never considering it,” Chamberlin said. “No one has ever made a request to annex it.”

The costs of annexation, which likely would start in the hundreds of thousands of dollars, are paid by the developer and need to be approved by residents in the area, he said. None of those factors are noted in the appraisal of Carinalli’s land. Without those considerations, the value of the land would have been artificially inflated, Clark said in July.

“That should have been analyzed in the appraisal,” he said. “If it wasn’t, there are potential violations.”

De La Montanya said the property was valued accurately at the time. In 2004, people were willing to pay $2.5 million for such land as the Los Amigos Road property, he said.

“In 2004, we were in an environment of high appreciation and high demand for real estate,” he said. “My job is to interpret what the market is willing to pay for something.”

De La Montanya and Griffith also did not note about 20 percent of the land had development restrictions because it was classified as an “agricultural buffer zone,” which is described in Windsor’s general plan dating back to 1996. Even if the property was annexed, homes or commercial buildings could not be built in the buffer zone.

Instead, the appraisers valued Carinalli’s land as if 100 percent of it could be developed with houses and commercial buildings.

Investigators said Griffith’s involvement in the appraisal also raised questions for them. In 2005, she admitted to investigators that she forged signatures and license numbers on more than 300 appraisals she conducted before working with De La Montanya and unrelated to the SSU appraisal. The state revoked her trainee license in 2006.

Carinalli’s company continued hiring her to conduct appraisal reports until at least 2007. She conducted several appraisals for Carinalli’s company on land in Lake County owned by Jay Soderling, a convicted savings and loan swindler who borrowed money from Carinalli.

Griffith applied for a new license in 2009, but the state refused her request, stating her misconduct had demonstrated “fundamental dishonesty.”

In a statement, Griffith admitted the forgeries were not proper but said no one “suffered any damage whatsoever and that my work during this time was characterized as very good.”

California law does not require an appraiser be licensed unless the loan involves a federal agency, such as the Federal Housing Administration.

Carinalli said he did not know Griffith.

De La Montanya said his close relationship with Carinalli did not influence his appraisal.

“It’s not a good ol’ boys network. It’s called a community,” De La Montanya said. “People rely on their community. That’s how business gets done.”