Questions over SSU Foundation's loan to Carinalli
Published: Friday, November 13, 2009 at 3:00 a.m.
Last Modified: Friday, November 13, 2009 at 10:50 p.m.
For nearly a decade, the Sonoma State University Academic Foundation made sure every loan it gave to former board member Clem Carinalli was secured with deeds that entitled it to seize valuable real estate if the loans went bad.
But early this summer, the foundation discovered its name had been removed — without its permission, according to a university spokeswoman — from one of the deeds securing its loans.
The switch erased the foundation's legal rights to take land Carinalli used as collateral. It has triggered a chain of events that ultimately may force the group to return a $232,500 payment from Carinalli and reimburse his bankrupt estate.
The foundation might have to give the money back, according to legal experts, because it appears it received preferential treatment from Carinalli within a critical 90-day period before he filed the largest personal bankruptcy in Sonoma County history.
The development came to light last week at a hearing where the U.S. trustee in charge of Carinalli's bankruptcy proceedings said the foundation's loan was not secured with property, which contradicted previous statements by SSU officials.
The foundation, which loaned Carinalli at least $9.6 million over seven years, now may have to borrow money to repay the Carinalli estate at a time when it is struggling to fund campus grants and student scholarships for next year.
The altered deed is at the center of a dispute between SSU officials, Carinalli and the title agent who served as middleman in the loan deal.
In an interview, Carinalli said he did not discover the collateral had been removed from the loan until SSU contacted him in July. He said he never instructed anyone to take away the SSU foundation's legal rights to foreclosure.
The dispute has exposed discrepancies between public records and statements made by SSU officials over the past four months describing the foundation's relationship with Carinalli.
Foundation officials declined repeated requests this week for an interview to explain the discrepancies.
The beginnings are not in dispute.
In 1997, the foundation loaned $732,500 to Carinalli, who had resigned from the group's board of directors two years earlier to avoid a potential conflict of interest when he received his first loan from the foundation.
The loan was secured by a deed of trust to five properties, according to public records. That deed empowered the foundation to foreclose on all five Carinalli properties if he defaulted on its loan.
In 2005, Carinalli repaid part of the original $732,500 loan, said his attorney, Merle Meyers. At that time, Meyers said, Carinalli requested that some of the five properties used as collateral be returned, meaning the deed of trust would be partially rescinded.
Carinalli had a right to partially repay the loan and receive some of his collateral back, according to loan documents on record with Sonoma County.
However, on Feb. 1, 2005, the deed of trust was fully removed so that the foundation's outstanding loan no longer was secured with any of Carinalli's property as collateral.
Carinalli never requested to remove all the properties securing the loan, Meyers said.
“It appears that was just a mistake,” Meyers said.
Jim Daw, who owned a title company in Santa Rosa that provided numerous services for Carinalli, fully removed the deed of trust covering all five properties in 2005, according to county records.
Daw had been appointed by the foundation to serve as middleman and safeguard the deed until Carinalli repaid the loan.
Daw said he did not recall the 2005 transaction. However, he said he would not have rescinded the collateral unless he received a written request from the foundation, which was the only party that could authorize him to remove its name from the deed under state law.
“If I was presented the documents, I would have just signed them and they would have been submitted to the county,” he said.
But the foundation never instructed Daw to remove its name from the deed, spokeswoman Susan Kashack said.
“We never authorized that,” Kashack said.
The altered deed went undetected for four years, surfacing only after Carinalli ran into severe financial problems and stopped payments to some of his lenders last spring.
The timing, however, is in dispute.
The foundation maintains it did not learn that someone had rescinded its deed of trust until sometime well after July 9, according to Kashack.
In a taped interview July 9, SSU's chief financial officer, Larry Furukawa-Schlereth, told The Press Democrat that both of the foundation's outstanding loans to Carinalli were secured by property.
However, the foundation notified Carinalli about a week before July 9 that one of its loans had become unsecured, Carinalli said.
Furukawa-Schlereth, who also serves as the foundation's chief operating officer, declined multiple requests for an interview placed through Kashack and his office.
To repay the foundation, Carinalli borrowed $232,500 and used the same five properties that originally backed the foundation loan as collateral for the new loan.
He received the new loan July 9 and transferred the money to the SSU foundation that same day, according to his bankruptcy documents and county land records.
The timing is an issue because SSU executives who also are on the foundation's board vigorously defended its lending practices on July 9 in a three-hour meeting with The Press Democrat. They stressed the loans were safe, well-managed and conservative because all were backed by real estate, even though the foundation already had told Carinalli it knew one of its loans was unsecured, according to Carinalli, bankruptcy documents and county land records.
SSU President Ruben Armiñana, who is the foundation board's chairman, was unavailable for comment, Kashack said.
On July 17, the foundation announced Carinalli had repaid the $232,500 balance on the 1997 loan. It also said it was taking possession of 9.6 acres of vacant land north of Windsor that Carinalli mortgaged in return for a $1.25 million loan.
The disclosure helped to fuel concerns among creditors that Carinalli was providing preferential treatment to some lenders. On Sept. 14, a small group of disgruntled investors forced Carinalli into bankruptcy, an action that requires him to restructure his debts publicly.
Regardless of who is at fault for the altered deed, attorneys expect the foundation will be required to return the $232,500 in the coming months.
Under bankruptcy law, the court can overturn any payment Carinalli made to creditors in the 90 days prior to his bankruptcy filing if the transaction is viewed as preferential treatment.
“That will probably happen in this case because it's $232,500. That's a lot of money,” said Mike Fallon, a bankruptcy attorney in Santa Rosa.
Meyers agreed, saying the payment probably is viewed by the court as preferential and in most cases would need to be repaid by the foundation.
If returned, the money would be lumped together with Carinalli's other $196 million of assets. Carinalli's $191 million of debts will be repaid from that asset pool by a tightly controlled pecking order that puts unsecured creditors, such as the foundation, near the bottom.
You can reach Staff Writer Nathan Halverson at 521-5494 or nathan.halverson@
pressdemocrat.com.
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