GUEST OPINION: SSU Foundation responds to questions about Carinalli loan

Recently, there have been a number of news reports and editorials in The Press Democrat newspaper regarding loans issued by the Sonoma State University Academic Foundation, particularly a $232,500 loan to Clem and Ann Marie Carinalli which was paid in full on July 9, 2009. We write today to provide some facts regarding the Carinalli matter.

The Carinalli loan was originally made on March 6, 1997 for $732,500. Foundation documents and public records indicate that the loan was fully secured by a Deed of Trust that attached a lien on several Sonoma County real estate parcels. The Promissory Note and the Deed of Trust securing the loan contain provisions commonly found in such documents often called a “partial release clause” that allows certain of these parcels to be released from the deed of trust as the loan balance is paid down over time.

In January 2005, the Carinallis made a payment of $500,000 on this loan, reducing the balance to $232,500. At that time, the Foundation and the Carinallis signed an agreement modifying the note to reflect the reduced loan balance. This agreement states that all the other terms and conditions of the note remain the same, including the partial release clause.

In March 2007, Mr. Carinalli requested that the interest rate on the same $232,500 loan be lowered in keeping with prevailing interest rates, and that the term be extended. Not wanting the Carinallis to pay off the loan early and to preserve the income stream at current interest rates, the Foundation agreed to this request. Sonoma Mortgage & Investment Company (“SMIC”), the Foundation’s loan servicing agent, prepared a modification agreement which the Foundation and the Carinallis signed, and which states that other than the reduced interest rate and term extension, all the other terms and conditions of the note remain the same including, again, the partial release clause.

In April 2007, Foundation communications with SMIC confirmed that multiple properties still fully secured the payment of the outstanding loan balance.

In late June, 2009, in response to Mr. Carinalli’s statements that he was ceasing to make payment on numerous loan obligations, and recognizing the possibility that the Carinallis might be the subject of a bankruptcy, the Foundation ordered an independent title search on all properties believed to be securing this loan, as well as another loan for $1,250,000 secured by property in Windsor.

As part of this process and in early July 2009, the Foundation learned that the Deed of Trust on all the parcels that secured the $232,500 loan had been released. While this was not the case for the other larger loan secured by the Windsor property, the Foundation promptly contacted Mr. Carinalli. On July 8, Mr. Carinalli told the Foundation that he believed the loan was still secured and that an error must have occurred with the county records.

Based on this information, the Foundation believed that Mr. Carinalli was correct that an error had occurred, and that all of the loans should still be backed by property. Since, at that time, the Foundation was unable to locate any documents indicating that it had authorized the release of all the parcels securing the loan, the

Foundation continued to investigate in order to confirm whether there was an error and how it occurred. Prior to completing its investigation, and late in the day on July 9, 2009, Mr. Carinalli paid off the loan in full. At the onset of the Carinalli bankruptcy, the Foundation restarted its investigation and continues to investigate this matter.

Loans to the Carinallis were made between 1995 and 2003. The financial problems that the Carinallis are experiencing following the unprecedented economic downturn that began several years after these loans were made, have reflected unfairly and negatively on the Foundation. We have been and will continue to take steps to move the Foundation forward and to maintain the trust and confidence of the Foundation’s many supporters.

First, the public should understand that the Foundation’s financial statements are audited each year by an independent certified public accounting firm and that these statements have long been publically available. Each of these annual audits has concluded that the Foundation’s financial statements meet the highest audit standards.

Second, an internal audit of Foundation operations is being completed by the California State University Trustees’ internal auditor, who reports to the CSU Board of Trustees. When this review is complete, it will be made public.

Third, the University has announced the creation of a special campus committee. The goal of this committee is to review the conflict of interest provisions of California statutory law as its relates to SSU auxiliary organizations such as the Academic Foundation, and to consider implementing standards of practice that exceed these legal requirements for each of the SSU auxiliaries.

Finally, the Foundation is fully cooperating with an audit being conducted by the State Attorney General related to the Foundation and including loans it made to the Carinallis. We have supplied the Attorney General with all documentation requested and will continue to be responsive to the Attorney General’s requests.

The Foundation has not and is not able to respond to media requests for further information on this matter because it is the subject of bankruptcy litigation and because the Foundation cannot engage in speculation. Accordingly, we have been advised by our counsel not to comment further at this time.

On behalf of the entire Foundation Board, we are committed to being as transparent as we are legally able. We will continue to the very best of our abilities to be trustworthy stewards of funds donated to our academic and student programs.

Ruben Armiñana is president of Sonoma State University and chairman of the board of the Sonoma State University Academic Foundation. Patricia McNeill is president of the SSU Academic Foundation. Larry Furukawa-Schlereth is vice president/chief operating officer and Letitia Coate, is secretary and chief financial officer of the foundation. All are members of the SSU Academic Foundation executive committee.