Title company disbursed money without approval, deceased real estate investor's father/executor claims in suit

The fight over the assets of deceased real estate investor Raj Gulati is escalating, with his father accusing a title company of improperly diverting proceeds of a building sale to an influential local private money lender.

Mohinder Gulati, executor of his son's debt-ridden estate, this week sued the title company that handled the $2.1 million sale of a Railroad Square building Gulati was renovating when he died suddenly last year at age 39.

Mohinder Gulati claims the title company, Folsom-based Financial Title Co., improperly paid lien holders more than a half-million dollars as part of the December sale of the old Oliver Hotel building and an adjacent lot on Fourth Street.

He says the company didn't have permission to pay $413,000 to Clement Carinalli, owner of Sonoma Mortgage and Investment Co., and $97,000 to architect Kevin Kellogg. Both Carinalli and Kellogg had filed liens against Gulati's properties after he died in his home July 23.

The suit is the latest and most contentious wrinkle in the financial drama that has unfolded since Gulati's death.

Rumors swirled after Gulati's death that his downtown Santa Rosa real estate empire was a house of cards and the lifestyle he was living - palatial home, Italian sports cars, an airplane - were far beyond his means.

After months reviewing his son's affairs and preparing to liquidate the properties, Mohinder Gulati said the debts of the estate - which included properties valued at more than $20 million - appeared to exceed the assets.

Carinalli filed suit against the estate in November to recover the $5.1 million he says he loaned Gulati to help him finance his real estate ventures. Carinalli, who has called Gulati a close friend, never obtained deeds to the properties, something he has characterized as an "accommodation" to Gulati, according to court papers.

Gulati's family fired back with its own lawsuit Monday.

Anne Dennis, the Santa Rosa attorney representing Gulati's estate, claims Carinalli used his influence as a wealthy real estate investor to persuade the title company to give him the remaining proceeds of the Railroad Square sale.

"We got 'good-old-boyed,'" Dennis said. "They bent over backwards because it was Clem Carinalli, and Clem Carinalli brought them millions and we're just the dead guy."

Carinalli, who is not a party to the suit, said he was unaware of it and had no comment. His attorney, Clay Clement, did not return a call for comment. The escrow officer for Financial Title who handled the deal, Sandy Veveiros, declined to comment. Other company officials did not return calls.

That left only Dennis to explain how Carinalli came to be paid $413,000 from the sale of a property he did not own and without the approval of the estate.

The estate does not deny Raj Gulati owed money to Carinalli. Negotiations about how to repay Carinalli have been ongoing, Dennis said.

But since Carinalli does not have a deed of trust on the Fourth Street property or the estate's other properties, his debt is unsecured and therefore he is not guaranteed full repayment, Dennis said.

Carinalli has asked a court to grant him deeds of trust for the properties, but that suit is in its early stages and far from decided.

"The title company acted as judge and jury as to Mr. Carinalli's claim," Dennis said. "They just gave it to him."

Carinalli's suit came in November 2006, after the estate entered into an agreement to sell the property to an investment group. He made a legal claim on the property through a document called a lis penden, or a notification of pending lawsuit.

Buyers rarely purchase properties with pending lawsuits hanging over them, and part of the title company's job is to make sure such encumbrances are removed to create a "clean title" for the buyer.

Carinalli on Dec. 8 agreed to remove his lien, which allowed the escrow on the property to close later that month.

But Mohinder Gulati never agreed to the payment in writing, as explicitly required by the instructions for the escrow, Dennis said.

There had been discussions between the estate's previous attorney and Carinalli about paying Carinalli some portion of the proceeds of the sale, but no formal deal was ever struck, Dennis said.

The family is under tremendous pressure to get the properties sold, Dennis said. Carinalli is charging 15 percent interest on the loans, and the debt is increasing as interest accrues. The Fourth Street property was one of the the first to find a buyer, Dennis said.

A residential rental property in downtown Petaluma was sold last month, and the sale of a warehouse in Railroad Square is near, she said.

But the major downtown buildings that Gulati owned - like the North Coast Bank Building and 404 Mendocino Avenue - remain on the market, as do the parcels where he planned high-rise projects.

Dennis said it is possible the whole affair stemmed from "a terrible mix-up" by an escrow agent who took Carinalli's word for it that there was a deal, neglecting to get Mohinder Gulati's permission before distributing the funds.

"It's a divorce, and in a divorce you don't take sides between the spouses," she said.