The hits keep coming for the struggling Coast Financial Holdings Inc.
Already facing a class action from shareholders and operating under a cease-and-desist order, the Bradenton, Fla., company was slapped Thursday with multiple lawsuits on behalf of 125 Coast borrowers, alleging that its involvement with a troubled Florida real estate developer led to a breach of its fiduciary duty and ultimately constituted fraud and racketeering.
The suits, filed in three Florida counties, add to Coasts legal woes. The $834 million-asset company is also defending itself against shareholder lawsuits that charge it defrauded investors by failing to disclose possible problems in its portfolio.
Coasts troubles surfaced in January when it revealed that 482 property owners who had contracted with the home builder, Construction Compliance Inc. of St. Petersburg could have a hard time repaying loans after the financially strapped builder halted construction on their homes.
Shares of Coast, which reported a first-quarter loss of $2.4 million, have been rocked by the news, dropping from $16.20 on Jan. 18 to $3 at the close of trading Friday.
The latest suits say Coast officials knew Construction Compliance was in dire financial straits but hid that from borrowers while continuing to do business with the developer.
Alan E. Tannenbaum of the Sarasota firm Levin Tannenbaum filed the suits on behalf of the borrowers.
The complaints say that Coast and the mortgage broker American Mortgage Link marketed and sold residential home or lot packages to investors across the country and engaged CCI to develop the properties in 2004 at a time when CCI was already $2 million in debt.
CCI was insolvent when approached by Coast, the court papers say, and was not in the position financially or otherwise to honor contracts to build & the nearly 500 home construction contracts which Coast and AML would funnel CCI.
Mr. Tannenbaum says that early last summer, CCIs financial situation become so desperate that it went to Coast for a loan. Coast refused to lend its own money but released to CCI half of the 10% retainer it had kept on the builders draw but failed to tell borrowers it was doing so.
Its the most extreme case of a banks involvement in a fraudulent scheme that Ive come across in my 28 years of doing construction and development litigation in Florida, Mr. Tannenbaum said Friday.
Mr. Tannenbaum, who also charges that Coast took excessive and undisclosed fees from the mortgages, is asking the court to grant rescission, which would allow his clients get their money back from the bank and invalidate their mortgage notes. But courts are often reluctant to grant rescission, so he is also asking for unspecified damages.
James Schutz, an analyst at Sterne, Agee & Leach Inc., said he is disappointed that the parties were unable to reach an out-of-court settlement and avoid protracted legal dispute.
People were hoping that they would be able to settle this without court action, Mr. Schutz said. Its very clear that they were in discussions about this for quite some time, and I guess it just didnt work out.
Tramm Hudson, a veteran banker who was brought in as an adviser to Coast after the loan problems surfaced, said he welcomed the opportunity to disprove Mr. Tannenbaums allegations.
These investors knew full well what they were doing in terms of borrowing the money, we did not hold a gun to their head. Mr. Hudson said Friday. We believe that we have a solid contractual obligation with these borrowers and that they are obligated to repay these loans.
Mr. Tannenbaum blamed Coast for the failure to reach a settlement.
Coast was not able, because of its financial weakness, to offer the kind of workout that was appropriate for the circumstances, and thats why lawsuits were filed, he said.
