Insurer won’t cover legal fees in Aspen lawsuit

By Steve Green

Published Thursday, May 7, 2009 | 7:30 a.m.

Updated Thursday, May 7, 2009 | 9:27 a.m.

An insurance company is refusing to indemnify a Las Vegas hard-money lender in a lawsuit filed by disgruntled investors, saying the lender has been operating like a bank as opposed to being strictly a mortgage broker.

Aspen Financial Services LLC, a company controlled by long-time lender Jeff Guinn, is being sued by two sets of investors in Clark County District Court.

The suing investors claim Aspen and Guinn -- son of former Gov. Kenny Guinn -- mismanaged their investments, failed to disclose important information to investors and engaged in transactions that generated fees or otherwise benefited Aspen and Jeff Guinn at the expense of the investors.

As a hard-money lender, Guinn pools investors' money and loans it to developers who can't or don't want to obtain traditional bank loans. Such hard-money lenders typically charge higher interest rates than banks and, like banks, have seen loan defaults soar as the recession has hurt their borrowers and slashed real estate values.

Guinn and Aspen revealed this week that in one of the investor suits, filed by Lois Levy and other plaintiffs in November, insurer Carolina Casualty Insurance Co. is refusing to cover the legal fees for Guinn and Aspen and is denying any liability coverage for the case under a $3 million policy.

The revelation came when Guinn, Aspen and associated company Aspen Bay Financial LLC sued the insurance company, claiming it is wrongfully denying coverage for a legitimate claim.

Attached to the lawsuit is a letter from Richard Bortnick, a Pennsylvania attorney for the insurer, spelling out the reasons for denial of the claim.

Bortnick said that when Guinn sought management liability insurance, the insurer advised Guinn explicitly that the policy does not cover banking activities. Aspen was required to ``confirm the insured does not actually lend the money as a bank but is truly just a broker.''

``It is clear that the Levy plaintiffs predicate their claims against Aspen Financial not on its role as a `mortgage broker' and `real estate agent/broker,' but rather on its capacity as a bank, lender and/or loan servicer,'' Bortnick wrote. ``Indeed, all of the conduct at issue in the Levy litigation appears to relate to banking-type services. As such, there is no coverage under the policy with respect to the Levy litigation.''

Many of the Levy lawsuit's allegations covered in Bortnick's letter involve Aspen's role as servicer of the loans.

For instance, it notes that as the Levy plaintiffs' agent, Aspen was to exercise diligent and good faith efforts to represent their interests in servicing loans, was to promptly notify investors when borrowers defaulted and was to follow the investors' instructions in dealing with delinquent borrowers.

In cases of loan defaults, Aspen was to either enter into forbearance agreements or foreclose on the property backing the loans and, when necessary, seek payments from personal guarantors of loans.

The insurance company's lawyer also said the Levy lawsuit ``implicates other coverage questions,'' including whether Aspen knew of the matters at issue in the lawsuit when it applied for the insurance last summer, whether Aspen and its managers gained a profit or advantage to which they were not entitled, whether fraud was committed and other issues.

In their lawsuit against the insurance company, Aspen Bay Financial and Aspen Financial Services said: ``Mr. Bortnick's analysis does not correctly adduce the facts; (and) the analysis incorrectly misapplies the terms of the policy to the law.''

The Aspen companies charged: ``Defendant insurer has established a business practice of unlawfully depriving its insureds of benefits.''

Separately, some of the plaintiffs in the second investors' lawsuit against Guinn and Aspen have amended their complaint with new allegations.

One of the new allegations is that the defendants induced them to loan money for a project -- but failed to disclose the project was not backed by real estate collateral.

Led by investor Donna Ruthe, the plaintiffs said that in 2006 they participated in an investment of $21.85 million for a second-priority loan to Flamingo/TC LLC for a condominium and commercial development at Flamingo Road and Town Center Drive. The investors said they were told by Aspen and Guinn that the loan was backed by adequate security.

Later, they say they learned their second trust deeds were worthless because they had been subordinated to another lender.

The investors say they had been told that under the deal, AmTrust Bank would have a $79.7 million first priority deed of trust and that their $21.85 million second deed would have adequate security because the project was valued at $116.76 million.

They said they had been told the AmTrust loan would refinance a loan for the project in which Aspen itself was a first trust deed investor; and that the Ruthe investors' investment would refinance a loan for the project in which Aspen was a second trust deed investor.

But, the plaintiffs charge, Aspen and Guinn failed to disclose:

--The second trust deed holders' interests had been subordinated, without their consent, to AmTrust.

--The borrower, Flamingo/TC, would not be permitted by AmTrust to repay the maturity of the loan funded by the Ruthe investors at maturity.

--The value of the property was far less than they had been led to believe. The $116 million figure was based on site improvements -- improvements that were not scheduled for completion in one phase until six months after the loan they invested in matured; and improvements in a second phase that were not scheduled to begin until after the first phase was completed.

--With the close of escrow on the Ruthe investors' loan, Aspen received at least $613,500 in fees and Aspen and Guinn appear to have received more than $9 million from the payoff of their interests in the previous first and second priority loans that were paid off by the AmTrust loan and the Ruthe investors' loan.

``No security existed for plaintiffs' investment since the second priority deed of trust and the personal guarantees were an unenforceable sham,'' the investors charge.

The project, the lawsuit says, eventually went into foreclosure -- a process that resulted in Aspen billing the investors for more than $400,000 in fees and costs for which they received no benefit.

One of the attorneys representing the Ruthe investors, Alan Freer of the Las Vegas law firm Solomon Dwiggins & Freer, said his clients are not hopeful they will be able to recover their investment in the Flamingo/TC deal.

The property remains tied up in litigation between Aspen and AmBank; and it's unclear if the second trust deed investors would receive anything even if the borrowers were pursued for their personal guarantees.

Guinn and Aspen have not yet responded to the amended complaint, and they have denied wrongdoing in both sets of investor lawsuits. An attorney for Guinn and Aspen today declined comment on the new allegations.