Collapse of San Antonio loan company resulted in losses of more than $25 million for investors, lawsuit says

A publicity brochure for a New Opportunities Inc. fund aimed to allay investor concerns, assuring them that directors Terry A. Cleveland and James W. Hale had “never lost a dime of capital!!”

But a lawsuit filed Monday in the bankruptcy of their mortgage company and related entities alleges investors have racked up losses of more than $25 million.

Cleveland – a chartered accountant who served as president of New Opportunities – and Hale – an attorney and vice-president of the company – have ‘refused to explain’ the staggering losses resulting from the company’s financial collapse, according to Uvalde’s trustee in bankruptcy, John Patrick “Pat” Lowe. in the trial.

So far, 172 creditors – many of whom are retired and living on fixed incomes – have filed papers with the court showing debtors owe them more than $31.5 million combined.

Still, Cleveland and Hale told investors in a letter at the end of 2020 that New Opportunities had no more than $5.8 million in assets, leaving a shortfall of more than $25 million. .

“The question is, where did the $25 million go? They never responded to that. I asked them,” said Stephen A. Roberts, an Austin attorney representing 35 investors who collectively lost about $7.9 million.

Among his clients are the directors of Pape-Dawson engineers in San Antonio. Its chief executive, Sam Dawson, is said to have lost about $1.9 million.

Injunction requested

Lowe, who has taken control of debtors’ assets, wants a bankruptcy judge to order Cleveland, Hale and other defendants named in the lawsuit to give a detailed account of all money and/or property they received in the 10 years prior to the January 2021 bankruptcy filing.

Lowe is also seeking a preliminary injunction preventing Cleveland and Hale from disbursing proceeds from the sale of a 15,000 square foot office building at 8531 N. New Braunfels Ave., the pair owned in partnership.

Net property proceeds “may be the largest source of payment for any loss recovery,” Lowe says in his lawsuit. It has an assessed value of about $1.2 million, according to the Bexar Appraisal District website.

The duo’s partnership sold the building on Dec. 17, according to Bexar County land records.

Lowe’s lawsuit represents the latest legal action against Cleveland and Hale. A few investors initially forced New Opportunities into involuntary bankruptcy. A Bexar County couple then sued them for more than $1 million in February in San Antonio District Court. And, in August, Roberts filed suit on behalf of his 35 clients.

Attorneys for Cleveland and Hale did not immediately respond to a request for comment. They have yet to file a response to Lowe’s lawsuit, but have denied similar allegations in state court cases.

Indeed, Lowe’s complaint largely follows an amended version of Roberts’ lawsuit, filed in October.

Lowe declined to comment, and the attorney who filed the lawsuit on his behalf did not call back this week.

Started in 1989

Cleveland and Hale launched New Opportunities in 1989 to invest in real estate. It and related entities later got into “equity-based mortgages,” mostly in and around San Antonio.

A stock mortgage is granted in exchange for the borrower executing a promissory note promising to repay the lender at interest rates higher than conventional rates, Lowe states in his lawsuit. The loan is secured by a lien on the borrower’s property. Borrowers are required to have significantly more equity than with a conventional mortgage.

New Opportunities would make money on the difference between interest paid by borrowers and interest paid to investors. It is believed to have capped loans at 60% of the value of the borrower’s property, meaning the borrower ‘cannot afford to default’, according to a publicity brochure Lowe cited in his trial.

In 1993, Cleveland and Hale created a series of investment funds to raise money to finance or buy mortgages. In investor presentations, they announced that 100% of investor funds would be used to fund or buy mortgages, saying they were “safe, proven investments with high returns and backed by by mortgages,” Lowe’s lawsuit states.

The investments weren’t safe, he says.

“The truth is that there was no legal pledge of the mortgages as security for the notes,” Lowe adds in the complaint. “There are no mortgage pledges on file in the public record, and Cleveland and Hale admitted under oath during the bankruptcy case that there were no such documents.”

Investors held on to their notes for years, Roberts said. Instead of paying for the notes at maturity, New Opportunities rolled them into a new note “over and over again”, he added. The initial investments could therefore have been made many years ago.

Lowe says investors were also offered higher interest rates if they deferred interest payments until the loans matured. This would have allowed Cleveland and Hale to collect mortgage payments for years without having to pay interest to investors. It also allowed the couple to hide from investors that they were not collecting enough mortgage payments to cover the interest owed to investors.

Cleveland and Hale suggested investors take money out of their retirement funds and invest it in new opportunities.

“Ponzi scheme”

Instead of investor funds being used to purchase mortgages, Cleveland and Hale admitted under oath that they had used the money to pay interest on the notes.

“It fits the classic definition of a Ponzi scheme: tricking investors into believing the business is profitable and that their investments are succeeding by secretly using new investment dollars to pay existing investors,” the report says. Lowe’s trial.

The balance of the mortgages should have been greater than the balance of the money New Opportunities got from the investors, said Roberts, the attorney for 35 investors. Yet he only declared $5.7 million in assets and more than $31.5 million in investor notes.

“We don’t know if they’ve ever had $32 million in mortgages,” Robert said. “They could have been under water all the time because they borrow money and issue mortgages, and they don’t pay the money back. They just pay interest and roll the notes.

Lowe says he was unable to determine when the value of the mortgages fell below the value of the amount owed on the notes held by investors.

New Opportunities and its related entities reported just over $1 million in revenue in 2020 and $919,272 in 2019, not nearly enough to cover interest payments, Lowe says.

Annual interest is nearly $1.6 million on more than $31 million in 5% interest notes, he adds.

Yet the 35 investors say in their lawsuit they continued to receive interest payments and did not know New Opportunities was in financial trouble until they received a December 31, 2020 letter from Cleveland and Hall. .

‘Beyond our control’

“Conditions beyond our control require us to suspend all payments on the Fixed Income Notes,” they wrote in the letter, according to the 35 investors’ lawsuit.

The pair blamed the ‘unfortunate situation’ on falling interest rates over the years, increased competition, borrowers paying off high-interest loans through refinancing, economic downturns and borrower bankruptcies. .

The pandemic was the “tipping point,” the couple said, according to the lawsuits. Yet the complaints mention that New Opportunity obtained a $71,509 loan from the Paycheck Protection Program.

Despite New Opportunities’ impending doom, the lawsuits allege it continued to solicit additional investment from investors in 2020.

Cleveland and Hale each received monthly salaries of $6,000 before the bankruptcy, and their companies that owned New Opportunities received a “substantial” monthly expense allowance, according to Lowe’s lawsuit.

The 35 investors sued Cleveland and Hale for fraud, civil conspiracy and violation of the Texas Securities Act.

Roberts said he believed some investors contacted state or federal criminal justice authorities, but he did not know if there was any follow-up.

Last month, US Bankruptcy Judge Michael Parker granted a $2 million interim distribution to creditors from some of the debtors’ assets.

And just this week, in the Bexar County couple’s lawsuit, retired Judge H. Paul Canales ordered Cleveland and Hale to hand over their individual tax returns for the years 2018, 2019. and 2020 – but limited the information to revenue from New Opportunities and eight other entities.

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