Sour development deal settled in court

Thursday, April 28, 2011 4:36 PM

Jurors on Thursday awarded about $130,000 in damages to two investors of a failed development, but they returned close to that same amount in a counter lawsuit.

It was the conclusion of a four-week trial that pitted two investors against a local appraiser, a land seller, a real-estate agent and First National Bank of Durango.

A six-person jury deliberated for two days before reaching its decision in 6th Judicial District Court. It was the longest jury trial in recent memory in La Plata County.

Jury selection began April 4, and closing arguments were made Tuesday. Jurors included a business owner, special-education teacher, mechanical engineer, grocery-store worker and a retiree.

“There was wrong on the part of every party to an extent,” said jury foreman Mike How of Bayfield in an interview outside the courthouse. “A lot of people lost a lot on this. In the end, we felt that the damages needed to be as equally distributed as possible.”

The Boulder investors accused the defendants of conspiring to inflate the price of a 70-acre parcel they bought and planned to develop in 2006.

The defendants said the investors made a risky investment and lost, and are now pointing the finger at everyone else.

Vista Montana was a proposal to build 150 homes about a mile south of Elmore’s Corner (U.S. Highway 160 and Colorado Highway 172) on Florida Mesa.

The development never got started for a variety of reasons: The investors weren’t approved for a development loan, the property had issues that needed to be addressed before development could begin, and the investors defaulted on their loan after purchasing the property.

The investors – Jeffrey Baron and David Martinez – had little development experience, and a third business partner who did have experienced died on the day of closing the loan.

Andy Littman, their Boulder lawyer, said the defendants conspired to inflate the price of the property for his clients. As proof, he argued:

b Durango residents Karen and Richard Langhart bought the property in April 2006 for $2.2 million. Four months later, it was appraised at $9 million. The investors bought the property in November 2006 for $9 million. He accused the appraiser, Victor Romano, of issuing an inflated appraisal to appease the Langharts.

b First National Bank of Durango said it would provide a development loan, but the loan was never issued, making it impossible for the investors to build infrastructure. (The bank said the developers never formally asked for the loan.)

b The Langharts were longtime customers of the bank, and it was in the bank’s interest to facilitate the loan to help the Langharts wipe away previous loans that were growing toxic.

b Erin Beck, the real-estate agent, was interested in one thing: earning a high commission. So it was in her interest to see the property sell for as high a price as possible, and in doing so, she neglected to properly inform the investors of the property’s value and market conditions.

The investors thought they were purchasing a “turn-key” development, meaning the land was suitable for development and had received previous approvals, Littman said.

The economic collapse of 2008 played no role in the failed development, he said; rather, it was the negligent and bad-faith dealings on the part of the defendants.

“The value was never there in this property,” he told jurors during closing arguments.

But lawyers for the defendants said the investors simply made a reckless investment. They came to Durango at the height of the real-estate boom expecting to turn $2 million into $25 million, said David E. Wilson, a lawyer for the appraiser.

The investors failed to exercise due diligence and take the appropriate steps to get the development going, Wilson said. The appraisal value changed dramatically because of the development potential, he said.

He compared it to rose seed that has little value. But if the seed is planted, watered and fertilized, it becomes a rose that can be sold for a profit on Valentine’s Day.

The investors never nurtured the development, Wilson said.

“The green flag never flew on this project on the part of the plaintiffs,” he said during closing arguments.

The investors knew before buying the property that more needed to be done before lots could be sold, said Shawn Davlin, the lawyer for the Realtor.

“They certainly knew this project wasn’t turn-key, and it wasn’t ready to go,” he said.

Kate Burke, a Durango lawyer representing the bank, said plaintiffs wanted jurors to believe two juxtaposing views: that the bank thought the Boulder investors were “strong investors” and could cover the loan in order to help out the Langharts, and that the bank conspired to make the investors fail and default on the loan.

Chief District Judge Gregory Lyman made a previous ruling in favor of the bank resulting from the foreclosure of the property. But he left it up to jurors to decide how much the investors owed in deficiency payments to the bank.

The bank said it was due $1.8 million but was awarded only about $147,000 plus interest – a clear loss for the bank.

Durango lawyer Barry Spear, who represented the bank, said he wishes the jurors had seen things more from the bank’s perspective.

But the jury foreman said the bank failed to prove it was owed what it was requesting.

“They were asking for things that were ridiculous,” he said.

Melody Warren, another juror, said the moral of the story is that people need to be their own advocate.

“We sent a message that everyone was responsible,” she said.