Class action complaint claims complex lending scheme is impermissible under Ohio law

When banks and other lenders make a loan for real estate financing, they typically take back from the borrow a promissory note (promising to re-pay the sums borrowed) and a mortgage against the real estate financed (securing the payment of the loan).

And under that scenario, even a borrower in default has certain rights as against the lender.

First, there is a statutory right of redemption of the property in the foreclosure process under O.R.C. Section 2329.33:

…in sales of real estate on execution or order of sale, at any time before the confirmation thereof, the debtor may redeem it from sale by depositing in the hands of the clerk of the court of common pleas to which such execution or order is returnable, the amount of the judgment or decree upon which such lands were sold, with all costs, including poundage, and interest at the rate of eight per cent per annum on the purchase money from the day of sale to the time of such deposit, except where the judgment creditor is the purchaser, the interest at such rate on the excess above the judgment creditor’s claim. The court of common pleas thereupon shall make an order setting aside such sale, and apply the deposit to the payment of such judgment or decree and costs, and award such interest to the purchaser, who shall receive from the officer making the sale the purchase money paid by the purchaser, and the interest from the clerk. …

Second, the borrower has the right to the net proceeds from the foreclosure sale beyond the court costs and the amount due to the lender (i.e., any built-up equity in the property belongs to the borrower).

Finney Law Firm alleges in a recent class action complaint that Cincinnati companies Build Realty, Inc., Edgar Construction LLC, and certain investors associated with them have created a tremendously complicated scheme to impermissibly attempt to deprive a broad group of real estate investors of these statutory rights in the lender/borrower relationship.

From the Complaint:

This case involves a complex business scheme where Defendant Build Realty, Inc. and Defendant Edgar Construction LLC solicit investors to purchase and improve real property from/through them under a fraudulent structure, prohibited by Ohio law. To effectuate this transaction, Edgar Construction, LLC (“Edgar Construction”), purchases certain real property from a third party, then immediately resells the property at a higher price to itself as trustee of a trust under which the investor is the beneficiary. Edgar Construction’s affiliated entity, Build Realty, Inc. (“Build Realty”) agrees to lend the investor the afterrenovation-value of the property, including the higher purchase price and an additional amount for improvements (held in escrow). As part of this transaction, the investor, Build Realty, and/or Edgar Construction simultaneously execute numerous agreements, under which the investor is obligated as a mortgagor and borrower on a note for the amount loaned by Build Realty. One of the documents signed during this transaction also purports to allow Defendants to reclaim the property, extinguishing the investors’ rights therein, upon any default and without the opportunity for cure or any subsequent foreclosure or deed in lieu of foreclosure.
The Ohio Supreme Court and courts throughout the state have recognized the structure of the Transaction as an improper clog on the right to redemption. Additionally, the Transaction is fraudulent, void for unconscionability and as against public policy, and involves numerous breaches of the fiduciary duties owed to the investors (which are the beneficiaries of the trusts). This Transaction effectively allows Defendants to profit at the expense of their investors/beneficiaries, including (i) the retention of the down payments paid on the properties, (ii) the difference in the purchase  price that Edgar Construction paid and the purchase price for the conveyance from Edgar Construction to Edgar Construction, as trustee, and (iii) any foreclosure proceeds the investor(s) would have realized.

The Class Action Complaint seeks compensatory damages and disgorgement of profits, punitive damages and a declaration that such transactions by these defendants are impermissible under Ohio law.

For more information on this suit, contact attorney Casey Taylor at (513) 943-5673 or [email protected].

Read the Complaint below:

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