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Mortgage Loan Pileup in Federal Court

LAS VEGAS (CN) - Nearly 570 direct lenders in commercial mortgage investment loans claim that USA Commercial Mortgage filed for Chapter 11 after it was "no longer able to perpetuate its fraudulent activities and conceal from the direct lenders that the loans were in default."

Plaintiffs, many of them retirees who say they have "lost their live savings as a result of defendants' loan servicing" practices, say they have been "repeatedly victimized by the avarice of their purported loan servicing professionals and their co-conspirators."

USA Commercial Mortgage, which was a licensed mortgage broker, filed for bankruptcy on April 13, 2006. The company serviced the loans, which were made on behalf of direct lenders to third-party borrowers and secured by real property.

In December 2006, co-defendant Compass Financial Partners and/or seven other Compass entities were the successful auction bidder of USA Commercial's loan servicing rights.

Direct lenders tried to terminate Compass as their loan servicer in May 2007, "as a result of Compass's extensive loan servicing misconduct to the financial detriment of the direct lenders," according to the federal complaint.

A judge issued an injunction that protected Compass from being terminated as the loan servicer, but allowed 51 percent of the direct lenders to move for termination of their loan servicer.

In April 2009, co-defendants Silar Advisors and Asset Resolution sought to move the trust funds from one account into loan-specific "sub-accounts for greater transparency to the direct lenders," claiming that they "understand and acknowledge that funds will not be distributed from these accounts without further order from the court."

The court acknowledged, but did not approve, the substitution of Asset Resolution for Compass as loan servicer, but added Silar and Asset Resolution as parties to the preliminary injunction.

The court then ruled in July 2009 that the loan servicer "was not entitled to collect default interests and late charges as servicing compensation in connection with the loans if the amount ultimately collected was less than the full principal amount of the loans."

The court added that for each of the loans, the loan servicer was to get only one accrued annual servicing fee, to be calculated by multiplying the weighted average of the servicing fee percentages for one year by the total amount ultimately collected.

The next month, the court approved conveyance of title to the collateral securing the loan based on a sale price of $8.5 million, and determined that Asset Resolution was entitled to recover only $1.5 million in servicing fees and advances from those sales, including a $94,000 servicing fee.

Asset Resolution had claimed it was entitled too all the proceeds from sales, about $2 million.

Bankruptcy proceedings began in October 2009. It was then that Asset Resolution disclosed that it had disbursed about $950,000 of the trust funds to itself.

Silar's initial funding of Compass's acquisition of the purchased assets was based on a "first-tier" financing of $38 million. Such initial funding was to be repaid in installments. But after its original funding source dropped out in January 2007, Compass "was desperate to secure funding to complete its acquisition of the purchased assets and not lose its non-refundable $6 million good faith deposit. Thus, Compass agreed to the extreme funding and repayment terms offered by Silar," according to the complaint.

The 92-page complaint claims that Compass's and Silar's "wrongful loan servicing enterprise" was assisted by the legal advice of defendant Tyson Lomazow, a New York attorney "who rendered legal opinions that purported to justify their misconduct."

Defendants "purported to act as the direct lenders' loan servicers in connection with the loans even though they lacked the required powers of attorney to do so," the complaint states. Despite lacking authority, defendants "wrongfully took actions and incurred obligations and liabilities on behalf of the direct lenders." Defendants' "lack of such authority" precludes them from pursuing claims of recovery, the lawsuit states.

Defendants also wrongfully "took and retained funds as purported loan servicing compensation to which they were not entitled," the lawsuit states.

Additionally, defendants allegedly failed to get consent of at least 51 percent of the direct lenders to take actions on their behalf, and failed to get consent before proposing discounted payoffs.

Defendants "failed to disclose and accept ... proposed discounted payoffs because they did not include millions of dollars in default interest, late charges and other fees to which defendants wrongfully claimed to be entitled," according to the complaint.

Defendants also failed to evaluate and resolve the defaulted loans in a timely manner because they "intended for the loans to accrue additional amounts of default interest and late charges," according to the complaint.

Compass, the lawsuit states, paid $8 million for the loan servicing rights in 2007, but claimed to be entitled to more than $120 in loan servicing compensation.

"As a result, the value of the collateral securing the loans depreciated substantially when the economy and the commercial real estate market subsequently experienced a significant downturn, causing plaintiffs to suffer millions of dollars in damages."

Plaintiffs seek compensation and damages for racketeering, elder abuse, breach of contract and other charges.

Asset Resolution is not listed as a defendant.

Here are the defendants: Silar Advisors LP; Compass Partners LLC; Compass USA SPE LLC; Compass Financial Partners LLC; Compass FP Corp.; Compass USA Holding LLC; Compass USA LP; Compass USA GP LLC; Leonard Mezel; David Blatt; Boris Piskun; Jay Cohen; Ron Friedman; Silar Special Opportunities Fund; SMOF A LLC; SSOP LLC; Robert Leeds; Jay Gracin; Hin-King Tai; Cade Liu; Mark Olson; Windemere Capital LLC; Oakbridge Capital Inc.; Economic Growth Group Inc.; Repotex Inc.; Servicing Oversight Resolutions LLC; Michael Reiner; Tyson Lomazow; Citron Investment Group Inc.; Michael Citron; and Danielle Citron.

The lawsuit was filed by Lisa Rasmussen with Bickel & Brewer.

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