PORTLAND, Ore. (CN) – The court-appointed receiver for a chain of failed old folks homes has filed a fraud action against the law firm that represented the chain, asking for $400 million from Davis Wright Tremaine.
The law firm, based in Seattle, wrote Sunwest’s offering memoranda and worked as the company’s general counsel from 1999 to 2008. It prepared at least 120 offering memoranda and wrote opinion letters advising lenders on whether to invest with Sunwest, according to receiver Michael Grassmueck’s complaint.
In a separate federal complaint, the receiver demands $20 million from the accounting firm of Grove, Mueller & Swank, claiming the accountants aided and abetted breaches of duty.
In the lawsuit filed against Davis Wright in Multnomah County Circuit Court, the receiver says the firm left important information out of the memos, including the fact that Sunwest commingled the accounts of its various entities, that some facilities were in default by millions of dollars, and that the survival of each facility depended on Sunwest’s ability to recruit new lenders.
Representing Davis Wright, Joseph Arellano with Kennedy Watts said Davis Wright “provided excellent and appropriate work” to Sunwest. Arellano blamed Sunwest’s collapse on the implosion of the financial and housing markets.
“It’s unfortunate that Davis Wright Tremaine is being singled out, but so is every other professional that worked with them,” said Arellano. “The receiver is trying to get money back for the people who lost it, and I understand that, but it’s hard to believe that every professional who worked with them is to blame.”
The receiver says Davis Wright attorneys attended Sunwest board meetings, helped design Sunwest’s business plan for recruiting investors, encouraged investors and reassured investors of the safety of their money.
“Toward the end,” the lawsuit states, “DWT was literally churning out offering memoranda to induce investors to provide cash for the Sunwest Enterprise, despite their knowledge of its serious financial problems. In short, DWT played a critical role in creating, sustaining and propping up the Sunwest Enterprise.”
In the lawsuit against the accountants, Grassmueck says that Grove, Mueller & Swank prepared Sunwest’s audited financial statements from 2004 through 2007, and failed to report that Sunwest entities were borrowing from each other and were in default on loans.
Sunwest opened its first senior living facility in 1992. The company and its various entities ran 270 facilities by the time the Securities Exchange Commission filed a securities fraud lawsuit against it in 2008. Most facilities had trouble meeting the 95 percent occupancy goal Sunwest had set, so the companies often borrowed from each other in daily, undocumented loans, the lawsuit states.
Since the facilities never made a sustainable income, Sunwest depended on new investors to stay afloat, Grassmueck claims. Sunwest collected more than $400 million from more than 2,000 investors, and $1.7 billion from lenders. It has been sued repeatedly and faced multiple foreclosures since the company collapsed.
The offering memoranda and investment opportunities were securities but “were never registered as securities with any state or federal authority,” the receiver says.
To complicate things further, the Park National Bank has sued Sunwest, Grassmueck, and other in Raleigh, N.C., Federal Court. The bank says Sunwest and its River’s Edge NC Apartments owe the bank $22.2 million, and that Grassmueck does not have jurisdiction to enjoin Park Bank from collecting the debt.