We represent dozens of tenants in common (TICs). Many of our clients invested with Carlton Cabot and Cabot Investment Properties. No telling where Cabot is hiding these days although its pretty common knowledge that investors, regulators and even the feds are hot on his trail. Whether or not his investors will ever be made whole remains to be seen. At this point, we are simply trying to protect them from having to foot the bill on Cabot’s failed projects.
A tenancy in common is a real estate investment that allows multiple people to purchase fractional interests in a property. TICs are often used to acquire shopping centers, hotels and office buildings. By pooling resources and purchasing fractional interests, investors can participate in larger projects. Promoters promise investors stable cash flow, capital appreciation and professional property management. While the concept is great, the industry has been marred by scams and slimy promoters such as Cabot.
In a normal investment, the only thing at risk is your investment. Buy $10,000 of IBM stock and the worst that can happen is the stock goes to zero. While the market always has volatility, your losses are capped by the total money invested. That may not be so with Cabot’s tenants in common investments, however.
To acquire large projects such as shopping centers, Cabot’s investors not only invested their hard earned money, they also signed promissory notes and mortgages. According to the promotional materials, these loans were “non recourse” meaning there was no personal liability. If the project went under, the banks could only look to the real estate and value of the buildings.
Or so investors thought.
Buried in the hundreds of pages of offering documents were “springing guaranties” and personal indemnification clauses. If the stockbrokers that sold these tenants in common interests even read the fine print, they certainly didn’t inform their customers. These clauses say that the lender can go beyond the TIC and seek contribution (money) from the owners of the tenants in common. The investors.
The result with Cabot was failed projects throughout the United States and a spate of foreclosures and threats of personal guaranty litigation. The investors in the Cabot Ashtabula project are right in the thick of the mess.
Although we do not represent the Cabot Ashtabula tenants in common, we certainly follow their cases. In most of the Cabot projects, the TICs banded together and are fighting hard against the lenders. That wasn’t the case in Cabot Ashtabula, however. According to records we obtained from the clerk of courts for the Northern District of Ohio, the tenants in common on that project did not even file a response to the bank’s summary judgment motion. In laymen’s terms, they rolled over and played dead.
If that was their strategy, it didn’t work. Without any opposition filed, the court granted a foreclosure judgment to the lender. Why none of the TICs fought the foreclosure remains a mystery. For any single investor the cost of fighting the lender can be expensive but even if 3 or 4 ban together the costs become manageable.
What happened after the foreclosure was granted was tragic. According to the United States Court of Appeals, the 30 tenants in common that invested in the Ashtabula project, did not file any response or object to the lender’s motion to foreclosure. Shortly after the bank’s summary judgment motion granting foreclosure, the TICs apparently “woke up” and filed an appeal. In that appeal the TICs raised several great defenses. Among other things, they challenged the standing of the servicer and note holder to bring the foreclosure.
Unfortunately, the arguments were too late. The 6th Circuit ruled that “the failure to raise objections to the… evidence before the district court’s [trial court] ruling constituted a waiver of those objections. In other words, if a party fails to object before the district court to the affidavits or evidentiary materials submitted by the other party in support of its position on summary judgment, any objections to the district court’s consideration of such materials are deemed to have been waived.”
In layman’s terms, the appeals court said the 30 tenants in common waited to long. By not raising objections to the bank’s foreclosure motion, the TICs waived whatever defenses they may have once enjoyed.
The appeals court issued its ruling on March 12th. That paves the way for the lender to sell the property, in this case a mall in Ashtabula, Ohio. The mall was financed with a $40,300,000 loan. If the foreclosure doesn’t bring in enough to cover the principal, late fees, interest, receiver’s fees and legal fees, there could be a deficiency. Given the commercial real estate market in recent years, most commercial foreclosures result in a deficiency.
If the Cabot Ashtabula deal is structured like the other Cabot projects, the investors may find themselves fighting for their lives. Why? Because most of the Cabot deals contain personal guaranty language. That means if the tenants in common lose the next round, they could find themselves having to cash in savings, postpone retirement and even sell their homes to pay off the deficiency.
Suddenly the investment of a lifetime becomes a lifetime sentence.
All is not lost, however. There are defenses to these foreclosure cases and we believe that many of the lenders knew or should have known that Cabot and his cronies were crooks.
If you are a Cabot tenants in common investor, don’t wait until the 11th hour to fight and don’t believe that you are not at risk because your broker or a glossy sales brochure tells you otherwise. Find competent counsel immediately.
The fraud lawyers at Mahany & Ertl represent tenants in common in a wide variety of settings. We can help pursue cases against third parties who sold the investments (often insurance agents, investment advisers or stockbrokers) and can defend you against foreclosure and claims for personal guaranties. Unlike some law firms, we will gladly represent groups of investors if there is an identity of interest.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. Services available in many jurisdictions.
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