The real estate investments put together by developer Gregory Jeffreys in the years before his criminal indictment have been the target of lawsuits by investors, who claim Jeffreys took advantage of them.
But these investors do not blame Jeffreys alone. They – and others who are familiar with elaborate transactions at the Ridpath Hotel and in Airway Heights – are unsparing in their assessment of appraisers, bankers, an attorney and other institutional parties involved with the transactions. The system, they say, broke down.
“Obviously, it didn’t work,” said John Black, an attorney who filed some of the first civil lawsuits over Jeffreys’ transactions before a different attorney took over. “Investors relied heavily on their belief in what they thought was a fair system: i.e., the bank and the appraisers not only protecting the investors’ interest but their own interest. What we don’t really know is how those appraisals got so far afield.”
Two separate, bulky and long-standing civil cases are plodding through Superior Court in Spokane County. One involves an investors group called Club Envy LLC, which purchased the restaurant space at the Ridpath in 2008. The other involves investors who purchased West Plains property in 2007.
In each, attorneys have been wrangling over the role of those third parties and what “duty of care,” if any, they owed to investors who lost money. A key part of the defense – made by two separate appraisers and an attorney – is that they’re being unfairly blamed for market failures by investors who never bothered to check out deals in the pre-crash market.
Eric Sachtjen, the attorney who worked on many deals with Jeffreys and is named in investors’ lawsuits, asserted in court documents that “damages, if any, were caused by their own (investors’) respective carelessness, negligence, lack of due diligence and fault.”
Several investors have said in depositions that they did not look at appraisals or pay much, if any, attention to closing documents before jumping into the deals with Jeffreys. They said they relied on representations from Jeffreys and partner Brian Main, in particular, about the deal’s details.
But others have said in court filings they depended on the expertise of people they expected to act as gatekeepers to ensure the deals were fair, or at least conducted in an “arm’s length” fashion, with all the parties having equal knowledge or representation. In these deals, they allege, they were sold properties at dramatically inflated prices, in deals that enriched Jeffreys and left them on the hook with property worth far less than they owed.
The lawsuits are just one example of the degree to which Jeffreys’ business dealings became entangled with a wide swath of the Spokane financial world. He now faces 73 felony counts in a federal indictment alleging theft, bank fraud and wire fraud, among other crimes; his wife, Kim Jeffreys, and girlfriend, Shannon Stiltner, are also charged in the case.
None of the allegations made by investors against appraisers, bankers or attorneys is part of the federal criminal case. The civil suits have focused on four business associates of Gregory Jeffreys: longtime local real estate appraiser Scot Auble; Spokane Valley appraiser Value Logic LLC; Sachtjen, the attorney; and RiverBank.
Auble and Value Logic owner Terry Savage both declined to comment for this story. Neither Sachtjen nor RiverBank executives returned phone calls seeking comment.
Auble is a longtime Spokane resident and second-generation appraiser, a graduate of University High School and Washington State University. He was, until recently, president of Auble, Jolicoeur & Gentry, which bills itself as the largest “real estate consulting and appraisal firm in the Inland Northwest,” but he has now left the firm.
Auble performed appraisals of several elaborate Ridpath transactions, many of which involved Jeffreys and Main. In 2008, in the months before the economic crash, he appraised the restaurant space at the Ridpath for a transaction the two partners were putting together. Investors claim the appraisal was a key part of a scheme to “flip” the property at an artificially inflated price. Auble was named in a lawsuit along with Jeffreys and others, and he has unsuccessfully sought to have the claims dismissed.
The suit alleges Jeffreys and Main set up sham transactions on paper to drive up the appraised value. In May 2008, Jeffreys contracted to buy the space for $700,000. He then assigned the right to purchase the space to Main for $1.55 million – the value Auble gave to the property shortly thereafter.
Jeffreys and Main solicited investors to purchase the restaurant – the suit alleges they also vastly overstated the potential for rents in the property. An investors group called Club Envy LLC was formed, and the appraisal was used as the basis for the group to take out a loan from Banner Bank to buy the property. Investors say that whether they read the actual appraisal report or not, they relied on the appraised value and the bank’s acceptance of the appraisal to approve the loan.
Club Envy LLC purchased Unit 19 in the Ridpath at the appraised value with a $1.2 million loan from Banner Bank. Of that, $700,000 went to satisfy Jeffreys’ initial agreement to purchase the unit, $600,000 went to one of Jeffreys’ LLCs and $250,000 went to Main, according to the lawsuit. Club Envy never found a renter.
Investors allege a similar pattern in other Ridpath sales.
Auble denies the allegations in the lawsuit but, so far, his defense in court has relied less on the quality of the appraisal than on various legal aspects of the case – but that is likely because he has been seeking to have the case against him summarily dismissed. Crucially, he argues that he did not prepare the appraisal for the investors and the Club Envy transaction; he prepared it for the transactions between Jeffreys and the former owner, and between Jeffreys and Main, on behalf of a different lender – RiverBank.
In court records, Auble’s attorney argues that Auble wasn’t aware of the existence of the pending Club Envy acquisition and that investors did not rely upon his report in making their decision.
A judge rejected his attempt to have the case against him dismissed in November. The case is set for trial this summer.
Airway Heights appraisals
The appraisers involved in the Airway Heights transactions made similar arguments but were more successful. Value Logic LLC, owner Savage and appraiser Jenny Benson were dismissed from a suit in January. Savage is a longtime appraiser in Spokane, having worked for Auble’s firm for 13 years, and his client list includes local governments, major banks and large law firms.
The dismissal turned less on the appraisal itself than on a key question: How much did investors actually rely on it?
Jeffreys made four land deals near Airway Heights on the West Plains in 2006 and 2007, following a similar pattern as in the Ridpath transactions, court documents say. In the transaction prompting the lawsuit, he agreed to purchase a 39-acre parcel of land for $300,000; Value Logic appraised the property three days later at $4.25 million.
Investors allege the value was based almost entirely on “sham transactions” that Jeffreys set up on paper, such as offers to buy that never closed. A technical review of the appraisal, commissioned by the plaintiffs in the suit and conducted by Kidder Mathews in Seattle, rated it “poor” and concluded “the results of the appraisal are misleading.”
An investors group, RussellRock LLC, was formed and purchased the land for $1.8 million. It was presented as an opportunity to get the parcel at a low price and make a lot of money quickly, investors said – but at least some of them acknowledge paying little attention to the details. They were told of the appraisal value, they said, but never examined the report themselves.
Others said the appraisal was a crucial factor in their decision to invest. Alan Cummins, a California investor, said in a court declaration that representations of appraised property values, proffered by Jeffreys and Sachtjen, the attorney, and supported by RiverBank’s decision to extend a loan on the appraised value, were major reasons he decided to proceed with the investment.
Value Logic performed the appraisal at the behest of RiverBank, another party with a long-standing relationship to Jeffreys and another civil defendant.
Attorney had clients on both sides of transactions
Whether they should have known or not, many of the investors say they did not understand how the labyrinth of the transactions enriched Jeffreys and left them liable for future failures.
An example: In the RussellRock transaction, Jeffreys made $830,000 and kept a 25 percent interest in the investment group – along with what they allege was de facto control of the group. Each investor made personal guarantees against the loan, and Jeffreys did not, and those guarantees eventually were called in. Investors have said that every investment group involved in the West Plains deals included people who were bankrupted.
The investors were represented by Sachtjen. In court documents, Sachtjen has identified clients that include a wide range of parties on both sides of the transactions, including several investor groups; Savage, of Value Logic; Jeffreys; and Main.
Sachtjen was named a defendant, along with his former firm, Workland Witherspoon, in two lawsuits filed by investors. He and the firm have been dismissed from a case involving a West Plains transaction, though the terms of the resolution are private.
He and the firm remain defendants in the Ridpath suit. Investors claim Sachtjen helped Jeffreys and Main “bargain adversely” against them, breached his duty to them by failing to advise them of the risks involved, and furthered the “wrongful acts” of Jeffreys and Main, whether negligently or intentionally.
Sachtjen has left Workland Witherspoon and now works for Paine Hamblen.
Jeffreys borrowed from several banks
Jeffreys’ transactions always involved a lot of leverage, and he borrowed money from several local banks. In the criminal case, he is accused of stealing a government payment intended for Washington Trust Bank.
The bank had loaned Jeffreys $6.5 million for the construction of a military processing station. At the same time, he had a $5.12 million loan on the project from Wells Fargo. Federal prosecutors allege both of those loans were obtained fraudulently.
He has borrowed more than once, according to court records, from Coastal Community Bank, an Everett-based bank with branches on the state’s West Side that won a judgment against him for a $1.8 million default.
Many of his transactions were financed by RiverBank, a Spokane institution with a single branch that focuses on business lending. RiverBank financed three of the four disputed land deals in Airway Heights involving Jeffreys and Value Logic. The bank was involved in the Ridpath deals as well; it has foreclosed on several of Jeffreys’ properties in the hotel, and has sued him for defaulting on a separate loan of $1.7 million. That loan, according to RiverBank’s court filings, was approved in part based on personal guarantees from Gregory and Kim Jeffreys.
In 2011, RiverBank entered an agreement with state and federal regulators that required the bank to restructure and undertake “safe and sound” business practices. Bank officials said the problems were centered on a single unnamed borrower.
Investors in one of the West Plains transactions named RiverBank as one of the defendants in its lawsuit and have argued that the bank’s failure to examine the underpinnings of the deals put investors at risk. That portion of the lawsuit has been stayed, pending arbitration between the bank and plaintiffs.
Much of what occurred between the parties and the appraisers, bankers and attorneys is unknown, hidden behind privileged communications. But whatever their precise role and legal culpability, the transactions could not have proceeded without the legitimacy provided by those parties who investors thought were refereeing the system, said Black, the attorney who represented the plaintiffs in some of the first legal actions against Jeffreys.
“I don’t think Jeffreys could have done what he did without the work of the appraiser and the attorney,” he said.