CONWAY — A pair of expert witnesses testified Wednesday that Beach First National Bank and an appraiser it hired breached their professional standards during a 2007 transaction with state Sen. Ray Cleary, who is suing the bank for fraud related to a $3 million loan his Waterfall Investors 2 corporation received to help develop a 160-acre tract along S.C. 90 near North Myrtle Beach.
Bank of North Carolina – which took over Beach First’s assets, including the loan to Cleary, when federal regulators shut down Myrtle Beach-based Beach First in 2010 – has filed a foreclosure lawsuit against Cleary, saying the state senator still owes $2.6 million on the loan.
Cleary, who was chairman of the bank’s board of directors at the time the alleged fraud occurred, said in a counter-suit that Beach First used a fraudulent appraisal to convince him to take the loan. That appraisal overstated the property’s value and understated the amount of undevelopable wetlands on the property, according to court documents.
Cleary says Bank of North Carolina is responsible for Beach First’s actions because it assumed the loan and all legal liabilities in an agreement with the Federal Deposit Insurance Corp.
Carlton Segars, a real estate appraiser in Columbia, testified during Wednesday’s third day of a jury trial that an appraisal of Cleary’s land conducted by Jim Jayroe, owner of Jayroe Appraisal Co., failed to verify the number of wetlands on the property. Jayroe stated in the appraisal that he relied on an engineering study to determine the number of wetlands, but no such study was included in Jayroe’s documentation and it is not clear whether that study exists.
Jayroe’s appraisal showed the property had just 39 acre of wetlands and was worth nearly $6.9 million. A wetlands delineation two years later by the U.S. Army Corps of Engineers showed there were 107 acres of wetlands. Cleary said the difference reduced the property’s value by more than two-thirds.
Jayroe was on the bank’s pre-trial list of potential witnesses in the case, but has not yet been – and isn’t expected to be – called to testify about the validity of his appraisal.
Dalton Floyd a lawyer representing the bank, stated during cross-examination that the appraisal was the bank’s property and that Cleary did not have a right to rely on it in making his investment decisions. The bank’s lawyers have said Cleary – who had previous real estate development experience and sat on the bank’s loan committee – had financial savvy and plenty of opportunity to get his own appraisal and do proper due diligence for the loan, but chose not to.
Donna “Sissie” Childress, a Columbia-based banking expert, testified that Beach First had an obligation to make sure the information in Jayroe’s appraisal was correct.
“The bank has a responsibility for having a good confidence level that the documentation is correct – they had an obligation to verify the information,” Childress said.
Childress said Bank of North Carolina has breached its duties by failing to file a legal claim against Jayroe over the appraisal.
Floyd stated during cross-examination that the bank would be the only party harmed by a faulty appraisal because the bank would be stuck with an under-collateralized loan. Floyd said the bank had no duty to report any potential problems with its appraisal to the borrower.
Cleary said earlier in the trial that he told Beach First officials that he was relying on the appraisal’s wetlands total to make his decision on whether to take the 2007 loan on the property.
Katie Huntley – Beach First’s chief credit officer at the time and now a vice president at Bank of North Carolina – testified Wednesday that Cleary never put any conditions on the loan contingent on the wetlands total. Cleary also did not ask the bank to verify the number of wetlands shown in Jayroe’s appraisal, she said.
If he had, “I would tell him that we wouldn’t do that and he would have to get the wetlands studies himself,” Huntley said.
A credit memorandum Huntley prepared for the bank’s loan committee shows Cleary spoke to her about the property’s wetlands, but Huntley said Wednesday that Cleary only told her “what he thought the [amount of] wetlands were” and did not say his loan decision would be based on an appraisal showing that amount.
Cleary is asking for at least $1.7 million in actual damages, including money he spent on timber removal and other pre-development projects at the tract. Cleary is suing Bank of North Carolina for fraud, breach of contract and negligent misrepresentation
A jury of seven women and five men will decide the case, with testimony expected to continue Thursday at the Horry County courthouse.
Waterfall Investors 2 was formed in January 2006 by Cleary and Bill McKown, with a third entity called Vision Capital owning less than 1 percent of the corporation. In June 2006, McKown and Vision Capital assigned their interests in the corporation to Cleary.
Cleary, a Surfside Beach dentist, has served in the state Senate since 2005 as a Republican from Murrells Inlet.
Contact DAVID WREN at 626-0281.