CONWAY — An Horry County jury on Thursday said the bank that state Sen. Ray Cleary once helped run did not defraud him in a $3 million property loan, agreeing with bank officials that Cleary is solely to blame for the loan’s default because he failed to do his own due diligence.
Brad Floyd, a lawyer representing Bank of North Carolina, told the jury during closing arguments that Cleary was motivated by money during the real estate boom but then tried to blame the bank when the economy soured and development plans for the property fell through.
“He saw what he thought was a good deal, and he wanted to get in on making some of that money,” Floyd said. “He knew exactly how the loan process works. The bank is not there to tell Mr. Cleary whether his investment gamble was a good one.”
The jury of seven women and five men agreed, taking more than four hours to return their verdict in the four-day trial.
Bank of North Carolina defended the case as the successor to Beach First National Bank, which was shut down by federal regulators in 2010.
Cleary was chairman of Beach First’s board of directors and a member of its loan committee.
Bank of North Carolina assumed Beach First’s assets, including the Cleary loan, in an agreement with the Federal Deposit Insurance Corp.
Cleary had alleged that Beach First committed fraud by providing him with a property appraisal that overstated the value of land backing his loan and understated the amount of undevelopable wetland on the property.
The bank’s 2007 appraisal stated the 160-acre tract – owned by Cleary’s Waterfall Investors 2 LLC – had just 39 acres of wetland and was worth nearly $6.9 million.
The U.S. Army Corps of Engineers later determined the property – located along S.C. 90 near North Myrtle Beach – had 107 acres of wetland, greatly reducing the tract’s value.
The loan was in Waterfall’s name but Cleary signed a personal guaranty for the debt.
Cleary had testified that Beach First officials knew he was relying on the bank’s property appraisal to decide whether to take the loan.
Cleary said he asked bank officials to verify for him the number of wetland on the property, which the bank did through an appraisal it contracted to Jayroe Appraisals Inc. in Myrtle Beach.
The appraisal proved to be flawed, relying on a developer’s conceptual drawing rather than an engineering study to determine wetland.
Bank officials testified that the appraisal was for the bank’s use only. Katie Huntley, Beach First’s chief credit officer, testified that she never made any representations to Cleary about the number of wetland on the property and that he never made the wetland issue a contingency for the loan.
Josh Wise, at the time a loan officer for Beach First, said Cleary’s only concern with the appraisal in 2007 was how it valued the property he wanted to develop.
Wise said Cleary gave the appraisal “a very cursory glance” at the time and asked Wise to send him a summary of the document rather than the complete appraisal.
Wise said he contacted Cleary in 2010 because the loan was past due and that is when Cleary raised issues about the wetland being misrepresented in the appraisal.
Bank of North Carolina filed a foreclosure lawsuit against Cleary and Waterfall Investors in 2011. Cleary’s charges of fraud stem from counterclaims he filed in that lawsuit.
Jim Watson, a Myrtle Beach banking expert, testified Thursday that he reviewed the 2007 appraisal and other appraisals Beach First had obtained for Cleary’s property and found that they were “properly done.”
Watson, a former senior vice president at Myrtle Beach-based The Anchor Bank and later as Carolina First, said he had never heard of a borrower making a loan contingent on a bank’s appraisal.
“No sir, not in 40 years of lending money,” he said.
Rick Gleissner, a lawyer representing Cleary, said Beach First “dropped the ball” by failing to verify information in its appraisal and then letting Cleary rely on that information to take the loan.
“They were so negligent, they were reckless,” Gleissner said, adding that it took courage for Cleary to confront the bank he once helped lead over its misrepresentations.
“I hope you can find the courage to tell the bank to make up for their mistakes,” Gleissner told the jury.
Cleary testified earlier this week that he was met with resistance when he confronted bank officials about problems with his loan and the property appraisal.
“I expected the bank to look at those appraisals to see how false they were,” he said. “I thought the bank needed to sue the appraiser. This wasn’t fair and the bank needed to accept that fact. I pleaded with them to accept that fact.”
Dalton Floyd, another lawyer for Bank of North Carolina, said Cleary only complained about the wetland “when he couldn’t pay back the loan.”
“He made a bad deal that he should not be able to get away with,” Dalton Floyd said. “He borrowed the money and he ought to pay it back. That’s the justice we’re looking for.”
The jury found that Cleary owes Bank of North Carolina $2.9 million on the loan, including interest. The foreclosure of the property will go forward during a hearing next month.
Bank of North Carolina is seeking a judgment against Cleary and Waterfall Investors.
Waterfall Investors 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.