Stein-Brief Sues Butterfield to Avert New Default Notice

The Stein-Brief Group, which recently restructured more than $80 million in debts to halt foreclosure on its huge Monarch Beach development, has filed a lawsuit in an attempt to prevent yet another creditor, Butterfield Savings & Loan, from filing another notice of default against it.

In addition to a permanent injunction barring Butterfield from foreclosing on a Stein-Brief property in Newport Beach, the Laguna Niguel-based developer is also seeking $10 million in punitive damages from the Santa Ana-based S&L.;

In a lawsuit filed Wednesday in Orange County Superior Court, Stein-Brief alleges that in 1984, when it ‘desperately needed” funds from Butterfield to make a multimillion-dollar mortgage payment on its Monarch Beach development in Laguna Niguel, Butterfield fraudulently coerced it to buy a house in Newport Beach for $1.5 million as part of the deal.

In all, Stein-Brief said, it borrowed $9 million from Butterfield, including the cost of the house.

The lawsuit alleges that Butterfield “made it clear to Stein-Brief that the loan would not be funded unless Stein-Brief agreed to purchase” the house at 3 San Sebastian in the Harbor Ridge Development in Newport Beach. At the time, the lawsuit said, Butterfield was holding the house in its inventory.

According to its lawsuit, Stein-Brief had “no interest” in buying the house and “the sole reason” it agreed to do so was that Butterfield made the demand “within days” of the expected closing of the Butterfield loan and the Sept. 28, 1984, “due date of the payment on the Monarch Beach property.”

Butterfield officials could not be reached Wednesday evening to comment on the lawsuit. The S&L;, which was seized by federal regulators and declared insolvent in August, 1985, is now being operated by a receiver. Stein-Brief officers were also not available to discuss the action.

Since Stein-Brief entered into its loan agreement with Butterfield, the lawsuit says, Stein-Brief discovered that Butterfield could not comply with its promise to repair soil slippage problems besetting the Newport Beach house and that the appraised value of the house as represented by Butterfield was fraudulently inflated.

Value Questioned

“The house may well be valueless,” according to the lawsuit, which demands that the $800,000 loan on the house be rescinded, that Butterfield take the house back and that Butterfield return to Stein-Brief its $725,000 down payment.

Despite being termed valueless, the four-bedroom, 4 1/2-bath home with ocean views gained notoriety earlier this year when Orange County Supervisor Bruce Nestande briefly stayed there rent-free. The supervisor and his wife stored furniture in the home and slept over for a few nights when the Nestandes were between homes. The incident raised eyebrows soon after when Nestande joined other supervisors in unanimously approving a Stein-Brief development.

The lawsuit said that Butterfield “has begun demanding that Stein-Brief make the payments on the $800,000 note and it also threatens to foreclose.”

The lawsuit noted that Stein-Brief received a “great deal” of publicity when San Diego-based Avco Community Developers posted a notice of default against it last April 17 for failing to make payment on a $49-million loan.

In late June, Avco was repaid after Stein-Brief obtained $68.3 million in new financing from Southmark Mortgage Corp. As part of the financing package, another Stein-Brief creditor, Beverly Hills Savings & Loan, took over 170 acres of the 400-acre Monarch Beach development.

In light of this recent history, the lawsuit said, “if a notice of default is recorded concerning the house, it is likely that such will be publicized by the news media and that the reputation of Stein-Brief to meet its just obligations will be severely damaged.”