Borrower Vs. Lender: Suit Highlights a Trend : S&L; That Cut Off Loan Is Taken to Court by Financially Ruined Builder

Martin Saucedo was not the most experienced builder around, but he did put up a number of houses and was working on his most ambitious project, a 42-unit apartment complex in Santa Ana, when the roof caved in.

Saucedo was paying his workers and suppliers from periodic payments he was getting through a construction loan at Mercury Savings & Loan in Huntington Beach. But two-thirds of the way through the project, Mercury stopped sending money, and the project was halted.

The S & L claims there were serious construction defects, among other problems. Saucedo denies there were serious problems, and a city inspector said Saucedo had fixed some defects and was correcting others when Mercury cut off the loan.

For Saucedo, 52, the collapse of the project 4 years ago ruined him financially. He lost his business, three rental houses, an apartment building and the home he built for his family on Martin Lane, a Cowan Heights street he put in and named after himself when he built seven custom homes there during the mid-1970s.

Due in Court Monday

Now, Saucedo and Mercury are scheduled to head to Orange County Superior Court on Monday for trial on the civil actions brought by the builder and James Foxx, a Palm Desert developer who sold the property to Saucedo and still has an interest in it.

Saucedo wants a jury to decide if the S & L breached its contractual and fiduciary duties under the loan, acted negligently or acted in bad faith by refusing to continue funding the project. Foxx wants damages for interference with his business opportunity, and he wants to rescind the deal and take back the property, which now has a retirement home on it.

The case is similar to the kind of litigation that has been cropping up more frequently against banks and savings and loans.

“In the last 5 years, there has been just an explosion of lender-liability lawsuits,” said Thomas D. Phelps, a Los Angeles banking lawyer. “Courts and juries have felt that lenders were overbearing and overreaching and too commonly insensitive to borrowers.”

The cases have been built on legal principles that have been around for a century, he said.

Much like the development of bad-faith law in insurance cases, lender liability has evolved to a great extent from the relationship between lenders and borrowers and the high fiduciary duties that lenders have, said Dennis F. Fabozzi, a Santa Ana banking lawyer.

Lender-liability lawsuits have changed the commercial contract landscape. Instead of being limited to money lost under contracts, he said, plaintiffs also can seek big damage awards for bad faith, emotional distress and interference with business opportunities. Even punitive damages can be awarded, he said.

Suits Have Effects

The suits have affected the way lenders price their loans, the representations they make and their desire to continue making certain kinds of loans, such as construction loans, the lawyers said.

“The suits also change the way borrowers deal with lenders,” Phelps said. “It’s made them more aggressive and more self-confident when they get into trouble with loans. They’re more likely to threaten lender liability suits rather than pay back loans on schedule.”

Many lender-liability suits involve a borrower’s inability to repay loans and a bank’s oral agreement to restructure loans. But a state appellate court in May threw out a $47-million fraud verdict that hinged on oral promises by Bank of America executives.

Saucedo’s case, however, is not based on any inability to pay back the loan, said his lawyer, Robert S. Lewin of Newport Beach. Instead, Mercury stopped funding the loan in mid-course, 6 months before the $1.4-million loan was due.

Before he applied for the loan in March, 1984, Saucedo “pre-sold” the finished complex, opening escrow with a buyer to sell the twin three-story buildings for $2.15 million, according to court records.

Saucedo and Mercury officers were familiar with each other. The builder had taken out four prior construction loans at Mercury.

In a construction loan, the lender monitors the progress of the work, inspects the site to make sure the work claimed to be done is in fact done and pays the bills, or vouchers, submitted by the contractor.

Tension Grew

Construction began that May--shortly after the city adopted stiffer building codes. The new codes, though, did not apply to Saucedo’s job, Lewin said. Nevertheless, tension grew between the builder and city inspectors over code enforcement, the lawyer said.

Two or 3 months into the loan, Mercury began to miss or slow down on the payment of some vouchers, and in October, the payments stopped altogether.

Foxx’s attorney, Richard S. Ruben of Costa Mesa, said that his client as well as Saucedo were never notified in writing or orally about the reason for the funding halt. And S & L records obtained in pretrial discovery show no reason.

In one deposition, a former Mercury loan officer said he made the decision on his own and without knowledge of any defects in construction.

But claims that no notice was given are ridiculous, said Leonard Shane, Mercury’s president, and William Morris, a current loan executive.

“There were many, many problems,” Morris said. “The building encroached on a side yard set-back. There were massive beams set in a way that caused them to sway. It would have cost more to rehabilitate the building and lace it with steel rods and I-beams than to demolish it and start from scratch.”

The S & L stopped the funding, he said, “to protect Mercury’s interest.”

James Lindgren, Santa Ana’s supervisor of inspections, said there were “extensive framing problems” in the initial stages of the construction.

“Saucedo had absolutely no concept of construction technique,” Lindgren said. “The man didn’t know what he was doing. He just got in over his head and didn’t know what to do--or really couldn’t comprehend the fact that we were trying to help him, not hinder him.”

But, the city inspector said, the “two or three” serious problems the city had with the project were “pretty nearly all corrected” by October.

He said Saucedo previously had finished two or three other buildings in Santa Ana. “We had problems with them, but they were worked out,” Lindgren said.

Besides alleging poor construction, Mercury claims in its court papers that Saucedo had defaulted on the loan and had gone over budget. But Lewin and Ruben pointed out that interest payments were current and the loan principal was not due yet. Saucedo also had gone only slightly over budget--67% of the funds were expended while 65% of the work was done--and the S & L didn’t give him a chance to correct the discrepancy, the lawyers said.

A carpenter by trade, Saucedo tried to continue with construction after Mercury stopped funding. He said in an interview that he mortgaged his home and sold some notes to raise more than $100,000 to pay workers and suppliers.

But the effort wasn’t enough.

Abandoned and given to Mercury in foreclosure, the property in the 200 block of South Broadway in downtown Santa Ana became a refuge for the homeless and a target for vandals. Mercury put an armed security guard at the site. Eventually, the S & L tore down the structure and sold the property.

The complex was Saucedo’s most ambitious project. He had put up 11 homes and apartment buildings, including a 30-unit apartment structure, but this one would have been a crowning achievement that would have netted him $500,000 or more, he said.

Instead, he wound up without a house and is living with his wife and three of their four daughters in a rented townhouse in Orange.

He now works as a carpenter for another contractor, and figures he won’t be back in business on his own again.