Ex-Friends Sue Newport Couple, Alleging Fraud : Courts: Their complaint says they were bilked of $2.35 million by former building association and art museum official.

Five former friends of onetime building industry leader Charles J. Diamond sued him and his wife Monday, accusing them of fraud and seeking a court order that would block him from erasing his debts in bankruptcy.

Diamond, a Newport Beach resident who was treasurer of the Newport Harbor Art Museum, is accused in the complaint filed in U.S. Bankruptcy Court in Santa Ana of bilking his longtime friends of a combined $2.35 million.

Bankruptcy records indicate that about two dozen friends, neighbors and family members entrusted to Diamond a total $4.5 million for, they said, safekeeping or loans.

Diamond denies he owes them money. He argues in his personal bankruptcy case that he told his friends they were investing in his now-worthless companies, not in him, and that they are savvy investors who knew their money was at risk.

Diamond’s bankruptcy lawyer, Rebecca Callahan of Newport Beach, said Diamond “absolutely” denies any fraud accusations. “There is no fraud here,” she said.

The lawsuit, filed by Richard Polonsky, William and Michele Klein and Raymond Berke, all of Newport Beach, and Marvin Brooks of Rancho Mirage, also names three Diamond companies and six Diamond trusts as defendants.

The suit alleges that the companies were “mere shells” that were used in such a way that they were no different from the couple’s personal business. It also contends that the Diamonds are using the trusts to hide their assets from creditors.

The former friends assert in the lawsuit that Diamond never told them that their money would be used “to fund the acquisition of an art collection hanging in his home, his personal lifestyle and investments, to capitalize Diamond’s corporations or to pay personal debts and living expenses.”

The suit asks the court to rule that these debts cannot be discharged in bankruptcy, which would mean that Diamond would continue to owe the full amount of the debt.

Diamond, a former president of the influential Building Industry Assn. of Orange County, has reached tentative settlements with most of the remaining friends, Callahan said.

In affluent Newport Beach, residents are known to give friends thousands of dollars as unsecured loans or investments, and borrowers in trouble usually find some way to secure their debts and avoid bankruptcy, say court observers.

But rarely have such large sums changed hands among so many of Orange County’s affluent residents, observers said, noting that Diamond’s bankruptcy case is one of the bitterest they have ever seen.

Callahan said Diamond’s efforts to repay his debts over time and avoid bankruptcy were rebuffed by his friends. She said he had met with some of them several times before being pushed into bankruptcy to propose paying them from a number of sources, mainly from income he received from his interest in 16 apartment complexes.

Separately, Michael Botwinick, director of the Newport Harbor Art Museum, said in a sworn statement Monday that Diamond called him early this month and threatened to sue him and his lawyer if he filed a claim against Diamond in Bankruptcy Court. Botwinick turned over $50,000 of his personal savings to Diamond.

Callahan said she was unaware of any telephone call between the two.