Inside a high-end real estate deal gone bad

Scattered across 540 acres of San Diego County hills and ravines, the 235 opulent homes of the Bridges at Rancho Santa Fe flank a private golf course and country club with tile-roofed towers inspired by Tuscan villages.

The placid panorama belies decades of bruising battles among the project's developers. The cast includes home-building titan Lennar Corp., a bankrupt La Jolla deal maker and, in an improbable late entry, con man-turned-preacher Barry Minkow.

The dispute ultimately led to a federal criminal conviction against Minkow and a continuing investigation by the Justice Department. But it all began here, at a classic Southern California home development that promised riches for its partners but ended up exacting a high price on the key players.

The court filings offer a rare glimpse into the inner workings of a high-end real estate deal gone bad.

Lennar, the venture's main financier and manager, says it lost $50 million on the Bridges in spite of the custom-built mansions and expensive tract homes gracing its hillsides. Sales soared during the housing boom, but by 2009 the company was moving only one home every two months, San Diego real estate consultant Russell Valone said.

"Lennar did not go into this project thinking they were going to sell half a unit a month," said Valone, the president of MarketPointe Realty Advisors. "There's no way they planned on being there that long — they're a public company and they want to get that money back and put it to work."

At the center of the wrangling is Lennar's partner at the Bridges: Nicolas Marsch III, 64, of La Jolla. A native of Chicago, where his family was in the construction business, Marsch took the helm of the enterprise in the 1970s and set out to make his fortune as a developer in California and Colorado.

Marsch ultimately set his sights on Rancho Santa Fe, 25 miles north of downtown San Diego. Described by CBS sportscaster and former resident Dick Enberg as "Beverly Hills in the country," the very private suburb caught the world's attention in 1997 when 39 cultists at a rented mansion poisoned themselves in expectation of ascending to a spaceship.

Marsch had purchased much of the Rancho Santa Fe land by the early 1980s. He launched the project he then called Horizon Country Club in 1985, in a partnership with a wealthy Northern California developer, Ronald Williams.

The partners had a falling out in 1988, court records show, with Marsch accusing Williams of withholding funds for Horizon to pressure Marsch into selling out cheap.

By 1990, work had shut down. The site sat fenced off for most of the decade as the pair battled in court — and were sued in turn by business partners who said they had been stiffed, including the noted golf course designer Robert Trent Jones Jr.

When the court dust settled, Williams ended up with the property, which he seized as collateral for defaulted loans, and Marsch ended up with a $37-million judgment against Williams. To buy out his partner and revive the project, Marsch needed more financial muscle — and found it in Lennar.

Miami-based Lennar began looking for joint ventures in California in 1995. By the end of that year it was talking to Marsch, who brought a local developer's edge: a ground-level view of the project and familiarity with the power brokers who ultimately authorize developments.

Marsch's dealings with San Diego's power elite went back decades: He had sold a Breckenridge, Colo., ski condo in 1979 to a group including Roger Hedgecock, a county supervisor and later San Diego mayor who wound up convicted for his role in a campaign-finance scandal.

The group paid less than market value for the condo and soon sold it at a big profit, the San Diego Union-Tribune reported in 1984. Hedgecock and other supervisors voted to reduce development in parts of the county's Alpine area, but not where Marsch owned property.

No formal allegations of wrongdoing emerged in the case. Hedgecock, now the host of a nationally broadcast radio talk show, declined to comment on the condo deal or Marsch.

The development deal struck by Marsch and Lennar, like many other projects expected to take years before becoming profitable, included front-end fees to compensate the organizers in the earlier years.

Beginning in 1999, Marsch enjoyed a hefty income stream from the Bridges, including $310,000 a year in developer fees, plus 3.5% of every lot sale, home sale and club membership, and a smaller fraction of home resales, a San Diego Superior Court judge wrote in summarizing the case. Lennar also agreed to cover a host of Marsch's expenses, including his legal tab for suing Williams, debts to previous investors and the taxes owed on earnings from the Bridges.

Lennar and Marsch agreed to split any eventual profits 50-50 — but only after the home builder had recovered the hundreds of millions of dollars in capital it had poured into the deal, plus 25% interest a year.

For years, Marsch looked like a huge winner. Court records show he received $19 million in fees from the Bridges from 1999 through 2008, plus $41 million for expenses. Counting unrepaid loans and additional perks, Lennar calculated Marsch's total benefit at $71 million.

But as the years passed, the Bridges did not earn back Lennar's investments. With little hope of back-end profit, Marsch's relationship with the home builder soured. Lennar blamed the red ink on housing-market factors beyond its control.

In December 2006, Marsch's Briarwood Capital sued in San Diego County Superior Court on behalf of itself and of two partnerships it had formed with Lennar: HCC Investors and Lennar Bridges. The six defendants, all Lennar-related, included the parent company; Lennar San Jose Holdings Inc., a California subsidiary; and Lennar Homes of California.

Causes of action included accounting fraud, breach of contract and unjust enrichment, with Marsch alleging that Lennar had cheated him with bookkeeping tricks and mismanagement. In a separate lawsuit, he accused Lennar of squeezing him out of participation in the Lakes, a residential project adjacent to the Bridges.

The defendants countersued, denying wrongdoing and claiming that Marsch owed their partnerships money. Things became so heated by 2008 that Lennar stopped paying Marsch fees from the Bridges, contending he had violated his obligations to their joint venture.

With settlement talks going nowhere and each side accusing the other of bullying through litigation, Marsch stepped up the pressure in a July 11, 2008, letter to Lennar's outside directors.

He compared his experience to Hollywood accounting, in which an array of fees and charges, often with no relation to real costs, can make profit ephemeral. The blockbuster "Titanic," for example, grossed more than $1.84 billion without initially generating any back-end bonus for writer-director James Cameron.

"Does it really take me dragging Lennar through trial … to end up as James Cameron did collecting what is owed to me and showing Lennar's accounting to be the fraud that it is?" Marsch wrote.

Rather than inducing the home builder to settle, the letter provoked Lennar to accuse Marsch of extortion. It filed a suit in Florida state court.

"He picked the wrong guys to try to extort," Lennar attorney Daniel Petrocelli said.

As Marsch dug in to defend himself in that suit, he experienced another setback in November 2008, when San Diego County Superior Court Judge William R. Nevitt Jr. tossed out the Lakes project lawsuit. Marsch's pretrial testimony, Nevitt wrote, was inconsistent and "inherently incredible."

A few weeks later Marsch hired Minkow. As a teenager in Reseda in the 1980s, Minkow had founded ZZZZ Best, a carpet-cleaning firm that turned out to have done little actual work, leaving investors with losses of at least $26 million. After serving seven years in federal prison, Minkow had become pastor of San Diego's Community Bible Church and operated a fraud investigation business on the side.

In January 2009, Minkow unleashed broadsides against Lennar over the Internet and in reports delivered to federal agents, calling Lennar "the bully of the prison yard" and "a blatant financial crime in progress."

Lennar's joint ventures, Minkow said, appeared to be "part of a Ponzi scheme." He said Marsch's $37-million judgment against Williams, which had been contributed into the Bridges partnership, had been improperly diverted to prop up other Lennar deals such as Landsource Communities Development, a failed joint venture that cost the California Public Employees' Retirement System nearly $1 billion.

Lennar shares fell 20%, and the company promptly amended its lawsuit to accuse Minkow as well as Marsch of libel and extortion. Through attorney Petrocelli, it urged federal prosecutors to investigate.

That ultimately led to Minkow's March 31 guilty plea to conspiring to manipulate Lennar stock. In the deal, he agreed to cooperate with the government's investigation. He faces a penalty of up to five years in prison at sentencing, scheduled for July 7 in U.S. District Court in Miami.

Settling the civil extortion and libel suit this month, Minkow agreed that he owes Lennar $583.5 million in damages.

Petrocelli said Minkow, through his attorney, had handed over substantial evidence in the case to both Lennar and the government.

Marsch, meanwhile, was ordered last summer to pay Lennar $17.5 million in damages, including millions of dollars that Lennar had given him to pay taxes and other expenses but that, Lennar argued, Marsch kept for himself. The judge also ordered Marsch to pay Lennar $36.4 million in legal costs for their San Diego suits over the Bridges.

Marsch is appealing those judgments, contending he should have had a jury trial. He declined repeated requests for comment, made by phone, email and in person at his beachfront La Jolla home.

In a written statement in March he said he had hired Minkow — but only to find Lennar insiders who would reveal secrets, not to commit a crime. "Mr. Minkow is on his own down there in Florida," Marsch attorney Richard Van Dyke said.

Marsch and Briarwood are in bankruptcy. A bankruptcy judge handed control of the cases to trustees last summer, writing: "This court has lost confidence in Mr. Marsch's capacity for candor and honesty."

Homes that Marsch or his companies owned in Beaver Creek, Colo.; Del Mar; and La Jolla and at the Bridges have been seized by creditors, as have two prize lots he had owned overlooking the Bridges clubhouse.

When his primary residence in La Jolla entered foreclosure in November, Marsch owed $13.6 million on the home, according to a court filing by a Deutsche Bank subsidiary that bought the mortgages.

Property records show the bank bought back the home for $5 million at an auction June 16.

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