Cetus Mortgage Ltd. had about $60 million in loans many of them delinquent on its books when it was taken over by state regulators earlier this month.
The state, however, is stepping back after U.S. Bankruptcy Court in Reno said it will appoint a trustee to oversee the affairs of Cetus Mortgage.
The Reno company, which specialized in so-called "hard money" lending on real estate projects, filed for Chapter 11 bankruptcy protection shortly after its operations were taken over by the Nevada Division of
Mortgage Lending.
Its biggest unsecured creditor is U.S. Bank, which provided a $50,000 line of credit to Cetus. The list of secured creditors, however, spills across more than 30 pages that list 11 or 12 creditors predominantly Washoe County residents and businesses on each page.
A meeting of creditors is set for August 11.
State regulators said it's unclear who will look out for the interests of those creditors until the bankruptcy court names a trustee but they made it clear that they're out of the picture.
"Until a trustee is appointed by the bankruptcy court, the division (the state's Division of Mortgage Lending) is unable to advise investors or borrowers as to who will be servicing their loans," the state said in a prepared statement.
And it advised investors to get moving on legal action.
"While the division is doing all that it can within its jurisdiction to protect investors, do not delay any civil action you might have regarding this matter," the state said in its statement.
Documents filed last week in the early legal sparring over that bankruptcy filing provided the first picture from the company about how its business went bad.
When the state seized the mortgage company on July 7, regulators said they'd received complaints from investors that Cetus wasn't repaying them, signatures appeared to be forged on some documents and construction projects weren't started even though investors' funds had been loaned to developers.
The company's attorney, Joseph Darby of Reno, adamantly denies those allegations.
In court filings, he says the investors' complaints appear to be the result of misunderstandings, and the failure of Cetus was caused by the collapse of the residential development business.
At the bare minimum, Darby says, observers ought to withhold judgment until an accounting of the company's business is complete.
Cetus, he said, had a clean record with investors and regulators during most of its 20-year history, and its founder, Marcie Benvin, has been cooperative in resolving the company's problems.
The U.S. Trustee's Office, which oversees Chapter 11 reorganization cases, successfully requested appoinment of a trustee to take control of Cetus.
While appointment of a trustee is unusual, U.S. Trustee William Cossitt said his office sees evidence of "fraud, dishonesty, incompetence, gross mismanagement or criminal conduct" in the Cetus case.
Darby, however, argued that an appointed trustee would take too long to get up to speed on the workings of Cetus. Instead, he sought appointment of an examiner to sort through the company's records and make a report to the bankruptcy court.
No one yet has detailed the number and amount of bad loans on Cetus' books.
In a court filing last week, however, Darby said, "Numerous loans brokered and serviced by the debtor were in default."
Cetus raised money from individual investors and made loans secured by real estate. In some instances, Darby said in court documents, a single
investor would pony up all the money to make a loan. In other cases, money from 35 investors or more would be pooled to make a loan.
State regulators are sorting out whether Benvin may have paid investors in one deal by dipping into the funds from another deal.
Sheila Walther, a top mortgage supervisor with the state, said in a court filing that regulators are investigating the possibility that
Benvin may have made a $400,000 payment to one large investor even though the borrower, JE Morros Construction & Development of Sparks,
was late making its payment to Cetus.
JE Morros Construction & Development was the largest borrower from Cetus, the Division of Mortgage Lending said when it took over the company.
Morros, which developed homes in Spanish Springs, itself is seeking to reorganize under a Chapter 11 bankruptcy petition it filed in late June. The State Contractors Board later suspended the company's license.
Its real estate brokerage affiliate, Morros Realty Inc., remains licensed with the state Real Estate Division.
Hard money lenders such as Cetus provide loans, typically at relatively high interest rates and secured by real estate, in deals that can't be financed by banks or other lending institutions.
