By: Robin Ford Wallace, Reporter
Dade County Superior Court Judge Brian House last week awarded plaintiffs $10 million in punitive damages in the most recent civil suit against Southern Group LLC, developer of the Preserve at Rising Fawn.
In the absence of a response from Southern Group – and in the absence of Southern Group from the Nov. 29 hearing – House granted a motion for default judgment against the developer filed by Scott Kuperberg, the Atlanta attorney acting for plaintiffs Vincent and Ann Mihalik of Virginia.
The order awards the Mihaliks attorney fees of $14,839.87 as well as actual damages of $892,434.39. That figure, Kuperberg explained after Thursday’s hearing, represents three times the dollar amount the Mihaliks are out for mortgage payments past and future on three Preserve lots they bought in 2007.
“We filed the case under the federal and state RICO statutes, the Racketeering Act, and that allowed us to get triple damages” said Kuperberg.
As for the whopping $10 million, Kuperberg said that was in keeping with the seriousness of the developer’s wrongdoing. “We explained the gravity of the case,” said Kuperberg. “There’s been many other cases, there’s the criminal indictment of Mr. Dobson and the Southern Group companies, the bankruptcy that they’ve done, and how they’ve just taken so much money out of the coffers of this county, and the numerous foreclosures and the numerous bankruptcies, and the judge saw fit to award us $10 million in punitive damages.”
The Mihaliks filed their civil suit on May 1, just a week before the U.S. Attorney’s Chattanooga office issued its May 9 indictment of Joshua Dobson, one of the three owners of Southern Group, and of Paul Gott, another alleged player in the no-money-down, no-monthly-payment financing scheme that the feds say defrauded banks of $45 million.
But Kuperberg said the dates are coincidental. “We’d been working on this case since May or June of 2011,” he said. “The timing with the criminal case had nothing to do with it.”
The Mihaliks were among the earliest buyers in the failed luxury housing development at Johnson Crook, having been approached in 2006 to participate in the 100-percent financing plan used to market Preserve lots.
During the plan’s heyday, as described by participants, typical Preserve lot purchasers were “straw buyers,” people who allowed the developer to use their good credit to take out bank loans against building lots that in many cases they had never seen.
These investors had none of their own money at stake, as the developer promised to make the mortgage payments for a specified time frame and also provided funds for the required down payment, holding a second mortgage against the buyer to secure this sum.
The buyers hoped to make a profit by “flipping” their lots – reselling them to bona fide buyers or back to the developer – once the developer had increased their value by completing amenities at the development such as swimming pools, spas and clubhouses.
But at the Preserve that never happened. The sprawling equestrian center that dominates Rising Fawn’s Newsome Gap Road was the only amenity in place when, in late 2008, the housing market crashed and sales slowed. In the summer of 2009, Southern Group ceased making the promised loan payments, and lot buyers abruptly found themselves responsible for loans they’d never planned repaying. Foreclosure after foreclosure ensued.
Ann Mihalik, who was present at Thursday’s hearing, said she and her husband differed from the typical case in that regard. “I think unlike some investors, we were in from 2007, the beginning, and we’ve been paying the mortgage all the time,” she said.
She said she and her husband had visited the Preserve in 2006 to pick out their lots. “They basically sold us on the fact that we were going to buy in early, before the amenities,” she said. “They were going to guarantee the amenities and the roads and the city water and everything else.”
Her husband returned in late 2010, she said, but she hadn’t been back herself before the hearing date. “When I drove by this morning, I was just in shock,” said Ms. Mihalik.
Despite what she’d read and been told, said Ms. Mihalik, she hadn’t realized how little had been done at the Preserve by way of improvements. She wasn’t even able to get to all three of the lots. “We have a contract with them saying they’re going to build roads,” she said. “There’s no roads, so what are we going to do with this land?”
She said she and her husband had bought the lots with the hope of selling two and keeping one, perhaps to build on in retirement or perhaps to sell in retirement.
Ms. Mihalik and her attorney explained that one reason for the litigation was to gain release from the second mortgage Southern Group held against the couple, a sum of $54,000 that represents the 20 percent down payment on three lots that in 2007 sold for $90,000 apiece.
“It’s better now than later, if they’d decide however many years later to come back and try to collect on it,” said Ms. Mihalik after the hearing.
Judge House’s ruling includes a clause that cancels the second mortgage.
Later on in the Preserve’s short history, building lots – many of them two to three acres on the mountainside with no access to roads, electricity or water – went up from the $90,000 the Mihaliks paid to $175,000 or even $250,000 a pop.
The Mihaliks’ lawsuit questions those values baldly. “The appraisals were based on artificially inflated prices gleaned from internal sales,” reads the complaint.
What’s next? Attorney Kuperberg says the Southern Group partners have the right to appeal but thinks it unlikely they will. “I’d say one phase of the case is over,” he said. “Now comes the collection part of it.”
He agreed that there could be the rub – as Southern Group’s Joshua Dobson awaits a Feb. 4 trial on the criminal charges, partner and brother-in-law Travis Shields remains mired in federal bankruptcy proceedings for his TAS Properties. TAS is the entity to which Southern transferred much of its Crook property in 2011, frustrating Dade County’s Jan. 3 attempt to auction it off for an estimated $500,000 in back taxes.
Still, Kuperberg hopes to secure his clients compensation in the end. “Judgments are valid for a number of years and while maybe they [the developers] don’t have much today, they may have something tomorrow,” he said. “We’re going to take a look and see what’s there, see where all the money went.”
Besides, said Kuperberg, this wasn’t just about money but right and wrong. “I think the crux of this case is this was not just a matter of the real estate market sinking, which it did all over Georgia. I know a lot of good, worthy builders who did try to build and the market didn’t work,” said Kuperberg. “But in this case, clearly something wasn’t right. We found things that just weren’t right, and apparently the judge agreed with us.”
Two earlier lawsuits filed in federal district court against Southern Group and associated Preserve players were settled out of court. Another Preserve-related case was scheduled for trial in Dade Superior this spring, but that may change following an agreement by Lookout Mountain circuit judges to recuse themselves from hearing it.
Judge House as well as Jon Bolling “Bo” Wood, Kristina Cook Graham and Ralph Van Pelt all signed off on a Nov. 14 order agreeing it was improper for them to hear McCormick v. Johnson because the plaintiff, Joel McCormick, is Dade County’s sitting chief magistrate.
Judge McCormick, a former Preserve property manager, is suing Deborah Johnson, the widow of Eugene Johnson, over a herd of Black Angus cattle he says he co-owned with her husband as part of his finder’s fee in the sale of the Preserve land to Southern Group.
In court papers, McCormick says Johnson, the Crook’s previous owner, promised him a $500,000 consulting fee but only paid him $275,000 in cash. Of the remainder, he wrote, $100,000 was to have been offset by McCormick’s interest in the cattle.
Following the local judges’ agreement to step aside, the McCormick case has been assigned for hearing to the Hon. Larry Salmon, a retired Floyd County judge.