“They Probably Lied”: An Anatomy of a Real Estate Fraud and How to Avoid Becoming a Victim

By Jack Rudolph and Michael Huntley

Jack Rudolph and Michael Huntley were chasing the American Dream for themselves and their families when they stumbled across a sixty-six-unit complex in Corpus Christi, Texas. It was known as the Crestview Apartments, and even though it was listed at $1.73 million, it seemed to be a great deal as it not only boasted 95 percent occupancy but 95 percent paid occupancy. That should have been the first red flag, but the partners ultimately bought the complex from Daniel and June Feng, two Chinese immigrants who held the property in their LLC, Shanghai Investments. In this cautionary tale for real estate investors: • If it sounds too good to be true, it probably is. • Always insist on more than one piece of verifiable income. • Do not enter into an agreement with a seller based exclusively upon his or her own self-generated financial statements, even if they are written in gold ink.

• Language: English
• Publisher: Lulu Publishing Services
• Release date: Nov 8, 2018
• ISBN: 9781483490328

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Huntley

Copyright © 2018 Jack Rudolph and Michael Huntley.

All rights reserved. No part of this book may be reproduced, stored, or transmitted by any means—whether auditory, graphic, mechanical, or electronic—without written permission of the author, except in the case of brief excerpts used in critical articles and reviews. Unauthorized reproduction of any part of this work is illegal and is punishable by law.

ISBN: 978-1-4834-9021-2 (sc)

ISBN: 978-1-4834-9022-9 (hc)

ISBN: 978-1-4834-9032-8 (e)

Library of Congress Control Number: 2018909975

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

Any people depicted in stock imagery provided by Getty Images are models, and such images are being used for illustrative purposes only.

Certain stock imagery © Getty Images.

Lulu Publishing Services rev. date: 11/5/2018

Although the accounts of this book took place in the state of Texas the laws are very similar from state to state with subtle exceptions. The Tips we’ve provided are however universal.

Dedication

I am dedicating this book to my father who spent hundreds of hours going over the details of this case with me and even more helping me to write this book. He gave me two of the greatest gifts one could ever give his time and his love.

-Jack Rudolph

FTBD

Definition of Fraud

"Chapter 27 of the Texas Business and Commerce Code provides an additional remedy to persons who are victims of fraud in connection with real estate and stock transactions. The elements of statutory fraud are essentially the same as common-law fraud, except to establish statutory fraud the plaintiff does not have to prove the defendant’s knowledge or recklessness.

To bring an action for statutory fraud, the plaintiff must establish that there was fraud in connection with a transaction involving real estate, stock in a corporation or stock in a joint-stock company. A transaction means that there is either a sale of real estate or a stock or there was a contract to sell real estate or stock entered into between the parties. Real estate includes land, the structures or improvements on the land and any assets of the real estate, such as minerals and water. A transaction involving the purchase of a stock option, however, is not considered a transaction involving stock in a corporation under Chapter 27.

"To prevail in an action for statutory fraud, the plaintiff must prove that the defendant:

1. Made a false representation of past or existing material fact,

2. Made a false promise to do an act, or

3. Benefited by not disclosing that a third party’s representation or promise was false.

"The proof of the element of a false representation of past or existing material fact is the same for common-law and statutory fraud. A false promise must be material and made with the intent to not fulfill it. A claim of nondisclosure may be established by showing the defendant had actual awareness that the third-party’s representation was false, did not disclose this to the plaintiff and the defendant benefited from the non-disclosure. Actual awareness may be inferred when objective manifestations indicate that the defendant was actually aware that his actions were false, deceptive or unfair."

"The plaintiff must also prove that the false promise was made prior to entering into a contract and for the purpose of inducing the plaintiff to enter into the contract. This element can be shown by establishing that the defendant either intended that the plaintiff enter into the contract or had reason to believe that the plaintiff would enter into the contract in reliance on the representation. The element of reliance is the same for both common-law and statutory fraud.

"The plaintiff must further prove that the false representation or promise caused injury or damages. In an action for statutory fraud, a plaintiff may recover both actual and exemplary damages. To recover exemplary damages from a defendant who made a false representation, the plaintiff must prove, by clear and convincing evidence, that the defendant had actual awareness of the falsity of the representation. When the action involves non-disclosure concerning third parties, the plaintiff must prove, by clear and convincing evidence, that the defendant had actual awareness of the falsity of the third party’s promise or representation in order to recover exemplary damages."

It is our intent through this book to prove that the strong circumstantial evidence presented to the reader shows the agents involved should have known the financial information we had been provided in this transaction was false and may have even had a hand in preparing it. Not only did the circumstances behind this sale meet the aforementioned definition of fraud, but it was so egregious that it warranted exemplary damages. Yet we lost the case and were unable to prevail in the forthcoming litigation. It is our goal to use the turmoil from this transaction to encourage future real estate buyers to do as much due diligence as possible before proceeding into any transaction. It is a lot easier to not close on a purchase than it is to leave your fate in the hands of a jury. All of the names of people and places have been changed to protect identities.

CHARACTER

Character cannot be developed in ease and quiet. Only through experience of trial and suffering can the soul be strengthened, ambition inspired, and success achieved.

—Helen Keller

Michael and I considered ourselves to be men of character and integrity, but we were naïve in believing that all men and women operated under the same set of standards.

THE START OF IT ALL

It was the late 2000s. People had been making money buying and selling properties hand over fist for the five years of the new millennium, Michael and I included, but little did we know our bubble was about to burst.

They probably lied? I kept saying to myself repeatedly as Garrett’s words resonated in my head.

Was he kidding?

How could Garrett have said so flippantly, without hesitation that his clients had, probably lied to us?

Garrett Brewer and Isaac Davis were agents for Daniel and June Feng who sold us the Crestview apartments, a sixty-six unit apartment complex in Corpus Christi, Texas.

What did he mean by that? I had just finished telling him that Michael and I had lost nearly a quarter of a million dollars in less than one year of ownership of this apartment complex. I told him that we could not even collect enough to cover the utility bills as he had told me his clients were doing while we were in escrow with them. We had lost two hundred and fifty thousand dollars and were on the verge of bankruptcy and all they could say was Eh, they (the Feng’s) probably lied?

If they did feel their clients were not telling the truth why had they not been more cautious when disseminating their financial statements to the public? Now mind you, this was not a little white lie, like fudging a name or two on the rent roll, but one so horrific that it put two unsuspecting buyers on the verge of financial ruin.

We just kept thinking to ourselves How could they have lied to us? We counted on the income they had reported to us during the due diligence period as part of our decision to purchase the Crestview. We relied on this income to cover the payment on the $1.5 million in financing we took out to purchase this property. This was a loan that was backed by the performance of the property and it was based on this performance we signed a personal guarantee. A guarantee which was backed by our personal assets and the homes in which our families lived.

It was this one conversation that was the basis of what turned out to be a major fraud case and a two-year forensic analysis of everything we’d been told about or given on the Crestview Apartments. Michael and I figured that after all, if the Fengs lied about collecting the money from their tenants for their utility bills, what else could they have lied about.

However, I digress. Let me tell you a little bit about me and my business partner and best friend, with whom I made this investment. My name is Jack Rudolph, and my business partner is Michael Huntley. I am a sales representative in the high-tech industry in Orange County, and Michael works for the Planning Department in Los Angeles County. We are not a corporation, we are not wealthy, and we are not real estate moguls. Labels we would use to describe ourselves would be dad, husband, coach, scout leader, church volunteer.

We were just two people who were seeking the American dream for our families, a way to put our kids through school, a way to have a comfortable retirement and perhaps a path to self-realization. We are writing this story not in an effort to win sympathy for our cause but in order to help other investors avoid the pitfalls of real estate fraud. Real estate is, in most cases, a great investment, and we have done very well in real estate both together and individually.

However, in this particular case we did not.

TIP 1

If it sounds too good to be true, it probably is.

The story of the nightmare known as the Crestview Apartments began in the fall of 2006. Michael and I had just sold a small apartment building we owned in downtown Reno and needed to roll over the proceeds of our investment into another property; otherwise, we’d be liable for the capital gain taxes associated with it. Through an Internet solicitation we received from Colonial