Everything started to fall apart for Andrew Eliopulos on Christmas Eve of 2007. The president of J.P. Eliopulos Enterprises in Lancaster, Calif., had been in a holding pattern with IndyMac Bank on his construction loan, which had come up for renewal six months earlier.
But even with the depressed housing market, Eliopulos thought he was in good shape. He had about $27 million outstanding on the loan for the development and construction of Joshua Ranch, almost 900 acres in northern Los Angeles County. He had plenty of equity, though. In the spring of that year, as the loan was coming up for renewal, the bank got an $82 million appraisal on the property.
After meeting with his bankers in July to renew the note, he got a call that the bank thought the appraisal was stale. They wanted a new one. As the new appraisal was being conducted, IndyMac extended the loan for Joshua Ranch 30 days at a time, Eliopulos says. At the time, he looked into finding new financing, but his IndyMac lenders pressed him to hang in there. "They were saying, 'Don't worry, we'll get through this. We've got a good appraiser,'" Eliopulos says.
Throughout the fall, Eliopulos did "more than we were supposed to do" to stay current with the loans. Finally, on Christmas Eve, as Eliopulos was finishing up a half-day at the office before hosting the family's traditional holiday meal and playing Santa Claus to the kids, Eliopulos got a phone call from the bank.
The new appraisal had come in. It was for $17 million for both the vertical and horizontal sides of the project, nearly an 80 percent drop in value in roughly nine months.
Eliopulos was beyond stunned.
"I said, 'What, was this guy afraid to write 'zero'? If you're going to kill it, kill it all the way,'" Eliopulos recalls.
In his heart, though, he thought it was an honest mistake. What possible reason could IndyMac have to pull the plug on his loan? He'd been a borrower there for years. He was a good customer who had met all the performance requirements of his loans. Yes, it had to be a mistake.
What he didn't know until much later was that IndyMac Bank was desperate to get out of construction lending altogether. Or that within months, he would be at the center of the home building industry's battle to combat abusive banking practices.
The 'beginning wave' of litigation
Eliopulos was unable to meet IndyMac's demand to either come up with $10 million, the difference between the new appraisal and the outstanding balance, or pay the note in full. IndyMac foreclosed on Joshua Ranch and filed suit to collect from Eliopulos and his elderly mother on personal guaranties, which obligate individuals to make good on debts incurred by their corporations. Eliopulos countersued IndyMac for breach of contract, among other charges. In his lawsuit, Eliopulos alleges that in light of the subprime debacle, IndyMac "fabricated excuses that caused substantial delays in the project" and misled him "into believing that IndyMac would consider and evaluate the new loan application in good faith and would likely approve the loan application, when in point of fact, IndyMac had decided that it would no longer make construction loans."
Jeffrey Hermann, lead attorney for IndyMac in the suit, declined to comment.
"The suit is about IndyMac not having the means to go forward," Eliopulos says. "We felt they terminated the project, damaged it, and didn't allow us to seek a remedy. Had they told me this a year ago, I could have fixed myself."
He's right about that, says Bob Kline, principal of R.W. Kline, a Scottsdale, Ariz.-based real estate asset solutions company that works with both builders and banks. He has spoken numerous times with Eliopulos about his situation, but is not involved in its resolution. "They tied his hands a little early. If they had just told him a year ago they couldn't lend him the money, it could have changed everything."
Eliopulos' lawsuit against IndyMac is in "the beginning wave" of litigation against lenders by home builders, says Michael Hackard, principal of the Hackard Law Firm in Sacramento. Hackard also is a spokesman for the Homebuilders Coalition for Responsible Bank Behavior, a group of builders who have organized to try to push for legislative and regulatory change in banking practices.
"(Litigation) is a necessary step," says Mick Pattinson, president of Carlsbad, Calif.-based Barratt American. "Banks are pulling the rugs out from under the builders. If left unchecked, it will wipe out most of the industry. The games that are being played, the deceit, the tricks – we're the victims of it."