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Dec. 8, 2022

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15 American Equities funds $43 million in the red

Insolvent funds placed into receivership; local investors stung

By , Columbian business reporter
Published:

About 200 investors from Vancouver and the Portland metro area got an unfortunate surprise last month when they were notified that a slate of 15 mortgage investment funds managed by local firm American Equities Inc. had all become insolvent and have been placed into receivership.

The funds’ collective liabilities exceed their assets by an estimated $42.8 million, making it unclear how much money will find its way back to the investors — many of whom are reported to be senior citizens whose investments made up a significant portion of their retirement savings.

News of the insolvency comes about three months after American Equities was hit by a breach-of-contract lawsuit brought by two investors.

Under the terms of a receivership process, a court-appointed official known as the general receiver takes control of an insolvent company in order to conduct an assessment of its assets and liabilities and develop a plan, subject to court approval, to liquidate the assets and repay investors and creditors as best as possible.

In this case, Clyde Hamstreet of the Portland-based financial consulting company Hamstreet and Associates has been placed in charge of the 15 limited liability companies that comprise the investment funds. The LLCs’ names are all variations of “American Eagle Mortgage,” such as “American Eagle Mortgage 100” and “American Eagle Mortgage Short Term.”

American Equities turned the LLCs’ assets over to Hamstreet on May 8, according to court filings, and Hamstreet’s petition to be appointed general receiver was approved two days later in Clark County Superior Court.

Local investors briefed

In a letter dated May 22, Hamstreet notified investors about the receivership process and invited them to attend an introductory meeting on May 30.

Multiple investors who attended the meeting and later spoke to The Columbian described the audience as a group of around 200 people. Many were elderly residents who had invested their retirement savings in the funds, or relied on the payouts as part of their income in retirement.

In an email to The Columbian, Hamstreet consultant Maren Cohn said a preliminary estimate shows that the American Eagle funds collectively have roughly 500 investments from approximately 200 individuals.

The majority of the investors appear to be from Portland and Southwest Washington; a court filing lists roughly 350 addresses that were contacted about the investor meeting. About a quarter of the addresses are in Vancouver. (However, many of the addresses are duplicates due to investors being listed both individually and through trusts or individual retirement accounts).

The investors’ meeting included an informational slideshow presentation, which Hamstreet later posted online. The slideshow includes a preliminary assessment of the value of each fund’s assets and liabilities, based on initial information provided by American Equities.

All 15 funds are insolvent, according to the preliminary assessment, with liabilities exceeding assets by amounts ranging from $121,737 to about $12.8 million. As a whole, the funds were listed as being $42.8 million in the red.

American Equities created and managed the funds prior to the receivership, but the company is not part of the receivership process because each fund had a separate LLC. American Equities has other assets and investments and remains in business.

Reached for comment on Wednesday, American Equities founder and President Ross Miles said the decision to place the funds in receivership was made to ensure that some investors wouldn’t come in ahead of others.

“It was done for the protection of investors, so there could be an equitable distribution of the assets to investors,” he said.

American Equities dates its founding to 1979, according to Miles, and originally specialized in single mortgage transactions. The company began to branch out with the creation of investment funds with multiple assets starting around 2003.

In her email to The Columbian, consultant Cohn said that Miles claimed to have transferred management responsibility for the funds from American Equities to a separate entity called American Eagle Mortgage Management at some point around 2009, although it’s unclear if the switch was ever formalized.

“In any event, we believe the same people were responsible even if the names and roles of the entities changed,” she wrote.

According to the state Department of Revenue, American Eagle Mortgage Management is governed by Miles and another American Equities official.

Miles said that many of the local investors became involved in the funds due to referrals from friends and family over the course of American Equities’ first three decades of operation in Vancouver, during which he said the company had very few foreclosures and enjoyed a stellar reputation.

But things changed when the 2008 financial crisis hit, he said, and a significant chunk of the funds’ equity was wiped out during the following five years. The company had weathered multiple recessions in the past, he said, but this time the funds didn’t recover.

“We never expected losses like that, not even close,” he said.

Lawsuit filed

For many of the investors, the May 22 letter appears to have been the first indication that there was a problem, although some of the investors who spoke to The Columbian said that they had stopped receiving payments in April.

But some investors appear to have found out earlier. The receivership decision came about three months after investors Douglas and Suzanne Nichols filed a lawsuit in Clark County Superior Court against 10 of the American Eagle LLCs as well as American Equities, Ross Miles and two other company executives.

The complaint, filed on Feb. 8, accused the companies of securities violations and breach of contract. It alleged that American Equities covered up the funds’ losses by misrepresenting their value and convincing investors to keep rolling their payouts back into the funds.

According to the complaint, the Nicholses began investing with American Equities in the late 1990s. After an initial round of investments provided them with a modest return, they began making larger investments in the American Eagle funds, investing the majority of their retirement savings from 2003 to 2018 — more than $1 million in total.

The lawsuit states that the Nicholses began to ask about the performance of the real estate assets in late 2017, and Miles met with them in March 2018 and revealed that several of the assets had become nonperforming due to foreclosures.

The Nicholses allege that they requested all of their invested funds and interest be paid out, and American Equities initially agreed, but the payments stopped after the first few months.

The Nicholses claim to have learned around October 2018 that American Equities was struggling to make the required minimum payments on IRA and 401(k) investments to some of the early investors, and that the staff had begun using money from the funds to pay their own office expenses or to pay off other investors.

Lawyers for American Equities and the other defendants in the lawsuit moved for the case to be stayed and moved to arbitration, which they said was mandated in the terms of the contracts that the Nicholses signed when they made their investments. A judge granted the motion, and the Nicholses agreed to enter an arbitration process, which is ongoing.

Miles declined to comment about the lawsuit, stating that American Equities’ response to the allegations and its side of the story would come out in the arbitration process.

Receivership process

As the receiver, Hamstreet’s first task will be to evaluate the American Eagle funds’ collective assets, which include about 60 pieces of owned real estate and about 230 contract receivables secured by real estate, which Cohn described as “similar to a mortgage.”

The company has focused on the real estate assets first, Cohn said, and will later move on to the contracts. In both cases, one of the concerns will be whether the actual value of the assets matches the assessments provided by American Equities, she said, although it’s too soon to say.

“About 50 (of the real estate assets) are bare land and 10 have buildings on them, several of which appear to be poorly maintained,” she wrote. “Some of these contracts are in default, which may raise questions about the value of the underlying assets, but many are not in default and may well be related to good properties.”

It’s also too soon to offer an estimate for how long the process will take, she said, because Hamstreet has not yet learned enough to form a long-term plan. If the assets turn out to be sufficient to warrant a liquidation, that process would take additional time to play out, she said.

All expenses of the receivership, including fees paid to Hamstreet, forensic accountants and the law firm Miller Nash, which is representing Hamstreet in the proceedings, will be paid from the assets of the receivership, Cohn said.

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Columbian business reporter