When local blog The Humboldt Herald last week broke the news that Bank of America was suing Eureka businessman/political lightning rod Rob Arkley and his wife Cherie for $50 million, it was tempting to shrug off the item. After all, hounding Arkley is more or less the raison d'etre for Heraldo, the Herald's fictitious author(s). But at least two aspects of this story make it newsworthy: First, Arkley's holdings, if not the man himself, are inextricably linked to Humboldt County -- from the 400-odd people employed by his Eureka-based company Security National, to his oft-cited civic philanthropy, to his ownership of Eureka's Balloon Track property, the controversial would-be home of the Home Depot-anchored Marina Center development. And second, the defendant in the case is not some easily severed corporate tentacle; it's the Arkleys themselves.
The suit, which was filed in U.S. District Court's Northern California District in March, reads like a cautionary retelling of the housing bubble collapse. The Arkleys' alleged debt to Bank of America, which ballooned to more than $124 million in 2007, was generated by the bubble's deflation.
It began with what's called a "warehouse facility agreement" between Bank of America and an Arkley company called Sequoia Funding Trust (with a third company -- Kitty Hawk Funding Corp. -- acting as go-between). "Warehousing" deals work like this: A financial institution (B of A, in this case) extends a short-term, revolving line of credit to a mortgage banker (like Sequoia). This credit line is secured by something tangible, usually real estate. In this case, a large pool of mortgage loans was secured primarily by single- and multi-family residential properties in 44 states.
When all goes well in such deals, the mortgage banker services the loans for a while (sending bills, collecting payments and interest, etc.) before selling them off to a permanent investor, making a tidy sum in the process. (The Arkleys used another of their many companies -- SN Servicing Corp. -- to service the loans.) Unfortunately for the Arkleys, the timing for this particular transaction couldn't have been worse.
When the deal originated -- "on or about May 27, 2005," according to the lawsuit -- U.S. housing prices were soaring, with scant indication that a collapse was just months away. In retrospect, it was perhaps the worst time in American history to invest in real estate, yet credit had never been more available. Bank of America granted Sequoia Funding Trust a revolving loan with an upper credit limit of $255 million. It's unclear from the suit just how much of that credit Sequoia used. What is clear, at least judging by the complaint, is that the company borrowed more than it could repay.
The original loan, which was scheduled to end on Aug. 19, 2006, was amended four times in the first 18 months, each time delaying the due date. Then, on July 25, 2007, with $124.4 million overdue, according to the complaint, the deal got personal. As an inducement for Bank of America to sign yet another forbearance agreement, Arkley offered an "absolute and unconditional" personal guarantee of repayment, according to the lawsuit. In other words, the debt no longer belonged to Sequoia Funding Trust; it belonged to Robin P. Arkley, II. He further promised to pay any attorneys' fees arising from enforcement of the deal, and to maintain a personal net worth of at least $50 million until the debt was paid in full, the suit states.
By fall of 2007, the nation's housing market was in virtual free-fall, and secondary mortgage deals -- like warehousing agreements -- were spiraling into complete chaos. Starting in late September 2007, the suit alleges, Arkley began defaulting on the loan, in part because the properties that were serving as collateral on the debt were now worth less than 80 percent of the amount due.
Such declines in real estate values were virtually unprecedented, and banks had their hands full dealing with the epidemic of loan defaults. Following "The Arkley Guarantee," the complaint alleges, Bank of America granted 12 more forbearance agreements on the debt, which by 2009 had been whittled down to $89.3 million. The bank's final grace period expired on July 22, 2009. A month later, B of A sold the mortgage loans at public auction. The winning bid (the bank's own, as it turned out) represented less than half the outstanding principal balance.
B of A then subtracted the purchase price from Arkley's debt, leaving $49,928,351, "plus accrued interest, fees, costs of collection, and enforcement," the suit claims. Which is where things currently stand. Bank of America is suing the Arkleys for breach of contract and seeking "not less than" the $50 million allegedly due, plus an untold amount in interest, fees and attorney bills. Arkley's Security National Corp. issued a press release that said virtually nothing about the case beyond professing an expectation for a speedy resolution.
Of what significance is this suit beyond fodder for gossip? Perhaps none, though taken in conjunction with the FDIC's closure and subsequent investigation of the Arkley-owned Statewide Bank in Louisiana in March, the incident raises questions about the overall health of Arkley's portfolio and the security of his local holdings. According to the county tax collector's office, Arkley has not paid last year's property taxes on the Balloon Track property, which total $29,715, or the current year's, which amount to $24,777. He owes roughly $15,000 to the City of Eureka for consulting work on the Marina Center's Environmental Impact Report, according to Eureka City Manager David Tyson, though Tyson added that in February, Arkley made a lump payment of $162,000 to the city. "I'm confident they'll pay the balance," he said.
Next month, Bank of America will ask a District Court judge for a "writ of attachment," which would render Arkley's local holdings (excluding the Balloon Track, which is owned by CUE VI, one of his corporate tentacles) into the custody of the U.S. Marshal Service pending a resolution to the case. A case management conference is scheduled for July 29.