When life hands you lemons, make lemonade. That may be the best way to describe what occurred at the Hawthorn subdivision in Foley, where developer Pennstar LLC defaulted on a $1.2 million loan sometime between Oct. 31, 2006 and Dec. 18, 2009, the day the lender, Peoples First Community Bank of Panama City, Florida, was shut down by the U.S. Department of the Treasury.
According to records maintained by the Baldwin County Planning & Zoning Department, the 51-lot Hawthorn subdivision was initially platted as the fifth phase of the neighboring 105-lot Summercrest subdivision on County Road 12. Both were among Pennstar’s first subdivisions, built upon one of the first parcels of former farmland the company purchased shortly after it was incorporated in 1997.
But for reasons unexplained between Planning Commission meetings in June 2006 and February 2007, Pennstar amended the plat to separate the 22-acre first phase of Hawthorn, where it adjoined a 16.9-acre parcel to the south labeled for “future development.”
According to its articles of incorporation, Pennstar included two members: Wolf Creek Industries Inc., which listed Clarence Burke as its president, and Alliance LTD, of which David DeLaney signed as a “general partner.” To purchase the Summercrest and Hawthorn properties, Alliance awarded Pennstar a $423,000 mortgage in October 1997, according to records.
Notably, the DeLaney family’s Alliance LTD has been a 43.5 percent shareholder of Baldwin County Sewer Service (BCSS), as was Burke’s Wolf Creek Industries, according to an affidavit signed by forensic fraud investigator Lindsey Boney in a 2014 lawsuit against Pennstar and related defendants filed by plaintiff Phillip Bass. But aside from their joint interests in operating the largely unregulated private sewer utility, the two have also been heavily intertwined in purchasing property and developing subdivisions within BCSS’s service territory.
Other ventures the pair have incorporated include:
• Crossroads LLC in 1998. Pennstar, Thomson LLC and John B. Foley IV are listed as initial members. Robert T. Cunningham III signed as Thomson LLC’s manager, but he also amended the incorporation in 2001 to list Burke’s Magnolia River Management LLC as the primary manager. The Boney affidavit claims Pennstar, Foley and Thomson each have a 33.3 percent interest.
• Landstar LLC in 1999. Pennstar and Cunningham’s Streamline LLC are listed as initial members. The manager is Summit Construction Company Inc., which, according to Boney’s affidavit, is owned 2 percent by Burke and 98 percent by his wife, Dorie.
• Rustal LLC in 2006. Signed by Burke, the articles of incorporation list Crossroads LLC as its initial member, with Magnolia River Management as the primary manager.
• Stratosphere Land Holdings Inc. in 2006: Burke and David DeLaney are listed as the initial board of directors, serving as president and secretary, respectively. Burke’s Summit Construction Company is listed as the registered agent.
In November 2006, a few months before engineer John Avent and surveyor David Diehl of Engineering Development Services LLC vouched for the new-but-preliminary Hawthorn plat in front of the Baldwin County Planning Commission, Pennstar sought another loan using Hawthorn property as collateral. Burke turned to Peoples First, which bank probate records indicate he relied on for loans dozens of times, dating back to a $191,000 mortgage taken on behalf of Landstar in 1999. Mortgaging roughly 52.4 acres of property at Hawthorn, Peoples First loaned Pennstar $1.261 million.
In the same time period, Peoples First had made a habit of pursuing “high-risk real estate loans to drive profitability,” according to an audit by the Department of Treasury’s Office of Inspector General released in 2011. Primarily pointing fingers at its loans in the Florida Panhandle, the audit determined “Peoples First failed primarily because of excessive concentrations in high-risk nonhomogeneous loans located in Florida and inadequate credit administration.”
When the bank was closed by the U.S. Treasury’s Office of Thrift Supervision in December 2009, the Federal Deposit Insurance Corporation (FDIC) estimated losses to its Deposit Insurance Fund at $514.7 million, according to the audit. FDIC also estimated that Peoples First’s failure resulted in a loss of $6.3 million to the Transaction Account Guarantee program.
Within weeks of its failure, Hancock Bank of Mississippi assumed Peoples First’s assets in a loss-sharing agreement with the FDIC. As a result, many mortgages that could not be satisfied would be auctioned on the courthouse steps of the county where they originated.
In Baldwin County, probate records indicate those included $17.3 million in Peoples First mortgages signed by Burke, including the $1.2 million Pennstar mortgage using Hawthorn as collateral.
There are no public records to indicate how much of the loans were paid off before they were defaulted on. In an email to Lagniappe from June 2018, Greg Hernandez of the FDIC’s Office of Communications wrote that “due to Privacy Act restrictions, loans are not listed by companies or individuals — whether for a failed or open bank” and “if the acquiring bank purchased a loan from the failed bank or if it conveyed [the loan] to the FDIC, the information about the holder of the loan is confidential.”
But it is relatively easy to trace those mortgages from foreclosure sales, which are open to all bidders after they are advertised for a period of weeks in a newspaper of public record. For the Hawthorn mortgage, the foreclosure sale was advertised in the Foley Onlooker on March 30, April 6 and April 13 of 2012. On April 24, 2012, a subsequent foreclosure deed notes, “Hancock Bank did offer for sale at public outcry, in front of the main entrance to the courthouse in Bay Minette, Alabama at 1:30 p.m., to the highest bidder for cash,” the Hawthorn property.
The deed was granted to Alabama Capital LLC for a total of $145,001. Alabama Capital, according to Boney’s affidavit, is owned and managed by the DeLaney family and its Small Business Management Corporation (SBMC). Essentially, the DeLaneys, as owners of the company that owned 50 percent of Pennstar, were able to use another one of their companies to recoup the collateral Pennstar defaulted on for 11.4 cents on the dollar.
Afterward, between January 2014 and September 2017, tax records indicate Alabama Capital turned around and sold 34 lots in Hawthorn to Benchmark Homes for a total of $356,100. Between July 2014 and August 2018, Benchmark built homes on the lots and transferred the deeds to individual buyers, generating a total of $4,921,328 in sales on the 34 lots, turning those lemons into lemonade.
Again, there are no public records to indicate how much of the mortgages were paid before they were defaulted on, and there are no public records of the auction process documenting such factors as the starting bids on foreclosed properties, the number of bids received and who else may have bid on a single foreclosed property before it was awarded to the highest bidder.
But according to records that are available, the Hawthorn property was not the only Pennstar-related property the DeLaneys were able to recoup after Peoples First mortgages had fallen into foreclosure.
At least 13 lots in the Autumn Chase neighborhood, used as collateral for two mortgages — a $1.9 million between Rustal LLC and Peoples First in June 2007 and a $323,100 mortgage between Rustal LLC and Peoples First in November 2007 — was awarded to BankTrust, as trustee for the SBMC, for a total of $709,546 between May 22 and July 24, 2012.
Other Peoples First mortgages signed by Burke that subsequently went into default involved properties in the subdivision of Islandwood, Bellaton, Woodlawn, The Commons and Abbey Ridge. DR Horton bailed out the $4.2 million mortgage between Country Club Development and Peoples First at Bellaton for a total of $1.35 million in May 2012. Other lots were kept by Hancock, while still others at Islandwood and Woodlawn in particular were awarded to a myriad of buyers.
During an interview with Lagniappe in August, David DeLaney made statements about Burke’s role in the 2014 Bass lawsuit in which he twice said his business partner, Burke, had been trying to deceive Phillip Bass in a land purchase Bass was led to believe cost $4.8 million, when it only cost half of that. He also said he believed Burke had the closing statement filled out incorrectly in order to trick Bass into paying more. DeLaney has indicated he no longer intends to speak to Lagniappe about his business interests, which include BCSS and Alabama Capital. On Sept. 5, his attorney, Daniel Blackburn, sent a letter to Lagniappe demanding proof DeLaney’s statements had actually been made. Lagniappe stands by its reporting of the interview.
Lagniappe sent a series of questions regarding this story to Blackburn, as well as three other attorneys who represent BCSS, Burke or the DeLaney family.
The only response came from Bert Taylor, who represented BCSS in the Bass lawsuit:
“I was the attorney for BCSS in the Bass litigation and respond only because you reference an affidavit prepared by a witness for Bass, Lindsey Boney. That affidavit, which contains confidential information about the ownership interests in BCSS at certain times, was prepared using documentation produced in the litigation under a Protective Order entered by the Court … and was supposedly filed with the Court by Bass’s attorney under seal as part of a motion filed. The information contained therein about BCSS is protected by the Court order and is not to be made public by order of the Court. The fact you have it indicates you have it illegally. I would expect you and your publishers to honor the Court’s order with respect to the confidentiality of such information.”
The full affidavit is published below.
Blackburn’s law firm, Blackburn & Conner P.C., was also under contract to represent the Baldwin County Commission and Baldwin County Planning Commission from 2010 until last month when they were voted out by commissioners who cited the number of conflicts of interest among the reasons for ending their employment. The contract was entered into during the first meeting that included newly elected Commissioners Tucker Dorsey and Bob James in November 2010.
At the time and throughout his eight-year tenure as a commissioner, ending in a re-election defeat by Billie Jo Underwood last year, Dorsey was an employee of Burke’s Magnolia River Management. While he previously claimed to Lagniappe to have customarily recused himself from matters involving BCSS, he did use his pulpit to address the situation at Summercrest and Hawthorn, according to meeting minutes of an Aug. 12, 2012 work session of the County Commission.
In a discussion about subdivision bonds, Dorsey lamented the crash of the real estate market and repeatedly suggested he was “out of the development business.” Summercrest, he said, was “rocking” before the development of Hawthorn, when “the market quit on me … so my project stalled down there.”
Records show that on Aug. 15, 2017, Dorsey spoke about and voted for a zoning change to reduce 98 parcels of property on Fort Morgan to 17 for development by Tyler Prescott and DeLaney’s Alabama Capital. In June of that same year he abstained from another vote about an Alabama Capital property rezoning, citing a conflict of interest. He did the same in July 2016, according to Baldwin County Commission minutes.
Marie Tatum, another employee of Magnolia River Management who was deposed in the Bass case, testified that within her office, which was in the same building as BCSS, only Clarence Burke, his wife, Dorie, and Tucker Dorsey were authorized to sign checks on behalf of Pennstar. Records also show that in 2005, Burke signed an agreement giving Dorsey power of attorney for him at Summit Construction Company.
Tatum further testified that she kept the books for Burke’s “development companies,” which did not include Wolf Creek or Magnolia River Management, but in the period around 2005, Tatum said she would mail David DeLaney monthly financial statements and check registers from Pennstar, but not deeds or titles. Tatum also said she would have “probably” mailed David DeLaney his annual Schedule K-1 form, which indicates each partner’s income, deductions, credits and more in a business partnership.
AFFIDAVIT OF LINDSEY BONEY
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