Opinion ID: 1901993
Heading Depth: 1
Heading Rank: 6

Heading: The Diversions

Text: Beginning with the first draw on the construction loans, Sandner and Haralson began diverting substantial sums from the proceeds. These sums were treated as payments for services or materials furnished by Sandner or by corporations owned by Sandner and Haralson. Unknown to Shades Ridge, Sandner formed a corporation called Horizon Development Services, Inc., to prepare the plans and specifications for the construction of the apartment buildings and also furnish other necessary architectural services. Haralson, or the trust for his wife and children, owned 25% of this corporation. Ed Bailey, the architect hired by Horizon to design the apartment projects, also had an interest in this corporation. Payments totaling $45,000 for architectural services ostensibly meant for Bailey were in fact paid to Horizon. Another corporation, Developers Services, Inc., in which Sandner owned an interest, and Harrison as trustee under the trust for the benefit of Haralson's wife and children owned a 25% interest, sold carpets and drapes to the apartment projects. The carpet was of such inferior quality that it had to be replaced prior to being used. This carpet cost significantly less than the amount allocated for carpet; the difference in the amount expended and that allocated was diverted to Developers Services, Inc. Other sums misapplied from the apartment projects construction loan proceeds included: $45,105 paid to Bruce MacClary, Sandner's contractor for the project, for construction work and materials supplied to one of Sandner's other projects, LePappillon Apartments; $5000 to M & L Investment Company, another of Sandner's companies; $24,000 to Harrison, trustee; $20,100 to Horizon Properties; and $7000 to Horizon Inns and Management, another Sandner Company. Following the usual procedures, MacClary made monthly requests for payments indicating with each request the percentage of the construction contract which had been completed. Ed Bailey, the architect, approved these requests and Sandner paid them from construction loan proceeds. In June 1972, it came to the attention of one of the banks involved that the amounts paid to the contractor exceeded by 16% the progress of the work performed. In September 1972, an agreement was reached authorizing further payments to MacClary in exchange for MacClary's promise to complete the 170-unit project by 30 November 1972. MacClary filed suit in November 1972 claiming that construction was complete. The case was settled in September 1973. Prior to that time, however, it came to Shades Ridge's attention that numerous deficiencies existed in the 170-unit project. These included incomplete landscaping and cleanup, leaks in the roofs in many units which caused extensive damage to ceilings, wood balconies out of plumb, and other deficiencies. In an agreement between Shades Ridge and Sandner, Sandner agreed to complete the units and to make certain repairs and refurbishings.