Facts

Plaintiffs John and Diane Nathan and defendant David J. Prenatt were close friends for approximately 15 years.

Plaintiffs allegedly loaned defendant a large sum of money over a period of several years. Plaintiffs alleged misrepresentation and failure to repay the loans.

PLAINTIFFS' CONTENTIONS:
Plaintiffs contended that, based on their long-term friendship, beginning in or around late-2003, Prenatt approached plaintiffs seeking to borrow money for Prenatt's business purposes. Plaintiffs contended that Prenatt represented to plaintiffs both expressly and through a continuous course of conduct: that Prenatt was a loan broker (licensed by the State of California); that Prenatt had a short-term hard money lending business and a loan placement business called "David Prenatt Financial" located in Santa Barbara; that Prenatt would borrow monies from plaintiffs, and would re-lend those monies out to third parties at much higher interest rates (and collect points on the third party loans), to be able to provide a return to plaintiffs of 10 percent to 12 percent interest; that plaintiffs would always be able to recall the loans with 30-day notice any time they needed cash, and that plaintiffs' funds would be immediately available; that Prenatt would hold plaintiffs' funds for legitimate business purposes consistent with a short-term hard money lending business as contemplated by the parties (and the Promissory Notes); and that Prenatt was doing plaintiffs a special favor, because plaintiffs was in a distressed situation (and that he had no other creditors).

Plaintiffs contended that Prenatt failed to disclose to plaintiffs that David Prenatt Financial was a sham corporation set up and used for the operation of an illegal financial scheme; and that Prenatt, rather than relent and properly invest plaintiffs' monies in the manner dictated by the agreements between the parties, upon information and belief, he had instead disposed of or misappropriated plaintiffs' monies completely or in a manner that made such funds unlikely to be recovered and otherwise unavailable to plaintiffs. Plaintiffs contended that, based on Prenatt's representations to plaintiffs, in November 2003, plaintiffs lent $200,000 to Prenatt pursuant to a note with interest payable monthly at 12 percent per annum.

Plaintiffs contended that, based on Prenatt's representations to plaintiffs, in early-2004, Prenatt again approached plaintiffs offering to help plaintiffs to borrow more money for Prenatt's business purposes. Plaintiff Diane contended that she told Prenatt that she did not have money to lend at that time but that her elderly parents (from which she had power of attorney) did. Plaintiffs contended that, as a result, in January and again in February 2004, plaintiffs' parents (Rosalind and Arthur Siegelman) lent to Prenatt $400,000 and $500,000 pursuant to two separate unsecured notes with interest payable monthly at 12 percent per annum.

Plaintiffs contended that, on Feb. 21, 2007, Prenatt paid plaintiffs $1.9 million towards the notes. At the time of the payment, plaintiffs contended that Prenatt owed $2,526,372. Plaintiffs contended that, as a result, and based on Prenatt's representations to plaintiffs, plaintiffs issued a new promissory note for $626,372 due and payable in full on Feb. 21, 2008 with interest payable monthly at 12 percent per annum. Plaintiffs contended that the maturity date of this promissory note was later extended by written agreement of the parties to June 30, 2008 and then again to June 30, 2009.

Plaintiffs contended that, from time to time between May 2004 and early-2007, Prenatt approached plaintiffs offering to borrow more money for Prenatt's business purposes. Plaintiffs contended that they lent Prenatt a total of $4,008,372 in funds pursuant to 10 different notes with interest payable monthly at either 10 percent or 12 percent per annum. Plaintiffs contended that, shortly after the payment of $1.9 million, Prenatt offered plaintiffs to allow him to re-borrow the money just paid so that Prenatt could continue to use it for his business purposes, and for plaintiffs to continue to receive monthly interest payments.

Plaintiffs contended that, pursuant to Prenatt's persistent requests, plaintiffs lent Prenatt $1 million on March 16, 2007 pursuant to a promissory note secured by an assignment of LLC Interest. Plaintiffs contend that this note is due and payable on or before March 16, 2017. Plaintiffs contended that, on April 23, 2009, plaintiffs lent an additional $1 million to Prenatt pursuant to a promissory note due and payable in full on April 23, 2009, with interest payable monthly at 12 percent per annum.

Plaintiffs contended that Prenatt breached each and every Note by, among others things, failing to repay in full all principal and interest due and owing at maturity. Plaintiffs contended that Prenatt has defaulted on all of these Promissory Notes in that he failed to pay the entire sum due and owing at maturity and by reason thereof, plaintiffs contend that the entire amount of the Note plus accruing interest and late charges as set forth in the Note is now due, owing and unpaid from Prenatt.

Plaintiffs contended that, in or about July of 2009, plaintiffs informed Prenatt that each and every Note between plaintiffs and Prenatt was not paid when due and that by virtue of that and other events of default, the entire Indebtedness was past due and owing. Plaintiffs contended that Prenatt failed to repay the plaintiffs.

Plaintiffs contended that Prenatt engaged in soliciting funds from the general public for the purpose of investing in real estate projects, including but not limited to hotels. During the relevant time referred to herein, plaintiffs are informed and believe that Debtor held an interest in real property in Santa Barbara County.

Plaintiffs contended that, prior to the Petition Date, the plaintiffs loaned or invested in excess of $6,828,372 ($4,008,372 in promissory notes plus $2.82 million in real estate investments) based on representations by Prenatt that the funds would be used for loans and investments in real property.

DEFENDANT'S CONTENTIONS:
David Prenatt admitted that Diane Nathan was a creditor but he denied that John Nathan was a creditor. He contended that John Nathan did not sign any promissory note. Prenatt contended that John Nathan's involvement was limited to a $1 million investment in the El Prado Hotel as a limited partner. Prenatt admitted that plaintiff Diane Nathan's claims against him were evidenced by promissory notes and real-estate investments between he and Diane Nathan. However, Prenatt denied ever approaching plaintiff Diane Nathan. He contended it was she who approached him wishing to invest. Defendant denied that there were ten (10), and admitted only that there were nine (9) promissory notes.

He further denied that John Nathan signed any of the promissory notes. Prenatt admitted that plaintiff Diane Nathan loaned him $400,000 and $500,000 from her parents' accounts, pursuant to two separate unsecured notes with interest payable monthly at 12% per annum.

Defendant contended that he believed the money was Diane Nathans', not her parents'. Prenatt contended that Diane Nathan represented to him that she had acquired money through smuggling pre-Columbian art into the United States which she thereafter parlayed into a multi-million dollar real-estate portfolio. Prenatt contended that Diane Nathan further represented that she kept her money in her parents' accounts for tax purposes and for use in investments.

Defendant denied plaintiff Diane Nathan's allegations that she issued new promissory notes based on Prenatt's representations and he denied that David Prenatt Financial was a sham.

Damages

$6,828,372 ($4,008,372 in promissory notes plus $2.82 million in real estate investments).

Result

Stipulated judgment in the amount $5,125,000 pursuant to 11 U.S.C. sections 523(a)(2)(A)(B), (4), (6). Plaintiffs dismissed the claims pursuant to 11 U.S.C. sections727(a)(3),(4), and (5), 18 U.S.C. section 152. The judgment shall be satisfied upon Prenatt paying Nathan a settlement amount of $1,500,000.00.

Other Information

FILING DATE: Sept. 28, 2010.