Anchorage Daily News

After suffering a big hit to its bottom line last year, Denali Alaskan Federal Credit Union, the state's third-largest, is suing a prominent local builder and his business associates to recover $16 million in delinquent loans for Anchorage and Mat-Su housing projects.

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In its suit, the credit union also accuses Lee Baker Jr., the builder who spearheaded the projects, and his wife Pat Baker, a real estate broker, of fraud.

Their delinquent loans are the main reason Denali Alaskan lost $2.8 million last year, according to Keith Fernandez, the credit union's associate vice president of marketing.

"We have been working with (the Bakers and their companies) for a number of years. It always worked out very well. Unfortunately, with these projects, it did not," Fernandez said.

The credit union's lawsuit, filed in mid-March, claims that the Bakers used some of the loans for unauthorized expenses, and it alleges that Lee Baker made false statements to the credit union about his progress on three condo projects in Anchorage and the Mat-Su, to induce it to provide more loans.

The Bakers, who are divorcing, vigorously deny the allegations of fraud and misrepresentations.

"These are ridiculous accusations, and they will be proved as false," said Pat Baker.

Lee Baker could not be reached for comment but in his court filings, he also denies the fraud charges.

The Bakers acknowledge that they defaulted on many of the loan payments but dispute some of the alleged defaults, according to their recent filings in state Superior Court.

Despite its problem with the Bakers, Denali is financially sound, Fernandez said.

MARKET WOES

The delinquent loans that soured Denali Alaskan's financial statements in 2007 are another sign of how a recent slowdown of Anchorage's "go-go" real estate market has affected the local housing industry and some of its creditors.

Denali isn't the only local lender that provided money for Lee Baker projects that recently have gone awry: other lenders include First National Bank of Alaska and Northrim Bank.

In recent months, many of Anchorage's biggest home builders, including Spinell Homes, have scaled back on their new projects.

Lee Baker, who owns Discovery Construction Inc., is a more extreme case.

His company has built hundreds of homes in Anchorage and the Mat-Su in recent years, ranging from single-family houses in Independence Park to town homes along Lake Otis Parkway, in Oceanview and Wasilla.

Now Baker is battling for financial survival amid at least a dozen lawsuits seeking to collect debt from some of his recent projects.

"Lee has got more claims against him than he's ever going to be able to pay, unless the housing market rebounds," said Erik LeRoy, a bankruptcy lawyer who is representing Lee Baker in the credit union suit.

"We're taking the position that we'll see what we can work out with banks and work out with various properties," LeRoy said.

The Denali Alaskan suit asks a state Superior Court judge to order the foreclosure of a number of Discovery's undeveloped or unfinished condo units, including ones in the Chugach Meadows complex off East 72nd Avenue, the Bryn Mawr complex in East Anchorage, and the Lake View Estates complex in Wasilla.

"My understanding is that owner-occupied -- which includes owners who have units used (for) rental -- units are not part of this lawsuit," Fernandez said.

If a judge orders the foreclosures, Denali would either sell the unfinished properties or work with a developer to complete the units before selling them, he said.

The lawsuit isn't pursuing foreclosure just on Baker's delinquent condo-building loans. It also targets delinquent loans for the Bakers' Hillside home, their Whittier boat slip and their Anchorage storage yard. In addition, Denali is seeking to repossess Lee Baker's 2003 Wild West Vigilante motorcycle because he "is in default of his obligation to maintain insurance on the motorcycle."

The lawsuit says the total debt owed is $16.9 million, plus interest and fees. The lawsuit also seeks punitive damages.

LeRoy said Baker wants to pay his debts but the motorcycle foreclosure was akin to the credit union "taking their finger and grinding it into the wound on Baker's arm."

He said Baker has provided him records showing that he is up to date on his motorcycle insurance payments.

An attorney for Pat Baker said that she also hopes to settle with the credit union for the delinquent loans she owes -- an estimated $700,000.

But the attorney, Gary Spraker, said the fraud accusations are a questionable tactic and he thinks they will be hard to prove.

Denali's lawsuit says Lee Baker "made false and fraudulent statements concerning the status of construction projects" to induce Denali to lend him millions of dollars more and that the Bakers failed to disclose that they borrowed money rather used their own funds for the storage yard down payment.

The Bakers deny these claims. In addition, Lee Baker asserts in his court filings that Denali's "own conduct is a contributing fact to any losses it will suffer."

CREDIT UNION IMPACT

So what harm did the delinquent loans cause to Denali Alaskan?

The credit union mainly makes new and used-car loans. First-mortgage real estate loans compose just 15 percent -- totaling $49 million -- of all of Denali's lending. But much of that real estate lending has gone bad. As of Dec. 31, $12.4 million worth of these real estate loans was delinquent more than six months, according to Denali's financial statements filed with the National Credit Union Administration.

Fernandez noted that the delinquent loans represent only about 4 percent of the credit union's loans.

As a small percentage of the credit union's business, the overall impact isn't that big, he said.

Denali Alaskan is well-capitalized and expects to have made a profit in the first three months of this year, he said.

The 2007 loss won't cause the credit union to drop member services or cancel its plans to open three more branches this year, he added.

Suresh Srivastava, a finance professor at the University of Alaska Anchorage who examined the credit union's financial statements, said the credit union has made roughly $2 million to $3 million in profits in recent years, and to suddenly lose $2.8 million in a year is "a significant loss."

"Obviously, they have suffered a heavy loss on delinquent loans," he said.

He said the financial statements also showed that the credit union has invested more heavily in real estate than its peer group.

HOST OF LAWSUITS

In recent months, creditors ranging from a local bank to plumbers and painters have filed lawsuits or small claims against Lee Baker and Discovery Construction.

The Denali Alaskan foreclosure suit names some of those other creditors as defendants, a maneuver that could put Denali first in line for payment if the court allows the foreclosure and units in the three condo projects are then sold, according to attorneys involved in the case.

At least one other local financial institution, First National Bank, has filed a foreclosure suit against Baker and his former business partners involving a delinquent $4.3 million loan that was to be used to develop a 100-acre subdivision high on the Hillside. That case is still pending in court.

In the past month, Pat Baker and her business, Northern Trust Real Estate Inc. -- which has sold homes for Discovery and other clients -- has also been drawn deeper into the legal morass involving Discovery Construction.

For example, last month several condo buyers, including Danny and Denise Belcevic of Texas, sued Northern Trust to get back the $540,000 in earnest money that they had borrowed from Northrim to buy 18 units at one of Discovery's soured townhouse projects -- the Dove Tree project in Eagle River.

In their lawsuit, the Belcevics accused Northern Trust of withholding their earnest money after they terminated a purchase contract for the town houses, according to court filings.

The lawsuit also accuses Northern Trust of violating the Belcevics' purchase agreement by immediately turning over the earnest money they borrowed from Northrim to Lee Baker to use on construction.

LeRoy, who has been reviewing the allegations, said the Bakers' position is that the use of the earnest money was part of the agreement.

Find Elizabeth Bluemink online at adn.com/contact/ebluemink or call 257-4317.

Housing developments involved in lawsuit

Denali Alaskan Federal Credit Union wants its money back from the financially troubled Anchorage homebuilder Lee Baker Jr. Here are the residential developments involved in the lawsuit and the amount, with interest and fees, that Denali Alaskan says it is owed:

• Chugach Meadows condos in Anchorage: $3.8 million

• Bryn Mawr condos in Anchorage (never built): $9.8 million

• Wasilla Lake View Estates condos: $2.6 million

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