Potential Liability for Diamondhead

Vicki Hunsinger
Here is what I wrote on 5/18 regarding my conversation with a former Maveron executive:
After only a couple of minutes in to the conversation, he stopped me with his take on what was happening at Diamondhead. He then went on to tell what "would happen to Diamondhead" if the venture was not successful. He was very clear that Diamondhead is in control of this situation; not Mr. Brown. Diamondhead has what Mr. Brown needs to make his venture profitable. He said that Diamondhead should be making the terms, not Brown, and that Diamondhead should have Mr. Brown put up a portion of the money in good faith. This money would not be refundable if Brown can not build.

Here is what he told me during our discussion. I am paraphrasing our discussion.

Vicki, you know this is a scam. If Diamondhead enters into a venture and this person moves on with the money that belongs to other people before he delivers any product, then the recourse of those damaged people will be to sue Diamondhead. Diamondhead will be viewed as the "deep pockets" in this business deal. The developer is gone and is protected by his LLC status to some extent. If he has nothing to begin with, then he has nothing to lose. Not only will the reputation of the community be ruined, but property values will reflect that view. In addition, legal costs, increased insurance costs, and costs for legal counsel if the insurance company will not cover this situation. In any event, any excess damages above insurance will be passed on to the property owners. This does not consider what the diversion of moneys normally spent on Diamondhead facilities will mean in terms of maintaining the community at an appropriate level. Individuals, even if on the Board, can be sued by damaged clients. This is certainly true if Diamondhead did not conduct this business transaction in a prudent, wise business manner. By this I mean that Diamondhead did not do the work necessary to assure that they were entering into an agreement which was ethical, legal, etc. If Diamondhead had fore-knowledge that this was not an ethical business deal, or even had doubts that it was ethical, then the parties to that deal have liability. If those parties are in anyway receiving some type of remuneration for participating in this, it compounds their liability. He went on to tell me about another venture capital group (I am personally a friend with the principle business associate in this group, so I knew of whom he was speaking) that has done several of these deals over the past 10 years. He told me that they require a significant amount of money be placed in escrow by the developer to show his good faith. He told me that serious developers will do the deposit, otherwise there is no capital investment by this firm. He told me that a percentage of the developers were unable to get their projects off the ground and the non-refundable deposit went to the investment group.