A federal court in San Jose is expected soon to rule on a lawsuit in which a member of a local real estate consortium has charged some of his former partners with racketeering involving a downtown parcel near the proposed Google Transit Village.
The case centers around an approximately 1.2-acre site at 777 West San Carlos St., which the group sold in March for $11.2 million. The site is home to a proposed affordable housing project with 156 units.
Gregory Malley, of Cupertino, alleges some of the more wealthy partners in a business group he was part of called San Jose Midtown Development (SJMD) forced him to take loans from them that came with interest rates ranging from 20% to 40% when Malley needed more funds to remain in the group.
Malley’s attorney, Gautam Dutta, said Malley originally invested more than $100,000 in the project.
California law allows interest rates in such matters to be capped at 10%, excluding certain exemptions that Malley’s attorney says don’t apply in this case.
Malley, who owns the Homestead Bowl bowling alley in Cupertino, claims SJMD and former partners Sangeeth Peruri, Sindhu Peruri and Thomas Malgesini engaged in practices, such as unlawful collection of usury interest.
Usury refers to a rate of interest that is considered to be excessive as compared to prevailing market interest rates.
According to the suit, Malley alleges the defendants violated federal Racketeer Influenced and Corrupt Organizations (RICO) Act statutes by “engaging in conduct designed to unlawfully collect and attempt to collect usury interest.”
Malley also is charging the defendants with wrongful garnishment and breach of contract prior to the group selling of the property to an affiliate of Arcata-based residential developer Danco Group. Danco, which is not involved in Malley’s lawsuit, has said it wants to develop the property to include affordable housing of 156 residential units.
Dutta says Malley is owed more than $1.8 million in proceeds from the sale based on his 16.66% ownership stake in the property. The suit alleges Malley’s former partners withheld his proceeds when he refused to agree to not sue them.
“What you kind of have here is a violation of the golden rule,” Dutta said. “Everybody went through an arduous process to develop (the property) and they charged sky-high interest rates to remain in the group. When the property was sold, the management said they would not give Mr. Malley his share of proceeds without his agreeing to not sue the managers.”
Attorneys with Los Altos-based Thoits Law, the firm representing the defendants, declined comment and referred to their own motions to dismiss the case on the grounds that Malley’s claims “fail as a matter of law.”
According to the dismissal claim, the defendants argue that under terms of the operating agreement between all the SJMD parties, no actual loans were made to Malley, and there is “no allegation that Malley ever received any money or that he was obligated to repay any money to SJMD or any of its members.”
The dismissal claim argues that “since there was no loan that Malley was obligated to repay, there can be no usury claim,” and as such, Malley’s RICO charges also fail and should be dismissed.
A hearing on the matter that had been set for Oct. 8 in the U.S. District Court for the Northern District of California was canceled this week. A status conference has been set for Nov. 5 to go over the next steps in the case.
Contact Rex Crum at [email protected] or follow @rexcrum on Twitter.