Judge releases report on Bend real estate case

By Jeff Manning
The Oregonian

December 24, 2009

Umpqua Bank knew as early as March 2007 that the owners of Bend-based Summit Accommodators were diverting millions of dollars from their clients' accounts to fund their own real estate projects, according to a newly issued report by the court-appointed bankruptcy trustee.

Rather than blow the whistle on what may well turn out to be one of the landmark criminal fraud cases to come out of Oregon's real estate crash, Umpqua kept quiet, continued to reap substantial dividends from the large deposits Summit offered and helped finance some of the real estate projects with $6.3 million in loans, the report claims.

The trustee's report was released by U.S. Bankruptcy Court Judge Randall Dunn Wednesday after the bank fought to keep portions of it secret. It reveals much about the relationship between Umpqua and Summit, including the fact that Umpqua's most senior executives for months considered whether the bank should buy Summit outright.

In the end, bank officials opted against such a deal, suspecting they were being played as "suckers," according to the report. That proved a shrewd move for Umpqua, but it didn't do anything for Summit's unsuspecting customers.

"Umpqua knew that other 'suckers' were readily available: namely (Summit's) new exchange customers who were being signed up and whose money was being put at risk," said Kevin Padrick, the Bend-based trustee, charged with returning as much money as possible to Summit's former customers. "While these 'suckers' unknowingly took the risk that Umpqua Bank was unwilling to take, Umpqua continued to profit by providing services that allowed the (Summit) shareholders to continue their scheme."

Padrick filed a civil lawsuit against Umpqua last summer claiming the bank aided and abetted money laundering.

Umpqua vehemently denies those charges and it fought hard to keep portions of Padrick's report under wraps. John Spencer Stewart, a Portland attorney representing the bank, said repeatedly in U.S. Bankruptcy Court that the Umpqua documents Padrick sought to release were more "strategic" than illuminating.

"They're intended merely to embarrass the bank," Stewart said.

Umpqua has so far succeeded in keeping a host of internal Umpqua documents, that Padrick had hoped to include with his report, out of public view. The battle over the release of the internal bank documents will take place in January.

Summit was a so-called facilitator of 1031 tax-free exchanges, a hugely popular tax strategy. It's role was simply to hold their client's money while they concluded their property exchanges.

Summit moved much of its banking business and more than $15 million in deposits to Umpqua in 2005.

"WOW!!! What a day in Central Oregon," former Umpqua President David Edson raved in a subsequent email to his Bend-area managers. "Keep the pedal to the metal and we'll own Central Oregon."

The relationship grew closer, beginning in May 2006, when the two sides began talking about Umpqua buying Summit.

The talks were still going on 10 months later. On March 2, 2007, the Summit principals met with Umpqua executives, including CEO Ray Davis and Edson and others.

In a memo to the gathered bankers, Summit executive Lane Lyons delivered a bombshell. Instead of holding its clients' money in highly liquid short-term accounts, Summit had invested about 17 percent of it in a variety of "local real estate ventures and businesses."

The investments "allowed Summit founders to build substantial net worths ..." the memo stated.

The Lyons memo disclosed one more bit of big news: the real estate investments had put the company in a cash-flow pinch. Summit proposed that an acquisition or injection of capital by Umpqua could solve that problem.

Some Umpqua executives were underwhelmed with Lyons' pitch. Brad Copeland, Umpqua chief credit officer, said in an email, "This is just nonsense and the guy is clearly desperate."

It's not clear how serious Umpqua ever was about acquiring Summit. The two sides had periodic meetings as late as the fall of 2008, when the real estate crash was well underway and Summit executives desperately tried to fend off disaster.

By late in the year, some bank officials were speaking the obvious -- that linking up with a company that for years had been helping itself to its clients' money was a terrible idea.

Bob Campo, a bank employee, predicted in a Dec. 6, 2008 email that Summit would get mired in civil litigation if it failed to produce its customers' cash.

"Do we want to be even on the periphery of this world," Campo asked, "much less enter into some of equity position that may entangle us in their business issues?"

But Umpqua already was entangled to some degree. It had loaned more than $6 million to various individual real estate projects headed by Summit principals and it was earning nice profits on Summit's deposits, which ultimately grew to more than $78 million.

Thirteen days after Campo wrote that email, Summit filed for bankruptcy. Customer lost $29 million, Padrick said.

"I'm sure glad we didn't get into bed with these guys," Copeland said in a subsequent email to bank CEO Davis. "I suspect there are some significant fraud issues involved and our records will be subpoenaed. This will probably get very ugly."

Updated December 25, 2009

Jeff Manning: 503-294-7606

Copyright 2009