Details emerge in real estate case

Details emerge in real estate case

December 29, 2009

New details about Umpqua Bank’s affiliation with Bend’s failed Summit 1031 Exchange and the more than $40 million in claims filed by creditors against the company came to light in a report unsealed last week in federal bankruptcy court.

The report, filed Dec. 4 in U.S. Bankruptcy Court in Portland by Kevin Padrick, the Bend-based trustee of the Summit Accommodators Liquidating Trust created by the court to sell Summit’s assets to provide restitution to creditors, takes a critical view of Umpqua Bank’s relationship with Summit, which operated what Padrick describes as a Ponzi scheme.

Previous bankruptcy court filings detail Padrick’s assertion that Summit used money from new investors to pay off older investors, often because the money from the older investors was tied up in speculative real estate.

An attorney for Umpqua Bank has repeatedly denied any wrongdoing by the bank.

The report also provides further details about Summit’s business dealings and explains what Padrick is doing to help make whole the company’s creditors, many of whom were unwitting real estate investors in Central Oregon.

Padrick alleges in the report that Umpqua CEO Ray Davis and former Umpqua President Dave Eston met with Summit principals Lane Lyons and Timothy Larkin in March 2007 and listened to Lyons discuss how he, Larkin and Summit’s other principals — Brian Stevens and Mark Neuman — used a shell corporation to invest funds from Summit clients in illiquid real estate investments rather than liquid bank accounts, as Summit’s contracts stipulated.

Such activity, in Lyons’ words, “allowed Summit’s founders to build substantial net worth,” according to the report.

The meeting, Padrick alleges in the report, was an attempt by Summit to bring its shell corporation back to “100 percent liquidity” through some sort of strategic alliance with Umpqua or the sale of all or part of the company to the bank.

In the report, Padrick said Umpqua got cold feet as the real estate market started to sour but continued to do business with the company, knowing Summit was diverting its clients’ funds.

Padrick further alleges that based on an e-mail Lyons sent to Umpqua’s officers after their initial meeting, Umpqua had previously expressed interest in purchasing a competing 1031 exchange company. Therefore, Padrick writes, Umpqua “had a high level of understanding of the 1031 industry.”

In a Dec. 4, 2008, e-mail from Edson to Davis included in the report, Edson writes that “(Lyons) appears to be in a panic regarding the future of Summit. We probably shouldn’t guess as to what he would like to do but it seems likely they need liquidity to meet the payment demands of their clients.

“You will recall a year or so ago they wanted us to provide a loan secured by illiquid real estate to buy time to sell it,” Edson continued. “Well, there is no market for the property and they still have to meet client demands.”

Edson went on to say he felt Summit’s principals would give up full ownership of the company in exchange for a $5 million to $10 million loan, but “in my opinion, it wouldn’t make sense to do that. Owning Summit for $5-$10 million couldn’t begin to cover the potential underlying liabilities they may have to their clients.”

Summit Accommodators Inc., a Bend-based real estate services company doing business as Summit 1031 Exchange, filed for Chapter 11 bankruptcy protection on Dec. 19, 2008.

In the report, Padrick reasons that Umpqua knew Summit’s shareholders were diverting clients’ money for their own personal benefit and had created a liquidity crisis as a result, but Umpqua continued to provide services to Summit because “terminating ... would have put an end to the very lucrative relationship among Umpqua Bank, Summit and the shareholders.”

“While Umpqua Bank was pampering the shareholders, the shareholders were continuing to implement a Ponzi scheme of significant magnitude,” Padrick writes in the report.

The report states Summit had roughly $70 million in deposits at Umpqua in the first half of 2008, which later fell to $13 million.

An attorney for Umpqua, John Spencer Stewart, of Stewart Sokol & Gray LLC in Portland, said Padrick’s inclusion of internal Umpqua e-mails in the report was a “strategic” move to help Padrick with his pending legal action against Umpqua Bank.

Padrick, acting on behalf of the liquidating trust, filed suit against Umpqua Bank in June in Multnomah County Circuit Court seeking $30 million in damages for allegedly aiding and abetting Summit.

The lawsuit

Umpqua successfully moved to incorporate the suit into Summit’s federal bankruptcy proceedings, but U.S. Bankruptcy Court Judge Randall Dunn last week ordered the case back to state court.

Stewart said some of the unsealed report was redacted by Judge Dunn, and for good reason.

“Judge Dunn had some very cogent comments,” Stewart said, referring to hearings held last week in bankruptcy court to unseal the trustee’s report. Umpqua Bank had argued against unsealing the report due to confidential documents included in it, according to court records.

“He basically said (Padrick’s) emphasis on internal (Umpqua) e-mails — some of which he’s redacted — was a strategic move by a plaintiff in a lawsuit and he made it clear that Umpqua was to be commended for being approached about making loans to these people and turned them down — so to their credit, they chose not to do it,” Stewart said.

Reached last week before the report was unsealed, Stewart said the bank is concerned with Padrick’s suit.

“We think this is an absolutely frivolous case,” Stewart said. “There was no aiding or abetting; we’re a depository bank ... like all other banks, and there’s no evidence of that.”

Messages seeking comment left for the attorneys of Stevens and Larkin were not returned. A message left for Neuman, who is representing himself, was not returned.

Shawn Ryan, the Portland-based attorney for Lane Lyons, said he had no comment.

When Summit filed for bankruptcy last December, it stated it was short approximately $14.2 million out of a total of $27.8 million due its clients, according to a statement posted on the company’s now defunct Web site.

Subsequent creditors’ claims ballooned to more than $41.5 million as of Nov. 20, 2009, according to the report.

Padrick was appointed bankruptcy trustee on Feb. 17, 2009. In his report, Padrick said Summit’s shareholders initially expressed their desire to make their exchange clients whole and were willing to turn over all the assets in which they had an ownership interest.

According to the report, the shareholders later balked, until a stipulated court order made May 4 turned over most of the shareholders’ assets, subject to certain exclusions, to the trustee. A liquidation plan was confirmed by the bankruptcy court on May 12.

Among the properties turned over by the shareholders to the trustee for inclusion in the liquidating trust were 80 finished lots, 29 homes, two mobile home parks, 11 “income-producing properties” and 19 residential or commercial development projects. All told, there were roughly 140 properties formerly owned by the shareholders, according to the report. According to court documents, most of the properties were in Central Oregon but others were scattered around the Western U.S.

Padrick is now in the process of selling some of the properties. As of Dec. 4, seven have been sold, netting the liquidating trust $1.5 million, according to the report. Two properties are under contract with expected gross proceeds of $1.7 million, and 13 properties are listed for sale for roughly $5.84 million, though the gross amounts are subject to fees and claims from third-party interests.

A number of properties also are being abandoned, according to the report. Many of the properties were purchased or refinanced at the height of the real estate bubble and carry debt that exceeds their current market value. Padrick writes in the report that creditors have the first option to purchase such properties before they’re abandoned.

Other claims

In addition to selling assets, Padrick — who is charged by the court to maximize restitution for the creditors — also is pursuing claims against three insurance companies who sold policies to Summit between 2005 and 2009 that covered crime and professional liability. The total claims could reach as much as $13 million, according to the report.

Summit also had roughly $13.5 million in cash reserves at the time of its bankruptcy filing, which were turned over to Padrick. Two distributions have since been made to creditors, according to the report.

Jeanette Thomas, a Portland-based attorney for the creditor’s committee, said most of the roughly 150 creditors who had transactions pending with Summit when it filed for bankruptcy have received roughly 40 cents on the dollar for their claims.

“We thought (the creditors would) get 40 percent and they did,” said Thomas, adding that it’s not uncommon for creditors in a typical bankruptcy case to get much less.

Thomas said that despite the tough real estate market, it’s her understanding that sales of assets in the liquidating trust have been going well.

“(Padrick) is making good progress at some level, given that lots of the properties are in Central Oregon and your real estate market isn’t exactly flourishing yet, but I feel (he) is doing a pretty good job and is on target,” Thomas said.

Also, in September, most of the members of the creditor’s committee joined the suit Padrick brought against Umpqua.

Bert Manual, a Yuba City, Calif., rice farmer who initially was owed $512,232 by Summit, hopes to get up to 60 to 70 percent of his money back.

“Am I hopeful I’ll get it all back? Yeah? But am I realistic? Yeah,” Manual said. “Padrick said he’d get us between 60 and 70 percent, but that’s a flip of the coin. It’s just — it’s hard to swallow, these guys taking our money like that.”

According to the report, the U.S. Department of Justice issued a grand jury subpoena for Summit’s records on Dec. 30, 2008.

In addition, the report states investigations are under way by the states of Idaho and Oregon, the Federal Bureau of Investigation, the IRS Fraud Division and the U.S. Attorney.

Andrew Moore can be reached at 541-617-7820 or amoore@bendbulletin.com.

What’s a 1031 exchange?

Summit arranged 1031 exchanges, a federally-sanctioned real estate transaction that allows property owners to defer the capital gains tax from the sale of a business or investment property if they purchase a similar property with equal or greater value within 180 days.

A caveat of a 1031 exchange, which is named after Section 1031 of the U.S. tax code, is that money from the sale of the property cannot be handled by the property owner and must be processed through a third party. In the 1031 exchange industry, the third party is referred to as a “qualified intermediary.” Summit acted as a qualified intermediary in such transactions.

During the 180 days after a client sells a property and before he or she buys a new one, the qualified intermediary typically keeps the client’s money in a bank account or some other liquid investment that can be easily converted to cash, according to industry standards.

There are no laws specifying where a 1031 exchange company can or cannot place its clients’ money during the 180 days.

However, Summit, in its exchange contracts, stated it would place its clients’ money into deposit accounts at financial institutions and use those funds only to accomplish the contracted exchange, according to court documents.