Summit 1031 fallout: Umpqua Bank tries to get case dismissed

By Nick Budnick
The Bulletin

May 15, 2010

PORTLAND — A bankruptcy trustee’s effort to implicate Umpqua Bank in what he alleges was a defunct Bend-based firm’s “Ponzi scheme” ran into stiff opposition Friday in a Portland courtroom.

Trustee Kevin Padrick, as well as a creditors’ group, allege that Umpqua knowingly aided and abetted Summit Accomodators Inc. in improperly using new investors’ money to ease a cash crunch by paying off obligations incurred earlier. Also known as Summit 1031 Exchange, the firm was set up as a financial mechanism called a 1031 exchange that lets real estate investors avoid capital gains taxes on the sale of a property.

However, in the courtroom of Multnomah County Circuit Judge Marilyn Litzenberger, lawyers for Umpqua Bank argued that the case should be dismissed, claiming Padrick and the creditors’ group, known as the Miller plaintiffs, had not met the necessary standard of proof to show that Umpqua knew that any laws were being violated.

Not only that, but they argued banks enjoy protection similar to attorney-client privilege, meaning they can’t be blamed for their clients’ actions.

“It’s not a get-out-of-jail-free card at all,” said John Spencer Stewart of Stewart Sokol & Gray LLC. But, he added, if a bank obeys Oregon law, it can’t be held liable for its clients’ actions, “no matter whether its customer is acting properly or improperly.”

However, Michael Simon of Perkins Coie, representing the Miller plaintiffs, and Daniel Skerill, representing Padrick, say Umpqua had the necessary knowledge to realize there was something wrong with Summit’s finances.

Umqua has denied wrongdoing.

Litzenberger said she will issue a ruling Friday on Umpqua’s request to dismiss the suit.

Summit filed for Chapter 11 bankruptcy reorganization in U.S. Bankruptcy Court in Portland in December 2008 when it could not repay clients’ exchange funds that Summit’s principals, through another company, had invested in real estate that could not be sold in time to repay clients because of the deteriorating real estate market. The case was later converted to a Chapter 11 liquidation to sell the properties on behalf of creditors.

In March, the four principals of Summit agreed to pay $16.8 million in damages to settle a lawsuit filed by Padrick in federal Bankruptcy Court.

Nick Budnick can be reached at 503-566-2839 or at nbudnick@bendbulletin.com.

Copyright 2010