Umpqua-Summit 1031 hearing

Before suit against Umpqua was settled, judge OK'd damages motion

By David Holley
The Bulletin

October 20, 2010

Just before Umpqua Bank settled an aiding and abetting lawsuit, originally worth $30 million, filed by the bankruptcy trustee and creditors of Bend-based Summit 1031 Exchange, a Multnomah County Circuit Court judge approved a motion to add a claim of punitive damages to the lawsuit.

It's unclear whether the decision or something else caused the settlement, because parties from both sides are not commenting on the issue, citing a nondisclosure agreement. Terms have not yet been released, and the parties said that a final document had not yet been signed.

Attorneys for the trustee and creditors of Summit 1031 made more than an hour of statements at the Sept. 13 hearing, 11 days before the settlement was reached.

The statements accused Umpqua Bank of knowingly doing business with Summit, when Summit was what attorneys called a Ponzi scheme.

Though similar statements had been made in the original and amended complaints related to the case, Michael Simon and other attorneys for the plaintiffs delved into some previously unreported details of Umpqua's alleged relationship with Summit during the hearing.

“Umpqua Bank knew what was going on here was a Ponzi scheme,” Simon said, according to a recording from the hearing. “Since they knew there was a liquidity problem, they knew that new money had to be used to pay the old creditors.”

Since the suit was originally filed, Umpqua has denied knowledge of any alleged wrongdoing, as it did during the court hearing. After the two parties settled the case, the suit was dismissed.

Yet Daniel Skerritt, an attorney for the plaintiffs, said Umpqua was first allegedly notified of the way Summit operated in March 2007, when Summit presented Umpqua with a PowerPoint of its business operations.

The 1031 exchange

Summit operated a 1031 exchange, named after section 1031 of the U.S. Tax Code, which helps real estate investors avoid the capital gains tax on the sale of a property. Investors can avoid the tax by purchasing another property of equal or greater value within 180 days, if the sale is handled by a third-party administrator like Summit.

Also, 1031 exchanges must keep money readily available so they can invest it for customers.

Summit eventually ran into liquidity problems, stating on its website that it was short $14.2 million. It later filed for bankruptcy in December 2008 because the money was tied up in real estate, in which Summit clients' money had been invested, rather than in liquid bank accounts, according to previous articles in The Bulletin citing court documents.

That is what ties Umpqua into the suit, the attorneys alleged. Skerritt said the PowerPoint, which was an exhibit in court, showed that Summit was investing clients' money in another company called Inland Capital Corp., owned by the principals of Summit. That company would invest in real estate instead of keeping the money readily available, Skerritt said.

When the real estate market turned for the worse, it made things hard for Summit. Attorneys for the plaintiffs alleged Umpqua knew in March 2008 that Summit didn't have as much in liquid assets as it needed, but still agreed to take some of the deposits from Summit's newest investments later in 2008.

Simon alleged that because Umpqua knew Summit did not have as much in liquid assets as it needed, that meant the bank knew Summit was taking on new loans from new clients to pay off old clients' loans — the basics of a Ponzi scheme, he said.

Had Umpqua turned away from Summit after it allegedly realized that, Simon said, it wouldn't be held liable for people who came on later in 2008 and lost money when Summit filed for bankruptcy in late 2008.

Different views

Attorneys said Umpqua could have reported the alleged wrongdoing to authorities.

John Stewart, a Portland-based attorney for Umpqua Bank, said it had entered into a confidentiality agreement with Summit and couldn't report any alleged wrongdoing, adding that he believes nothing indicated an actual crime.

The plaintiffs' attorneys said that because Umpqua knew the allegedly illegal manner by which Summit was operating, Umpqua did cause damages to the plaintiffs.

Among the plaintiffs who filed the original lawsuit against Umpqua Bank were 57 people who invested in Summit in late 2008, after Umpqua had made an agreement to hold Summit's deposits. The plaintiffs' attorneys said Summit looked to holding deposits in Umpqua as a way to try to save itself from failure.

Skerritt alleged the Summit deposits, which the attorneys say totaled between $50 million and $100 million, were attractive to Umpqua Bank in a time of economic turmoil.

Stewart said Umpqua didn't facilitate the exchange or encourage any wrongdoing. He said Umpqua merely wanted deposits, like any bank.

Skerritt said the large amount of deposits made it hard for Umpqua to turn away from Summit.

“So again, the bank is turning a blind eye to what was disclosed to them, because they want those deposits,” Skerritt said.

David Holley can be reached at 541-383-0323 or at dholley@bendbulletin.com.

Copyright 2010