Ponzi claims at Summit 1031 lead its trustee to sue bank

Umpqua Bank’s lawyer calls lawsuit — seeking $30M — ‘outrageous’

By Andrew Moore
The Bulletin

June 24. 2009

The court-appointed trustee in charge of liquidating the assets of Bend-based Summit 1031 Exchange filed a lawsuit Friday in Multnomah County Circuit Court seeking more than $30 million in damages from Umpqua Bank for allegedly aiding and abetting Summit in operating what the complaint called a Ponzi scheme.

Kevin Padrick, trustee of the Summit Accommodators Liquidating Trust, alleges in the complaint that Ray Davis, the president and CEO of Portland-based Umpqua Holdings Corp., the bank’s parent company, along with Dave Edson, the company’s commercial banking president, learned Summit was operating a Ponzi scheme in a series of personal meetings and telephone conversations with Summit’s principals beginning in March 2007 but did not stop Summit from depositing its clients’ money in Umpqua Bank.

The complaint alleges that even after learning of the Ponzi scheme, the bank solicited more business from Summit to earn more fee money, increase its market share of deposits and profit from interest on loans it made based on the increase in deposits. Summit filed for bankruptcy in December.

Steve Philpott, the bank’s general counsel, said the bank will “vigorously” defend itself against the claim, that it has a “reputation for honesty and fair dealing” that it will uphold and that the claim against Davis and Edson is “outrageous.”

“To imply that Ray or Dave or anyone at Umpqua knowingly aided and abetted a Ponzi scheme is outrageous. I mean, it’s nonsense,” Philpott said. “And frankly, I don’t know how you can attach a Ponzi scheme label to what Summit was doing.”

U.S. Bankruptcy Judge Randall Dunn also said Summit “arguably ran a Ponzi scheme” during a Summit bankruptcy hearing in Portland last month.

Philpott said Umpqua did not loan money to Summit or invest in Summit and only provided standard banking services to the company.

Padrick declined to comment on the case. Messages left for Padrick’s attorney, David Aman of Portland-based Tonkon Torp LLP, were not returned.

The Summit Accommodators Liquidating Trust was established in May after Summit’s liquidation plan was approved in bankruptcy court. Padrick, who was the Chapter 11 trustee in the case, was then named trustee of the liquidating trust.

Pursuant to his role as liquidating trustee, Padrick is attempting to return more than $40 million in asserted claims to the company’s roughly 120 unsecured creditors. He’s authorized to do that by, among other things, selling real estate throughout the Western United States and Mexico that was purchased by Summit’s principals or related third parties through as many as 91 separate legal entities formed by the principals.

In a May 7 story in The Bulletin about Summit’s bankruptcy, Jeanette Thomas, the attorney for the official committee of unsecured creditors, said Padrick also is authorized to seek damages.

Summit, which was incorporated as Summit Accommodators Inc. but did business as Summit 1031 Exchange, filed for Chapter 11 bankruptcy protection after reporting on its Web site that it had a liquidity problem that left it short more than $14.2 million due its clients.

The Bankruptcy Court judge overseeing the case later approved motions by Padrick and the creditors committee to liquidate the company’s assets.

Bankruptcy filings also say Summit is the subject of FBI and state investigations.

Throughout the complaint filed Friday, Padrick alleges Summit’s principals embezzled money from Summit and operated a Ponzi scheme.

Padrick alleges that as far back as 1995, Summit principals Mark Neuman and Brian Stevens began embezzling money from Summit by loaning the company’s funds to a separate business entity they controlled named Inland Capital Corp.

The complaint alleges Inland then made “substantial” loans to Neuman and Stevens, and later to Lane Lyons and Tim Larkin, who became equal shareholders in the companies when they joined Summit in January 2006. According to the complaint, the principals and related entities they formed benefitted personally from the loans from Summit. The complaint also says the embezzled money from Summit was primarily invested in real estate.

Due to the amount of money embezzled from Summit, according to the complaint, the company had insufficient funds to pay off its obligations to its clients, and “the only way that Summit was able to continue meeting its payment obligations was to bring in new clients — in other words, the principals engaged in a classic Ponzi scheme.”

Summit, in its exchange contract, 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 the complaint.

The complaint alleges Umpqua bank began in mid-2005 to “aggressively solicit” business from Summit, which had used Columbia River Bank as its primary bank. In late 2005 or early 2006, Summit and the principals switched their banking to Umpqua, according to the complaint.

The complaint then alleges Umpqua and Summit began discussions about “a potential business relationship beyond that of depositor-bank,” and discussed a “strategic alliance of some kind.”

In early 2007, the discussions began to escalate, resulting in a series of face-to-face meetings and telephone conversations between the Summit principals and Davis and Edson, according to the complaint.

The complaint alleges that no later than March 2, 2007, Summit’s principals “described in great detail all relevant aspects of their Ponzi scheme to Davis, Edson and other Umpqua officials” by providing them “a PowerPoint presentation and a memorandum describing their business model in detail, including the diversion of funds to Inland for the principals’ personal benefit.”

The complaint also alleges Summit’s “principals practically bragged that they had used the embezzled exchange funds to build up substantial net worth for themselves” but that they faced a serious liquidity problem because of the embezzlement and needed a loan or equity investment from Umpqua to cure the problem.

The complaint does not allege Umpqua loaned money to Summit but that Umpqua did make “substantial loans” to Summit’s principals and their related entities between 2005 and 2008. The complaint does not specify how much.

The complaint argues that Umpqua knew of the principals’ scheme as far back as 2005 due to detailed financial information provided to the bank by the principals and their related entities in order to secure loans from the bank and that “the financial information disclosed in detail how the principals had used money embezzled from Summit through Inland to their personal benefit.”

As the real estate market began to deteriorate in 2007 and 2008, Summit’s liquidity problem worsened as the number of new clients dropped and the principals’ real estate investments struggled, according to the complaint.

The complaint argues that the principals — “with Umpqua’s encouragement and substantial assistance” — continued to cause Summit to contract with new clients during the market’s decline.

Summit filed for bankruptcy on Dec. 19.

In his claim for relief, Padrick argues Summit’s principals breached their fiduciary duties to Summit by embezzling funds and that Umpqua “knew or had reason to know” that the principals’ conduct was wrong and was done so “pursuant to a plan or agreement among the principals and Umpqua.”

Padrick further argues Umpqua actively encouraged and substantially assisted the principals in their conduct, that Umpqua is liable in an amount exceeding $30 million and that Umpqua acted with “malice” and “a conscious indifference to the welfare of others.”

Philpott, Umpqua’s general counsel, said “the complaint is one side of the story, and in due course, we’ll have the opportunity to file our answer and go through the typical civil litigation process, but Umpqua has a solid reputation for honesty and fair dealing and we’re going to uphold that reputation.”

Reached early Tuesday evening, Larkin, one of Summit’s principals, said, “We disagree strongly with the allegations, and we look forward to defending ourselves as the process unfolds. In the meantime, we will continue to do what we can to provide the most positive outcome for the creditors.”

Attempts to contact the other Summit principals or their attorneys for comment were unsuccessful.

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

About 1031 exchanges

Summit performed 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.

Such treatments are different from the $250,000 federal capital gains exemption for the sale of a primary residence.

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.

During the 180 days, between when 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 park its clients’ money.

Copyright 2009