Summit Accommodators case draws Umpqua’s ire

Courtney Sherwood, staff writer
Portland Business Journal

January 24, 2010

Umpqua Bank is striking back against claims that it bears financial liabilities linked to the bankruptcy of a real estate investment company.

In a 78-page report released late last year, bankruptcy trustee Kevin Padrick alleged that Bend-based Summit Accommodators used client money to fund a Ponzi scheme, and that Umpqua knew what was happening and did nothing to stop it.

Now Steve Philpott, general counsel for the bank, has responded. He said Padrick’s report ignores facts, misinterprets evidence and portrays a conspiracy that did not exist. Philpott also accused Padrick of going beyond his duties as a trustee in leveling his accusations.

Padrick’s claims, assertively argued in court documents, have been widely aired, frustrating Umpqua officials. It may be months before Umpqua is expected to dispute the claims in court, which ultimately spurred the bank to take its response public.

“As a financial institution with operations in three states, we’re involved in litigation all the time,” Philpott said. “But these are unprecedented claims.”

At the heart of the battle: Whether Umpqua can be held liable for more than $30 million that Summit’s 114 claimants lost when the company filed for bankruptcy in late 2008.

Among the points in dispute:

l Padrick asserted that Summit’s owners were trapped in a Ponzi scheme in which they had to constantly recruit new business in order to avoid collapse.

Summit’s principals were not trapped in a Ponzi scheme, Philpott said, just a liquidity shortfall, and they were looking for a new source of funds before they filed bankruptcy.

l Summit presented its liquidity dilemma to the bank and sought a loan or other business partnership — which Umpqua turned down. According to Padrick’s report, the bank should have seen a clear Ponzi scheme and impermissible self-dealing, and should have ceased associating with Summit. He quoted an e-mail from Umpqua Chief Credit Officer Brad Copeland to Umpqua CEO Ray Davis: “I suspect there are some significant fraud issues involved and our records will be subpoenaed. This will probably get very ugly.”

Philpott said Umpqua did not see Summit’s activity as illegal, just risky, and the bank opted not to help with Summit’s liquidity needs.

l Padrick has also challenged Umpqua’s efforts to keep some e-mails and other records out of court proceedings, hinting that these records may bolster his case.

Relevant documents have been released, Philpott said. Those that remain confidential contain trade secrets and confidential commercial information that could provide insight to bank competitors, he said.

l According to Padrick, by allowing Summit to maintain its accounts, Umpqua continued to profit from its business relationship with the Bend company.

“In the grand scheme of things, yes, we tried to profit by charging more on our loans than we paid on deposits,” Philpott said. “But they weren’t paying us for deposits, we paid them for deposits.”

Lawyers not associated with the case caution observers to avoid jumping to any quick conclusions.

Bankruptcy trustees must pursue any claim or cause of action that could benefit creditors, said Thomas Gerber, a creditor’s attorney at Bullivant Houser Bailey in Portland.

“It is his charge to go out and see if he finds anything that is relatively suspicious to him,” Gerber said. “You can’t put too much emphasis on the result of an interim investigation. ... In the end, the truth will come out in court.”

Summit’s troubles have their roots in the mid-1990s, when several company owners saw an opportunity to generate more profits from client cash, according to court documents. They founded Inland Capital Corp., which used cash from Summit clients to fund loans — often to Summit owners and affiliates.

Until then, Summit’s core business helped investors postpone tax liabilities by investing proceeds from one land sale into the purchase of a new piece of real estate, also known as a 1031 exchange. The company charged $750 for the service.

It earned bank interest on clients’ money during the 45-day to 180-day period between the sale of one property and the purchase of another.

The Inland Capital loans added a new source of profits, but also tied up client funds that had to be returned before loans came due. According to Padrick’s report, that led Summit to constantly recruit new clients to backfill its funding needs.

When real estate markets crashed, it became harder to recruit new clients, and in late 2008 Summit filed for Chapter 11 bankruptcy reorganization. Its former owners are under criminal investigation linked to Inland Capital, though no charges have been filed.

The complex case has spawned at least six lawsuits, including two seeking more than $30 million from Umpqua, which entered the picture late in the game.

Attorneys expect only one suit against Umpqua to proceed, as both were filed with the aim of winning a judgment for Summit’s creditors, and both make similar legal claims.

Another suit, in which Padrick sought $13 million from Summit’s pre-bankruptcy owners, has reached partial settlement. Details of the settlement have not yet been filed in court, but people familiar with the litigation said that the owners did not have a full $13 million.

Padrick is also pursuing claims with insurance companies, which could yield up to $21 million if he is successful.

But according to his report, creditors have made claims of $41.5 million against Summit.

That leaves Umpqua Bank, with $9.2 billion in assets, as Padrick’s deepest-pocketed target.

Copyright 2010