Settlement reached in Summit bankruptcy

Settlement reached in Summit bankruptcy

Defunct company’s four principals agree to pay $16.8M in damages; deal is expected to benefit creditors

March 04, 2010

The four principals of Summit 1031 Exchange have agreed to pay a total of $16.8 million in damages as part of a settlement agreement to a lawsuit filed against them by Kevin Padrick, the company’s bankruptcy trustee, according to U.S. Bankruptcy Court documents filed Tuesday.

The settlement, which will benefit creditors in Summit’s bankruptcy, also could have ramifications for a separate lawsuit Padrick has filed against Umpqua Bank.

The suit accused Summit’s principals — Mark Neuman, Brian Stevens, Lane Lyons and Timothy Larkin — of breach of fiduciary duty, civil conspiracy and professional negligence, among other allegations, in their roles managing Summit.

Padrick filed the suit, an adversary proceeding, in U.S. Bankruptcy Court in March 2009. Summit conducted 1031 exchanges, a real estate transaction that allows investors to avoid capital gains taxes on the sale of property.

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 the 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.

The settlement dismissed seven of the nine claims without prejudice, meaning Padrick reserves the right to seek damages for the dismissed claims at some future time.

According to the settlement, Stevens and Neuman will each pay $7.5 million in damages, while Lyons and Larkin will each pay $900,000, to resolve a claim of breach of implied-in-law contract.

The final claim included in the settlement was resolved per a court order in May 2009. The order required the principals to turn over assets to Padrick, but certain personal assets, such as the principals’ homes, were excluded.

Attempts to reach Stevens and Larkin were unsuccessful. Neuman declined to comment.

Lyons referred to a statement issued in December by his attorney, Shawn Ryan of Portland: “My client would have preferred, and could have obtained, a judgment closer to zero, if the matter had progressed to trial. However, due to his limited resources to continue fighting, I’m satisfied to have the matter settled in a manner that rightfully allocates the vast majority of responsibility for Summit’s failure away from my client.”

As Summit’s bankruptcy trustee, Padrick has authority to file suit against other parties for the benefit of Summit’s creditors.

The settlement may affect Padrick’s suit against Umpqua, which was filed in Multnomah County Circuit Court last year. In the suit, Padrick, acting as Summit’s trustee, alleges Umpqua aided and abetted Summit in operating what Padrick has characterized in bankruptcy documents as a Ponzi scheme.

Umpqua has strenuously denied the claim and further argues that the settlement proves Padrick’s suit is frivolous.

Steven Philpott, general counsel for Umpqua, said Wednesday, “If you are going to dismiss the claims against the people who you say are the principal wrongdoers, if you are going to dismiss their claims for bad acts, why are you pursuing claims against Umpqua for aiding and abetting those bad acts.”

“Umpqua Bank misstates the settlement and its effect,” said Padrick in a statement e-mailed to The Bulletin. “As part of the settlement, the shareholders agreed to a court judgment against them on two of the nine claims in the case. In the court judgment, the shareholders turned over substantially all their assets and agreed to judgments against them that aggregate $16 million.

“The settlement and the judgment also preserve my right to pursue any or all of the remaining seven claims against the creditors at any time in the next three years. Umpqua Bank’s statement has no basis in fact or law.”

Bert Manual, a California man who was an exchange client of Summit’s and a creditor in the case, said the settlement was “good news.”

“My question is, where ... are they going to get it?” Manual said.

Per the settlement, Padrick agrees not to enforce the judgment for damages before March 2, 2013. The settlement also requires Padrick to release liens on the principals’ personal assets that were excluded from the order to turn over assets.

The agreement also stipulates that the principals’ settlement does not constitute any admission of criminal wrongdoing.

Summit’s principals have not been charged with any crime, though state and federal law enforcement agencies, including the FBI and the Internal Revenue Service, were investigating Summit’s activities, according to earlier court documents.

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