Legal Issues and Fraud and Lawsuits and Courts and Law

Much of trustee’s suit against Fair Finance lenders dismissed

November 12, 2012
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Fair Finance Co.'s investors have been dealt a blow by a federal judge who dismissed a bankruptcy trustee's lawsuit against one of the company’s deep-pocketed lenders.

Trustee Brian Bash in February sued Fair’s lenders—Rhode Island-based Textron Financial Corp. and New York-based Fortress Credit Corp.—seeking up to $1.2 billion in actual and treble damages.

The suit charged the companies turned a blind eye to Fair CEO Tim Durham’s fraudulent activities because they were making millions of dollars on their lending relationship and held first liens on the only Fair assets with real value.

It accused the two companies, which have billions in assets, of aiding and abetting theft, fraud and insiders’ breaches of fiduciary duty.

But Judge Patricia A. Gaughan of the Northern District of Ohio’s Eastern Division said in her ruling Friday that Fair Finance is at least “equally” responsible for the harm to investors, and she dismissed the claims against Textron.

“Textron need only show that [Fair Finance] is at least as culpable as Textron,” the judge wrote. “Textron need not establish that it is less culpable.”

Regarding Fortress, the judge dismissed some counts against it and ruled that the trustee cannot collect treble damages because the  company did not commit a criminal act of damage to property, or theft.

It's not clear whether Bash intends to appeal the ruling. He and his attorneys were not immediately available for comment.

Without a big recovery from Textron or Fortress, Fair investors—who purchased unsecured notes with interest rates as high as 9 percent—may face an uphill battle recovering a signficant chunk of the more than $200 million they're owed.

The judge did decide that the trustee’s claims that Fortress intentionally committed fraud can go forward.

“Loan funds borrowed from Fortress were ‘directly routed to a debtor-owned account for use by Durham in furtherance of the Ponzi scheme,’” the judge wrote.

The judge said Fair created a special-purpose entity to receive Fortress funds only after Fortress declined to consider making Fair a direct loan. "Moreover," the judge wrote, "the Fair Finance SPE was controlled by Durham and [James] Cochran, who in turn have been convicted of a massive fraudulent scheme.”

A grand jury in March 2011 indicted Durham, Cochran and Fair Chief Financial Officer Rick Snow on charges of wire fraud, securities fraud and conspiracy to commit wire and securities fraud. A jury convicted Durham on all charges and Cochran and Snow on some charges in June. The three are scheduled to be sentenced Nov. 30.

The lawsuit against Textron and Fortress was Bash’s most aggressive push yet to recover money for the Ohio residents who bought Fair's unsecured notes. Payments ceased to all 5,000 noteholders when the company collapsed in November 2009.

Bash has filed dozens of suits since early 2010. But most seek to recover relatively small sums that were transferred out of Fair at a time the trustee alleges it was insolvent. Many of the defendants are Durham friends or business associates who appear to have few assets.

Durham and Cochran bought Akron, Ohio-based Fair in a 2002 leveraged buyout. Authorities charged that almost immediately, Durham drained tens of millions from the company by making loans to himself and failing businesses he owned. They say millions also went toward Durham’s mansions, a yacht, part ownership of an airplane and extravagant gambling trips.

The trustee’s suit charges that by December 2003, Fair already was operating as a Ponzi scheme reliant on the sale of additional unsecured notes to Ohio residents to stay afloat.

Textron provided a $22 million line of credit that financed the purchase of Fair from then-owner Donald Fair. Since its founding in 1934, the business had focused on buying finance contracts from fitness clubs, time-share condominium developers and other firms that offered their customers extended-payment plans.

To catch up on IBJ's coverage of Fair Finance and Durham, click here.
 

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