A decade after an FBI raid shut down a massive Ponzi scheme engineered by Indianapolis businessman Tim Durham, a lawsuit finally is going to trial that could recoup millions of dollars for the fraud’s victims.
A federal judge in northern Ohio has set aside three weeks for the jury trial, which begins Feb. 24 and pits Fair Finance Co.’s bankruptcy trustee against one of Fair’s former lenders, the Fortune 500 firm Textron Inc.
Durham was convicted in 2012 of being the ringleader of a scheme to loot Akron, Ohio-based Fair Finance after he and Indianapolis businessman Jim Cochran acquired it in 2002. Durham received a 50-year prison sentence, while Cochran got 25.
The suit that bankruptcy Trustee Brian Bash filed eight years ago against Textron, which provided financing to Fair from 2002 to 2007, is the only major lawsuit remaining among the more than 140 filed by Bash in a quest to reduce losses for the more than 5,200 investors who bought $208 million in unsecured investment certificates, known as v-notes, from Fair that were never repaid.
The stakes could hardly be higher in the litigation, which charges that Textron saw evidence of Durham’s fraud but looked the other way because its lending relationship with Fair was highly profitable and, unlike noteholders, it held liens protecting it from losses. Without a big judgment, or a lucrative 11th-hour settlement, victims of the fraud will be left with an underwhelming recovery—currently 11 cents on the dollar, based on distributions of $18 million in December 2015 and $5 million in October 2017.
Legal teams representing the two sides in recent months have jockeyed for the upper hand by filing motions asking Judge Patricia Gaughan to restrict or expand the range of topics deemed permissible to discuss before the jury.
For example, Rhode Island-based Textron argued—ultimately unsuccessfully—for barring testimony from defrauded v-note holders, arguing that whatever they would have to say has no relevance to the legal issues at play in the case.
“Understandably, the trustee hopes to sway the jury in this action with lurid and heart-rending personal testimonies from as many of the victims as this court lets them parade to the stand,” Textron’s legal team wrote. “The trustee has identified 11 former v-noteholders, including an elderly, disabled former nun, as witnesses for trial.”
Attorneys for the trustee, on the other hand, accuse Textron attorneys of trying to narrow the scope of the case to obscure their clients’ wrongdoing.
“Apparently, Textron wants to try this case—but only if it can sanitize the trial of any inkling of its wrongful behavior,” attorneys for Bash wrote.
They added: “The creditors in this case are the innocent people who were swindled by Tim Durham and Jim Cochran—with the full knowledge, participation and financial backing of Textron—to invest in v-notes.”
While Textron generally is seeking to narrow testimony and Bash is seeking to broaden it, one area where the roles are flipped is attorney’s fees.
Bash ultimately prevailed on a motion to bar disclosure that he and his legal team have collected more than $28 million in legal fees and expenses, with millions more approved but not yet paid.
Those fees are irrelevant to the case, attorneys for Bash argue. “The only conceivable reason for introducing such evidence would be to unfairly prejudice the jury against the trustee and the trustee’s counsel.”
Attorneys for Textron had argued that it would be unfair for members of the jury to hear v-note holders testify about their losses without also establishing that the size of future payouts would be affected by numerous factors, including attorney’s fees.
Textron is one of two lenders Bash sued in 2012, charging they stood idly by as Durham drained tens of millions from Fair in the form of loans he never repaid.
Fair Finance, founded in 1934, specialized in buying finance contracts from fitness clubs, time-share condominium developers and other firms that offered their customers extended-payment plans. Durham’s withdrawals, which began almost immediately after he bought the firm in 2002, went toward supporting lavish lifestyles maintained by him and his friends and to prop up other parts of his failing business empire.
The biggest settlement to date was with another lender, New York-based Fortress Credit Corp., which began the lending relationship in 2007, after Textron was paid in full. Fortress in 2015 anteed up $35 million.
The Textron suit has followed a far more convoluted path.
A judge in 2012 dismissed the case. But four years later, an appellate court reinstated it. In September 2018, Gaughan dismissed a civil conspiracy claim but let a fraudulent transfer claim stand.
At issue with the fraudulent transfer claim was whether a lien Textron placed on Fair’s assets in 2002, when the lending relationship began, was extinguished and replaced when Fair negotiated a new agreement in 2004 on a $17 million line of credit.
The distinction is important because a lien arranged in good faith in 2002, before the fraud began, would be legally shielded from efforts by Bash to claw back millions of dollars in loan payments.
However, if a new lien was established in 2004, it no longer would have that good-faith protection, according to attorneys for Bash. That’s because Durham’s fraud by then was well under way and Textron knew or should have known about it.
Bash’s lawsuit quotes from an internal Textron email from November 2003 in which Senior Vice President Ralph Infante expresses concern that Durham’s use of v-note sales as “a piggy bank” to fund losses at his other businesses was “wrong.”
The same email indicates that Textron’s credit committee was concerned that “us knowing” that v-note sales were being used for purposes other than funding Fair’s operations “could come back to haunt us.”
In a response filed in 2017, Textron “admits that the referenced document contains the quoted language, but denies insofar as the quoted language is taken out of context and does not provide a full and accurate characterization of the document in question.”•