(CN) - Synovus Bank may be liable for $66 million in creditor claims for its role in a bankrupt Florida businessman's check-kiting scheme, a federal judge ruled.
Based in Columbus, Ga., Synovus is a financial services company that also operates in Alabama, South Carolina, Florida, and Tennessee.
Synovus Bank maintained 77 accounts for Frank and Anne Mongelluzzi, husband and wife former owners of Able Body Labor, a Florida staffing company that had offices in 25 states and annual revenue of more than $200 million from 2004 to 2009, according to the 45-page ruling, from Pensacola Federal Judge Virginia Hernandez Covington, published June 25.
On the surface, the Mongelluzzis were successful business owners, as in addition to their staffing company they owned restaurants, pawn shops, real estate firms, yachts and airplanes.
But the foundation for their empire was far from stable, as Frank allegedly supported their companies with a check-kiting scheme, according to the ruling.
Under the purported scam, Frank and his business associates wrote checks drawn on accounts with insufficient funds to cover them, then, taking advantage of the typical one- to three-day window it takes for checks to clear, transferred funds from a $35 million Synovus credit line to the accounts so the checks wouldn't bounce.
When the Mongelluzzis wrote the checks from other underfunded Synovus accounts, the bank gave them overdraft loans to cover them.
The scheme unraveled in 2010 when several other banks closed or froze the involved accounts and refused to honor checks drawn from them.
Synovus in turn refused to advance the Mongelluzzis or their companies any money from the credit line, disabled or closed eight of their corporate accounts, refused to process outgoing wires, and required that the couple pledge stock from 18 of their companies as collateral for the overdraft loans.
Synovus Bank emailed the Mongelluzzis in July 2010 and told them they owed it $45 million and that the "overdrafts represent an illegal action of writing checks without funds to cover them."
But rather than stopping all of its dealings with the Mongelluzzis, Synovus set up the sale of the couple's Able Body Labor business assets, and the bank got $42 million from the deal, while the Mongelluzzis got nothing.
The deal gutted the Able Body Labor entities, making them shell corporations with no way to pay their bills.
The Able Body businesses and the Mongelluzzis' other non-staffing companies filed for bankruptcy in Tampa Federal Court in May 2013.
The unraveling of the Mongelluzzis' empire left a mountain of unpaid bills, as 231 creditors filed more than $123 million in claims in the bankruptcies.
On the creditors' behalf, Chapter 7 bankruptcy trustee Angela Welch sued Synovus Bank, alleging 12 counts of fraud.
Welch claims the bank enabled Frank Mongelluzzi's check-kiting scheme with its overdraft loans and credit line advances, and that $66.4 million the bank got from Mongelluzzi and the Able Body deal is open game for creditors.
Synovus moved to dismiss, claiming the trustee cannot prove Frank Mongelluzzi's alleged check kiting was meant to defraud his creditors.
In its motion for dismissal, Synovus claimed that "a check kite unlike a Ponzi scheme does not necessarily carry an intent to defraud creditors. Therefore, allegations of a check kite are insufficient to state a claim."
But U.S. District Judge Virginia Hernandez Covington refused to dismiss the case.
She found that although there are factual issues the trustee has sufficiently pled her case to survive Synovus' dismissal motion.
"The court determines that certain factual disputes regarding the logistics of the banking transactions involved and the intent of the relevant actors are not proper for resolution at this juncture. The parties will have an opportunity to frame their respective arguments as to the nature of the allegedly fraudulent banking activity at the summary judgment stage," Hernandez Covington wrote.
Synovus Bank did not respond to a request for comment.
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