(CN) — The Sixth Circuit revived a bankruptcy trustee's attempt to claw back $17 million from a bank accused of helping Ponzi schemers steal more than $200 million of investors' money.
Fair Finance was once a respectable Ohio-based company that had provided financial services since the Great Depression.
By the 2000s, it was primarily in the business of purchasing consumer receivable contracts from businesses, profiting on the difference between the purchase price and the amount ultimately collected. It financed the purchase of these receivables by selling investment certificates, on which it paid regular interest.
But when Timothy Durham, James Cochran, and Rick Snow took over the company in 2002, they turned Fair Finance into their own piggy bank and paid the company's interest payments with money from new investors, according to court records.
The company increased its sale of certificates, offering them for longer terms, higher amounts, and at higher interest rates, doubling Fair Finance's liabilities within 18 months.
The money was not used to purchase more receivables, but to finance loans for Durham and Cochran, their relatives, and related companies.
For example, Cochran used $780,000 to fund a personal real-estate purchase, and Durham loaned more than $9 million to the company that held his personal car collection.
The scheme fell apart when the 2008 financial crisis hit, and Fair Finance could not meet its interest payments.
The company declared bankruptcy after an FBI raid on its offices. More than 5,000 investors reported losses of $215 million, but the trustee recovered only $5.6 million in assets.
The Seventh Circuit affirmed fraud convictions for Durham, Cochran and Snow in 2014.
On Tuesday, the Sixth Circuit revived Fair Finance trustee Brian Bash's attempt to recover money for defrauded investors from Textron Financial Corporation, which allegedly helped conceal and perpetuate the Ponzi scheme.
"Textron's March 29, 2002 audit of the debtor revealed that Textron knew, as early as spring 2002, that Durham had been causing the debtor to make insider loans and that the debtor had dramatically increased its V-Note placements," Judge Andre Davis, sitting by designation from the Fourth Circuit, wrote for the three-judge panel.
Nevertheless, Textron maintained its relationship with Fair Financial after receiving assurances the internal loans would be paid down, and the bank even extended the company's $22 million line of credit.
Textron's dealings with Fair Financial ended two years before the FBI raided Fair Financial's headquarters, when the company fully repaid Textron the $17 million it owed.
Bash, the trustee, claims in court that this transfer was fraudulent because Textron did not maintain a valid security interest in the company's assets.
The panel found the trustee's arguments plausible enough to warrant further discovery.
"Because the trustee has established the existence of an ambiguity as to whether the parties clearly intended the 2004 amended and restated loan and security agreement, or ARL&SA] to extinguish the 2002 L&SA and the security interest it created, we conclude that the district court erred when it determined as a matter of law that the 2004 ARL&SA was not a novation of the 2002 L&SA and that the security interest created pursuant to the 2002 L&SA remained in full force," Davis said.
The judge continued, "The trustee sufficiently showed, for purposes of withstanding Textron's motion to dismiss, that the debtor's assets were no longer encumbered by a pre-existing valid lien when the parties executed the 2004 ARL&SA and the debtor granted Textron a new security interest in its assets."
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