When Textron Financial Corp. agreed to lend Indiana businessman Timothy Durham up to $22 million to buy Fair Finance Co., it knew things about Durham that Fair’s owner and investors in Ohio didn’t at the time.
That’s in part because Textron in 2001 conducted a background check on Durham, who was at that time a high-profile, successful Indianapolis business owner with a lavish lifestyle involving mansions, expensive cars and beautiful young women.
Textron’s due diligence showed Durham had a personal credit score of 552, said Brian Bash, trustee for now-bankrupt Fair Finance.
That low score placed Durham’s personal credit among the bottom 10 percent of all Americans, Bash said in a 152-page lawsuit filed this week in U.S. Bankruptcy Court in Akron. Most credit scores range from 600 to 750, with a number above 700 considered good, according to the Experian credit scoring firm.
Providence, R.I.-based Textron Financial still lent money to Durham and his business partner James Cochran even though both men didn’t put any of their own money into the January 2002 purchase of Fair Finance, Bash said.
Textron knew, or should have known, about other warning signs, including that Durham headed a number of money-losing businesses at the time of the Fair Finance purchase, the lawsuit alleges.
The lawsuit claims emails and memos from Textron Financial indicate that Textron executives as early as 2003 were questioning the viability of Fair Finance, its related businesses and numerous insider loans.
When Textron Financial ended its line of credit with Durham and Fair Finance in 2007, Durham found another source of money, New York City-based Fortress Credit Corp., Bash said.
Fair Finance was forced into liquidation in February 2010 following FBI raids in November 2009. Durham, Cochran and Fair Finance’s former chief financial officer await trial in June in Indiana on federal charges they defrauded investors.
Bash is seeking big bucks in a jury trial from both Fortress and Textron — nearly $1.2 billion in actual and treble damages — saying they allowed Durham to perpetuate a “massive fraud” and Ponzi scheme that stole more than $200 million from more than 5,000 Ohio investors who bought uninsured Fair Finance investment certificates.
Bash is going after Textron and Fortress at least in part because the two businesses appear to have deep, deep pockets.
Textron Financial is the commercial financing arm of Textron Inc., a $10.5 billion corporation that owns Bell Helicopter, Cessna aircraft, E-Z GO golf carts and utility vehicles, Jacobsen turf care products and more.
And Fortress Credit is part of the publicly traded Fortress Investment Group LLC, a global investment firm and hedge fund in New York City with $43.6 billion under investment last year.
Both Textron and Fortress declined comment, citing the ongoing litigation.
Lawsuits tell only one side of a dispute; neither Textron nor Fortress had officially responded to the filing as of Friday.
Bankruptcy trustees have a duty to bring as much money as possible into an estate for eventual equitable distribution to creditors, said Jon Groetzinger, visiting professor of law at Case Western Reserve University in Cleveland. That includes suing people and organizations that might have unknowingly received money prior to a bankruptcy filing, he said.
Trustees may sue in what are called fraudulent conveyance actions, he said. That is typically the case if a trustee suspects a Ponzi-type scheme was at play, he said. Groetzinger said he was speaking generally, not on the specifics of the Fair Finance case.
“Whoever gets more money than they should have, whether they did it knowingly or not, can be a defendant in a lawsuit by a bankruptcy trustee,” Groetziner said.
That’s even if the defendant received money legitimately, he said.
Bash’s money chase doesn’t end with those two financial companies.
Bash is also suing numerous other people, including Durham and Durham’s relatives, Cochran and Cochran’s relatives and others including celebrities Ludacris and Brian “Kato” Kaelin. He’s also filed against other businesses, accounting firms and organizations who he believes were paid with Fair Finance money before being forced into bankruptcy or who he claims knew there was fraud taking place.
The trustee in the past couple of months told the U.S. Bankruptcy Court that he would be filing numerous lawsuits this year that would seek to bring in substantial dollars into the Fair Finance estate. The couple of million dollars recovered so far has gone to pay for legal and forensic accounting bills.
Bash now is going after money in a big way.
In pursuing Textron, Bash indicated he has communications, including email, that show the financial firm was aware that something was amiss at Fair Finance.
“Textron’s credit committee was concerned that ‘in today’s world of Sarbanes-Oxley, predatory lending and recent court rulings [Lehman Brothers], ... the issue with us knowing that the [Fair Finance investment certificates] proceeds are going elsewhere could come back to haunt us,’ ” Bash said one email from November 2003 shows. That same email from a Textron official expressed concern that Durham was using the investment certificates “as a piggy bank,” according to Bash.
Bash said Textron made a $10 million profit off its line of credit to Durham and Fair Finance. Fortress made $4 million in fees and interest from February 2008 to November 2009, according to the lawsuit.
But Fair Finance was insolvent as early as December 2002, not quite a year after Durham bought the company, Bash said. The lawsuit alleges Fair Finance was being run as a Ponzi scheme by no later than December 2003. Only the money coming in from the sale of new investment certificates kept operations running, the lawsuit said. Among the allegations in the lawsuit are claims Textron waived seven loan covenant violations in 2003 and ignored other “red flags.”
Textron refinanced its loan with Durham and Fair Finance in 2004 and “knew, should have known or was willfully blind to the fact that Durham and his companies were financially struggling since at least 2001 and that Durham bought [Fair Finance] with the specific intent to fund the insiders with the proceeds of new and continuing private placements of the [investment certificates],” the lawsuit said. At the time of the refinancing, Textron knew Durham was defrauding investors, the lawsuit charges.
Uncomfortable with loans
Another Textron email shows the company was uncomfortable with all of the Durham insider loans and delays in audited financial statements, the lawsuit said. In early 2007, Durham hired a firm to find a successor lender to Textron and eventually hired Fortress Credit, Bash said.
A member of the search firm “identified a serious concern that Durham was operating the debtor [Fair Finance] as a fraud scheme,” the lawsuit said.
Even so, Fortress Credit agreed initially to provide a $50 million credit facility to Durham and Fair Finance even though it either knew, should have known or disregarded fraud at Fair Finance, the lawsuit said.
All told, about $72 million went through Fortress from Fair Finance, the lawsuit said.
“Fortress knowingly took advantage of other creditors, including the individual noteholders, by perpetuating Durham’s Ponzi scheme for Fortress’ benefit,” the lawsuit said. “Fortress protected itself, to the detriment of innocent third party creditors and the individual noteholders.”
Jim Mackinnon can be reached at 330-996-3544 or firstname.lastname@example.org