The Timeshare Beat
August 10, 2001
This is a story about mortgages, banks, lawsuits and how suddenly things can go to hell in a handbasket. It has nothing directly to do with Epic Resorts or timeshare, except for some of the principals involved, but it is a fascinating (and ongoing) tale.
In the mortgage business money ricochets around at the speed of light, from this account to that one, this loan covering that loan, the wires humming with transfer activity. A mortgage is originated, a middleman puts up cash for the loan, a big bank lends the middleman the money to pay for it, an investment company buys the mortgage and maybe sells it to someone else, and the funds somehow manage to end up in the right accounts. Eventually.
But sometimes there's a hitch and money goes astray. That is what happened in late 1997 to New York City-based Pioneer Commercial Funding Corp., a middleman in the business of residential real estate lending.
| American Financial Mortgage Corp. was registered as a Foreign Corporation
in several states, including Florida, New York and Nevada. The address for the registered officers in each case
is 1150 FIRST AVENUE, SUITE 900, which is Epic Resorts' corporate headquarters. None of the foreign corporations for AFM that we were able to find are currently active, most carrying the notation "Revoked for Annual Report" around 1998/1999. According to Pioneer's attorneys, AFM is no longer actively in business. In 1998 NCO Group Inc. paid $1.7 million for the collection division of American Financial Enterprises, Inc., an accounts receivable management company headquartered at-- you guessed it-- 1150 First Avenue in King of Prussia, PA. This is likely the company Flatley sold to repay CoreStates, as is noted in the body of this article. Epic Resorts' Web site is registered to American Financial Enterprises, Inc. When we called the various numbers we found for AFE, the phone was answered, "Thank you for calling Epic Resorts." |
A Minneapolis, MN investment firm was paying Pioneer for a bundle of mortgages it was purchasing. The funds were supposed to be wired on to Pioneer's bank as payment for some mortgages that American Financial Mortgage Corp. had purchased and then resold. But three electronic wire transfers-- totaling $1,779,519-- somehow landed in American Financial's account at CoreStates Bank in Philadephia, PA instead of with Pioneer.
American Financial's corporate officers were Thomas Flatley, Scott Egelkamp, and Howard Seidman. The corporate address was the same as Epic Resorts' headquarters building in King of Prussia, Pennsylvania.
Since this had happened before, Pioneer didn't worry about it at first; they were certain the money would find its way back to them once the error was pointed out.
But it didn't. This time CoreStates refused to give it back.
CoreStates had a written agreement with Flatley for a "cash management" arrangement in which the bank routinely covered overdrafts from Flatley's various corporate accounts with a credit line. The bank made hundreds of thousands of dollars in interest via this arrangement, Flatley was covered and everyone was happy. But on Nov. 6, 1997, bank officials discovered that more than $4 million in overdrafts had just been written in Flatley's
| A legalese definition of check kiting is as follows: A person commits
the crime of check kiting if he, pursuant to a scheme or artifice to defraud, obtains money from a financial institution
by drawing a check against an account in which there are not sufficient collected funds to pay the check and, as
part of the scheme or artifice, he purports to cover that check by depositing in such account another check drawn
against insufficient collected funds. In other words, you write a check from an empty account in one bank, deposit that check in another account or bank, then quickly withdraw the money from the second account before the check has time to bounce. Flatley and his attorneys have adamantly denied any check kiting scheme -- then and now-- and it should be noted that no action against him has ever been taken on that charge. |
Flatley's companies included commercial real estate enterprises, resorts in Florida and Arizona, and American Financial Mortgage Corp. The bank abruptly froze all of Flatley's business accounts located at that bank, including American Financial Mortgage Corp. Caught in this freeze was Pioneer's $1.7 million, and CoreStates adamantly refused to release it. CoreStates maintained that the money was in their bank at the time, in a frozen account, and therefore belonged to them. The bank used that $1.7 million to cover nearly half of the $4 million in overdrafts.
Throughout this initial period of conflict Tom Flatley and his attorney, David R. Moffitt, tried to persuade CoreStates to release the $1.7 million to Pioneer. Not only did CoreStates refuse, they twisted Flatley's arm hard to get him to cough up the remainder of the overdraft not covered by the $1.7 million.
On March 18, 1998, the bank's attorney sent a letter to Moffitt, saying that he intended to file a federal racketeering lawsuit against Flatley and his companies, accusing them of check-kiting. As a businessman, of course, the last thing Flatley needed was to have such an accusation tagged to him. He bowed to the threat and signed a 20-page agreement in which he pledged to repay CoreStates the balance of his overdraft debt and consented to the bank's seizure of the $1.7 million. He sold one of his companies to pay back the debt.
The agreement, which some have compared to a shotgun wedding, also required Flatley to pay the bank's legal fees if Pioneer sued the bank, as well as any ultimate judgement against the bank. It is questionable whether the bank could pass punitive damages on to Flatley, but at least theoretically it put him on the hook for all money assessed against the bank.
Finally, after months of attempting to get their money returned to them, Pioneer did file suit in April of 1998 in the Philadelphia Common Pleas Court. In the meantime, First Union had merged with CoreStates, so First Union became a codefendant in the case. American Financial was named as a codefendant because regardless of what CoreStates had done, Flatley's mortgage company still owed Pioneer $1.7 million.
But such lawsuits can drag on interminably, and by the time the case finally went to trial in the summer of 2000, Pioneer had been forced out of business.
Both the bank and American Financial defended themselves firmly and expensively. Howard J. Seidman, who ran American Financial for Flatley, testified that he made many calls to CoreStates trying to get the money released, but the bank wouldn't comply. The bank aggressively maintained that the money in question clearly belonged in the American Financial account and therefore was legally theirs to seize, without question.
But according to a very thorough article on this subject in The Philadelphia Inquirer, hundreds of pages of bank documents and memos showed up belatedly in the middle of the trial that seemed to contradict that stance, among them the 20-page document signed by Flatley and memos that seemed to show some discrepancy in the bank's stated position.
Said the article, "In one [memo], a CoreStates executive named Don Mishler commented in puzzlement about
the $1.7 million that had landed in American Financial's frozen account: 'Go figure how the funds got here. . ..'
That statement seemed to contradict dramatically the bank's position in court that there was no puzzle about it
and that the money clearly belonged in the account.
"In another memo, a bank executive recommended coming down hard on Flatley: 'We should shoot and ask questions
later.' "
During the long and colorful trial the judge repeatedly attempted to get the bank to settle, but was turned down each time by bank officials who did not even bother to attend the trial.
Finally, on June 30, 2000 the eight jurors on the case took an hour to decide that Pioneer had a security interest and that CoreStates had committed the tort of conversion. They found that First Union was liable to Pioneer for the $1.7 million.
For the second phase of the trial, where consequential and punitive damages were decided, the attorneys on both sides went all out to try to turn the jury their way.
In the end, on July 26, after deliberating for just under 2 hours, the jury sided once again with Pioneer.
It awarded Pioneer $13.4 million in "consequential" damages, which represented the diminution in the value of Pioneer’s stock from the day the account was frozen to the day of trial. In addition, the jury awarded $337.5 million in punitive damages.
The trial judge later reduced the amount of punitive damages to $40.5 million.
The awards were distributed against the defendants as follows:
On December 4, 2000, judgment was entered in favor of Pioneer Commercial Funding against CoreStates Bank, N.A. and First Union National Bank (First Union had merged with CoreStates) as follows:
and in favor of Pioneer Commercial Funding Corp. against American Financial Mortgage Corp. and Thomas Flately as follows:
Meanwhile, the entire case has been appealed, and an error that would initially have cost the bank only the $1.7 million that wasn't theirs in the first place has already far exceeded that amount in attorney fees alone.
------------------------------------------
UPDATE: On August 19, 2004, the Pennsylvania Supreme Court published its decision regarding the case on appeal:
Pioneer Commercial Funding Corp. and Bank
One, Texas, N. A.
vs
American Financial Mortgage Corp. and Thomas F. Flatley
and Northwest Funding, Inc. and CoreStates Bank, N. A.
http://www.courts.state.pa.us/OpPosting/Supreme/out/J-62-2004mo.pdf
See also: Lesson to Warehouse Lenders On Collateral http://www.cadwalader.com/assets/article/Gelertnt-Kalembka_100404.pdf
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