The trustee for Fair Finance Co. will get another legal shot at recovering significant funds for more than 5,000 Ohio residents who lost $208 million in the long-running Akron-area financial scandal.
A U.S. appeals court recently overturned a lower federal court decision that, barring other appeals, will allow the trustee to re-sue Textron Financial Corp., which loaned millions of dollars starting in 2002 to Fair Finance under its now imprisoned Indiana-based owners. Those owners, Timothy Durham and James Cochran, were convicted in 2012 of transforming Akron-headquartered Fair Finance from a decades-old legitimate business into a Ponzi scheme to pay for their extravagant lifestyles.
The U.S. Court of Appeals for the Sixth Circuit in Cincinnati last week reversed a U.S. District Court ruling from November 2012 that threw out Fair Finance Trustee Brian Bash’s lawsuit against Textron Financial. Bash had sought actual and “treble” or triple damages from Textron Financial — some $950 million — and from another company that loaned money to Fair Finance, Fortress Credit Corp.
The 2012 ruling allowed the Fortress litigation to proceed; Bash and Fortress last year settled the case, which brought in $35 million to the Fair Finance estate, some of which ended up going to the victims.
Bash had to wait until the Fortress case was over before he could appeal the 2012 Textron Financial decision. The trustee in April argued, through his legal counsel, that the district court improperly dismissed his claims against Textron. The appeals court agreed with Bash in all but one claim.
“We are delighted to have the chance to increase the recovery for the benefit of the estate and victims of this Ponzi scheme,” said Daniel Warren, legal counsel for Bash who argued the case before the Sixth Circuit court. Warren and Bash are both lawyers at the Cleveland offices of Baker & Hostetler.
A Textron spokesman declined comment, saying the company policy is not to discuss litigation.
The appeals court decision does not mean Textron Financial has to repay the Fair Finance estate. The decision instead allows Bash to sue the business in the hopes of recovering funds.
The Sixth Circuit ruling also does not explicitly state how much money is at stake in a new lawsuit against Textron Financial.
But the 38-page ruling notes that Textron Financial in 2007 received a payment of nearly $17 million from Fair Finance and also notes that “the trustee alleges, and Textron does not dispute that, from the execution of the 2004 [finance agreement with Fair Finance] to Textron’s payoff, [Fair Finance] made more than $300 million in payments to Textron.”
Following the settlement with Fortress Credit, U.S. Bankruptcy Court last fall approved distributing the first ever interim payments totaling $18 million to the thousands of creditors, many of whom invested their life savings in Fair Finance through the purchase of uninsured investment certificates.
The Ohio investors were attracted to the high rate of interest the certificates paid and were told that the investments provided working capital to Fair Finance.
The $18 million distribution worked out to about 8 to 9 cents on the dollar to the more than 5,000 Fair Finance creditors who had purchased about $208 million in the investment certificates.
While creditors got back $18 million, Bash retained more than $24 million in the estate to pay for legal and professional expenses and also to pay for ongoing litigation.
Fair Finance was forced into bankruptcy in February 2010 after FBI raids the week of Thanksgiving 2009 closed the business down. It never reopened.
The raids followed federal wiretaps on Durham and Cochran and an October 2009 story by the Indianapolis Business Journal that investigated Durham and his use of Fair Finance as a source of money that paid for a mansion, luxury cars, parties and more. Durham and Cochran bought Fair Finance in January 2002 from the Fair family, which founded the business in 1934. By 2003, Fair Finance was being operated as a Ponzi scheme, prosecutors said.
Durham was sentenced to 50 years in prison, while Cochran got a 25-year sentence. Another company executive, Rick Snow, received a 10-year prison sentence.
Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com. Follow him @JimMackinnonABJ on Twitter or www.facebook.com/JimMackinnonABJ