What was Summit 1031?
1) Summit was a qualified intermediary; let’s call them QI’s. Under tax law, QI’s are a third party that assists taxpayers in executing tax deferred exchanges under Section 1031 of the tax law. Section 1031 allows taxpayers to sell business or investment use property and avoid the tax on the gain if they buy an equal amount of replacement property.
2) Under the tax code, the exchanger cannot hold the proceeds from a sale. The rules force the exchanger to pay tax if he has access to the sale proceeds. So part of the role of QI’s is to handle the money out of reach of the exchangers.
3) Even though the QI business was created under tax law, the QI business was and generally still is unregulated. There are a few states that have now passed some regulations.
4) QI’s make money in two ways. First, they charge an exchange fee. The exchange fees would generally cover the QI’s overhead. Secondly, QI’s invest the money. Some QI’s pay part of the return on the investment of the exchangers’ money to the exchanger, others don’t pay any part of the return to the exchanger.
5) Summit Accommodators, Inc had been in the QI business since 1991. About 80% of the funds were invested in financial institutions and 20% of the funds were invested in short term loans secured by real estate. Some of these loans were made to the Summit principals and some of the loans were made to unrelated third parties. The Summit principals loaned money on some real estate deals that involved other people that knew little or nothing about where the loans came from, generally just that the Summit principals were making the loans.
6) Let’s call these people innocent parties. There are 106 innocent parties who have been dragged into the whole mess.
What happened to Summit 1031?
What happened to Summit 1031?
1) In 2008 the real estate world, which had been slowed down over the previous year, virtually came to a grinding halt when the economy collapsed in October/2008. The collapse triggered what would be similar to a run on the bank for Summit. Those loans secured by real estate could not be liquidated fast enough to fund all the exchange money going out the door. Little new exchange money came in the door. The % of non-liquid assets rose to almost 50%.
2) Summit principals consulted with a bankruptcy firm in Portland, Sussman Shank.
3) Sussman told the principals they had to stop doing exchanges immediately! They told them the whole operations could be criminal. They brought in criminal attorneys, more bankruptcy attorneys and told the principals they needed to hurry and declare bankruptcy. They told them not to talk to anyone.
4) Sussman also said they had just the guy to install as a Chief Restructuring Officer- CRO. He could come in and run things and get all the notes and real estate liquidated. They told the principals that once they declared bankruptcy, the whole deal would be transparent and the pressure would be off. This structure of bankruptcy is a Chapter 11 “debtor in possession” which would allow the principals to work with the CRO in an effort to get the shortfall paid.
5) When Summit declared bankruptcy they had about $14 million of cash in financial institutions and about $13 million of illiquid notes.
6) Sussman told the principals to move money around so that it didn’t look like cash for legal fees was coming out of exchanger funds. Then they had the principals wire money close to half a million dollars as retainers to the various legal firms involved…… approximately half of that going right to Sussman which had already been paid smaller retainer when the principals first met with them.
7) The Summit principals also met with a man named Kevin Padrick. Padrick had been recommended as a guy who could help liquidate the illiquid assets and get the most for them.
8) KEVIN’s SALES PITCH – At the initial meeting Kevin told the principals he had financial partners that could come in with liquid funds which could be used to help complete exchanges timely. He said that would give the principals the needed time to liquidate their assets. The principals were willing to commit most all of their assets to help take care of the shortage of liquid cash.
Padrick also said that his company had lots of experience with exchanges and he could develop a plan to get them taken care of and mitigate damages. He also said that he knew how to get settlements from the bonding companies (Summit had $10 million of fidelity bonding and $3 million of E&O coverage). He said it would be in the best interests of the bonding companies to fund the shortage quickly to mitigate damages.
Padrick also said that his company had lots of experience with exchanges and he could develop a plan to get them taken care of and mitigate damages. He also said that he knew how to get settlements from the bonding companies (Summit had $10 million of fidelity bonding and $3 million of E&O coverage). He said it would be in the best interests of the bonding companies to fund the shortage quickly to mitigate damages.
9) Sussman advised the principals to hire Padrick and Obsidian. $100k of the half million that Sussman told the principals to sire went directly to Obsidian.
How did the bankruptcy unfold?
1) The CRO named Terry Vance came in. He took control and seemed to know what he was doing. Sussman said that they would be working directly under the CRO and so would Padrick and Obsidian. If they didn’t do a good job, the CRO could fire them.
2) Once Sussman got the money and filed the bankruptcy, they virtually quit talking to the principals. They would only talk with the principals personal bankruptcy attorneys present. There was no transparency. In fact, Sussman would not take phone calls from any exchangers (they said they were much too busy with other things) and told the principals not to be talking to exchangers. Creditor fear skyrocketed!
3) Padrick met with the principals to get a list of all their assets and sent some of his employees to take all the files related to the assets, and then he virtually disappeared. The principals later learned that he had run straight to the creditors committee and started making deals with them and their attorneys, Perkins Coie.
4) With no one talking to the exchangers, the calls started going to the Department of Justice, State Attorney General’s office etc. The entire situation blew up.
5) The CRO was successful in getting some property sold butObsidian was nowhere to be seen. Sussman did everything BUT anything constructive to move the bankruptcy along. Neither Sussman, Padrick nor Obsidian were doing anything under the direction of the CRO.
6) It wasn’t long before Padrick, who is pals with attorney Stephen Hedburg at Perkins Coie, somehow convinced Hedberg & Annie Buell(chair of the creditors’ committee) to remove Terry Vance as CRO and replace him with Kevin Padrick as CRO. On February 11, 2009 when the attorney fraternity asked the judge about it and the principals objected, the judge said he was just going to name a trustee instead.
7) At this same hearing the Judge instructed Kevin Padrick to giveSummit Principals the same presentation as he gave the Creditors’ Committee because they had no idea what Obsidian was going to do to create value and mitigate costs since they had done nothing for 3 months. Click Here To View this Presentation.
8) By the next week Padrick was appointed Chapter 11 Trustee. Sussman Shank turned its back on the CRO they had recommended and brought in- instead recommending Padrick for the trustee role. It appears that Padrick didn’t want Sussman working for him but needed Sussman’s support to get his trustee job. I believe he made a deal with Sussman to let them do all the exchange work, even though they had no idea how to facilitate exchanges.
So why did Padrick want to himself installed as trustee?
1) The minute Kevin was appointed as trustee; he charged the bankrupcty estate $500k of the money sitting in the bank. The trustee gets 3% of all assets, no matter what he does. Those assets were already sitting tin Summit’s bank account. There was no work was necessary to obtain these funds for the benefit of the exchangers.
2) He immediately hired his own company, Obsidian Finance Group, LLC. The contract allowed for his company to get paid 15% of the assets over and above the shortage. The principals were giving all their assets and Padrick said he could also collect from the bonding companies. He also would go after some other deep pockets- coming up.
3) There were some deals to sell property brought to the table by the principals in the meantime. However, Padrick turned those deals down. He wouldn’t be able to get the 15% for his company if those deals closed before he had final approval from the court for his trustee position. This took some time after he was named trustee.
4) He also made provisions for a success fee- this is more money that he makes on the deal which he shares with the attorneys involved.
5) Additionally, he hired his own attorneys which are to be paid for from exchangers’ funds. The CRO had no attorney and there were no attorney charges. Padrick’s attorneys immediately started racking up the charge hours.
7) When we filed an objection to the fees and subpoenaed the attorneys involved all of the sudden the attorneys’ malpractice folks stepped up and said they would do everything to keep their attorneys, Sussman Shank, from testifying. This is when I felt my suspicions became obvious; there was corruption behind this whole deal. But to prove any of it would cost BIG MONEY.
8) There is another round of fees coming up this month. Who knows how much it will be this time!
So what does this have to do with the 106 innocent parties?
1) There are 106 innocent parties that were involved in various real estate investments with the Summit principals.
2) When the principals turned over their assets, the assets included interests in various real estate investments with these innocent parties.
3) Instead of working with the innocent parties to figure out how to liquidate properties, Padrick, Obsidian and their attorneys, Tonkon Torp, started bullying all the innocent parties. There is a huge sum of money they can spend paying legal games with folks, and they’ve used that to intimate innocent people.
4) The innocent people needed to hire legal counsel to protect themselves from Padrick, who has shown he is little more than a legal predator. In most cases, this exhausted all the liquid funds that innocent parties had in their accounts. Padrick’s tactics are to use legal threats and actions against these people until they are out of money and can’t afford to defend themselves.
5) Padrick accuses all these parties of knowing all about the company that loaned money to these various investment entities. The innocent parties invested their own hard cash in these real estate investments. And many of the innocent parties put in hours and hours of time to help make the investments successful. They knew little to nothing about where Inland funds may have come from.
6) Padrick has virtually ignored any offers from innocent parties to buyout the principals’ share of the investment. Instead, his goal is to bully the innocent parties until they turn over their interests to him.
7) Padrick has filed a lawsuit against the principal’s bank, Umpqua Bank, for $30 million. All this bank did was to maintain deposit accounts for Summit. The only thing that makes sense for this lawsuit is Umpqua has deep pockets and Kevin wants more money.
8) To my knowledge, Padrick has done little to nothing in pursuit of the bonding companies. In fact, some of the exchangers have told us that Padrick hasn’t even told them that the bonds exist.
Is this Bankruptcy corruption?
1) There is a fraternity of attorneys in Portland that all work together on a daily basis. There is a spirit of cooperation that appears criminal. We believe there were behind the scenes deals being made as this whole bankruptcy unfolded. A lot of these attorneys have worked together at firms in the past. They are back-slapping pals. They don’t seem to do much of anything to represent their clients.
2) Padrick and his attorneys operate under a completely different set of rules. It is my opinion Padrick and the attorneys are doing a type of legal extortion- using their attorney bag of tricks to charge millions in fees to the bankruptcy estate.
3) The judge in the Summit case, Judge Randall Dunn, condones all of this behavior or just plain ignores it. He has done literally nothing to make the trustee, his company, the creditor’s lawyers or the trustee’s own lawyers accountable to anything. The case is a free-for-all for all these attorneys. And the free-for-all is easy because of how much cash was sitting in Summit’s bank account to begin with.
5) All this just posts a green light for these legal predators to crush the little guys in their way. The innocent parties are just being stripped of their net worth and they had nothing to do with this.
6. The Main people harmed by all this are the creditors. There really is little to no representation for the creditors. These legal predators just figure out how they are going to milk the whole situation for everything they possibly can. Kevin is a master at the sales pitch. There was the meaningless sales pitch the Summit principals back in December and I am sure there was a similar sales pitch to the creditors. Both debtors and creditors fell hook, line, and sinker for whatever variation of Kevin's sales pitch they received.
7) As an attorney and Chapter 11 trustee, Kevin is supposed to act with the highest fiduciary duty for the benefit of the creditors. I got a call from a creditor who said he was not even told about the bonds and that if Kevin would just collect on the insurance and the bonds the creditors would be paid off. Even though Kevin’s sales pitch dumbfounded the stressed out principals, he still has not collected the bond or the insurance, brought resources in to help complete exchanges and mitigate costs, or liquidate any property for any amount that would bring enough value to the estate to make up for the 15% that goes to Kevin’s Company, Obsidian Finance Group, LLC.
8) The creditors are watching the bankruptcy assets get raped before their very eyes!
9) Innocent parties are losing their money to attorney fees and their hard earned investments.
10) The debtors have lost everything and have been unfairly portrayed by the media because the media is fed information from Kevin Padrick. The worse he makes them look, the more he can bully everybody as “aiders & abettors” of a Ponzi scheme.
11.) The attorneys get rich, everyone else gets screwed. "
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