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Attorney fees eat up most of recovered Fair Finance funds

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A New York firm is contacting Fair Finance Co. investors seeking to purchase their bankruptcy claims – a sign that investors in the defunct business could secure a sizable recovery.

Investors in the Tim Durham-owned company in June began receiving letters from Woodbury, N.Y.-based ASM Capital offering to buy their claims for 5.25 cents on the dollar.

While few investors are swayed by that amount, they figure an investment firm wouldn’t have swooped in if its principals didn’t believe the actual payouts would be far greater than the offer.

So-called claims trading isn’t unusual in bankruptcy, especially in cases like Fair, where potential recoveries might take years to collect and many of the holders of claims are elderly.

“The people in that kind of business aren’t running charities,” said Doug Drushal, an attorney in Wooster, Ohio, representing about 200 purchasers of Fair Finance investment certificates. “They aren’t going to make an offer unless they think there is a pot of gold at the end of the rainbow they can grab onto.”

Fair, a consumer-finance company based in Akron, Ohio, halted payments on the notes after FBI agents raided its headquarters and Durham’s offices in Indianapolis in November 2009.
 

fair-finance-062512-15col.jpg Fair Finance investors faced locked doors on Dec. 7, 2009, at the investment firm’s Akron, Ohio, headquarters. One visitor took time to alter the door sign. (Photo courtesy of Akron Beacon Journal)

The raid was part of a federal investigation that culminated June 20 with a jury convicting Durham on all 12 of the felony counts he faced. The jury found Fair co-owner Jim Cochran guilty on eight of 12 counts, and company Chief Financial Officer Rick Snow guilty on five of 12 counts.

A grand jury indictment unsealed in March 2011 alleged that, after Durham and Cochran bought the business in 2002, they raided its coffers for personal expenses and to cover losses at failing businesses they owned.

The transfers, recorded as related-party loans, never were repaid, and prosecutors said Fair soon was operating as a Ponzi scheme, relying on the sale of new investment certificates to pay off prior purchasers.

The outlook for the more than 5,000 Ohio investors who hold more than $200 million in Fair Finance investment certificates looked dismal until early this year, when bankruptcy Trustee Brian Bash sued two deep-pocketed financial firms he accused of aiding and abetting fraud.

Though by then Bash already had filed dozens of lawsuits seeking to recoup some of the insider loans and other transfers that investigators say gutted the business, many of the defendants had few if any assets. Even Kelly Burgan, an attorney for Bash, said a year ago that investors likely would recovery only a “teeny-tiny fraction” of what they were owed.

Attorneys for the trustee no longer will speculate on potential recoveries. During testimony in the Fair Finance trial June 18, Bash said he’d recovered $5.6 million, with just $518,000 coming from collections on the massive related-party loans prosecutors say brought down the company.

Under cross examination by Durham defense attorney John Tompkins, Bash acknowledged it is his “hope and belief” he’ll be able to recover much more.

Lawyer fees

Bash in March asked Ohio bankruptcy court Judge Marilyn Shea-Stonum to switch compensation for his counsel – the Cleveland law firm Baker & Hostetler – from hourly fees to contingency fees, with attorneys collecting one-third of recovered funds.

Investors interpreted the move as a sign the legal team is so optimistic it can haul down large settlements or court judgments that it is willing to give up a sure thing – millions of dollars in hourly fees – for the potential of a much bigger payoff. Experienced attorneys working on Fair litigation have been charging as much as $400 an hour.

After the judge rejected the proposal, the trustee this month proposed lower contingency fees – 30 percent of the first $50 million recovered, 15 percent of the next $50 million, and 10 percent of all recoveries exceeding $100 million.

The judge has not ruled on the new request.

So far, expenses, including attorney fees, have eaten up the lion’s share of recoveries, and there have been no distributions to investors.

While the legal fees frustrate investors, they’re hopeful the lawsuit spree won’t be for naught. Buoying their spirits was a suit the trustee filed in February seeking up to $1.2 billion from two of Fair’s lenders – Rhode Island-based Textron Financial Corp. and New York-based Fortress Credit Corp.

The suit charges the companies, which have billions in assets, turned a blind eye to Durham’s fraud because they held first liens on the company’s only assets with real value – finance contracts it bought from health clubs and other firms providing extended-payment plans to their customers. As a result, they were positioned to collect what they were owed regardless of whether Durham looted the company.

The suit cites Textron emails sounding alarms about the extent of the withdrawals from Fair. One, sent by a Textron vice president to Durham in November 2003, expresses concern that Durham’s use of proceeds from note sales “as a piggy bank” to fund losses at other businesses was “wrong” and “could come back to haunt us.”

In March, Bash sued former Fair owner Donald Fair, saying he kept quiet about how Durham was running the company to ensure he received the full $20 million due from the purchase.

To collect the final $3.2 million in 2007, Donald Fair threatened to “create a ‘run on the bank’ that would halt the Ponzi scheme if he wasn’t paid in full,” the suit alleges. “In essence, Durham and Cochran ‘bought’ Don Fair’s silence by paying him in full.”

Including punitive damages, that case seeks more than $150 million.

‘Allegedly salacious quotes’

To no one’s surprise, the lenders and Fair deny the allegations and are girding for battle. In a motion to dismiss filed in April, attorneys for Textron scoffed: “The trustee here has engaged in an ill-considered rush to judgment, ignoring the facts on the ground at the time, and cherry-picking documents and allegedly salacious quotes from documents, while ignoring clearly exculpatory information that does not fit the trustee’s theory.”

The trustee’s move to sue lenders with substantial resources “makes everybody a lot more optimistic,” said David Mucklow, an Akron attorney representing about 260 investors.

ASM, which specializes in buying claims in bankruptcy, believes the recovery for Fair investors ultimately will be greater than what it’s offering, but the litigation to collect that money likely won’t wrap up for years, said Jared Muroff, the company’s managing director of research.

“We do think … it is a good opportunity for investors to take money off the table now,” Muroff said. He said the offer is open to all but the smallest investors, those with less than $10,000 in investment certificates.

Firms in ASM’s field sometimes offer far more than pennies on the dollar. Reuters reports, for instance, that claims in the Bernard Madoff bankruptcy case are fetching around 60 cents on the dollar. The trustee in that case, Irving Picard, has recorded $9.1 billion through legal settlements, and his office has said creditors ultimately could get a full recovery on their more than $17 billion in allowed claims.

Mucklow, the attorney for Fair investors, isn’t impressed with ASM’s offer, in part because the contract appears to give it the right to claw back payments from investors under certain circumstances.

“I am cautioning my people to look closely,” he said. “If I were in their shoes, I would wait.”

James Coco, a certified public accountant in Medina, Ohio, who is owed $200,000, isn’t interested.

“Fifty percent would get my attention,” Coco said.

Donald Russell of Doylestown, Ohio – whose family lost $475,000 – was more outspoken.

“It’s insulting, totally insulting,” he said of the offer. “My view is we have been patient for 2-1/2 years, and we are finally getting some answers. Now, at this point, we have these bottom feeders who are trying to victimize us some more.”•
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  1. Applause, applause, applause ..... but, is this duty to serve the constitutional order not much more incumbent upon the State, whose only aim is to be pure and unadulterated justice, than defense counsel, who is also charged with gaining a result for a client? I agree both are responsible, but it seems to me that the government attorneys bear a burden much heavier than defense counsel .... "“I note, much as we did in Mechling v. State, 16 N.E.3d 1015 (Ind. Ct. App. 2014), trans. denied, that the attorneys representing the State and the defendant are both officers of the court and have a responsibility to correct any obvious errors at the time they are committed."

  2. Do I have to hire an attorney to get co-guardianship of my brother? My father has guardianship and my older sister was his co-guardian until this Dec 2014 when she passed and my father was me to go on as the co-guardian, but funds are limit and we need to get this process taken care of quickly as our fathers health isn't the greatest. So please advise me if there is anyway to do this our self or if it requires a lawyer? Thank you

  3. I have been on this program while on parole from 2011-2013. No person should be forced mentally to share private details of their personal life with total strangers. Also giving permission for a mental therapist to report to your parole agent that your not participating in group therapy because you don't have the financial mean to be in the group therapy. I was personally singled out and sent back three times for not having money and also sent back within the six month when you aren't to be sent according to state law. I will work to het this INSOMM's removed from this state. I also had twelve or thirteen parole agents with a fifteen month period. Thanks for your time.

  4. Our nation produces very few jurists of the caliber of Justice DOUGLAS and his peers these days. Here is that great civil libertarian, who recognized government as both a blessing and, when corrupted by ideological interests, a curse: "Once the investigator has only the conscience of government as a guide, the conscience can become ‘ravenous,’ as Cromwell, bent on destroying Thomas More, said in Bolt, A Man For All Seasons (1960), p. 120. The First Amendment mirrors many episodes where men, harried and harassed by government, sought refuge in their conscience, as these lines of Thomas More show: ‘MORE: And when we stand before God, and you are sent to Paradise for doing according to your conscience, *575 and I am damned for not doing according to mine, will you come with me, for fellowship? ‘CRANMER: So those of us whose names are there are damned, Sir Thomas? ‘MORE: I don't know, Your Grace. I have no window to look into another man's conscience. I condemn no one. ‘CRANMER: Then the matter is capable of question? ‘MORE: Certainly. ‘CRANMER: But that you owe obedience to your King is not capable of question. So weigh a doubt against a certainty—and sign. ‘MORE: Some men think the Earth is round, others think it flat; it is a matter capable of question. But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it? No, I will not sign.’ Id., pp. 132—133. DOUGLAS THEN WROTE: Where government is the Big Brother,11 privacy gives way to surveillance. **909 But our commitment is otherwise. *576 By the First Amendment we have staked our security on freedom to promote a multiplicity of ideas, to associate at will with kindred spirits, and to defy governmental intrusion into these precincts" Gibson v. Florida Legislative Investigation Comm., 372 U.S. 539, 574-76, 83 S. Ct. 889, 908-09, 9 L. Ed. 2d 929 (1963) Mr. Justice DOUGLAS, concurring. I write: Happy Memorial Day to all -- God please bless our fallen who lived and died to preserve constitutional governance in our wonderful series of Republics. And God open the eyes of those government officials who denounce the constitutions of these Republics by arbitrary actions arising out capricious motives.

  5. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

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