Sunday, May 12, 2002

Loan cash vanished in transit

Erpenbeck case shows holes in system

By James McNair,
The Cincinnati Enquirer

        With the fallout from the Erpenbeck Co. meltdown topping the $75 million mark, the finger of blame is whirling in every direction.

        Everything from home down payments to income tax obligations appears to have been touched by financial problems at the Edgewood company, the region's fourth-biggest home builder in 2001. But if there was a consistent setting for where these problems started, it would have been at the closing table.

Bill Erpenbeck was charged Friday with passing a bad check
        For people buying or selling homes, closing is an almost sacred ritual. Buyers and sellers are brought together to confirm a union officiated by a closing agent and witnessed by real estate agents, perhaps a bank representative. Hallowed papers are signed and initialed. Money flies invisibly in every direction.

        Normally, closings end with property changing hands, one mortgage being paid off and another mortgage kicking in. But in Erpenbeck's brand of closing, six-figure sums earmarked to Erpenbeck's construction lenders vanished in transit, local lawyers and bankers say.

        It happened in about 200 Erpenbeck closings over at least a year. About $15 million is now unaccounted for.

        The chance for the $15 million to vanish stems from the manner in which new home sale closings were conducted in Greater Cincinnati until about a month ago.

        During a typical proceeding, closing agents — often a title company representing the buyer's lender — collect proceeds for the home purchase and convey the money to the seller and its lender. But as area title companies got to know the builders, they began letting them deliver the payoff checks to their banks.

        The system worked for the most part. Erpenbeck, though, is alleged to have deposited some checks — written to its various lenders at closings — into its own accounts at Peoples. The checks were endorsed “For Deposit Only.” From there, the money never made it to the bank that made Erpenbeck's construction loan. The total is about $15 million, Peoples officials say.

        As a result, Erpenbeck's lender never released the mortgage on the home. Home buyers learned belatedly that a strange bank has a first claim on their home. And now, everyone involved in the errant closings is bracing for a showdown to establish who was at fault.

Legal snarl

        In a class-action lawsuit filed on behalf of 200 Erpenbeck customers, Cincinnati lawyer Stan Chesley holds Peoples Bank of Northern Kentucky to blame for the misdirected money. The suit, filed Thursday, says Peoples engaged in “reckless and fraudulent conduct” by allowing Erpenbeck to redeem checks written to other parties.

        Peoples says it didn't know what was going on. Terrance Monnie, owner of the Monnie & O'Connor title company in Cincinnati, said that defense is ludicrous. His company was involved in several Erpenbeck deals.

        “If you subscribe to that, a check to "Mickey Mouse' found lying in the street may be deposited in anyone's account without question, a procedure that threatens the entire banking system,” Mr. Monnie said.

        “To further complicate the situation, the bank on which our checks were drawn also honored the misdirected checks.”

        Peoples fired a legal salvo of its own last week, dragging 15 banks, 21 title companies and 100 “John Doe Lenders” into a foreclosure action against Erpenbeck. It blamed the title companies for failing to ascertain the delivery or endorsement of payoff checks to Erpenbeck's lenders. Peoples said they also failed to find out if the lender's mortgages were released.

        In normal closings, when the seller's lender receives its payoff check, it releases the mortgage by filing papers in the county courthouse. Parties on the buyer's side can then look up the release themselves.

        “When we're the closing agent, we're responsible to that buyer's lender to see to it that that buyer's mortgage is protected. That is, seeing to it that the payoff gets to where it's supposed to go,” said Mike Fletcher of Lawyers Title in Cincinnati.

        But if loan payoffs aren't received, mortgages aren't released. Kentucky and Ohio law require the filing of releases only when mortgages are paid off. Lenders and title companies do not routinely backtrack to find out if releases were filed after closings.

Bankers quiet

        The internecine war — and perhaps the embarrassment of having loaned money to Erpenbeck — has left banks unwilling or reluctant to talk about the matter. Provident Bank, for example, would not even enter into a general conversation about real estate lending.

        One thing has changed, however. Most, if not all, Tristate title companies now insist on remitting closing proceeds themselves.

        Meanwhile, the dollar figure on the Erpenbeck-Peoples fiasco keeps growing.

        Peoples and a group of small Kentucky banks together have about $30 million in Erpenbeck loans at stake. Lawsuits, liens and judgments against Erpenbeck total about $20 million. And federal investigators are looking at about $25 million in checks and cash deposits that Erpenbeck is believed to have diverted from home sales.

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