BURLINGTON — Toward the end of 2001, when it was still considered safe to buy a home from the Erpenbeck Co., at least one major bank knew the builder was engaging in transactions that could have a devastating effect on its customers, a Covington lawyer charged in a civil filing Friday.

        The allegation against U.S. Bank, formerly known as Firstar, was contained in Superior Title Agency's answer to a lawsuit brought by Peoples Bank of Northern Kentucky. Peoples, trying to share the blame for Erpenbeck's siphoning of tens of millions of dollars from home-sale closings, is suing 15 banks, 21 title insurance companies and 100 “John Doe” lenders.

STORY ARCHIVE

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INVESTIGATION

If you have any additional information on the business dealings of the Erpenbeck Co. or Peoples Bank of Northern Kentucky - or on the involvement of any parties not yet identified in our coverage - please email Enquirer business reporter James McNair at jmcnair@enquirer.com or Kentucky Enquirer reporter Patrick Crowley at pcrowley@enquirer.com.

        Although Erpenbeck's sales had slumped from 2000, the company continued to sell houses and condominiums in Greater Cincinnati in early 2002. The family-owned company collapsed in April, and the FBI is investigating its diversion of at least $25 million in home-sale proceeds that should have been — but weren't — used to pay off construction loans to banks.

        One of those banks was U.S. Bank, a Minneapolis-based bank that was Erpenbeck's biggest lender. Like Erpenbeck's other creditors, U.S. Bank is trying to salvage what it can of its estimated $16 million in Erpenbeck loans. Last year, it began parking its repossessed Erpenbeck properties in a subsidiary called Sand Trap Properties.

        The lawsuit filed Friday by lawyer Robert Trainor contends that U.S. Bank has itself to blame for its unpaid Erpenbeck loans.

        According to the suit, U.S. Bank engaged in practices that effectively made Erpenbeck an agent for the bank at home closings. U.S. Bank, it said, authorized Erpenbeck to receive checks made out to the bank to pay off construction loans. When Erpenbeck kept the money, it caused U.S. Bank to breach its duty of making sure the construction loans were satisfied and their corresponding mortgages released.

        “Every Firstar transaction wherein Erpenbeck accepted a check on Firstar's behalf, Firstar must release the lien since it has been paid through its agent,” Mr. Trainor said.

        Mr. Trainor's client, Superior Title Agency in North Avondale, issued a $187,000 check to Firstar on Nov. 2, 2000, for Ross and Timothy Shively, who were buying a $214,000 Erpenbeck condo in Legendary Run in Clermont County. The Shivelys thought their lender held the only mortgage on the property. But after Erpenbeck went out of business in April, they did some research and found that the Firstar mortgage was never released. It remains so today.

        The incident reminded Mr. Trainor of a similar case in September 2001.

        Mr. Trainor said he represented a client who had found an unreleased Firstar mortgage of about $60,000 on his condo in Campbell County. He said he began writing letters and making phone calls, first to Erpenbeck, then to Firstar. In his lawsuit, he said he told Firstar that the practice occurred as early as 1999.

        “They (Firstar) didn't seem fazed by this,” Mr. Trainor said. “They said they would check with Erpenbeck and get back to me. They did and advised me they would release the lien. I thought this was an isolated incident.”

        U.S. Bank spokesman Steve Dale said the bank had no comment on the allegation because it had not seen the filing.

        Ever since its discovery of the $25 million in check diversions, Peoples Bank has maintained that Erpenbeck's other lenders — because of their negligence in monitoring its Erpenbeck loans and payoffs — must share the burden of absorbing the loss. Of the $16.8 million in unpaid loans pinned on the 211 homebuyers represented by class-action lawyer Stan Chesley, Firstar has $10.2 million, Bank One has $2.2 million, Peoples Bank has $2 million and Provident Bank has $1.5 million, among the banks with the most exposure.

        “Peoples Bank has long taken the position that there is culpability by other parties,” said Peoples lawyer Beverly Storm. “That's why we're pursuing claims against the other banks and title companies.”

        Banks that discover possible criminal acts by their clients are required to file what are known as suspicious activity reports with the government. Peoples invited the FBI to investigate the Erpenbeck transactions as soon as it uncovered them in March. Spokesmen for U.S. Bank, Bank One and Provident would not say if they filed suspicious activity reports.

        If they had, they wouldn't be able to talk about it, said Gil Schwartz, a former Federal Reserve Bank lawyer now in private practice in Washington.

        “If you file a suspicious activity report about some activity you think is improper involving banks, you are prohibited from revealing any information to any of the participants involved,” Mr. Schwartz said.

        “If you put out information to the general public, you're running the risk of violating federal rules,” not to mention laws on defamation and tortuous interference.

        So until the government itself takes action against someone defrauding consumers in bank transactions, no mechanism exists to forewarn the unsuspecting public.

        Tom Heath, who made a $5,000 down payment on an Erpenbeck house in Savannah Lakes in Union last July, said he wishes someone would have tipped him off about Erpenbeck's dealings.

        “I wouldn't have signed a contract with him,” he said. “I would have bought from someone else.”

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