The trustee in charge of liquidating the estate of the law firm of disgraced Manhattan attorney Marc Dreier cannot recover funds from Wachovia Bank related to a $9 million loan the bank extended to Mr. Dreier shortly before the firm collapsed, a bankruptcy judge ruled yesterday.
In Gowan v. Wachovia Bank, 10-5458, Southern District Bankruptcy Judge Stuart M. Bernstein granted Wachovia’s motion to dismiss a lawsuit filed by Sheila M. Gowan of Diamond McCarthy as Chapter 11 trustee for the estate of Dreier LLP. Ms. Gowan alleged the bank lent millions of dollars to Mr. Dreier’s firm even after it should have become suspicious that Mr. Dreier was involved in an illegal scheme.
Mr. Dreier was arrested in December 2008 for running a $700 million Ponzi scheme selling fraudulent promissory notes, and is now serving a 20-year prison sentence. Before his arrest, Mr. Dreier and his firm, of which he was the sole shareholder, conducted much of their banking at Wachovia, which is now part of Wells Fargo.
The trustee alleges that Wachovia had “inklings” that something was wrong in October 2007, when Mr. Dreier bought a $17 million yacht with funds from Dreier LLP accounts at Wachovia, according to the decision. Soon after buying the yacht, Mr. Dreier asked for an $8 million personal loan secured by a mortgage on the yacht. The request was referred to Christina Tighe, a risk assessor at Wachovia who had no previous experience with Mr. Dreier.
After reviewing the request, Ms. Tighe told Nathan Hale, the Wachovia employee who normally handled the bank’s relationship with Mr. Dreier, that Mr. Dreier’s income did not support the loan. She said she had been unable to verify that any cash was paid to Mr. Dreier in 2004 or 2005, that his tax returns showed no salary or wages and that his K-1 forms showed no guaranteed payments.
She offered to ask Mr. Dreier’s accountants to seek more information, but her superiors at Wachovia rejected the offer. She then “went on record” saying she believed that Mr. Dreier had misrepresented his business assets as personal assets, according to the opinion.
Mr. Hale later sent an e-mail to Jeffrey Grossman, Wachovia’s national managing director, complaining that Ms. Tighe’s accusation of fraud and request to talk to Mr. Dreier’s accountant “put our most profitable relationship at risk,” according to the decision.
Mr. Grossman and banking advisor Fernando Calvo further analyzed the activity of Mr. Dreier and his firm and concluded that almost all of the firm’s earnings should be consumed by its operations and by Mr. Dreier’s large purchases, including the yacht. Instead, the firm’s account had plenty of cash.
“We don’t understand his cash flow,” Mr. Grossman said, according to the decision. “It doesn’t add up.”
Nonetheless, Wachovia gave Mr. Dreier the $8 million loan.
Throughout 2008, Mr. Hale granted numerous requests by Mr. Dreier in violation of bank procedure in the hope of inducing Mr. Dreier to bring his firm’s attorney escrow account, then at Chase, to Wachovia. Much of Mr. Dreier’s Ponzi scheme, it was later revealed, was conducted through the Chase account.
In October 2008, Mr. Dreier told Mr. Hale that he would move the escrow account if Mr. Hale would extend an additional $9 million to an existing line of credit to his firm. Mr. Hale did so. Mr. Dreier immediately used almost all of the money to pay an investor in his scheme.
Mr. Dreier never moved the account from Chase to Wachovia as he promised. He also fell behind on the interest payments on his yacht mortgage, but Mr. Hale told Wachovia’s mortgage department not to call Mr. Dreier about the missed payments because he was such a valuable client. In December 2008, Mr. Dreier’s scheme came to light and he was arrested.
Most of the credit Wachovia extended to the Dreier firm, including the October 2008 loan extending the line of credit, was secured by various liens. When the firm’s landlords declared lease defaults and drew on the Wachovia letters of credit securing their leases, Wachovia reimbursed itself more than $16 million from a Dreier money market account at the bank.
The trustee’s complaint against Wachovia, filed in December 2010, originally alleged that Wachovia’s liens on Dreier assets were fraudulent, constructively fraudulent or preferential and sought to recover the money Wachovia received. The trustee later voluntarily dropped most claims except those related to the October 2008 loan.
In moving to dismiss, Wachovia argued that none of the transactions it undertook for Mr. Dreier and his firm were illegal and that it did not participate in the scheme. The trustee countered that the bank knew or should have known that Mr. Dreier was going to use the October 2008 loan to pay an investor in his scheme.
Judge Bernstein said that Wachovia’s suspicions did not add up to knowledge of the scheme.
“While Wachovia may have had reason to question Marc’s honesty and the accounting for and source of all of the funds used by him and Dreier LLP, this does not add up to actual or constructive knowledge that (1) Marc was running a Ponzi scheme through Dreier LLP’s account at Chase, or (2) the October 2008 Loan proceeds were destined for a Ponzi scheme investor,” the judge said. “Wachovia did not invest in the Ponzi scheme; it loaned money to Dreier LLP, a seemingly legitimate enterprise which, unlike Marc, apparently paid its obligations on time.”
The judge also rejected the trustee’s argument that the liens granted to Wachovia for the October 2008 loan were a preferential transfer under bankruptcy law, finding that the firm received new value—the loan—in exchange.
The judge did allow the trustee to replead on the narrow issue of the preferential transfer claim involving Wachovia’s alleged knowledge of the activity in the Chase escrow account.
Jordan W. Siev of Reed Smith, counsel to Wachovia, declined to comment.
Ms. Gowan and Howard D. Ressler, another Diamond McCarthy attorney who represented the trustee, could not immediately be reached for comment.
@|Brendan Pierson can be contacted at firstname.lastname@example.org.