A judge has ordered mediation in a lawsuit related to what borrowers say is more than $2 million of fraudulent loans from American Founders Bank.
Attorneys for the borrowers and bank met Wednesday to discuss a scheduling order for depositions, discovery and mediation. Franklin Circuit Judge Phil Shepherd told the attorneys to conduct eight depositions and complete the initial discovery request by Sept. 15.
Shepherd suggested that the attorneys enter into mediation in November and if that's unsuccessful, a pre-trial conference will be scheduled by December.
American Founders Bank, headquartered in Frankfort at 201 Limestone Drive, initially sued Lee Tevis, a homebuilder in Georgetown, after the bank said he defaulted on almost $2 million in loans. The money was being used to build a home in the Two Creeks subdivision near the Frankfort Country Club at 253 Duntreath.
The bank made several loans to different limited-liability corporations set up by Tevis, including $1.1 million to Two Amigos, $627,000 to Tevis Custom Homes and $159,000 to Tevis' wife, Holly, and Edge Custom Homes.
Bank president John Taylor said he was unable to comment on the lawsuit because of ethical and privacy concerns. Taylor said American Founders has faced a number of challenges although he does not think the bank did anything wrong.
Taylor said he's concerned that one-sided news coverage could hurt American Founders.
Tevis said in court documents he was building the home for James Tate, then the bank's senior loan officer, so Tate could circumvent the federal regulations for overseeing "insider" bank loans.
Tevis said in the court papers he acted as a straw man for Tate and was held as his "financial hostage."
Tevis said in the documents Tate told him to create new companies so he could keep funneling fraudulent loans into the project. Tevis said he was unable to escape from the financial "ponzi scheme" because new loans were used to pay off old debt, according to the documents.
The original estimate of $575,000 for the Two Creeks home soon grew to more than $1 million as Tate and his wife added more change orders, Nancy Schook, Tevis' attorney, said in a telephone interview with The State Journal.
The two-story structure grew from the original 5,000 square feet to more than 11,000 square feet, she said.
According to the Franklin County Property Valuation Administration, the house is assessed at $400,000 for 2008 and lists the square footage at about 8,600.
Schook said the home is about 90 percent complete and unoccupied.
Tevis and several business associates filed a counter-suit seeking unspecified compensatory and punitive damages. They claim the American Founder's board of directors was negligent in their supervision of Tate.
American Founders was formed in 2001 by several prominent figures, including former governor Brereton Jones. Tracy Farmer, former chairman of the state Democratic Party, is also a board member.
Several bank officials have already been deposed and Schook said during the court proceedings Wednesday their testimony indicates they knew the house was being built for Tate.
Douglas Sharp, attorney for American Founders, said in court filings the board of directors could not have foreseen the actions Tate is accused of taking. In court filings, bank officials said the loans were never discussed at board meetings.
Sharp said he could not comment on pending litigation but in court Wednesday he said there have been attempts to "try the case in the newspapers." Sharp said that would make it more difficult to reach an agreement through mediation.
A bank spokesman declined Wednesday to comment on the specifics of the lawsuit. Tate could not be reached for comment.
Tate allegedly told Tevis and his partners in March 2007 the "house of cards is about to collapse".
The Federal Deposit Insurance Corporation issued a cease and desist order after it found "unsafe or unsound banking practices" at American Founders in February 2007.
Taylor stressed the FDIC order was mutually agreed to and said American Founders has met or exceeded all the requirements of it.
"Nobody seems to want to write about that," Taylor said Wednesday.
The FDIC cited several accounting and bookkeeping errors and said the board of directors failed to provide adequate supervision. Tate and American Founders president Tim Wesley resigned in 2007. Tate is reportedly still unemployed.
Then board member Thomas Preston said at the time of the FDIC order the problems arose because the bank "grew too fast and it caught up with us."
It's also been reported that several other lawsuits have been filed in Fayette, Woodford and Scott counties. According to the Lexington Herald-Leader, other borrowers claim they were the victims of fraud, including a baker and a sports merchandiser.
Tevis and business associates also claim Tate promised to loan them $1.5 million to launch a cellphone service to allow users to download ringtones. They said the project failed after funding was withdrawn.