Highland Bank loses insurance claim over assigned leases

A Minnesota-based bank which lost $2 million when it purchased leases assigned by an equipment lease finance company involved in a fake Ponzi-style investment scheme has denied a claim for its losses via its insurers.

Highland Bank entered to a series of transactions with equipment lease finance company First Premier Capita (FPC), based on an assignment of leases. Many of FPC’s leases were with Equipment Acquisition Resources (EAR), a Chicago-based company engaged in refurbishing and selling or leasing high-tech machinery used in the semiconductor industry.

FPC had agreements signed by EAR’s owners, Sheldon Player and Donna Malone, guaranteeing EAR’s payment of all of its obligations and liabilities under the leases, court papers said.

Highland paid more than $4 million to purchase assignments of lease payments under three of the lease schedules. EAR made all the required payments up until 2009, but then abruptly ceased doing so and filed for Chapter 11 bankruptcy protection. In December 2009, Highland determined that the unpaid lease payments under the collateral assignment agreements could not be collected and wrote off a $2 million loss.

Court filings later revealed that EAR had engaged in a complex Ponzi scheme whereby it bought pieces of high-tech equipment near the end of their life cycles at extremely low prices and then sold them to another company called Machine Tools Direct (MTD) for much higher prices.

At the same time, EAR would enter into purchase and lease transactions with financial institutions, and often sold the same piece of equipment to multiple financial institution purchasers. The company received the proceeds from the lenders’ purchases, minus a cut for MTD, and then used the proceeds to pay for lease obligations and other expenses.

As a result of EAR’s collapse, Highland was forced to write off around $2 million, but when the bank discovered one of the signatures on the guaranty was fake, it went to court to persuade its insurance company to pay out compensation for the losses.

However the insurer, BancInsure, denied Highland’s claim, and a court has now agreed with its view that the loss did not “result directly from” a forged personal guaranty because the guaranty was worthless to the bank when it entered into the transactions. Highland was judged to have failed to show the “direct relation between the injury asserted and the injurious conduct alleged” that the doctrine of proximate cause demands.