July 5, 2018 / 9:14 PM / a year ago

Lawyer in Chinese drywall MDL calls for probe of bank that handled $200M settlement fund

(Reuters) - A plaintiffs' lawyer in the multidistrict litigation over allegedly defective Chinese-made drywall said in a filing Tuesday that U.S. District Judge Eldon Fallon of New Orleans should investigate fees paid to Esquire Bank, a publicly-traded litigation financier that handled about $200 million in settlement funds in the case.

Last month, you may recall, Judge Fallon ordered Esquire to transfer the $200 million, which had been set aside to pay attorneys’ fees in the drywall case, to a court-administered account. Judge Fallon ordered the transfer in response to an explosive brief by plaintiffs' lawyer Tucker Yance of the Yance Law Firm, who claimed that one of the lead lawyers in the drywall case, Russ Herman of Herman Herman & Katz, was conflicted because he serves as an Esquire director and holds stock in the bank. Yance claimed Herman had an interest in allowing Esquire to hold onto the $200 million at Esquire even though the bank had paid almost no interest on the funds.

Herman and the bank have since said Yance was wrong in every particular: There’s no conflict and the bank has been completely transparent about its handling of the $200 million, which was dictated by Judge Fallon’s directives. Herman said in a June 27 affidavit that he disclosed his ownership stake in the bank to Judge Fallon before the judge designated Esquire to hold the $200 million in 2013; since then, Herman said, he’s had no involvement in the bank’s investment decisions.

Esquire CFO Eric Bader said in a June 26 affidavit that a court-appointed settlement administrator and accountant closely supervised Esquire’s investment of the money and payment of interest on the deposit. Bader said the bank mostly invested in low-interest Treasury notes because Judge Fallon set safety and liquidity as priorities for the $200 million.

But Yance fired back with refined allegations on Tuesday, disputing Esquire’s assertion that it waived all but about $3,000 in fees on the $200 million. To the contrary, Yance claimed, Esquire has earned more than $1 million – and possibly as much as $5 million – in “customer fees” from other banks that assisted Esquire in administering the drywall settlement funds.

According to Yance, Esquire touted those fees in marketing materials for its 2017 initial public offering, but meanwhile passed none of the proceeds to the funds, which received only .02 percent interest during most of the time they were held at Esquire.

So what are these customer fees? Esquire held the drywall settlement funds off of its main balance sheet. According to the bank, that was because it didn’t treat the $200 million as a core asset that could be used as collateral for loans. Esquire said it was complying with court instructions to handle the settlement money with extreme prudence, investing only in super-safe Treasury notes.

But according to Yance, other banks paid Esquire fees to record portions of the $200 million as deposits on their books. Those fees, he alleged, were the result of complex interbank deals prompted by FDIC limits on insurable deposits.

The FDIC insures deposits of up to $250,000 in a single account. A giant deposit, like the $200 million in drywall money, has to be broken into smaller accounts to maintain FDIC coverage. To streamline the process for customers, according to Yance, banks have developed services that effectively spread big deposits among a network of cooperating banks in FDIC-insurable increments. If the primary depository bank, known as the relationship bank, is holding the money off of its balance sheets, Yance said, the other banks pay the relationship bank a fee to record the deposits they’re holding on their own balance sheets. That’s how Esquire earned fees on the $200 million drywall funds, according to Yance.

In 2016 alone, Yance said, SEC filings and other Esquire documents suggest that the bank earned about a million dollars in fees from agreements with other banks holding pieces of the drywall settlement deposits. Meanwhile, Esquire paid only about $34,000 in interest on the deposit that year, Yance said in Tuesday’s filing. “In a nutshell, Esquire was making lots more money in fee income from off-balance sheet sweeps, yet still paying our … deposits ‘peanuts.’”

Yance asked Judge Fallon to investigate “the existence of and exact amount of such fees collected by Esquire Bank.” Yance said the fees “could very well be in the range of $5 million or more,” between 2014 and 2018, based on his examination of Esquire’s public filings and court submissions. He called on Judge Fallon to claw back whatever Esquire had earned on the drywall settlement deposit.

In an email statement responding to my query on Yance’s new allegations, Esquire Bank said: “Since 2014, Esquire has insured that the funds have been invested in accordance with the court’s directive and has provided complete transparency to all parties via monthly account statements. No concerns or complaints were ever expressed as to the overall management of the funds. We are confident that the costs related to the administration of these funds are reasonable and we plan to formally argue both Mr. Yance’s recent filing and original motion in court.”

Herman’s affidavit described Esquire as singularly concerned with doing right by plaintiffs and their lawyers, who traditionally received “unfavorable treatment (from) large banks that did not understand plaintiffs litigation.”

Herman said he’s proud of his role at the bank, which, as he pointed out, is under the same federal regulatory scrutiny as bigger, more traditional banks. The bank’s 2017 public offering, he said, is powerful evidence of Esquire’s solid track record.

Esquire complied with Judge Fallon’s instructions for four years, Herman said, responding to every request from the settlement administrator and a court-appointed accountant. (Jacob Woody, a lawyer for settlement administrator BrownGreer, submitted a separate affidavit lauding Esquire Bank as more responsive and efficient than other banks he’s worked with in disbursing settlement funds.)

In his affidavit, Esquire’s CFO emphasized that the bank has unique expertise and an unblemished record in managing settlement funds. It has administered about $2 billion in such funds to date, the affidavit said. “It is not Esquire Bank’s business model to leverage off-balance sheet … funds into on-balance sheet deposit,” it said. At the time Judge Fallon ordered the transfer of the $200 million drywall deposits, the bank said the deposits were not material because they were not a core asset.

The views expressed in this article are not those of Reuters News.

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