PULLER MORTG. ASSOCIATES, INC. v. Keegan

• Decision Date: 30 April 1993
• Docket Number: No. IP 90-239 C.,IP 90-239 C.
• Citation: 829 F. Supp. 1507
• Parties: PULLER MORTGAGE ASSOCIATES, INC. and Kenneth A. Puller, Plaintiffs, v. Larry A. KEEGAN, Defendant.
• Court: U.S. District Court — Southern District of Indiana

829 F. Supp. 1507

PULLER MORTGAGE ASSOCIATES, INC. and Kenneth A. Puller, Plaintiffs, v. Larry A. KEEGAN, Defendant.

No. IP 90-239 C.

United States District Court, S.D. Indiana, Indianapolis Division.

April 30, 1993.

COPYRIGHT MATERIAL OMITTED

Richard S. Ewing, Stewart & Irwin, Indianapolis, IN, for plaintiffs.

Larry A. Keegan, Indianapolis, IN, for defendant.

ENTRY

BARKER, District Judge.

The plaintiffs in this case filed a fifteen count complaint against twenty-three defendants, in which they allege various forms of fraud, breach of contract, deception, and racketeering. Two years later, only one pro se defendant,¹ Larry A. Keegan, and the five counts against him remained.² This court conducted a bench trial on those five counts,³ and now enters the following Findings of Fact and Conclusions of Law:

I. Findings of Fact

1. Puller Mortgage Associates, Inc. (hereinafter referred to as PMA), is an Indiana mortgage banking company. PMA maintains its principal corporate residence in Marion County, Indiana.

2. Kenneth A. Puller is the president of PMA and jointly owns (with his spouse, Reva R. Puller) 100% of PMA's outstanding stock. Kenneth A. Puller maintains his personal residence in Hamilton County, Indiana.

3. PMA was formed in 1976 for the purpose of providing mortgage banking services for the federally insured housing industry.

4. Between 1982 and 1989, PMA became the first private mortgage banking company in the United States to receive HUD licenses to coinsure loans for the substantial rehabilitation of multi-family housing, the new construction of multi-family dwellings, and the new construction and substantial rehabilitation of nursing homes.

5. Throughout the 1980s, PMA used its HUD licenses to access secondary capital markets by pooling and securing mortgages under the authority of the Government National Mortgage Association (hereinafter referred to as GNMA), an agency of HUD. As a GNMA mortgage backed seller/servicer/issuer, PMA was able to fund HUD coinsured mortgages through the issuance and sale of GNMA mortgage backed securities. In order to fund loans and construction draws at a closing, PMA borrowed from a "warehouse" credit line, which it subsequently repaid by selling GNMA securities backed by a project's mortgage.

6. As a HUD mortgagee, HUD coinsuring lender, and GNMA seller/servicer/issuer, PMA was required to maintain a minimum level of net worth, liquidity, and sound capital resources.

7. PMA realized substantial profits throughout most of the 1980s, but in 1988, PMA began suffering financially, and on March 15, 1989 disaster struck PMA: A jury in Colorado returned a verdict against PMA for approximately $4,850,000 (hereinafter referred to as the "Colorado Judgment").

8. PMA subsequently informed HUD that because of its financial problems and the Colorado Judgment, PMA's financial statement no longer met the required minimum levels of net worth, liquidity, and sound capital resources necessary to retain its coinsurance licenses.⁴

9. On April 25, 1989, the FHA and HUD suspended PMA's coinsurance licenses. In the HUD withdrawal notice, HUD notified PMA that its coinsurance licenses would be reinstated if, within ninety days, PMA was able to file a financial statement demonstrating that PMA met HUD's required minimum levels of net worth, liquidity, and sound capital resources.

10. Due to the insecurities surrounding PMA's regulatory status, PMA's warehouse lenders refused to fund further construction draws to PMA' borrowers, and on May 10, 1989, GNMA cancelled PMA's GNMA issuing authority. Nine days later, GNMA took possession of PMA's coinsurance portfolio.

11. Prior to the entry of the Colorado Judgment, PMA and the New York Life Insurance Company were working to put together a $250,000,000 public securities offering (hereinafter referred to as the "NYLife Offering"). PMA was to be a principal in that offering — PMA was to originate, process, and service loans funded through the NYLife Offering — but because of the Colorado Judgment and PMA's regulatory problems, the offering was put "on hold." The NYLife Offering was projected to bring PMA a profit of $4,500,000 over a period of two years.

12. Enter Larry A. Keegan. Keegan, a resident of Sacramento County, California, is the president and the Chief Executive Officer of American Capital Investments (hereinafter referred to as ACI), a California corporation.

13. Keegan, whose companies were experiencing financial problems of their own, wanted to acquire a HUD coinsurance license for ACI. When he learned of PMA's financial and regulatory difficulties, Keegan requested a meeting with Ken Puller and PMA. On May 18, 1989, a tele-conference call was arranged, during which Keegan told Ken Puller, Timothy P. Brazill (a PMA attorney), and Douglas Brown (PMA's general counsel) that he retained control over fifty-nine million dollars worth of real estate, which could be converted into approximately seventeen million dollars cash. Keegan explained that his company, ACI, was a holding company, and spoke of "mushrooms of equity" (whatever that is) based on ACI's corporate and real estate holdings. Keegan told Puller that he was ready and able to resolve PMA's regulatory and financial problems, but PMA would have to act quickly, because if PMA did not accept his help, "he had to do something else with these particular real estate holdings."

14. When Puller and his associates apprised Keegan that PMA would need an immediate cash infusion of no less that $1,500,000, Keegan responded, "I can do that."

15. In the following days, Puller, Brown, and Brazill traveled to Washington, D.C. to speak with HUD officials about PMA's financial and regulatory problems. Keegan, too, traveled to Washington, D.C., and on May 21, 1989, the day before PMA was to meet with the HUD officials, Keegan, for the first time, met face to face with Puller, Brown, and Brazill. In Puller's Washington hotel room, Keegan provided to Puller a document entitled "Preliminary Business Outline & Concepts" (Exhibit 10a), and for approximately three hours discussed his and ACI's business abilities. During that meeting, Keegan made the following representations:

(1) Larry Keegan is the president, chief executive officer, promotor, and substantial shareholder of ACI;

(2) Larry Keegan has a significant understanding of the FHA mortgage business, and currently owns and operates several, very successful mortgage companies in California, including the Statewide Mortgage Amaford Corporation;

(3) ACI is a holding company, the assets of which consist of various parcels of real estate located throughout the United States (4) ACI is affiliated with and/or owns, as subsidiaries, Statewide, the Amaford Group, and the American Affordable Life Insurance Company;

(5) Statewide and Amaford are profitable, private mortgage banking companies, and the American Affordable Life Insurance Company is an extremely profitable life and casualty insurance company that maintains a general agency relationship with Life USA of Minneapolis, Minnesota and approximately 400 insurance agents throughout California;

(6) ACI has the ability to use approximately $57,700,000 in real estate assets that can be immediately converted into at least $17,000,000 in cash;⁵ and

(7) ACI holds control over that real estate, pursuant to the terms of stock subscription agreements executed by and between ACI and its "subscribers";⁶

16. At the close of that meeting, Keegan, in exchange for a majority ownership interest in PMA, offered to provide PMA sufficient and acceptable short-term operating cash and permanent equity capital such that HUD, FHA, and GNMA would reinstate PMA's suspended mortgage licenses. Keegan also proposed that if Puller would agree to remain as president of PMA for five years or more, ACI would agree to pay Puller an annual salary of $350,000 plus 20% of PMA's net profits.

17. On May 22, 1989, the day after the Washington hotel-room meeting, Keegan provided PMA additional documentation in support of his offer, to wit:

(1) A set of documents describing various real estate "controlled" by ACI (Exhibit 8);

(2) Copies of subscription agreements between ACI and ACI subscribers (Exhibit 9); and

(3) A binder containing a description of "ACI Land Acquisitions." See Plaintiffs' Post-Trial Brief, p. 9.

18. Later that same day, PMA officials met with the HUD officials. After reviewing PMA's financial status, the HUD officials told PMA that before they would restore PMA's revoked privileges as a GNMA issuer and FHA coinsurance lender, and approved FHA mortgagee, PMA would have to present a reinstatement proposal to HUD providing for the following:

(1) An equity infusion sufficient to allow PMA to submit an audited financial statement confirming that it had reestablished the necessary net worth, liquidity, and sound capital resources levels;

(2) The repayment of GNMA advances; and

(3) The acquisition of a warehouse credit line to assure the timely funding of PMA's future construction and permanent loans.

19. The HUD officials believed that for PMA to regain its coinsurance licenses, PMA would need to acquire $1,500,000 in cash (to disburse certain liabilities) and $10,000,000 in net equity (to improve the asset side of its balance sheet.)⁷ These requirements were not federally imposed mandates, but, according to Brazill's characterizations, represented "an organic dialogue of federal officials who were very well acquainted with Mr. Puller." HUD, GNMA, and FHA officials invited Puller to return to Washington on June 5, 1989 to submit a formal reinstatement proposal.

20. On May 26, 1989, Keegan sent (by facsimile) to PMA a cover letter⁸ and a draft document entitled "Preliminary Agreement/Letter of Intent." The Preliminary Agreement/Letter of Intent provided for an exchange of PMA stock for ACI stock and for ACI to "transfer to PMA Real Estate in sufficient quantities to satisfy the regulators for cash and...