Bank Held Equally at Fault in Money Order Firm’s Collapse : Finance: Wilshire State Bank improperly withheld payment of General Money Order drafts, a jury says.
When General Money Order Inc. went bust shortly before Christmas in 1991--leaving thousands of mostly poor customers holding nearly $20 million in worthless drafts--blame quickly fell on company President Jay Sun Hwang.
However, jurors hearing a recent lawsuit filed by a court-appointed receiver for Los Angeles-based GMO found another equally liable culprit in the financial debacle that created myriad bounced money orders and unpaid household bills for GMO customers.
The verdict in Los Angeles County Superior Court is that tiny Wilshire State Bank of Los Angeles should pay $1.6 million to the receiver because bank executives improperly held up payment on $7-million worth of GMO money orders. The bank’s action was improper, the jury found, because it was taken retroactively--that is, after the bank had agreed to cover the money orders under a credit agreement with GMO.
The receiver alleged that the hold on the money orders was a significant contributing factor to the Department of Corporations’ decision to shut down GMO.
Wilshire State is seeking a new trial. If the verdict stands, however, the $1.6 million will be added to about $12 million that the receiver--the Los Angeles law firm of Saltzburg, Ray & Bergman--has already recovered to be distributed to GMO customers whose money orders were not paid.
Many of GMO’s customers were poor and working-class blacks and Latinos who could not afford bank checking accounts.
Wilshire State attorney Richard H. Cooper, noting that the same jury decided that the bank was not guilty of breach of contract and negligence, said: “The . . . verdicts are internally inconsistent. It makes no sense.”
Assigning some responsibility to Wilshire State “sends a message that banks have to be careful in dealing with customers,” said Eric Edmunds, the attorney representing Saltzburg, Ray & Bergman. “The bank can’t just look out for itself and throw its customers to the dogs.”
The jury assigned 50% of the blame for GMO’s collapse to the bank and 50% to Hwang.
Hwang, a 58-year-old Korean immigrant, nurtured GMO for eight years, building it into a company with 1,400 agents who sold about $60 million in money orders a month. At the time of its demise, GMO was the second-largest money order firm in California.
But attorneys for the receiver say Hwang apparently had continual problems collecting from his vast network of sales agents.
In December, 1991, Hwang reported to Wilshire State that he might be unable to cover about $3 million in outstanding money orders, a situation that put GMO “out of trust,” or in violation of a state requirement that the firm always have sufficient cash on hand to cover all unpaid money orders in circulation. Kenneth Freedman, Hwang’s attorney, said Wilshire State’s response to Hwang’s predicament was to put a three-to-five day hold on 45,000 money orders, although there were funds available to cover those drafts.
Bad money orders were starting to appear after Hwang went to the bank, and the number quickly escalated after the bank imposed its hold. The Department of Corporations then stepped in, closing the company.
Bank executives say they were forced to take the action given what they described as Hwang’s history of financial dealings. After Wilshire State took on the GMO account, the bank’s chief operating officer, Joel Ziskind, said an inquiry discovered that Hwang had knowingly overstated the worth of the company--false information that he had also provided to the Department of Corporations.
“We don’t believe we caused the demise of the company,” Ziskind said. “It was because he was out of trust that caused him to go under.”
Edmunds acknowledges that Hwang disseminated false financial data on GMO but says it was done solely to keep the company afloat. In its eight years of existence, GMO had filed at least 30 lawsuits against sales agents who allegedly did not turn over cash collected from money order sales. One agent, Edmunds said, stole $2 million from GMO before being caught and sent to prison.
Over several years, Hwang poured more than $1 million of his own money into company accounts and sold off commercial property he owned in the San Fernando Valley to offset losses, Edmunds said.
Hwang was unavailable for comment.
The past few years have not been rosy either for Wilshire State, a state chartered bank with $100 million in assets and three branches in Southern California.
The 14-year-old bank, whose customers are mostly retail establishments and other small businesses, reported a loss of more than $610,000 for 1993 and one of $1.9 million for 1992. For the first six months of this year, the bank reported a profit of 194,000.
If the $1.6-million verdict stands, the bank expects to report a loss for the year, President William Im said.
