Nowhere to Run From Debts

The failed Bank of Newport’s founding president, who fled the state two years ago as regulators and creditors closed in on him, might be worse off now than he would have been had he remained in Orange County.

Ronald Lee Rodgers, once a well-regarded Orange County banker, moved quickly to Florida after a Newport Beach lawyer told him that state law there would protect more of his property from creditors than laws in California and other states.

But federal regulators pursued him, forcing him to admit in sworn testimony that he tried to hide assets and defraud creditors. A judge found that Rodgers “simply lied under oath” and refused to erase his debts.

Now Rodgers, 63, is about to emerge from bankruptcy in Orlando with little to show for more than 40 years in the banking industry but $3.2 million in debts that he still owes.

“He thought he was going to move here, file bankruptcy and have his debts discharged,” said a federal regulatory source in the case. “Having the discharge denied is a pretty serious thing.”

Thomas J. Prenovost Jr., a Santa Ana lawyer who represents a creditor, Frontier Bank in La Palma, called the order “very unusual.”

“He loses everything and still owes his debts. They can’t go away even in a later bankruptcy.” Prenovost said. “It’s a permanent thing that will follow him around as long as creditors are willing to chase him.”

Neither Rodgers nor his Orlando lawyer would comment.

Rodgers was Bank of Newport’s president from its opening in 1972 until he was forced to resign in March 1993. Regulators closed the bank in August 1994 after it suffered losses on real estate loans, a major fraud by borrowers and, finally, a run on deposits.

The Federal Deposit Insurance Corp., which covered insured deposits, was installed as receiver to liquidate the bank’s assets. The agency filed claims in Rodgers’ bankruptcy for $335,000 in unauthorized expense account binges and for more than $25 million in bank losses.

The judge’s refusal to discharge the debts means that the FDIC and other creditors can pursue Rodgers through civil court for payment.

Frontier Bank, for instance, was a day away from a final ruling in its $130,000 case before the bankruptcy filing halted action. And the FDIC, which plans to revive a suit over his expenses, also can name Rodgers as a defendant if it decides to sue directors and officers for Bank of Newport’s failure.

Any judgment against him would allow creditors 20 years to seize any savings, investments or other assets he may acquire.

Federal trustees also are required by law to refer any case of suspected bankruptcy fraud to prosecutors for possible criminal investigation. Donald Walton, the U.S. trustee in Atlanta who oversees Florida bankruptcy cases, said his office typically refers to prosecutors cases involving efforts to hide assets, but he would not say if the Rodgers case had been turned over.

“Had he stayed in California and listed his assets,” said the regulatory source, “at least he would have had his debts discharged and wouldn’t be facing possible criminal action and the humiliation of all this.”

Still, the former banker, who has agreed to a lifetime ban from the banking industry, didn’t lose quite everything. Under Florida’s homestead exemption laws, as well as pending settlements with the FDIC and the trustee, Rodgers will keep his home with a swimming pool in a comfortable suburban Orlando neighborhood.

He admitted in testimony that his wife paid for the house in full with cash he gave her from the sale of his Corona del Mar home and other assets. However, they have since put a $55,000 mortgage on the home, turning the proceeds over to the trustee for creditors.

The trustee also gathered $28,000 more with the help of the FDIC, which found cash and a car that Rodgers was trying to hide, court documents and his own deposition reveal. The trustee sold the car for $18,500.

The total raised to pay off creditors is about $83,000. Though Rodgers listed $3.2 million in debts, creditors filed only $1.5 million in claims.

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The settlements with the FDIC and the trustee, which will help to close the bankruptcy case, are expected to be approved this week. Under the terms, the FDIC withdrew a $25-million claim it had filed for bank losses and will receive about 63% of the funds collected after court costs and fees are paid. Other creditors, mainly banks, will receive pennies on the dollar.

Rodgers, without a job since he was forced to resign from Bank of Newport, also will keep what he says are rights to sue the Newport Beach lawyer he says advised him to move, Jon R. Stuhley, as well as a former Los Angeles banking lawyer on an unrelated matter for what he considers bad advice. Both lawyers denied providing any bad advice to him.

In two days of astonishing admissions at his bankruptcy deposition 14 months ago, Rodgers at first denied, then acknowledged that he left California in February 1994 for Florida to take advantage of that state’s more protective homestead laws and other advantageous exemptions for a bankruptcy petition he planned to file.

He testified that he went to Stuhley for help in finding the state that would provide bankruptcy petitioners with the most favorable treatment. He also said he asked for help in hiding his 1993 Chrysler Concord and some cash from creditors.

He said in his deposition that he turned over $28,000 to form a company, Financial Resources Inc., headed by a good friend. The company bought his car, paid off a $17,500 loan on it and continued to hold the car for him. He even drove it when he moved to Florida, he said. Financial Resources, he said, had little other business.

The company’s address was listed as Stuhley’s law office, a fact that helped creditors trace the Chrysler and search for Rodgers in Florida.

Stuhley, who was paid $30,000 for “insolvency advice,” denied in an interview that he tried to help Rodgers hide assets. He said he provided legal research as any lawyer would and that the Bankruptcy Court in Orlando simply interpreted federal laws differently than judges in Southern California do.

“I never advised anyone to do anything illegal,” Stuhley said. “Lawyers give advice all the time that can have beneficial consequences.”

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Stuhley, who said he hasn’t talked with Rodgers in more than a year, wouldn’t comment about specific matters because he said he was bound by attorney-client privilege, which forbids lawyers from revealing confidential legal discussions.

Rodgers received $169,000 from the February 1994 sale of the Corona del Mar home he owned with his first wife and $66,000 from the sales of his interest in a house in Durango, Colo., and a building in Portland, Ore.

He turned most of the money over to his second wife, Verna Johnson, his former secretary. She used $125,000 to buy a home in Florida in her name and more than $12,000 to fix it up, according to court documents.

Rodgers admitted in his deposition that he transferred the money to her to conceal it from creditors, and he amended his bankruptcy petition to show his interest in both the home and the car. Stuhley said he thought the transfer was a loan.

Meantime, creditors are weighing their options.

Frontier Bank, for instance, is trying to decide whether “proceeding against Mr. Rodgers has any potential for recovery,” said Prenovost, the bank’s lawyer.

Under Florida law, a homestead is completely exempt from a forced sale by creditors, and lawyers said the value in Rodgers’ house isn’t worth the cost of trying to prove it was obtained fraudulently. In California, the exemption for homeowners is limited to a range of $50,000 to $100,000.

In addition, wages for the head of a household are exempt from garnishment, according to Florida law, though creditors can go after any amount over $1,000 in a bank account in addition to other assets. In California, creditors can garnish such wages.

Rodgers formed Bank of Newport in 1972 with his major customers from another bank and with the founding chairman, Herbert W. Kalmbach, then President Richard Nixon’s personal attorney. Kalmbach resigned quickly in the aftermath of the Watergate scandal and his conviction on federal campaign financing violations.

Rodgers built Bank of Newport into one of Orange County’s largest independents with assets of more than $300 million at its peak in 1991.

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The bank catered to the wealthy and counted among its directors its multimillionaire chairman, E.O. Rodeffer, who pioneered tilt-up concrete construction for industrial buildings. Others included Los Angeles lawyer and Major League Soccer Chairman Alan I. Rothenberg, real estate developer William Messenger and William Baker, former Del Taco chief executive.

The bank built a pricey headquarters in Corona del Mar that featured a crystal chandelier in the vault, and Rodgers, a loner who shunned banking industry meetings, began buying luxury company cars.

He also began living the high life with his secretary on the company account, running up bills of more than $335,000 for expenses that were “unauthorized personal indulgences and acquisitions,” according a lawsuit the bank filed against him.

The bank was shaken by real estate loans that went bad, including two for office buildings that had contributed to the bank’s losses in the early 1980s. Regulators criticized the bank in August 1992 for weak management and chastised directors for failing to pay enough attention to bank affairs. Rodgers resigned under pressure seven months later.

The long recession hindered the bank’s recovery, and at least one possible deal to sell the bank fell apart after a major fraud by a borrower was discovered in 1994. The fraud, coupled with a later run on deposits, sent the bank to its demise that August.

Rodgers, however, was long gone by then. Six months earlier, in February 1994, he quietly and quickly slipped out of the state, and creditors spent months tracking him down. They learned that he had moved to Florida, but didn’t know precisely where until he filed a bankruptcy petition that July.

As the case now winds toward a conclusion, creditors must decide if pursuing Rodgers further is worth the expense. Though they’ll receive little from the bankruptcy, they could get judgments that would be enforceable in Florida for up to 20 years, lawyers said, and no one knows how much Rodgers, who earned $328,000 in his last full year at Bank of Newport, could be earning next year.

“As long as he’s unemployed,” lawyer Prenovost said, “I suppose that would discourage creditors from going after him, which is probably what he wants.”

BACKGROUND

Ronald L. Rodgers, 63, helped found the Bank of Newport in 1972 and built it into one of the county’s largest independent banks. But Rodgers resigned under pressure in March 1993 after continuing losses, and after regulators chastised directors for failing to monitor their officers. By then, the bank’s over-reliance on real estate loans and real estate collateral had combined with declining home and office building values to put the bank in serious financial trouble.

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Bank of Newport’s Long Slide

A major fraud and a run on deposits were the final blows to a struggling Bank of Newport. The bank long had been troubled with delinquent and nonpaying loans that pushed its ratio of bad loans to total loans beyond the 3% level acceptable to regulators:

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Bad loans Bad loans as % (thousands) of total loans 1985 $11,116 9.43% 1986 8,497 7.18 1987 7,007 5.70 1988 5,048 3.10 1989 5,900 2.82 1990 7,426 3.31 1991 10,478 4.59 1992 11,374 6.37 1993 5,974 4.61 1994* 5,252 4.57

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Cash Crunch

Even while recording profits in some years, Newport’s increasing loan losses slowly eroded its capital--its final cushion against losses. Under regulatory orders to raise capital, the bank picked up some cash from shareholders in 1993, and was slowly turning itself around when the fraud occurred.

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Earnings Assets Capital Adequacy (thousands) (millions) (6% min. req.) 1985 $-232 $169.1 N/A 1986 -1,296 184.3 N/A 1987 1,115 172.0 9.35% 1988 1,075 211.2 7.82 1989 2,069 265.8 7.52 1990 2,619 270.8 7.04 1991 -1,348 300.6 6.69 1992 -4,819 254.8 4.83 1993 -2,679 218.3 6.04 1994* -9,824 167.8 0.77

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* First six months, not including fraud losses N/A: Information not available Sources: Findley Reports, Anaheim; Sheshunoff Information Services, Austin, Texas; Researched by JAMES S. GRANELLI/Los Angeles Times