By Bridgett Weaver – Reporter, Louisville Business First
Dec 2, 2016, 4:39pm EST Updated Dec 2, 2016, 4:55pm EST
The Kentucky Court of Appeals ordered Porter Bancorp Inc. (NASDAQ: PBIB) the Louisville-based parent company of PBI Bank, to pay more than $10 million to Signature Point Condominiums LLC, Signature Point Apartments LLC and Signature Point KTC.
The court on Friday found PBI responsible for six different claims made by the prosecution, including fraud and the breach of the duty of good faith.
Louisville-based Zielke Law Firm, which represented the condo groups, sent a news release out explaining the situation that led to the dispute.
The claims stemmed from a 2006 transaction in which Scott Hagan, a real estate developer bought 90 acres of properties in eastern Jefferson County to create condos and other upscale residential developments. According to the court of appeals written decision, U.S Bank originally provided the financing for the purchase, but PBI took over the financing in 2007 at Hagan’s request. PBI provided a $25 million loan to Signature Point, split evenly between a $12.5 million revolving construction loan and a $12.5 million revolving development loan. A revolving loan allows for the loan amount to be withdrawn, repaid and redrawn again in any manner and as many times as needed until the the arrangement expires.
In 2010, with the real estate bubble burst and the real estate market in shambles, PBI and Signature Point negotiated a deal that allowed PBI Bank to hold the deeds to the property while letting Signature Point out of the loan agreement. PBI took the property in lieu of foreclosure, agreeing only to provide Signature Point with a right of first refusal before it sold the property to be developed.
To get Hagan to agree, the Zielke release said, the bank assured him that no one was interested in the property, a statement found to be fraudulent by the jury. The appellate court’s decision explains that only five days before making the agreement, there was a letter of intent from another company to buy at least one of the properties.
Signature Point was awarded $1.5 million in compensatory damages plus $5.5 million in punitive damages for a total of more than $7 million after the 2013 trial.
The appellate court also allowed to stand a 12 percent interest rate enacted in the trial court, despite several attempts by PBI to have the percentage lowered. Including the interest, which accumulated at a rate of $3,248.70 per day since the trial ruling in 2013, the complete amount PBI Bank must pay is $10,099,134, the Zielke release said.
The decision comes after a particularly volatile time in PBI’s history. The company has undergone changes in leadership and management due to problems, like this lawsuit, that stemmed from mismanagement during the Great Recession.The bank has been struggling to come out from under the dark cloud left behind by former management since it was replaced.
“This is part of all that bad business legacy that we’re trying to overcome from the recession years,” Kerry DeMuth, director of marketing and communications said in a Friday afternoon interview. “This was totally previous management.”
DeMuth said this lawsuit is part of a continued effort to clean up those past mistakes.
“None of those players are part of the team anymore,” she said. “The bank representation that initiated those business deals is no longer part of the bank.”
PBI Bank borrowed $35 million from the Troubled Asset Relief Program in 2008 under the Capital Purchase Program in an effort to breathe new life into the bank and repaid the loan in 2014. The company continues to operate under a consent order it agreed to with the Federal Deposit Insurance Corp. and the Kentucky Department of Financial Institution.
“We are very disappointed with the court’s decision regarding this legacy issue,” John Taylor, the bank’s president and CEO, said in a news release. “However, the bank’s capital and liquidity remain strong and its mission to serve our customers remains unchanged. At this juncture, we are conferring with out legal advisers and evaluating the merits of further pursuing the appellate process.”
DeMuth said it is still being decided how the bank will move forward with further appeals. She said officials plan to take some time to consider the remaining legal options that are available. No matter how they proceed, the bank is confident in its current position.
“Even if we have to pay the full amount, it’s not going to kill us,” DeMuth said. “We planned for the worst-case scenario.”