Lender Sues Former Executives

Wauwatosa-based CSMC, which also does business as Central States Mortgage Co., incorporated in March 1992 and was originally owned by the two Jungens, Dwyer and Poehnelt, according to a copy of the complaint provided by the plaintiff’s attorney Douglas H. Frazer. The company operated as a mortgage banker and utilized warehouse lines-of-credit to finance loans held-for-sale for up to two months.

CSMC never invested in loans held-for-investment, the lawsuit says. Some of its business was derived from credit unions.

The company reorganized in 1997 and 13 state-chartered credit unions acquired 53 percent of the CSMC’s shares. With the reorganization came a new name: CUSO — an acronym for “credit union service organization.” Since then, the number of credit union shareholders has risen to 30 and their collective share of ownership is around 72 percent.

The credit unions also invested in pools of mortgages originated by CSMC.

As chief executive officer until July 2008, Richard Jungen and the other defendants who were each officers of CSMC secretly invested in some of the pools themselves, the lawsuit says. A conflict-of-interest existed because as investors, the defendants had the ability to call the financing immediately due and payable.

In July 1997, the defendants launched Interim Funding — which is also based in Wauwatosa. Interim began buying mortgages originated by CSMC — but without a written agreement. CSMC directors only learned of the defendants’ interest in Interim and the pool financing in June 2008 as a result of board inquiries. When loans were rejected for purchase by Interim, CSMC was stuck with the mortgage which often defaulted or wound up in foreclosure.

The defendants allegedly shifted losses from Interim to CSMC.

“After the 1997 change in ownership, and continuing until at least August 2008, Interim, Jungen, Elaine Jungen, Poehnelt, Dwyer and Miller created, and participated in, a fraudulent scheme to enrich themselves at the expense of CSMC,” the plaintiff claims. “Through their operational control of CSMC, the ownership and control of the operations of Interim, the control of the P55 pool, and the concealment of their activities from the credit union investor directors of CSMC, these defendants manipulated the business of CSMC to its detriment.”

Under Jungen’s leadership, CSMC improperly purchased foreclosed mortgages and REOs — benefiting Interim and costing CSMC more than $15 million, the complaint says.

Sometimes, CSMC would allegedly refinance delinquent loans owned by Interim even though the loans had been previously purchased from CSMC.

Interim continued to demand that CSMC repurchase delinquent loans — ultimately forcing CSMC to repurchase all of the defaulted loans from the secret investment pool.

The defendants are also accused of deceitfully refinancing loans that had been on warehouses line too long and funding them through other warehouse lines as purchase transactions.

As delinquent and nonperforming loans began increasing in 2007, the defendants allegedly waited until 2008 to inform directors — leaving too little time to mitigate losses.

After CSMC directors ordered the termination of the relationship between Interim and CSMC, the defendants are accused of continuing risky lending and liquidating the pool of loans.

CSMC Inc., 10425 West North Avenue, Wauwatosa, WI 53226, Plaintiff, vs. Interim Funding LLC, Registered Agent Richard E. Jungen, 10425 West North Avenue, Suite 149, Milwaukee, Wisconsin, and Richard E. Jungen, 601 East Erie Street #605, Milwaukee, Wisconsin 53202, and Elaine E. Jungen, 2349 North 86th Street, Wauwatosa, Wisconsin 53226, and Jerome J. Poehnelt, W345 S8720 Whitetail Drive, Eagle, Wisconsin 53119, and Kevin J. Dwyer, 140 Legend Court, Wales, Wisconsin 53183, and Charles L. Miller, defendants.
Case Number 2009CV001723, Feb. 2, 2009 (Milwaukee County Circuit Court Civil Division)