Bank Sued Over Failed Firm

A mortgage banking joint venture between a Colorado firm and a Kansas bank appeared to be weathering the financial markets storm until March, when the bank pulled the plug on the operation. Now the bank is being sued for millions of dollars by its former partners.

The lawsuit was filed by Sofco LLC, R. Scott Christian and Robert R. Jones against National Bank of Kansas City in U.S. District Court for the District of Kansas at Kansas City, Kan., on Aug. 8.

The case involves First Fractional Funding, a joint venture between the plaintiffs and defendants that was launched in May 2006, according to court documents. The business involved the financing of fractional ownership interests in vacation properties, resort properties and second residences.

The deal called for the defendant to be the sole funding source for the loans, while the plaintiffs would provide the marketing, underwriting, processing and referrals, the complaint says. After the first six months in business, Christian was paid a $150,000 annual salary while Jones earned $50,000.

During its lifetime, First Fractional funded around $74 million in mortgages, generating $1.3 million in net income annually, the plaintiffs claim. An appraisal by the defendants valued the business at $12.5 million as of March 12, 2008.

In October 2007, First Fractional boasted about its success as the rest of the industry was in turmoil.

“While many in the mortgage industry are trying to survive the recent market unrest by cutting back on offered products, First Fractional Funding, a Denver-based lender specializing in fractional ownership mortgages, has experienced continued growth,” an announcement said. “Because First Fractional Funding’s business is not tied to the secondary market, the current market status has had a minimal effect on its business.”

The business operated until March 13, 2008, when National Bank stopped funding the loans without any prior notice, the defendants allege. The plaintiffs were notified that they could elect to receive $50,000 for their interest in First Fractional or purchase National Bank’s interest for $269,000.

The move by the bank, which was a violation of the license agreement between the parties, was done without giving the defendants any time to find alternative solutions, the lawsuit indicates. Pending loans were left unfunded and any goodwill was wiped out.

When the plaintiffs attempted to obtain financial statements and loan documents for the business so that they could seek out other funding sources, they claim National Bank stonewalled them.

Ultimately, First Fractional was forced to close down.

“Furthermore, as the result of defendant bank’s actions, the reputations and credibility of the division and plaintiffs were seriously damaged and, as the result, the value of the division and the licensed assets were substantially impaired and diminished,” the complaint says.

The plaintiffs are seeking a judgment of more than $6 million.

Around the time First Fractional was closed, National Bank also closed its New Vision Residential Lending wholesale unit.

The bank, apparently facing regulatory problems, entered a formal agreement with the Office of the Comptroller of the Currency on May 20, 2008.