Case type: Lender liability
Attorneys: David J. Noonan, Steven W. Sanchez
Law Firm: Post Kirby Noonan & Sweat
Venue: United States District Court, Southern District of California
Side:  Defendant
Trier of fact: Jury
Testimony Issue: Fraudulent transfers
Testimony Dates: January 31, 1997 and Februry 3, 1997 
Case Summary: San Diego Trust & Savings Bank (“SDTS”) was accused by Pioneer Liquidating Corporation (“PLC”), the successor in bankruptcy of consolidated entities known as Pioneer Mortgage, of permitting Pioneer Mortgage to engage in a massive check-kiting scheme during the period leading up to bankruptcy.  (A check kite is a fraudulent scheme in which a bank customer utilizes the time it takes for checks to clear to create artificially high balances of nonexistant funds through a systematic exchange of checks among accounts.)  PLC claimed further that SDTS’s practice of providing provisional credit to Pioneer Mortgage by honoring checks written on uncollected funds created a series of short-term loans subject to liability in bankruptcy in excess of $71 million, which PLC was entitled to recover as fraudulent transfers. 
Testimony summary: Pioneer Mortgage provided mortgage loans in the San Diego area.  It sold full and fractionalized trust deeds to investors to raise the funds to make the underlying loans.  PLC alleged that when Pioneer Mortgage ran into cash flow difficulties, the company resorted to check kiting.  PLC alleged also that the defendant bank participated in the check kiting and other fraudulent activities to keep Pioneer Mortgage in business so it could pay down its line of credit to the defendant bank.  The parties agreed that the defendant bank regularly permitted Pioneer Mortgage to withdraw funds before covering deposits had cleared. PLC claimed that during the 18 months prior to bankruptcy this practice enabled Pioneer Mortgage to make 473 allegedly fraudulent transfers totaling more than $71 million. PLC created a computerized database of Pioneer Mortgage’s checking account activity.  It used the database to support its claim of the existence of the alleged check kite and to calculate the dates and amounts of claimed fraudulent transfers.  Mr. Neches was retained on behalf of the defendant bank to review PLC’s database and to rebut its calculations. Mr. Neches testified that the computer database and calculations prepared by PLC failed to prove the existence of a check kite.  He testified that PLC’s computerized calculations of the dates and amounts of claimed fraudulent transfers were unreliable.  PLC’s computerized database of checking account activity contained information taken from more than 100,000 checks, deposit slips, bank statements and other documents.  PLC developed complex algorithms using the information in the database to calculate so-called “kite indications” and the dates and amounts of alleged fraudulent transfers.   Mr. Neches’ analysis uncovered key flaws in PLC’s approach.  PLC arrived at the $71 million total of claimed fraudulent transfers it sought to recover by aggregating each of the daily amounts it calculated the defendant bank had advanced to Pioneer Mortgage during the 18 months prior to bankruptcy.  Mr. Neches testified that PLC’s calculations were unreliable.  He testified further that small changes in the assumptions used by PLC to calculate each daily amount resulted in enormous variations from the $71 million total claimed. Mr. Neches’ testimony undermined PLC’s claim of the existence of a check kite.  He testified that Pioneer Mortgage’s use of provisional credit did not cause any bank to lose money.  His analysis demonstrated that on all but six days during the 18-month pre-bankruptcy period Pioneer Mortgage, in the aggregate, had enough money in its accounts at the defendant bank to cover all checks it wrote between accounts and that all checks eventually cleared in the normal course of collection.  These critical facts were cited by the Court in its Order Granting Defendant’s Motions for Judgment as a Matter of Law.
Result: The five-week trial ended with a hung jury after seven days of deliberation.  Subsequently, the Court ruled in favor of the bank, granting the defendant bank’s Motions for Judgment as a Matter of Law.  The matter was appealed and subsequently settled.