Developer's collapse leads Huntington to sue ex-employee: Bank's purchase of Sky, which lent to Timberstone, casts long shadow

Oct 11, 2009 (The Blade - McClatchy-Tribune Information Services via COMTEX) -- HBAN | Quote | Chart | News | PowerRating -- When Jerry Batt left Huntington Insurance in September, 2008, a Columbus business publication described him as the architect of a sales strategy that propelled the firm's parent company to the nation's top 20 banking companies in insurance sales.

But one month later, lawyers for the owner, Huntington Bancshares Inc., were not in a congratulatory mood as they entered a courtroom in Lucas County Common Pleas Court.

Armed with a $7 million court judgment involving a soured real estate development loan, the lawyers filed motions seeking to freeze any accounts the former president of Huntington Insurance had at rival Fifth Third Bank and seize funds due to him under his employment contract at Huntington.

It was another chapter in the unfolding saga of Timberstone Group Inc. of Springfield Township. The six-year-old commercial development firm was led by Dan Sandwisch and Mike Denman, who took on high-profile projects such as the Bartley Lofts condominium conversion in downtown Toledo, DeVeaux Village Shopping Center renovations in West Toledo, and Talmadge Town Center retail strip construction near Westfield Franklin Park.

Mr. Sandwisch, 43, and Mr. Denman, 36, recruited wealthy local investors to join real estate partnerships that often paid top dollar for retail, office, and residential properties that the young principals thought would yield premium rents.

But the firm defaulted on most loans, and properties are in various stages of foreclosure.

Mr. Batt was a principal investor who participated in several Timberstone partnerships, signing guaranties to repay bank loans if they were unable to do so.

Just a few years ago, in better times, Mr. Sandwisch and several other Timberstone investors jointly purchased a home for personal use in an exclusive gated community on Water Island in the U.S. Virgin Islands.

Reflecting national trend

Timberstone's failure mirrors a national decline in commercial real estate that has felled developers and torpedoed the bottom lines of banks that loaned to them.

The crisis was fueled by unrealistic expectations that property values would continue to rise, faulty assumptions about how much rent investment properties would generate, and relaxed lending standards by banks, said Karen Dynan, vice president of the economic studies program at the nonprofit Brookings Institution.

"Investors and lenders got very comfortable with the market and miscalculated the amount of risk associated with this lending," she said. "Investors and lenders let down their guards."

Timberstone's aggressive business strategy, even during the real estate boom earlier this decade, was questioned by some veteran real estate executives who warned of dire consequences.

Now Timberstone lies in ruins.

"They put together a very good staff of people," said longtime Toledo commercial realty owner and developer Joseph Swolsky, who invested in Bartley Lofts and a number of other Timberstone projects.

"They were able to take advantage of the good markets of 2005 and 2006. But they weren't able to withstand the pressures of the downturn in the economy and the contraction of the banking system."

A lawyer for Mr. Denman of Springfield Township, and Mr. Sandwisch of Maumee could not be reached.

The two men have filed separate bankruptcies in U.S. Bankruptcy Court in Toledo, listing $60 million in debts -- most linked to the company. Each lists his only income as less than $500 a week in unemployment compensation checks.

U.S. Bankruptcy Judge Mary Ann Whipple late last month allowed mortgage-holder Fifth Third Bank to foreclose on Mr. Sandwisch's five-bedroom Maumee house.

Series of lawsuits

The Timberstone collapse has spawned at least 16 lawsuits in courthouses in Toledo, Bowling Green, and Findlay. Four other cases have resulted in monetary judgments against the firm and its investors.

Dozens of local suppliers and construction contractors have been left holding hundreds of thousands of dollars in unpaid bills.

Owed more than $70,000 for electrical work, construction executive Dan Bollin, president of the Home Builders Association of Greater Toledo, showed up one July day at Mr. Sandwisch's Maumee home.

Informed that he was away, Mr. Bollin allegedly pressed the developer's wife and daughter to contact Mr. Sandwisch by mobile phone.

Accounts differ about what transpired. But Mr. Sandwisch's wife and daughter told police they felt threatened. And the incident prompted Mr. Sandwisch to seek a protection order against Mr. Bollin in a case that is pending in Lucas County Common Pleas Court.

"By no means was I over there to threaten him," said Mr. Bollin, who faces trespassing charges in Maumee Municipal Court. "I just wanted communication. Are you broke? Are you going to pay us?"

He admits that he entered the house through an open door after peering through the window and suspecting the house had been abandoned. But he quickly left when he realized his mistake, Mr. Bollin said.

Among investors involved in Timberstone projects who face potential liability in connection with failed projects is Urban Meyer, head football coach at the University of Florida in Gainesville. The former Bowling Green State University football coach was involved in financing a Timberstone shopping center in Findlay, according to Mr. Sandwisch's Chapter 7 bankruptcy petition. The coach, through a spokesman, declined comment.

Other investors include developers Joseph Swolsky and Robert Gersten and investment executive Scott Savage, Mr. Sandwisch's bankruptcy petition states. In all, the 250-page petition lists 27 so-called "co-debtors" who face potential liability for Timberstone debt.

Biggest bank involvement

Also figuring prominently in the bankruptcy petitions is the creditor with the most at stake: Huntington Bank of Columbus, as a result of its parent company's 2007 acquisition of Sky Financial Group in Bowling Green.

Huntington inherited at least $50 million in loans from Sky that originally were made to various Timberstone-linked projects.

Citing privacy issues, a bank spokesman declined comment on all matters related to the Timberstone collapse.

The biggest loan was for a shopping center in Fort Myers, Fla. A Timberstone partnership spent $22 million in 2007 to buy the Avenue Shops at Palm Drive and U.S. 41. It then spent more money to renovate, expand, and rechristen the center as Palm Pointe Shoppes. The purchase price represented a 40 percent premium over the price paid by the previous owner four years earlier, records in Lee County, Florida, show.

Now the project is in foreclosure, and Huntington is seeking $31.6 million from the owner, a Timberstone partnership called TGI Fort Myers 41 LLC.

Court-appointed receivers have taken charge of most of Timberstone's projects.

Mr. Batt, the 44-year-old former president of Huntington Insurance, originally Sky Insurance, was directly involved in at least six of the loans.

Huntington has filed suits seeking $17 million from Mr. Batt in connection with guarantees he made to cover loans for partnerships owning retail and office properties in the area around Westfield Franklin Park, a parking lot for tractor-trailers in the Toledo suburb of Lake Township, DeVeaux Village in Toledo, Chesterfield Plaza in Maumee, and a fitness club being developed at DeVeaux Village.

But the suits do not allege Mr. Batt used undue influence with colleagues to obtain the loans or that he received preferential treatment.

Rules for 'insider' loans

The nation's central bank, the Federal Reserve, has enacted guidelines for banks involving loans to top officials and those of some affiliated companies. "Regulation O" requires that the loans to so-called insiders be approved by the board of directors in most circumstances and stipulates that they may not "involve more than the normal risk of repayment," according to the Web site of the Federal Reserve's Board of Governors.

However, the rules do not prohibit such loans, said Richard Hamm, a banking consultant affiliated with the Barret School of Banking in Memphis.

"You do not extend credit to those insiders more favorably than other persons in the community with similar credit profiles could receive," he said.

Banks are required to summarize loans to insiders in quarterly reports filed to federal regulators, he added, noting that such reports typically get close scrutiny during bank examinations and other regulatory reviews. Sky Bank, between the end of 2004 and its purchase by Huntington in mid-2007, reported 14 loans to executive officers totaling less than $1 million. Borrowers aren't identified, however.

Mr. Hamm, the banking expert, questioned whether the head of an insurance agency affiliated with a bank would be covered by the regulation.

He noted, however, that many banks apply a similar policy to lower-level employees. "[Regulation] O gives us a model to follow for handling the rest of our employees," explained Mr. Hamm, who worked as a banker for 22 years in Huntsville, Ala.

Huntington wasn't the only bank that loaned money to Timberstone-linked developments.

Mr. Sandwisch's bankruptcy petition lists $5.4 million owed to Fifth Third Bank as well as smaller loans from First Federal Bank of the Midwest, Defiance; Henry County Bank, Napoleon, and Old Fort Bank, Tiffin.

But Huntington far exceeded lending by other banks.

Huntington as tenant

And Huntington Insurance became a prime tenant in a Timberstone-linked development.

The firm occupies a stately office building off County Road 236 in Findlay, next to the development firm's Shops at Timberstone Commons retail center.

The shopping center was supposed to be part of a large development that combined apartments, single-family home sites, retail, and office use. But many of the home sites are vacant.

The Shops at Timberstone Commons, near U.S. 224, includes a furniture store, Goodwill outlet, and fitness center. Most storefronts are unoccupied, however.

The office building -- for which Huntington signed a 10-year lease, according to material distributed by a real estate agency -- is now owned by a Pittsburgh business.

But records at the city of Findlay show that a development plan for the building was filed in 2007 by the original owner of the land, West Portage Development LLC, which was a Timberstone affiliate that included Mr. Batt, Mr. Denman, and Mr. Sandwisch as investors.

They sold the 1-acre parcel to another Timberstone affiliate in September, 2007, for $375,000.

And Mr. Batt obtained loans from Sky for projects unrelated to Timberstone. He and onetime business partner Phil Cargnino got $1 million from the bank to buy a pair of car washes in suburban Toledo. They were among a chain of car washes owned by a firm formed by the two men: Phil & Jerry's LLC.

In May, 2007, Sky -- not yet part of Huntington -- released Mr. Batt from his obligation to repay the loans if the firm was unable to do so, court records show. The decision wasn't explained. It is unclear if Mr. Batt withdrew from Phil & Jerry's.

But these loans continue to haunt Huntington. Phil & Jerry's, renamed Phil & Rebecca's last year, turned over ownership of those two car washes and at least five others in 2007 without the required permission of Huntington in a transaction that Huntington alleges was fraudulent, according to a lawsuit in Lucas County Common Pleas Court.

The acquiring firm, BBC Equities, was closed in late July by the U.S. Securities and Exchange Commission, which alleged in a complaint in U.S. District Court in Detroit that BBC and its founder, John Bravata, were operating an investment fraud known as a Ponzi scheme.

Huntington is now trying to repossess the car washes, but it is unclear whether there will be an attempt to block those efforts by a receiver appointed to represent the interests of BBC investors who stand to lose $50 million.

Neither Mr. Batt nor Mr. Cargnino responded to a request for comment.

Sky Bank loaned the firm $4.1 million in November, 2007, to purchase Amberwood Shopping Center in Ashland in north-central Ohio. But the firm failed to repay the loan, and Huntington filed suit.

Although BBC Equities claimed to own $400 million in real estate, the SEC says the firm was a fraud from its start in 2006 and never made a profit.

Troubled firm's local ties

BBC Equities also had ties to Timberstone Group. In early 2009, as Timberstone creditors began to line up, BBC announced it had purchased $115 million in properties from Timberstone for an undisclosed price.

The deal including shopping centers in Fort Myers, Fla., Maumee, and West Toledo. Contrary to BBC claims, however, real estate records show the deals weren't finalized.

There is no indication anyone affiliated with Timberstone was involved in or had any knowledge of the Ponzi scheme allegedly carried out by BBC Equities.

Jay Kaplan worked for Timberstone for five years as manager of its Rockland Truck Depot in suburban Lake Township. Whatever its problems, the firm didn't take shortcuts in its developments, he said. "They always did first-class work," Mr. Kaplan said. "They did things up right."

But like many other Timberstone projects, the truck depot is in foreclosure.

Huntington, in a suit in Wood County Common Pleas Court, claims that the 3695 Rockland Circle facility, which provides a lot for truckers to store their big rigs between runs, owes $1.9 million on a $2 million loan taken out in early 2005.

One Toledo developer, who spoke on the condition of anonymity, said that banks overall the past few years were too eager to loan money during the real estate boom.

"There was a willingness by all banks to overlook the realities of business," he said. "Now everybody is paying for it."

Mr. Bollin, president of Eagle Creek Builders and Transtar Electric, blames Timberstone's failure on the real estate collapse along with a flawed business strategy.

"They grew too fast, too quick," he said. "When you're growing a business, you have to have a strong foundation. I don't think they had it."

Contact Gary Pakulski at:

gpakulski@theblade.com

or 419-724-6082.

To see more of The Blade, or to subscribe to the newspaper, go to
http://www.toledoblade.com. Copyright (c) 2009, The Blade, Toledo, Ohio
Distributed by McClatchy-Tribune Information Services. For reprints, email
tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax
to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave.,
Suite 303, Glenview, IL 60025, USA.

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index