Banks that bought equipment leases from a now-bankrupt Syracuse firm say they're discovering that they're not going to get off as easily as had been thought.
Contrary to initial reports, a number of banks and thrifts say they have found that they received duplicate copies of the same equipment leases from Bennett Funding Group, a leasing company that declared bankruptcy in April amid allegations of fraud by a top official.
Many banks had said their initial studies of the leases indicated that such duplicate leases were sold only to individual investors, not to institutions.
But some banks and thrifts now say they have also learned that some of the Bennett leases they'd recorded as making regular payments were either paid off long before or had gone into default from the start, although Bennett officials never notified them - or paid them.
Mark Osborne, chairman and chief executive of Quincy, Mass.-based Hibernia Bankshares, said Bennett's not forwarding full payment on some repaid leases was a "common occurrence" among Bennett investors. Hibernia also found that some of its larger leases were in default from the start, but Bennett claimed they were still being paid monthly, Mr. Osborne said.
Hibernia has written off about $1.4 million, but the thrift has about $1.2 million in performing leases, and the bankruptcy trustee has reported holding $270,000 cash collected on the thrift's leases.
Banks said the recent discoveries were aided by a Coopers & Lybrand study conducted for the court-appointed bankruptcy trustee, Richard Breeden. The study showed that some banks did hold duplicate leases.
Such discoveries prompted many banks with Bennett leases to take further precautions in the last few months. Many are now writing off some of their leases or recording reserves of at least several hundred thousand dollars each to cover potential losses.
Citizens Bank of Princeton, Mo., for example, has written off a substantial portion of its $2.2 million investment, causing a second- quarter loss of $1.1 million. The $31 million-asset bank does have some duplicate leases, said Deryl F. Hamann, president and chief executive of Citizens' parent, Decatur Corp. of Leon, Iowa. But he expressed confidence that Citizens has original documentation to support its claim.
"As far as we're concerned, we're in a recovery mode," Mr. Hamann said.
According to Veribanc Inc., a Wakefield, Mass., research firm, 211 banks and thrifts in 31 states purchased leases from Bennett before the company was pushed into bankruptcy after its chief financial officer was charged with fraud in late March.
With most reporting several hundred thousand dollars of investments, the total exposure for banks is likely to reach more than $100 million, said Veribanc research director Warren Heller. Veribanc has not compiled a precise total, however, nor is it clear how many banks have recorded provisions to cover possible losses.
About 20 institutions could endure "significant losses," but a preliminary study by Veribanc shows that most of the affected banks and thrifts would be able to absorb any hits, Mr. Heller said.
However, the banks with duplicate leases in particular may face an uphill battle to recover any losses. To establish the priority of their claim, the institutions must prove to the bankruptcy court that they're entitled to the collateral first. But "when the same lease has been sold to several people, who's truly the first lien-holder is truly in doubt," Mr. Heller said.