Another Hard Lesson in Modern Lending
Nearly six years after the financial crisis, banks are lending to small business again, with loan volumes creeping back toward pre-recession levels. (Small commercial loan volumes were up 1.4 percent in the fourth quarter of 2013 compared to the year before, according to FDIC data, about 14 percent below the 2008 peak.) But for some commercial borrowers, the pain caused by the crisis's aftermath continues.
As I reported in the November 2012 issue of Inc. ("Hard Lessons in Modern Lending"), banks slashed their commercial loan portfolios in 2008 and 2009, under tremendous pressure from regulators and shareholders. Those hasty efforts to clean up bank balance sheets had a negative impact on many small business owners. One of them was David Moyal, president of Color-Web, a printing company.
In the 2012 article, I told the story of how, during the recession, Moyal had received a $200,000 loan for a down payment on a crucial piece of printing equipment. But before the equipment was delivered, the bank reneged on financing the rest of the deal. As a result, Moyal couldn't buy the machinery and his business plummeted--then, the bank sued him to get the down payment back. Moyal countersued, accusing the bank of a breach of contract and fraud.
Since the story was published a year and a half ago, the case has progressed. Last month, as part of pretrial discovery, Moyal and his attorneys found out that the lender, a subsidiary of Bridgeport, Connecticut-based People's United Bank, had already received the $200,000 back--months before the bank sued Moyal. The equipment distributor, Mitsubishi Lithographic Presses U.S.A. (MLP), had sent the money back to the lender--cash collateral in case the bank couldn't recover the money from Moyal's printing company. But the bank had kept that payment a secret.
Indemnity agreements between vendors and banks aren't unusual, says John H. McFarland, a Houston-based attorney who represents banks in lending litigation cases. "It's kind of like having an insurance policy," he says. "The fact they had an arrangement with the vendor to secure themselves doesn't change the fact the debtor still owes the money."
The unusual part is People's effort to keep that payment a secret. On April 20, 2011, a People's Capital and Leasing Corporation portfolio administrator named Jimmy J. Wallace wrote an email to MLP U.S.A.'s president, Marke Baker: "Please confirm that neither you nor anyone else at MLP, to the best of your knowledge, has informed Color-Web that these funds were wired. Legal counsel needs this confirmation so that PCLC can pursue reimbursement." Baker wrote back three hours later: "That is correct. No one at MLP has had any contact with Color-Web about this matter."
What's more, People's never disclosed the arrangement--or those emails--in court, even after specific requests from Moyal's lawyers. The emails surfaced as part of an inquiry by MLP's lawyers. "The email makes it look like the bank was hoping for a double recovery," says McFarland. "If they did not produce it when requested, it would highlight the impression that they weren't playing fair."
Further complicating the matter, over the course of 2012 and 2013, Moyal says that Baker of MLP met with him over lunch three times and offered to pay back the deposit to People's if he agreed to drop his countersuit. Neither Wallace nor Baker responded to multiple calls for comment. People's United spokesperson Valerie Carlson declined to comment on specifics of the case. "Like most financial institutions, we don't comment on customers and their situations. However we expect to prevail in court," said Carlson in a voicemail.
Moyal says he now plans to ask the judge to compel People's to submit to a forensic audit of its internal communications to get more information, or to throw out the case altogether. "This shows a billion-dollar bank and a billion-dollar company teaming up to crush a little guy," says Moyal. (People's has assets worth $32.9 billion; MLP, a subsidiary of RM Machinery, is privately held and does not disclose revenue.)
Since the bank's lawsuit was first filed, Moyal's business has struggled. In 2012, he shuttered his entire New Jersey operation and laid off 200 employees. Meanwhile, People's Capital and Leasing Corp., the People's United Bank subsidiary, sued Moyal separately for money he owed on other printing presses he'd purchased in past years. (That case is also ongoing.) Moyal has since retrenched to Manhattan, where he has 57 employees and does business under the name of another one of his printing companies, 1-800 Postcards. Annual revenue has fallen from a peak of $35 million to a projected $10 million this year. Still, "we're surviving," he says.
Last year, People's offered him $200,000 to settle the lawsuits, says Moyal. He rejected the offer. "I would love for them to sit in front of the 200 families of the men I had to let go, two of which got heart attacks and passed away in the months afterward," says Moyal. "They don't know who they're messing with. I'm not going away."