Fraud alleged in downfall of MILA Inc.

Published 10:20 pm Wednesday, September 10, 2008

The founder of MILA Inc., a local wholesale mortgage lender that failed last year, was accused by a bankruptcy trustee of taking millions of dollars out of his company to enrich himself.

Seattle attorney Geoffrey Groshong, the trustee for MILA’s Chapter 11 bankruptcy case, said in a new lawsuit that Layne Sapp should pay almost $16 million in damages. He accused Sapp of fraud and other violations of state financial regulations.

“I think Mr. Sapp knew things were bad in 2004 and, whether it’s human nature or greed, he decided to take as much money out of the company as he could,” said Brian Esler, a partner in Seattle’s Miller Nash LLP, which is representing Groshong.

After finding out Sapp posted $12 million as collateral for a recent loan he took out, Groshong’s lawyers moved in the past two weeks to seize that money.

Among his claims, Groshong asserted that Mortgage Investment Lending Associates was insolvent by the end of 2004, even though Sapp was publicly boasting of his business’ record loan volume at the time. He also continued to pay himself multimillion-dollar dividends through 2005.

As MILA’s fortunes fell, Sapp’s duty should have been to bolster MILA’s value so it could sell for the “highest possible price,” the lawsuit stated.

Instead, “Sapp failed to fulfill these obligations in the transactions, conduct and omissions described in this complaint.”

The suit against Sapp, Sapp’s wife and their six limited- liability corporations seeks a jury trial in the federal bankruptcy court in Seattle. Sapp could not be reached for comment.

In the days after MILA abruptly closed its doors in April 2007, some former employees alleged Sapp used the company as his own personal piggy bank. But many others loyally defended his running of the company.

At its peak in 2005, MILA’s 700 workers filled its headquarters building in Mountlake Terrace as well as several floors of a Lynnwood office building Sapp owned. That year, Sapp said the company funded at least $4.5 billion in mortgage loans, putting it among the top 30 subprime lenders nationwide.

“The volume was certainly up, but the profitability was falling,” Esler said.

At the same time, Sapp charged the company for a $15 million personal yacht, private aircraft and other huge travel expenses.

Groshong was appointed as trustee after the company filed for Chapter 11 protection in July 2007. In that filing, MILA claimed liabilities of $175 million, versus assets of about $7.9 million.

Actually, liability claims against MILA and associated firms total $2 billion today, Esler said. He added, however, that some of the claims may not be legitimate.

A trial date has not been set yet, but pretrial conferences are scheduled in November, Esler said.

Reporter Eric Fetters: 425-339-3453 or fetters@heraldnet.com.