MILA's Bankruptcy

The bankruptcy trustee in charge of MILA’s Chapter 11 case says there is evidence that MILA’s founder and CEO allegedly collected $32 million from MILA during the years before its demise, “improperly draining the Mountlake Terrace company’s assets as its fortune declined.”

From the Seattle Times:

“I think the executives at MILA knew by 2004 that this bubble was bursting and did their best to take out as much money as they could before it became obvious to everyone else,” says Brian Esler, who represents the bankruptcy trustee in the suit.

The suit claims Sapp, who owned about 90 percent of MILA, paid himself more than $10 million in dividends in 2004 and 2005 when the company was already “functionally insolvent,” meaning it had insufficient capital to continue normal operations and should have been preserving cash.

It also alleges he took $11.5 million in salary for each of those years, though “by March 2005, MILA was already delaying payments, even to important customers, to conserve cash.”

The trustee’s suit also claims that Sapp damaged MILA — and its creditors — in other ways:

He “surreptitiously seized” the mortgage software MILA developed and had another of his companies bill MILA for using it; charged MILA exorbitant amounts for his private yacht and business jets; and, in a “theft of corporate opportunity,” created separate companies to own a four-story office building and a parking lot that were leased to MILA, rather than having MILA buy the properties.

Sapp’s attorney, Jack Cullen, declined to discuss the allegations in detail but said: “We consider the claims nonsense. We don’t think they are founded in law or fact.”

Sapp did not return a call to his Hunts Point home.

Esler is asking the court to freeze $12 million in cash belonging to Sapp, to keep it available to creditors.

Bankruptcy Trustee Esler’s plan is to convince the court that MILA was technically insolvent for over two years before the company abrubtly closed it’s doors in April of 2007.  Esler cites improper accounting and a  twelve-fold increase in the number of loans MILA was required to repurchase from 2002 to 2004.

To protect creditors, the suit says, as early as 2005 “Sapp should have attempted to sell, liquidate or reorganize MILA at a time when it still had significant value, instead of continuing to manipulate and loot it for personal gain for another two years.”
The suit also takes a microscope to transactions among the various entities owned by Sapp. One example: The company that owned his 130-foot yacht billed MILA $395,374 over two years — although “MILA used that yacht only twice for asserted business reasons,” the suit says.

MILA’s creditor claims have ballooned up to 2 billion dollars.  By asking the court to freeze Layne’s personal assets, is the Bankruptcy Trustee is gathering evidence to try and make a case that the corporate veil was pierced? This means Layne might have co-mingled corporate assets with personal assets.  An example of that would be if personal expenses were paid for with corporate funds. This will be an interesting local case to follow.

Bankruptcy Trustee:
Miller Nash
Brian Esler
Lisa Peterson or Bruce Rubin

MILA Legal Counsel:
Jack Cullen
Foster Pepper
(206) 447-4689

MILA shuts down

MILA, a subprime wholesale lender based in Mountlake Terrace, WA just north of Seattle, closed it’s doors Friday afternoon, leaving the remaining 100+ employees (down from 600 last fall) only 15 minutes to check their emails and clear out their desks. MILA had been making staff reductions as far back as February of 2006.

The Seattle Times reports that a potential buyer of the company spent a week wandering around MILA headquarters, but no deal materialized.

Real estate agents: Loans in process but not yet funded now must be resubmitted to other lenders. 

For your reading entertainment, here are a couple of articles from the archives. The ad on the left is promoting a pay-option ARM.

What Bubble?
Despite forecasts of gloom and doom, broker innovations have kept the future bright
Layne Sapp, Founder and CEO, MILA Inc.

Inc. Magazine
2005 Entrepreneur of the Year
Layne Sapp

Local Lending Company Soars
After Flying Under the Radar
Seattle Times Oct 2004

When MILA first started out here locally, they ONLY worked the hard money side of the business.  When subprime loan originations skyrocketed, so did MILA’s growth.  When the subprime market started to fold this spring, MILA ceased doing subprime loans and instead focused only on the Alt-A and Prime mortgage market. However, there is now tremendous competition for Alt-A and Prime loans.

I question whether or not the company had any duties to notify employees and the general public that they were running out of cash. On the one hand, the company owes duties to its shareholders and any potential buyer NOT to speak too soon about problems that may have a negative effect on the value of the company, especially if cash problems appear to be temporary. On the other hand, what about duties of good faith owed to the general public or to its employees? 

Your thoughts?