Exchange Business Closes, Prompts Criminal Investigation

By Beacon Staff

An Oregon-based firm specializing in tax-deferred land deals collapsed last month after using customers’ money to fund its owners’ endeavors, leaving at least one local man out more than $1 million and affecting untold more here.

Summit 1031 Exchange closed its doors and filed for Chapter 11 bankruptcy in late December after announcing it has only about $13 million on hand of the $27 million it owes its clients. Summit had branch offices in eight western cities, including Kalispell.

The shortage, according to a posting on the company’s Web site, is the result of loans Summit made to Inland Capital Corporation, a company owned by the same people who own and run Summit. Inland, in turn, loaned the money to various individuals and companies that were involved in real estate investments located primarily in central Oregon.

“They’re supposed to be a trustee and they lent themselves money, which is not kosher, and now they don’t have it available for depositors,” Rolland Andrews, a local real estate professional, said. Andrews is one of Summit’s largest creditors; the company owes him about $1.1 million.

“It’s basically the same thing the guy (Bernard Madoff) they just handcuffed and had all over the front pages did,” he added.

Summit specialized in 1031 tax-deferred exchanges, a type of real estate investment named after a section of the IRS tax code. The exchanges allow investors to sell real estate and defer the capital gains taxes as long as they quickly use the sales proceeds to buy other similar real estate.

A third-party accommodator, like Summit, holds a client’s money for up to 180 days while they close on the second purchase. The accommodators make money off of fees and interest earned in the meantime.

Summit’s customers say they were led to believe the company was investing their money in short-term, liquid securities, like most accommodators do. Instead, Summit’s four principals – Mark Neuman, Brian Stevens, Lane Lyons and Tim Larkin – put millions of dollars into real estate deals through Inland.

For years, Inland, buoyed by a strong real estate market, was able to repay Summit. Then, the market went bust.

“… the recent crisis and downturn in the formerly profitable real estate market caused the entities and individuals who owe Inland to be unable to repay loans in a timely manner, which in turn caused Inland to be unable to repay SAI,” the company’s statement said.

Inland now owes Summit approximately $13.7 million.

It’s uncertain how many Kalispell investors are affected by Summit’s collapse. Bankruptcy documents list only Summit’s top 20 creditors, of which Andrews is the sole Montanan. Local attorney Richard DeJana is representing another creditor, who he said suffered six-figure losses.

“Because there’s a time limit on 1031s there’s a good chance he may lose the tax advantage, and then there’s the bigger question of whether he’ll recover his money,” DeJana said. “It’s scary how many little guys could be caught in the middle of this.”

Still others could be ensnared in the financial mess: Area lawyers and accommodators say 1031 exchanges are popular here because of the large amount of investment property like rental condos and ranch and farm lands.

Scott Adams, president of Kalispell’s Summit 1031 Exchange, said he wasn’t allowed to comment on the company’s financial situation. Susan Ford, a Portland bankruptcy lawyer representing Summit, did not return calls for comment.

Puck Workman of Exchange Services 1031, the area’s only other company dedicated solely to such exchanges, said she hoped Summit’s situation didn’t give the industry an undeserved black eye.

“This isn’t common,” she said.

Workman encouraged investors to ask their accommodator where their funds are being invested and if that entity is protected with federal insurance. The accommodator, she said, should also have their own bonding and insurance.

“You could’ve asked those questions to Summit, though, and they probably would’ve passed all the tests,” she said. “Good references and word of mouth in a small community can help you find a person you’re confident will do right by you.”

Summit, meanwhile, has been served with a federal grand jury subpoena and federal criminal investigators are looking into the company’s records. The company says it will try to sell land and other assets to repay customers and creditors, but it’s unclear whether its assets will fetch enough to satisfy all its debts.

“This next week will be a big deal,” Andrews said. “We’ll hopefully get a feel for whether there’s a light at the end of the tunnel.”