A financial decision that Layton “Scooter” Stuart made in the weeks preceding his death in March 2013 is breathing fiscal life into Little Rock’s One Bank & Trust. The de facto capital injection is happening in a way that he didn’t plan and couldn’t have foreseen.
The outcome of his $44,000 investment 30 months ago will produce an extraordinary balance sheet event measured in millions for the $326 million-asset bank he once owned, controlled and at times operated as his own piggy bank.
Under the terms of a settlement agreement in the final stages of closure, $14.9 million will be divided among three parties. One Bank will receive $6.9 million in much-needed capital while the U.S. Treasury and Stuart’s estate will each receive $4 million.
“That takes a lot of pressure off the bank on how examiners look at it,” Jerry Pavlas, Stuart’s successor at One Bank, said of the $6.9 million. “This is not a distress situation any more.”
The $14.9 million represents the remainder of a $20 million life insurance payout after loans against the policy and bank-paid premiums were repaid.
None of those millions would be in play if Stuart hadn’t made two monthly payments of $22,000 to keep his life insurance policy in force in early 2013.
“There wouldn’t have been any money to have a settlement,” said Dick Torti, executor of Stuart’s estate and trustee of the Stuart family trusts.
The payout from Stuart’s life insurance policy through John Hancock Financial has been tied up in litigation since the federal government seized the money more than two years ago. The settlement has resolved most of the issues in Stuart’s contentious probate case in Pulaski County Circuit Court.
“Everything has been agreed on,” Torti said. “I don’t count my beans until they’re all in the pot. It wasn’t everything we thought we deserved, but we think it is a fair settlement.”
Stuart’s wife, Tommye, and two adult children, Kirby and Hunter, were the designated beneficiaries of his life insurance policy through family trusts he established in 1997.
“I bet there were 12 lawyers at the U.S. Attorney’s Office, with a half-dozen on the phone, when we were hammering this out on [Sept. 25],” said Tom Prince, the court-appointed independent special administrator.
Prince was brought into the legal fray last October as an unpaid mediator and buffer between Torti and Pavlas, president and CEO of the bank since Oct. 25, 2012.
“The beneficiaries of the estate, who are my concern, are taken care of,” Prince said.
Picking Up Payments
Concern for his family’s financial well-being was a prime motivation when Scooter Stuart picked up the monthly payments to keep his $20 million life insurance policy from lapsing.
He stepped in after learning that new leadership at One Bank decided to quit making payments on the policy several months after the Office of the Comptroller of the Currency ordered his ouster as chairman, president and CEO on Sept. 28, 2012.
Part punitive and part cost-cutting, the decision to forgo future payments on Stuart’s life insurance was made after Pavlas was brought in as his replacement at One Bank.
The board of directors approved ending the premium payments although it was advised not to by Andrew Melton. Melton, the former chief financial officer of Worthen Banking Corp., was hired briefly as a consultant by Stuart to help fix the bank’s muddled operations under OCC supervision since 2011.
Before Pavlas severed the consulting contract, Melton advised the board to keep making payments on the life insurance policy even though Stuart had been removed from One Bank leadership.
Melton pointed out that if the bank quit making the monthly payments, there would be no recovery of any past premiums paid on Stuart’s behalf. Because Stuart kept the policy in force, One Bank recouped $3 million in May 2014 as reimbursement for past premium payments.
Stuart may not have intended to replenish the bank’s coffers to the degree his death benefits will. Motives notwithstanding, One Bank’s $9.9 million cut of his life insurance payout represents a sizable token toward the alleged damages to the bank caused by his self-dealing.
According to One Bank’s math, Stuart diverted more than $13 million from the bank for his own use. The tally was derived from a forensic audit ordered by the OCC that examined the bank’s financial records back to Jan. 1, 2009.
One Bank has lost more than $11.6 million during the three years since Stuart was escorted out and Pavlas was ushered in.
Direct ownership of the bank will remain in limbo in the wake of the settlement. The Stuart estate will relinquish its ownership claim to OneFinancial Corp., the bank’s holding company. The OneFinancial shares will be held by a newly established trust.
The shares are laden with as much as $40 million of delinquent debt held by three parties: the U.S. Treasury, with a $17.3 million claim tied to TARP funds; BHL Financing LLC, led by trucking heiress Johnelle Hunt, with a $14.7 million default judgment; and investors of trust-preferred securities, with an $8 million claim.
The most likely scenarios for curing OneFinancial’s significant shortcomings include selling One Bank or raising new capital.
Pavlas hopes to work out a global settlement of the holding company debt by mid-2016. That effort would be teamed with a recapitalization to bring in new money and investors.
Other Matters
In addition to its impact on Stuart’s probate case, the settlement will end two cases in federal court brought by the United States of America:
- A 2013 civil forfeiture action in U.S. District Court in Little Rock brought against Stuart’s estate that confiscated cash, cars and more along with the remainder from his $20 million life insurance policy. The assets were seized in connection with allegations of massive self-dealing by Stuart.
- A 2015 civil fraud action in U.S. District Court in Washington, D.C., brought against his estate and his heirs to recover $17.3 million in TARP funds.
The U.S. Treasury claimed it was deceived about One Bank’s condition by Stuart and other executives and that while most of the money ultimately flowed to aid the bank, more than $2.1 million allegedly was diverted for Stuart’s personal use.
Two loose ends among the assets in contention also were tied up as part of the settlement:
- One Bank and the U.S. government agreed to release any claims against the 2,646-SF ocean-front condo in Miramar Beach, Florida, that Stuart bought for $700,000 in November 2000.
- His estate agreed to release any ownership claims on a 1,711-SF condo in the University Park area of Dallas valued at $362,000 when Stuart purchased it in December 2004.