The late Layton “Scooter” Stuart considered it a point of pride that he didn’t draw a salary as chairman, president and CEO of Little Rock’s One Bank & Trust. Stuart was able to do that in large part because he owned and controlled the bank.
A forensic audit after federal regulators forced him out of the bank three years ago found that One Bank actually footed many expenses that an executive normally pays for out of a salary.
But one aboveboard form of compensation that Stuart received was a $20 million life insurance policy with his family trusts as the beneficiaries. His alleged abuse of the trusts and his borrowing privileges on the policy are the basis of a federal lawsuit headed for trial in February.
Under a 1997 split-dollar life insurance agreement, One Bank would pay for the policy and would recoup the premiums when the death benefits were paid. After Stuart died in 2013, John Hancock ultimately reimbursed the bank $3 million for premiums paid.
A September settlement disbursed $6.9 million to One Bank for money Stuart diverted from the bank over the years for his personal benefit and $4 million each to his family trusts and the U.S. Treasury, related to TARP money that Stuart misappropriated.
And $1.7 million that Stuart had borrowed from the cash value of the life insurance in 2011 was repaid to John Hancock out of the death benefits.
Dick Torti, trustee for the Stuart Family Trusts since 2013, filed the civil lawsuit claiming the trusts were defrauded because Stuart should never have been able to borrow against a policy that he didn’t own.
Torti sued to recover that $1.7 million from Debra Hoag, a Chicago insurance executive, and her firm, Gentry Partners Ltd.
Hoag, who helped set up the $20 million John Hancock life insurance, counters that she was duped into later becoming the trustee of the Stuart Family Trusts and helping Stuart obtain the loan.
Hoag contends that the trusts were legally invalid from their inception or were alter egos of Stuart. And that as such, she argues, Torti as the purported trustee does not have standing to enforce the claims of an entity that lacks valid independent form.
Her response to the complaint also claims that Stuart was “the real party in interest whose control over and abuse of the trusts rendered them legally indistinguishable from him.”
Hoag claims she worked in good faith with Stuart, believed he would use the loan for the benefit of the trusts and had no way of knowing otherwise.
Timeline: Scooter Stuart Legal Tangle Traced To $20 Million Policy
Aug. 8, 1997
Layton “Scooter” Stuart, chairman, president and CEO of One Bank & Trust, establishes the Stuart Family Trusts for the benefit of his wife, Tommye, and their daughter and son, Kirby and Hunter. Michael Heald, chief operating officer at the bank, is named as the trustee.
The three trusts are the owners and sole beneficiaries of a $20 million individual variable life insurance policy on Scooter Stuart. The policy is issued by John Hancock Life Insurance Co.
To fully fund the policy, 10 annual payments of $350,000 are to be paid by One Bank. The bank holds a collateral interest in the policy for repayment of the life insurance premiums.
The arrangement, known as a split-dollar life insurance agreement, is made as an inducement for Stuart to continue working at the bank he owns and controls.
The agreement between One Bank and the Stuart family trusts notes that Stuart “renders competent and faithful service to the bank, which is to the bank’s direct benefit and for which” he “is not compensated in a fashion commensurate with the value of such services in the prevailing market.”
Sept. 11, 1998
According to court filings, Heald requests the first of four borrowings against the cash value of the life insurance policy on the instruction of Scooter Stuart. The $78,534 allegedly went to Stuart, not the trusts.
The borrowing is made within weeks of the earliest date allowed under the policy.
However, under the terms of the split-dollar life insurance agreement between the Stuart Family Trusts and One Bank, the trustee is not allowed to borrow against the cash value of the policy.
According to court filings, John Hancock doesn’t know about the agreement or its terms, although the trustee, Heald, was required to make full disclosure.
Other borrowings from the policy follow on Nov. 3, 1999, $232,367; Jan. 2, 2001, $153,020; and Oct. 29, 2001, $104,618.
Jan. 20, 2011
One Bank enters into a formal agreement with the Office of the Comptroller of the Currency after the regulatory agency found that the bank’s classified loan levels were too high.
June 2, 2011
Debra Hoag, a Chicago insurance executive who helped obtain the John Hancock policy for Stuart and One Bank, agrees to serve as a replacement trustee of the Stuart Family Trusts for Heald. Hoag says Stuart and Heald deceived her into becoming trustee.
June 3, 2011
At the behest of Scooter Stuart, Hoag submits a loan request to John Hancock on the life insurance policy. The request is for the maximum amount possible. According to Hoag, Stuart told her the money would be used to inject additional capital in the bank, which was in dire financial straits.
June 7, 2011
John Hancock issues a $1,761,000 check to the “Stuart Family Trust.” Scooter Stuart receives the check, endorses it and has the money deposited in a One Bank account for Rivercity Energy, an entity he controls. The transaction occurs although Stuart allegedly has no legal right to conduct business through or on behalf of the trusts.
The money from John Hancock is combined with borrowings totaling more than $7.7 million against two life insurance policies covering One Bank staffers. These two checks secured by the bank-owned life insurance policies (BOLI) also are deposited in the Rivercity bank account.
According to court filings, the bulk of the money from the three life insurance loans is used by Stuart as part of a fraudulent transaction.
The money deposited in the Rivercity account funds “the purchase” of bad loans from One Bank. On paper, it appears Rivercity bought the bad loans.
However, there is no accounting that One Bank was paid with money that came from borrowings against two bank-owned assets (the BOLI) and the John Hancock policy, borrowings that weren’t presented to or approved by the board of directors.
July 2011
Michael Heald resigns or is fired as senior EVP and COO at One Bank.
May 23, 2012
The OCC renewed its supervisory agreement with One Bank and directed the bank leadership to revise its strategic plan, improve capital levels, fix management deficiencies and achieve certain capital ratios.
Sept. 28, 2012
The OCC issues a prompt and corrective action directive that ousts Scooter Stuart as chairman, president, CEO and director of One Bank. The order includes prohibiting the bank from making any payments on Stuart’s behalf, without OCC approval. When the bank later stops making payments on the John Hancock life insurance policy, Stuart steps in to keep it in force.
Oct. 25, 2012
Hoag resigns as trustee of the Stuart Family Trusts. Her replacement is Hunter Stuart.
March 11, 2013
Dick Torti is named as a replacement for Hunter Stuart as trustee of the Stuart Family Trusts.
March 26, 2013
Scooter Stuart dies. Torti later unsuccessfully attempts to collect on the life insurance policy for the benefit of the trusts. The holdup in releasing the funds is caused by a condition that Torti deems unacceptable. John Hancock requires that Torti release it from any claims related to or arising from the policy or payment of benefits.
June 11, 2013
The U.S. government seizes nearly $17.7 million in death benefits held by John Hancock as part of a civil forfeiture action. The balance of the $20 million payout is retained by the company as repayment for the $1.7 million borrowed against the policy by Stuart plus accrued interest.
June 2, 2014
Torti sues Hoag, her Gentry Partners Ltd. and John Hancock in U.S. District Court in Little Rock to recover the $1.7 million on behalf of the Stuart Family Trusts. The complaint alleges the parties shouldn’t have helped facilitate a loan against the life insurance policy and the money should’ve gone to the trusts, not Stuart.
Oct. 17, 2014
U.S. District Judge Leon Holmes orders the dismissal of all claims against John Hancock. He also dismisses claims of deceit, deceptive trade practices and civil conspiracy against Hoag and Gentry Partners. The case moves forward with claims of breach of fiduciary duty and negligence against Hoag and Gentry.
March 3, 2015
Heald is indicted along with three other top One Bank executives for participating in an alleged conspiracy to defraud the federal government. The indictment alleges that Heald helped create a web of transactions designed to hide loan problems at One Bank from bank regulators.
Feb. 22, 2016
A jury trial regarding the John Hancock life insurance loan is set to begin, barring the fruition of any settlement talks.