A former business partner has alleged under oath that he and others served as straw borrowers so that Walter Quinn of Little Rock could access money from Heartland Bank, where Quinn was a director and its leading shareholder.
Another former partner claims that evidence of self-dealing was noted by bank examiners in a confidential report that may be used if the case goes to trial.
John Lewis of Little Rock described his role as a straw borrower in a deposition given in a lawsuit involving a $3 million loan Heartland Bank made in 2011 to Colorado businessman Randal B. Parsley.
At that time, Quinn was chairman, president and CEO of Heartland’s holding company, positions he surrendered in late 2015 as his own financial problems became entangled with the bank’s.
Simmons Bank of Pine Bluff in August took ownership of the bank, which was the collateral on unpaid loans made to Rock Bancshares Inc., its holding company. Heartland lost more than $11.7 million in the first half of this year after losing nearly $7.9 million in 2016.
Parsley, the Colorado businessman, says he borrowed the $3 million to buy a 10 percent interest in an oil and gas company that Lewis and Quinn owned called Rock Exploration LLC of Little Rock. Parsley defaulted on the loan in 2015, and Heartland sued, winning a $1.9 million judgment last month against Parsley and his company in U.S. District Court in Little Rock.
Parsley, though, blames Quinn for the default and in February 2016 sued him as a third-party defendant in the Heartland lawsuit. Parsley is seeking damages against Quinn for breach of contract, among other things.
In addition to Lewis’ allegations, Parsley’s case file references a 2015 examination report on Heartland Bank by the Federal Reserve System and the Arkansas State Bank Department. The report reveals evidence of other “Quinn affiliates self-dealing with Heartland Bank and the involvement of Heartland officers/board members in those activities,” Parsley’s lawyer, Richard Downing of Little Rock, wrote in a court filing.
He also said the bank examiners’ report shows “a practice of handling specific loan activities and behavior by Quinn which amounted to a habit and custom of Quinn’s benefitting from Heartland Bank loans.”
The report is confidential, and the use of it violates the Code of Federal Regulations, according to a filing by Heartland’s attorney, Paul Bennett of Pine Bluff. His motion to keep the report out of the trial was denied last month by U.S. District Judge Billy Roy Wilson.
In an interview with Arkansas Business last week, Quinn denied any wrongdoing in connection with the bank. He also denied that there was ever an agreement for him to sell any interest in Rock Exploration to Parsley.
In a related development, Quinn’s RX Finance of Little Rock sued John Lewis last week in Pulaski County Circuit Court, alleging Lewis owed $1.3 million on a loan he guaranteed that was for Rock Exploration. The suit said that RX Finance loaned Rock Exploration $13.8 million in 2011, but as of December 2015 the loan was in default.
In that lawsuit, Quinn attached a December 2015 letter to Downing, Parsley’s attorney, that said Rock Exploration never received any money from Parsley for an investment “or for any other reason for that matter.”
Lewis didn’t return a call from Arkansas Business.
At first, Parsley, of Castle Rock, Colorado, thought an oil and gas investment with Quinn would be a godsend.
This is Parsley’s version of events:
In 2011, Quinn, then CEO of Heartland Bank, offered to sell Parsley 10 percent of Rock Exploration for $3 million. Quinn and partner Lewis would each put up 5 percent interest and split the $3 million.
Quinn, however, told a different version during a deposition in June, excerpts of which were filed in the case. Quinn said he and Parsley may have “talked about it possibly,” but he didn’t recall offering Parsley a 10 percent interest in Rock Exploration and “there was no investment made.”
Founded in April 2011 by Quinn and Lewis, Rock Exploration was in the business of acquiring, managing and operating oil and gas wells. It projected 2011 revenue of $5 million and net income of $1.1 million, according to an internal report prepared in October 2011 and included as an exhibit in the case.
For 2012, Rock Exploration projected $23.2 million in revenue and $10.6 million in net income.
The deal sounded so good that Parsley, who started working in the oil business in 1980, didn’t consult an attorney or get any of the terms in writing.
“Walter Quinn was a very highly thought-of banker,” Parsley said when he was deposed in May. “From talking to a lot of friends and so forth, John Lewis was an exceptional oil man. John Lewis and Walter Quinn did very, very well in the Fayetteville Shale and their investment seemed to be proper.”
The handshake deal was settled, Parsley said. “I trusted a great ethical banker and John Lewis. And they advised me that basically the paperwork would be put together,” he said. But Parsley would soon discover problems.
‘In Need of His Share’
To get the money for the investment in Rock Exploration, Parsley said in court documents, Quinn arranged a meeting with a Heartland Bank loan officer. After the meeting, the $3 million loan to Parsley, at 7 percent annual interest, was approved.
But before the loan closed, “Quinn was in need of his share,” Parsley said in his complaint. Lewis advanced Quinn $1.5 million and the $3 million proceeds of the loan all went to Lewis, according to the filing.
Lewis’ deposition provides some support for Parsley’s case.
“The mode of operation from Walter was that he would bring in straw borrowers and go ahead and sell them assets that he had,” Lewis said in his deposition. “I was a straw borrower, Randy Parsley was.”
Federal Reserve regulations restrict the amount of loans a bank may make to an affiliate of a control person, which in this case was Quinn, according to court filings by Downing, Parsley’s attorney.
Lewis said that his assets — not Rock Exploration — were pledged as collateral for Parsley’s loan. He said that was done at Heartland Bank’s request.
“Walter wouldn’t … carve out 10 percent of Rock Exploration because he had it pledged” to another bank, Lewis said.
After getting the $3 million loan from Heartland, Parsley said, he called Lewis the next day and said, “‘What are the next steps of handling this?’ He said, ‘I will get with Walter.’”
At first, the arrangement didn’t seem to bother Parsley. “I wasn’t really frustrated,” because he was paying the loans with money that came from Lewis. He said the arrangement worked well through 2012 and into 2013.
Parsley said he spoke to Quinn in the end of 2012 or in early 2013 and asked about Rock Exploration. “What are we going to do there, Walter, as far as the paperwork, the ownership, where the monies are, and so forth?”
“His comment is, ‘Let me talk to John and I will have John get back to you.’”
Nothing was settled, though.
Rock Exploration Assets Sold
In October 2013, Rock Exploration’s assets were sold to Radiant Oil & Gas Inc. of Houston for a price that wasn’t disclosed in the court filings. Parsley received no proceeds from the sale.
Lewis said in his deposition that he continued to make the payments on Parsley’s Heartland loan even after the sale to Radiant. He said Parsley was his partner in other business deals, and “I did not think it was fair for him to have to make those payments.”
The loan was extended several times, the last time in May 2015, when the principal balance was $1.7 million. It was supposed to be paid in November 2015, but wasn’t.
Parsley said Quinn told him that if he signed the May 2015 renewal, Quinn would give him the proceeds from selling some of his Heartland Bank shares. (According to Parsley’s account, Quinn sold stock to Chris Robertson, who “at the same time received a $4 million loan.”)
But Parsley never got money from Quinn. He said he told Quinn that Lewis “has honored his commitments, but you have not.”
Still, Parsley renewed the loan, which went into default in November 2015.
Parsley is seeking at least $1.5 million in damages from Quinn in a case set for trial starting March 13.