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Bank of America v. First Mutual Bancorp of Illinois

July 1, 2010

BANK OF AMERICA, PLAINTIFF,
v.
FIRST MUTUAL BANCORP OF ILLINOIS, INC. AND PETHINAIDU VELUCHAMY DEFENDANTS.



The opinion of the court was delivered by: Judge David H. Coar

MEMORANDUM OPINION AND ORDER

Bank of America brings actions separately against Pethinaidu and Parameswari Veluchamy and First Mutual Bancorp of Illinois ("First Mutual") (collectively "Defendants"), seeking to collect overdue loan payments from Defendants. In response to Bank of America's complaints, Defendants assert five affirmative defenses and bring virtually identical nine-count counterclaims against Bank of America. Bank of America moves to dismiss Defendants' counterclaims and strike their affirmative defenses. For the reasons stated below, Bank of America's motions are GRANTED IN PART and DENIED IN PART.

BACKGROUND*fn1

LaSalle Bank (now known as "Bank of America") loaned $30 million to the Veluchamys and an additional $10 million to First Mutual, guaranteed by Pethinaidu Veluchamy ("Mr. Veluchamy"). Because these loans are overdue, and more than $39 million owed has not been repaid, Bank of America brings actions against both First Mutual and the Veluchamys (collectively "Defendants") to collect the money owed. Defendants admit that they borrowed and failed to pay back this money. However, they allege that they are not obligated to do so because Bank of America committed various forms of wrongdoing, which are addressed in Defendants' nine-count counterclaims against Bank of America.

I. Bank of America's Loans to Defendants

Pethinaidu and Parameswari Veluchamy are the majority shareholders of First Mutual, which is a holding company for (and holds all the stock of) Mutual Bank. Beginning in late 2005, Bank of America loaned $30 million to the Veluchamys in connection with their investment in First Mutual (the "Veluchamy Loan"). The parties' initial loan agreement, which governed this arrangement, is dated December 1, 2005. This agreement was subsequently amended on December 28, 2006 (the first amendment), January 31, 2006 (the second amendment), and November 30, 2008 (the third amendment). The third amendment, which was drafted in May 2009 but dated retroactively to November 30, 2008, established June 30, 2008 as the due date for the Veluchamys' loan. Despite Bank of America's demands for repayment, the Veluchamys have only repaid about $1 million of this loan. Bank of America filed suit on August 19, 2009 to collect approximately $29 million still owed under the parties' loan agreement. (Bank of America v. Pethinaidu Veluchamy and Parameswari Veluchamy, No. 09 CV 5109.)

In February 2008, Bank of America loaned another $10 million directly to First Mutual pursuant to a loan agreement dated February 15, 2008 and amended as of November 30, 2008 (the "First Mutual Loan"). In September 2008, Mr. Veluchamy personally guaranteed this loan. Like the loan to the Veluchamys, First Mutual's loan was due on June 30, 2008 under the parties' November 30, 2008 amendment to their initial loan agreement. Despite Bank of America's demands, none of the $10 million loaned to First Mutual has been repaid, leading Bank of America to file suit to recover this debt on August 19, 2009. (Bank of America v. Pethinaidu Veluchamy and First Mutual, No. 09 CV 5108.)

Both the Veluchamy and First Mutual loans were contributed as capital to facilitate lending at Mutual Bank, the bank wholly owned by First Mutual and controlled by the Veluchamys, First Mutual's majority shareholders.

II. Regas's and Mahajan's Alleged Misconduct

Defendants' counterclaims allege, in essence, that Bank of America facilitated misconduct perpetrated by Defendants' business partners, James Regas ("Regas") and Amrish Mahajan ("Mahajan"), without Defendants' knowledge. Regas, the lead name partner of the firm, Regas, Frezados, & Dallas, LLP, served as Defendants' attorney, president of First Mutual, and a director of both First Mutual and Mutual Bank. Mahajan served as president of Mutual Bank.

Regas negotiated the initial Veluchamy Loan Agreement. Pursuant to this agreement, Bank of America loaned the Veluchamys a total of $20 million-$10 million on a revolving basis with a loan maturity date of November 30, 2006, and $10 million on a term basis with the term ending on November 30, 2010. Regas advised the Veluchamys to contribute the loan proceeds to Mutual Bank, via First Mutual, as capital to facilitate Mutual Bank's lending, and Bank of America knew that the loan proceeds would be used in this manner.

In 2005, Mutual Bank's assets increased by approximately $500 million primarily due to the bank's extension of commercial real estate loans. Both Regas and Mahajan stood to gain significantly from Mutual Bank's growth. Regas benefited because his firm "generated outsized fees" through work related to Mutual Bank's extension of loans, and the firm channeled a substantial portion of those fees directly to him. (Counterclaim ¶ 9.*fn2 ) Mahajan benefited as well because his employment agreement provided that he would receive a bonus if the bank's return on assets reached a certain point. In 2005, Mahajan's bonus increased by more than 60 percent, resulting in a $300,000 bonus in addition to his annual salary of $200,000. Regas and Mahajan benefited further as Mutual Bank's assets continued to grow in 2006. Mahajan's bonus increased to $610,000, and Regas's law firm continued to generate (and direct to Regas) sizeable fees from work related to Mutual Bank's extension of loans.*fn3

On December 28, 2006, Regas negotiated with Bank of America on Defendants' behalf to amend the Veluchamy loan agreement. The amendment, effective November 30, 2006, increased the maximum amount available on the revolving loan from $10 million to $20 million and extended the loan's maturity date to November 30, 2007. The capital available under the revolving loan (and unaltered term loan) continued to facilitate lending by Mutual Bank.

In approximately August 2007, Mutual Bank commenced a precarious course of expansion that, according to Defendants, ultimately precipitated the bank's downfall. Under the direction of Mahajan, and with the aid of Regas and his law firm, Mutual Bank initiated a substantial expansion of its loan portfolio that increased the bank's assets by a third (roughly $450 million) by taking on about 30 additional commercial real estate loans. These loans (the "Brokered Loans") were primarily for properties in the New York/New Jersey area and were brokered by Harry Shah ("Shah") and an affiliated entity named Prime Time.

Regas and Mahajan made a series of misrepresentations to the Veluchamys, other shareholders of First Mutual, and the board of directors of Mutual Bank regarding the nature of the Brokered Loans. Regas and Mahajan represented, for example, that the New York/New Jersey area, where the properties underlying most of the Brokered Loans were situated, was "the place to be" for such loans, and thus the bank could confidently expect payment on those loans. (Id. ¶ 15.) Regas, a banking attorney, experienced banker, and majority owner of his own bank, pushed the Mutual Bank board to approve the Brokered Loans, stating that the board would be "passing up a great deal" for the bank if it refused to do so. (Id.)

In fact, the Brokered Loans were not a "great deal" for Mutual Bank. Mutual Bank discovered later that the appraisals on which various of the loans were based were overstated, forcing the bank to write down the loans. Shah, who exercised an unusual amount of control over the appraisals, at various times chose and directed the appraiser. Since the size of each loan corresponded with the property appraisal, and the fee received by Shah and Prime Time amounted to a percentage of the loan, Shah and Prime Time had incentives to secure overstated appraisals. Regas and Mahajan knew or should have known as much, but they failed to disclose this information to the Veluchamys or First Mutual. Ultimately, Shah received more than $1 million in fees on the Brokered Loans, and his brokerage separately received more than $2 million in fees.

Regas and Mahajan made several other misrepresentations regarding the Brokered Loans. With respect to loans made in connection with the Shubh Hotels Boca and Shubh Hotels Detroit, Mahajan represented that the Boca hotel was a Sheraton in good condition, when in fact the hotel had lost its Sheraton flag and was in poor condition. Additionally, when Mahajan was asked prior to approval whether the principals named in connection with the loans were husband and wife, he falsely stated that they were not. Shortly after the Boca loan was approved and closed, $1.5 million in loan proceeds were advanced for the stated purpose of buying steel for a hotel expansion. However, ...


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