Howell Suits Start to Flow (Gwen Moritz commentary)

Get ready: The inevitable flood of litigation related to the life and death of former Springdale and Fayetteville banker M. David Howell Jr. has started with a trickle.

The first lawsuit was filed on Oct. 16 by Bank of America, which had honored almost $2 million worth of Howell’s bad checks. A week later, Howell was dead in a Beverly Hills hotel room.

Since Howell’s death, more than a dozen individuals have let the Pulaski County Probate Court know that they have an interest in Howell’s estate because they are holding promissory notes he signed. One of them, Little Rock businessman Robert Vogel, has actually filed suit in hopes of getting to the assets Howell left behind.

Specifically, Vogel filed suit against Howell’s family trust and against a life insurance trust containing insurance policies that Vogel believes to be worth some $17 million, with Howell’s two adult sons as the primary beneficiaries. According to his suit, these policies may be the only “substantial assets” available to pay Howell’s many, many financial obligations — and even $17 million probably won’t be enough to make everyone whole.

Vogel seems to know an awful lot about his friend David Howell’s estate planning; the suit includes the policy numbers of the three insurance contracts that Howell supposedly bought in the fall of 2000. Rumors of multi-million-dollar policies on Howell’s life have been circulating since shortly after his death; Vogel’s suit is the first information that seems definitive. But it does seem to dispute the other part of the popular rumor: that some of Howell’s investors were named as beneficiaries of the insurance policies.

Life insurance policies, being private contracts, are notoriously hard for creditors to crack into. But Vogel’s lawsuit takes a run at it by asserting that the premiums on the policies were actually paid with money “wrongfully obtained” from Vogel and other “similarly situated” investors.

It seems a reasonable supposition. Howell had been self-employed as a private investor since 1989, when he left OneBank after a falling out with owner J.B. Hunt. His primary source of income, at least during the last years of his life, was from investing the money given to him in exchange for promissory notes carrying annual rates of return of up to 50 percent. The premiums on $17 million in term life insurance on a man in his early 50s could run from $30,000 a year to $300,000.

A few days later, another Howell investor filed suit. But instead of going after a dead man and his life insurance, Dr. John D. McCracken of Little Rock is taking on Richard T. Smith, the Hot Springs bank owner who cosigned many of Howell’s promissory notes.

McCracken, you may recall, received one of the checks — for $45,000 — that Bank of America honored even though Howell’s checking account was depleted. But that’s small potatoes compared with how much he didn’t get. According to his lawsuit in Pulaski County Circuit Court, he is holding a $2 million promissory note signed by both Howell and Smith on Aug. 1. He also claims that $1 million of the money he gave Howell and Smith actually came from a loan made by Smith’s Bank of Salem on — get this — Oct. 15. By that time, Howell was missing, his checks were bouncing and the Arkansas Department of Securities was issuing an order of investigation against him. McCracken, a retired physician, said in his lawsuit that he “had a relationship of trust and confidence” with Smith and the Bank of Salem, and that Smith and the bank used this relationship to exercise influence over McCracken.

Even now, even speaking in the dry, lawyerly language of a civil suit, McCracken doesn’t seem completely convinced that Howell and Smith deliberately took advantage of their friends.

“Even if Richard T. Smith and the Bank of Salem had no evil intent or moral guilt or dishonesty of purpose and even if the loan to Dr. McCracken was based on a mistake of facts,” the suit says, “Dr. McCracken is still entitled to recover $2 million because Smith should have warned him that he was funding an “illegal and improper transaction.”

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McCracken may have trusted the Bank of Salem, but it didn’t trust him back. While the good doctor was holding an unsecured promissory note from Smith and Howell, Smith made sure his bank’s loan to McCracken was secured by a mortgage.

That explains why state bank regulators aren’t terribly concerned by the fact that Smith’s banks were lending money specifically for the purpose of investing it with Howell.