RICO Violation Alleged in Federal Suit

A federal judge has already ordered Little Rock lawyer Allen W. Bird II to repay $200,000 he allegedly bilked from a Fayetteville bankruptcy estate, but now the plaintiff is suing for $6 million in damages.

The federal lawsuit filed in June against Bird alleges violations of the Racketeer Influenced and Corrupt Organizations Act, fraud, embezzlement and more stretching back nearly two decades.

The federal complaint also lists as a defendant City National Bank of Fort Smith, now known as BankcorpSouth Bank. And, it lists the insurance company that bonded Bird as a court trustee, St. Paul Fire and Marine Insurance Co., now called St. Paul Reassurance Company Ltd.

The lawsuit comes less than a year after the settlement of a federal bankruptcy case that Larry D. Shaffer, owner of Northwest Financial Express of Fayetteville, says he was forced to file because of a conspiracy to put him out of the money order business in the mid-1980s. Shaffer believes the Fort Smith bank conspired to stop his growing business and then forced him into bankruptcy, and that led to Bird’s appointment as trustee of the bankruptcy estate.

“They had developed a plan to get us out of business,” Shaffer said, adding that he believes the bank was surprised at the amount of money flowing through the money order company and didn’t like the idea of a virtually unknown Fayetteville firm benefiting from it.

The federal complaint filed by Shaffer and his three money order companies alleges that Bird, as the federal court’s trustee, owes the judge-ordered repayment plus $6 million in damages based on the loss of business.

Shaffer’s lawsuit alleges that Bird took unearned and unauthorized fees and other unexplained deductions from the estate, and also paid out thousands of dollars in unauthorized fees to other professionals. The resulting depletion of the estate’s assets and alleged false statements Bird made to the court in the bankruptcy case led the court to approve a $500,000 settlement with City National Bank that Shaffer believes would likely have resulted in his favor through further negotiations.

Legal Wrangling

In a July 23 response to the federal lawsuit against him, Bird filed a motion on his own behalf to dismiss the case, stating it shouldn’t have been filed in the federal court of the Western District of Arkansas because he doesn’t live in the Western District. Bird also stated in his response that the RICO allegations should be dismissed for failing to state a cause of legal action.

Bird did not return calls for a comment.

Erwin Davis, a Fayetteville lawyer representing Shaffer and the money order companies, maintains the complaint is filed in the proper court and does meet RICO standards.

“Defendant Bird, acting in conjunction with defendant City National Bank nominated himself as trustee for the purpose of delaying administration of the estate, controlling the estate property, and because of his numerous acts of neglect, malfeasance, waste, embezzlement, misappropriation of funds, fraud, perjury, mismanagement of assets, negligence and other acts, he caused great damage to the estates of the three complaint plaintiffs,” Davis stated in a legal response to Bird’s motion to dismiss.

There are “more than sufficient facts to state a claim,” Davis wrote.

Lawyers for BankcorpSouth also asked that the case be dismissed because of the statute of limitations, failure to state a claim in the RICO allegations and because Shaffer and his companies had previously sued their former attorneys for failure to bring a suit against the bank. They lost the right to take additional action against BankcorpSouth because of that case, which they ultimately lost, the response from the bank’s attorneys states.

Smith, Maurras, Cohen, Redd & Horan PLC of Fort Smith is representing the bank. A representative of the law firm who declined to disclose his name said he represented the bank back in the mid-1980s when it first started dealing with the money order business.

The bank was receiving daily deposits from NWFX, but they weren’t enough to clear all the money orders coming through, the anonymous lawyer said.

“The bank was holding a very large bag with a hole in the bottom of it,” he said.

Shaffer and Greg P. Moldenhauer, his partner, dispute the suggestion that their accounts weren’t valid and have correspondence from the bank that doesn’t list overdrafts as a concern. A bank summary of the money order account shows an average daily balace of $1.9 million in May 1985 and $1.3 million in July.

The accounts began to overdraft once NWFX was no longer in control, but that was the bank’s doing, Moldenhauer said.

“Funny that they never brought that forward in court,” he added.

The Fort Smith lawyer said he’d like to see the case dismissed based on an affidavit filed with a response to the bank’s motion to dismiss. The affidavit is a statement by Moldenhauer about the events leading to and during the bankruptcy.

The affidavit was “improper” because it is based on allegations and opinions and not fact, he said. The law firm has requested that the court strike the response containing the affidavit and dismiss the case “like a legal domino drop.”

“We’re very hopeful the court will put this in the deep grave it deserves,” he added.

Money Order Madness

Shaffer had a history with money orders long before he started his own Fayetteville-based money order processing company. He’d worked for two of the nation’s top money order companies — Republic Bank and American Express.

He formed Northwest Financial Express Inc., then Gold Financial Express Inc. and NWFX. Gold sold money orders in Louisiana and Mississippi, and NWFX sold them in 12 other states. Northwest served as the “marketing arm” of both companies, Moldenhauer explained.

Shaffer and Moldenhauer maintain that the money order firms were doing fine the first few years. The business was starting to gain momentum when it entered a contract in 1984 with City National Bank to begin clearing the money orders. The bank never had a problem with overdrafts, Shaffer said, explaining that money was transferred daily to cover the money orders that came through and things were running smoothly.

But within months of City National Bank taking on the account, the bank wanted out of the contract. Shaffer said it entered a new agreement and also began clearing money orders through McIlroy Bank in Fayetteville, now an Arvest Bank.

In records obtained in mid-1997 from the bank’s lawyers, Shaffer and Moldenhauer found minutes to a July 3, 1986, meeting between City National Bank and McIlroy Bank officials, Arkansas banking commissioners and Beverly Bassett, head of the Arkansas Securities Department at that time. The records reflect concern over the money order clearing process, and the fact that City National Bank was listed on the money order forms and officials there hadn’t approved the forms.

According to the meeting minutes, Ron Floyd, then vice president of City National Bank, stated the bank feared potential losses of $500,000 to $2.5 million. But he also said they had put an end to the business and were only expecting items sold Nov. 1, 1985, and sooner to clear.

Shaffer said the bank had no potential loss because money was still being transferred to cover each day’s money order clearing total.

But 21 days later, the Arkansas Securities Department suspended Northwest Financial Express’ state license, and the money order clearing banks froze the company accounts.

Shaffer believes the bank officials misled Bassett into thinking his companies were not legitimate and not covering their money orders. Bassett, according to the minutes, discussed what needed to be proven to revoke the firm’s license.

When a City National Bank official stated that just stopping the business in Arkansas wouldn’t end the bank’s potential losses, the minutes reflect that Bassett said, “It’s extremely damaging to their reputations and business, and that alone generally puts them out of business.”

Within weeks of the license revocation, Shaffer’s three firms filed for bankruptcy. With his accounts frozen, Shaffer said he couldn’t cover the money orders clearing daily or pay other business expenses.

The bankruptcy was forced on Shaffer’s companies, but he points out that time told the story of the solvency of his business. He said every creditor was paid in full, money was bilked from the bankruptcy estate and there was still nearly $400,000 remaining in company assets that was returned to the corporations and used to pay their attorneys.

“One of my biggest things all along is to clear my name and the names of my senior officers,” Shaffer said of his still pending legal battle. “We didn’t do anything wrong. We had a legitimate business.”

Bird Trouble

Soon after the bankruptcy was filed, Bird, then an attorney with Little Rock’s Rose Law Firm, contacted Robert F. Fussell, a U.S. Bankruptcy Judge, asking to be appointed trustee for the NWFX bankruptcy case. Fussell granted that request.

Fifteen years later, Fussell wrote a scathing report of Bird’s actions as trustee in the $8.5 million bankruptcy case. In a 235-page ruling on the estate’s final accounting in June 2001, Fussell wrote that Bird had “committed misconduct of the highest order.”

He ordered Bird to return most of his trustee fees, pay his $330,000 legal tab to the Wright Lindsey & Jennings law firm for representing him, and return $199,979 to NWFX and set aside bonuses. The order also demanded the return of $103,000 paid to the Rose Law Firm from the estate’s coffers.

Shaffer said he had to spend $150,000 in legal fees to get the court to order a final accounting of the estate. He believes Bird had hoped to continue dragging out the case in an effort to dwindle funds down more, despite the fact that all creditors who could be found were paid in full more than 10 years before the final accounting was released.

Bird’s license to practice law in the federal courts was revoked last year following Fussell’s comments in a Sept. 6, 2003, letter about his conduct in the case. Fussell listed some of the overcharges to the account, including a $10,000 bonus Bird paid to an employee, $88,000 in duplicate trustee fees, and nearly $42,000 in overpayments in state regulator fees.

RICO

Davis believes the July 3, 1986, minutes of the meeting between bank and state officials points to a conspiracy and Bird was brought in to help carry out that conspiracy. Bird was not on the list of lawyers seeking appointment as bankruptcy trustees before NWFX filed for Chapter 11, he said.

Bird filed a number of false accounts regarding the estate in the 1990s and he settled a dispute with City National Bank by paying the bank $500,000 when the bank should be paying Shaffer damages, Davis said.

Bird’s effort to convince the court that the settlement was valid points to a conspiracy between Bird and the bank, Davis said. Because Bird caused the estate to drag on and information about the status of the estate was kept hidden, Shaffer and his companies didn’t know what was going on, he added.

“Every day he delayed, he helped City National Bank,” Davis said. “This is an example of an overzealous government striking down a little company. No one was complaining the money orders were no good, City National Bank just wanted out of the contract.”

Because Bird’s involvement didn’t end until 2001 and facts of the conspiracy are just now coming to light, Davis said the case is timely even against the bank.

“Larry [Shaffer] had a very valid business,” Davis said. “He’d discovered a niche in how to market money orders more efficiently. He would have been Arkansas’ latest billionaire if not for this.

NWFX Dates of Interest

September 1984 — Northwest Financial Express enters contract with City National Bank of Fort Smith to process money orders.

December 1984 — CNB begins negotiations to sell its data processing facility and wants new agreement with Northwest Financial Express to retain fees for processing of its money orders.

April 1985 — CNB begins distributing its own money order forms. And, the bank and Northwest Financial Express sign agreement to begin scheduled withdrawal of bank’s money orders in Texas, New York, Florida, Michigan, Tennessee, Arkansas and other markets.

May 1985 — Northwest Financial Express begins negotiation for purchase by competing money order company for $2.3 million.

June – August 1985 — CNB changes processing procedures, takes over Florida and New York offices, and revokes April agreement for withdrawal from markets, taking nearly half of money-order company’s business.

Sept. 6, 1985 — Northwest Financial Express threatens CNB with legal action for breach of contract and other allegations.

February 1986 — CNB makes settlement offer. No agreement reached.

July 3, 1986 — Meeting held at CNB with representatives of State Banking Commission, McIlroy Bank of Fayetteville, and Arkansas Securities Department Commissioner Beverly Bassett to discuss NWFX and its money order operations.

July 24, 1986 — Arkansas Securities Department suspends Northwest Financial Express’ license. Business grinds to a halt for money-order company as accounts are frozen and money orders discredited.

August 1986 — Northwest Financial Express, NWFX and Gold Financial Express Inc. file bankruptcy. Allen W. Bird II of Little Rock’s Rose Law Firm appointed trustee of the bankruptcy case.

December 1999 — Bird files final accounting in bankruptcy case showing that 100 percent of all claims were paid by the early 1990s.

Sept. 1, 2000 — Bird leaves the Rose Law Firm after 25 years on the same day that post-trial briefs are filed questioning his billing practices in the case. Bird sets up his own Little Rock practice.

June 22, 2001 — Federal Bankruptcy Judge Robert F. Fussell excuses Bird of trustee duties in the case and accuses him of misconduct.

January 2003 — Bird’s privileges to practice law in federal court are revoked.

Aug. 29, 2003 — Fussell issues $199,979 judgment against Bird for fraudulent billing.

December 2003 — Administration of the bankruptcy estate ended with all claims of the bankrupt companies transferred and abandoned over to Larry Shaffer.

June 22, 2004 — NWFX files federal complaint against Allen W. Bird II, St. Paul Fire and Marine Insurance Co., and CNB.

Source: NWFX and court records