A bankruptcy trustee is alleging a Dallas-area home flipper perpetrated a Ponzi scheme — with the participation or knowledge of the former regional executive vice president of Valliance Bank — that saw the bank paid back in full but defrauded investors out of at least $3 million.
In the litigation that’s ongoing in bankruptcy court in Phoenix, Arizona, trustee James E. Cross has set his sights on the bank itself and former chief lending officer and executive vice president for Texas, Shelby Bruhn, in trying to recoup funds for the investors allegedly duped by Skyler Aaron Cook. The bank and Bruhn have denied the allegations and moved to dismiss them, a request U.S. Bankruptcy Judge Eddward P. Ballinger Jr. denied.
“I don’t know whether this case can be resolved by way of summary disposition,” Judge Ballinger said at a brief hearing in October. “Maybe yes, maybe no, but I don’t believe it can be resolved by way of a motion to dismiss. … If you think you’ve got a summary judgment motion, well, bring it on, and that will force the other side to put up the evidence and we can find it out.”
Cross has alleged, in support of the claim that a Ponzi scheme was ongoing, that Cook bounced checks at Valliance Bank at least 257 times between January 2019 and August 2019.
“Despite the incredible series of substantial overdraws and suspicious Ponzi activity in the Cook Enterprise accounts for close to a year, Valliance managed to prolong the existence of the Cook Enterprise to assure that Valliance received payment in full at the expense of all other creditors of the Cook estate,” the trustee argued in a July response to the motion to dismiss.
“When the ‘music’ finally stopped, the only one that had a ‘seat’ was Valliance — at the expense of the assets of the estate and the dramatically increased claims in this case,” the trustee alleged.
Attorneys for Bruhn and Valliance declined to comment on the ongoing litigation Wednesday, citing firm policy.
Cook filed for Chapter 11 bankruptcy in February 2020, and the court converted it to a Chapter 7 bankruptcy proceeding in September 2020, according to court documents.
Jeff Goulder of Stinson, who represents the trustee, got involved about a year later. He told The Texas Lawbook Cook would solicit funds from investors, between $50,000 and several hundred thousand dollars, buy residential real estate, fix it up and sell it.
“The relationship between Cook and Bruhn and Cook and Valliance is unique, to put it charitably,” Goulder said.
Goulder said Cook operated a handful of businesses all with accounts at Valliance Bank, establishing a borrower-lender relationship.
“In addition, the bank was serving as a recruiter to investors for Cook,” Goulder said.
He pointed to an email from Cook’s former business partner to a potential investor representing that Valliance would handle all financings for all the projects and encouraging the potential investor to open personal bank accounts at Valliance. The email stated that by using Valliance and its institutional backing, the investor would be protected and the accountability and transparency of the projects would be ensured, in addition to allowing the investor to borrow money from the bank to invest in the projects.
“And the bank and Bruhn were copied on this email, so they knew they were being held out as a federally insured lending institution that could vouch for the transparency of the business practices and accountability,” Goulder said. “One would think, in the normal course, if a bank saw an email like this they would get on the phone and say ‘What are you doing? You can’t hold us out as vouching for your business practices.’ But that didn’t happen.”
Goulder said there’s another layer to the relationship between Bruhn and Cook: Bruhn formed a limited liability company and invested with Cook on several properties.
“So there’s a real web of relationships here where the bank is not just acting as a bank,” Goulder said. “It’s a lender, it’s a recruiter and it’s a business partner of Skyler Cook.”
When Cook’s business encountered financial difficulties and checks started bouncing in January 2019, Goulder said the bank was “regularly” communicating with Cook instructing him to take money out of certain accounts and move it into others to cover the checks.
That should have been a red flag, Goulder said. A second red flag should have been that some of Cook’s accounts would have up to half a million dollars coming in monthly but had average balances of just a few thousand dollars.
“The bank should have known something is amiss here and they have an obligation to do an investigation and shut off the spigot in dealing with someone like this,” Goulder said. “Ultimately, they did shut him down but not until this had gone on for a year and until the bank had been paid back.”
Valliance Bank, based in Oklahoma City, announced its expansion into Fort Worth in an August 2019 press release and named Bruhn as Texas market president at the same time. In January 2021 Bruhn was promoted to chief lending officer and executive vice president.
Bruhn is no longer with Valliance and in February was named president and CEO of First Financial Bank, Southlake Region.
In a motion to dismiss filed in June, Bruhn and Valliance told the court that the fraudulent transfer claims the trustee brought were filed too late, outside the two-year statute of limitations, and should be dismissed.
At the hearing on the motion to dismiss, Judge Ballinger said he wasn’t persuaded by that argument because the claims in the second amended complaint, filed in May, relate back to the claims in the original complaint.
The bank and Bruhn also argued in the motion that the bank had, as a matter of law, “acted in good faith by accepting the loan repayments and overdraft repayments, and the trustee fails to allege any facts establishing that Valliance or Bruhn had actual or constructive knowledge that the debtor was engaged in fraudulent activity.”
Bruhn and the bank also invoked the doctrine of in pari delicto, arguing that the claims should be dismissed because when a participant in illegal or fraudulent activity seeks to recover from another alleged participant, “the law will aid neither, but rather, will leave them where it finds them – especially where the participant seeking recovery is the more culpable party.”
“The trustee stands in the shoes of the debtor, and under Bankruptcy Code Section 541, his rights are confined to those of the debtor and are no greater,” Bruhn and Valliance argued. “According to the trustee’s own allegations, the debtor perpetrated a Ponzi scheme to defraud investors and used fraudulent financial statements to do so. Because the debtor couldn’t possibly obtain any recovery against defendants based on his own wrongdoing, neither can the trustee.”
Valliance and Bruhn are represented by John Craiger, Matthew S. Layfield, Michael A. Campbell and Nick A. Griebel of Polsinelli PC.
The trustee is also represented by Michael Vincent and Clarissa C. Brady of Stinson.
The debtor is represented by James Kahn and Krystal Ahart of Kahn & Ahart.
The case number is 2:21-ap-00336.