David Kern, partner, Roetzel & Andress, LPA
Kenwood Towne Place developer Matt Daniels faces a Dec. 5 trial on bank fraud and other charges. Jury selection starts Monday. A look at what's likely in the case.
CINCINNATI - When his company started work on the Kenwood Towne Place project in 2007, John Kraft never imagined the debacle that was to follow.
Six years later, Kraft Electrical Contracting has recovered just a fraction of the $2.9 million it was owed from the failed retail and office project. The building remains an eyesore. The project nearly put Kraft out of business.
“A project this big, it can’t go bad,” Kraft told himself when the unpaid bills started piling up in late 2008. “The finest property in Kenwood, great tenants, five banks watching the money. How can this get screwed up?”
Kraft still can’t answer that question with certainty.
So, he is among many looking for answers from next month’s criminal trial involving the project’s lead developer, Matt Daniels.
Jury selection begins Monday for the bank fraud trial that’s scheduled to begin Dec. 5 and could last for more than a month. As the trial date approaches, a last-minute plea agreement is looking less likely, based on pre-trial motions that ask U.S. District Judge Michael Barrett to resolve disputes over what can be presented as evidence.
Daniels, a partner in Bear Creek Capital LLC, faces 25 counts of bank fraud, mail fraud, wire fraud and destroying records. A 17-page indictment alleges Daniels acted with others to defraud the Bank of America, which financed the $175 million project that was sold in foreclosure last year.
Federal prosecutors gave a preview of their case in May, when they unsealed a plea agreement with Tina Schmidt, Bear Creek’s former chief financial officer.
Schmidt was the first indicted in the Kenwood case. She has agreed to testify against Daniels as part of a deal that would give her a sentence of no more than 51 months on a charge of conspiracy to commit bank fraud. Her plea agreement indicates Schmidt worked with Daniels to submit false loan documents to the bank and divert loan proceeds to cover Daniels’ personal expenses, including a new yacht. Daniels is an avid sports fisherman, whose angling exploits are documented on the web site of the U.S. Virgin Islands/Atlantic Blue Marlin Tournament.
Bear Creek’s former construction manager, Aubrey “Audie” Tarpley, was indicted on 21 counts of fraud and money laundering in August. His trial is scheduled for next March.
Tarpley told WCPO in May that he “never submitted one false document to anybody” involved in Kenwood Towne Place. Daniels’ lawyer, Ben Dusing, said at the time that his client “did not engage in criminal activity” and “looks forward to his day in court.”
Legal expert analyzes the case against Daniels
The government’s case will not be easy to prove, said David Kern, a partner in the Roetzel & Andress law firm in downtown Cincinnati. Kern represented the Bank of America in its foreclosure case against Kenwood Towne Place. He has closely followed the criminal and civil cases that arose from the Kenwood collapse.
“It is not an easy task because it’s so document-intensive,” Kern said. “It’s a 25-count complaint. They have to prove all of the elements of each one. One of the obstacles they will have is that Matt Daniels is not personally on a lot of the e-mail correspondence. He just didn’t use a lot of e-mail. That was mostly done through Tina Schmidt. She is cooperating with the government. So, her testimony is going to be critical in terms of proving that Daniels had knowledge of what was going on and that he in fact was the brains of the operation.”
Kern expects Daniels to argue that he was entitled to construction and development fees and, therefore, did not divert loan proceeds to cover his own expenses. Although Daniels refused to answer questions during civil proceedings, Kern said he has privately indicated an eagerness to testify in his own defense.
“He’s pretty convinced, I think , that he didn’t do anything wrong and just ran his business the way every other real estate developer does,” Kern said. “One of his key themes is going to be everybody does this: Taking construction loans proceeds that are supposed to be used for one specific project and using them instead for others.”
Before the trial starts, Kern expects a few legal skirmishes, based on recent court filings. One issue is whether Audie Tarpley can be compelled to testify on Daniels’ behalf. Generally, those facing criminal charges cannot be forced to testify on matters that could impair their own defense. But Tarpley has already testified in civil court depositions, so Kern expects Dusing to argue that Tarpley has waived his Fifth Amendment right against self-incrimination.
Another pre-trial fight will likely involve Daniels’ lifestyle, which once included a private jet, parties at his Indian Hill home and a sports-fishing business through which Daniels employed a captain
and crew for his 58-foot yacht, J.A.C.S.
“They want the prosecution to be prevented from presenting evidence of Daniels’ extravagant lifestyle,” Kern said. “It’s hard to see how the judge can keep that out,” since one count of the indictment specifically alleges that Daniels used loan proceeds to make a $500,000 down payment on a yacht.
“That’s clearly a hotly contested issue,” said Kern. “I think what Daniels is going to argue is that it was his money, taken out of a development fee, that it was money to which he was legally entitled. It’s going to be hard to make that relatable to any jury.”
Counting up the damages in the Kenwood Towne Place civil actions
It certainly wasn’t relatable to contractors like John Kraft, whose frustration level peaked in early 2009 when he was unable to secure payment from Daniels but continued to hear stories about the developer “taking the private jet to Bermuda for deep sea fishing.”
Many of Daniels’ business partners in Kenwood Towne Place have paid or agreed to pay contractors and the Bank of America. Daniels has not. His Indian Hill home is shielded against civil judgments because it is owned by a family trust. The property is worth $1.3 million, according to Hamilton County’s Auditor.
In theory, a conviction could result in the distribution of assets from the trust, but Kraft is not counting on it.
“I have no reason to think that they can penetrate that trust,” Kraft said. “Has he drained it? Who knows?”
The bank’s foreclosure case was one of the most complicated in Hamilton County’s history, generating more than 59,000 pages of court filings, more than 1.6 million pages of depositions and discovery documents. All but a few claims have been litigated or settled now.
The bank recovered $25.9 million from the 2012 foreclosure sale of the property to an investment affiliate of Phillips Edison & Co. The new owner has rebranded the project as The Kenwood Collection and recently convinced Saks Fifth Avenue to relocate its downtown store to the site.
Apart from the foreclosure judgment, Kenwood investors agreed to confidential settlements that could be worth more than $10 million for the bank, according to sources. But total recoveries will likely fall far short of the $113 million the bank was owed for principal and interest as of September, 2012, according to court records.
Kenwood investor Hank Schneider is pursuing a legal malpractice suit against the Keating Muething & Klekamp law firm, where retired partner Herb Weiss represented both Schneider and Daniels. Schneider claims he lost "tens of millions" because of "conflicts of interest and professional misconduct" by Weiss. An attorney for Weiss told WCPO in August that Schneider's losses were caused by "his own failures," not by Weiss or the Keating firm.
Contractors have recovered close to $10 million through litigation, or about 25 percent of the roughly $40 million in liens that piled up prior to the halt of construction in late 2008. But the money wasn’t divided equally. Contractors who worked on the publicly funded garage ultimately got up to 60 percent of their bills paid from money placed in escrow when the legal dispute started. Another group found a tiny parcel on the site that wasn’t named in the Bank of America’s mortgage. That allowed them to strike a separate settlement with new owner Phillips Edison. Still others reached separate settlement agreements with Kenwood investors.
“We still have claims out there but none are being actively pursued because they may or may not be collectible,” said Patrick O’Niell, an attorney for Benjamin Yocum & Heather, which represented Kraft and 14 other contractors. “For all intents and purposes, the cake’s been baked.”