“I never dreamed the bank was scheming against me.” Windy Gladney, developer

An odyssey continues as the result of a development deal gone sour.

When the old Fairwood Country Club went up for auction in 2005, developer Windy Gladney sensed opportunity. With 110 acres of prime real estate situated at the busy intersection of Interstate 12 and Millerville Road, Gladney envisioned a subdivision and shopping center in one of the Capital Region's fastest-growing areas.

“I stood on that property one morning with a cup of coffee and watched some of those 70,000 cars a day that pass by on I-12,” Gladney recalls. “That's when I decided to make a bid on it.”

It may have seemed like a good business decision at the time. But seven years later, the project has yet to get off the ground, and Gladney is potentially on the hook for $2 million. In the meantime, he has become embroiled in a contentious legal battle with fellow developer Jim Tanner, his former partner in a limited liability company called Kleinpeter Trace, and with BancorpSouth, which he claims conspired with Tanner by allowing the developer to use Kleinpeter Trace funds to pay off an undercollateralized, separate, real estate loan Tanner had with the bank.

The allegations make for compelling reading. In part that's because the case centers on Tanner, one of the city's better-known developers, who became overextended and fell on hard times, leaving a string of creditors and former business partners holding the bag. In part, it's because Gladney's charges of lender liability against BancorpSouth are egregious and, if proven true, could suggest criminal wrongdoing, banking experts say.

But the case is also noteworthy because it serves as a reminder of the problems bad real estate loans have caused for community banks like BancorpSouth. During the past decade, many smaller banks tied their fortunes to commercial real estate lending. When that market crashed in 2008, it put some of those banks in a precarious position from which they are still trying to recover.

“All the smaller banks around here rely on commercial real estate lending and always have because that's where their niche is, really,” explains Jonathan Briggs, managing director of Chaffe & Associates, a banking consulting firm in New Orleans. “That's where they can compete better. But then when the real estate market crashes, like it has, then the banks have a problem.”

Attorneys for BancorpSouth did not return calls for comment for this story, and local BancorpSouth President Larry Denison declined to comment, citing pending litigation. Calls to BancorpSouth's corporate office in Tupelo, Miss., were not returned. Tanner was unable to be reached for comment.

An unlikely pair

Gladney and Tanner were an unlikely pair from the start of their partnership, which goes back about 11 years. Gladney is a low-key guy from an old-line Baton Rouge family who doesn't like to dress up or wine and dine potential investors, preferring instead to climb on his tractor and—in his own words—“push dirt around.” He has kept a low profile over the years doing mostly residential developments, and likes to keep his name out of the headlines.

Which is why Tanner was such an appropriate—and perhaps necessary—partner. Tanner is known for being gregarious and outgoing. He was the rainmaker, a larger-than-life personality who enjoyed the art of the deal and preferred buying into projects that were already under way and flipping them to building from the ground up. The arrangement suited both men, at least for a time.

“Jim could do the Ruth's Chris lunches,” Gladney says. “I've been there twice.”

In 2001 the two formed a partnership, Kleinpeter Trace LLC, to acquire and develop a 100-acre tract on Airline Highway they purchased from Kleinpeter Dairy. They paid $1 million and divided the property into three parcels, two of which they sold and one of which Gladney developed on his own.

That was the extent of their dealings together until 2005, when the Fairwood Country Club property went up on the auction block and Kleinpeter Trace went after it. The 110-acre greenway and clubhouse had slowly been dying since its heyday as the golf club for Ethyl employees in the 1980s. By the mid-2000s, as suburban growth from Baton Rouge was heading east along the I-12 corridor, the land was worth more than the club, so the club's board decided to auction it.

Kleinpeter Trace proved to be the high bidder and picked up the property for $4.3 million, recouping some of its investment by selling nearly half of the land to other developers right off the bat. The partnership retained 53 well-positioned acres fronting I-12 and proceeded with plans to develop the parcel.

To finance the deal, Kleinpeter Trace negotiated a loan with BancorpSouth for a so-called multiple indebtedness mortgage that would, essentially, function as a line of credit against which the partnership could borrow as necessary. The mortgage was secured by the property and gave the partners the right to borrow up to $50 million. Under the terms of Gladney and Tanner's agreement with the bank, either partner could act as manager on behalf of Kleinpeter Trace. Under the terms of their arrangement with each other, Tanner took care of the books.

Not long after Kleinpeter Trace acquired the land, Hurricane Katrina struck, flooding the Capital Region with tens of thousands of new residents and sending the value of Baton Rouge real estate through the roof. Suddenly, Kleinpeter Trace's 53-acre tract on I-12 was among the area's hottest properties, and national developer AIG Baker surfaced with a whopping $12.3 million offer. The deal had just one stipulation: Kleinpeter Trace had to improve access from the interstate to the property—no small feat, given the challenges of dealing with federal and state transportation bureaucracies.

Approval for a $2 million I-12 onramp came swiftly from the feds but took considerably longer from the state, stalling the project for more than a year. By then, it was 2007, and Kleinpeter Trace had three notes secured by its mortgage with BancorpSouth: Note One, for $2 million, which had helped finance the acquisition; Note Two, for $2 million, which had gone to pay taxes on the parcels that were sold; and Note Three, for $1 million, which Gladney says he thought would pay for engineering work for the onramp.

According to court records filed by Gladney, however, Tanner didn't spend the $1 million from Note Three on engineering work. Instead, he allegedly deposited the money into his and his wife's personal checking accounts—with help from BancorpSouth and its local president, Denison.

“Denison delivered directly to Tanner (or his wife) the proceeds which should have been delivered to Kleinpeter Trace,” the lawsuit alleges. “Although Tanner had authority to make loans for the benefit of Kleinpeter Trace, he did not have authority to borrow money in the name of Kleinpeter for his personal use. BancorpSouth and Denison knew this and, if not … they should have.”

Looking back on it now, Gladney says perhaps he should have known better than to assume. But he says he never dreamed his partner would, as Gladney alleges, pocket borrowed money that was supposed to go to their joint business. Gladney's attorney, Mary Olive Pierson, who is an expert in lender liability suits, says the alleged conduct of Tanner and the bank is too egregious to be believed.

“Tanner would call the bank and say, 'Deposit this into my wife's checking account,'” Pierson says. “That's outrageous.”

Cash crunch

Such conduct was just the beginning, however. Gladney's lawsuit goes on to allege that Denison helped Tanner secretly borrow against the Kleinpeter Trace mortgage to pay off another loan Tanner had with BancorpSouth on The Bluffs clubhouse in St. Francisville. The scenic golf community had been riddled with problems since its inception in the 1980s, and Tanner had come along in the mid-2000s with plans to revitalize the development by finishing some of the filings and building a luxury clubhouse.

He had borrowed $2 million from BancorpSouth to help finance the project, securing the loan with just $900,000 in certificates of deposit. It was an upside-down loan to begin with, but it wasn't a problem until 2007, when Tanner ran into a cash crunch and tried to liquidate the CDs. That's when Denison realized the bank had a bad loan on its books, court documents allege.

“With Tanner needing cash and Denison needing to save or cover-up the drowning loans, a plan needed to be developed,” according to claims made in court documents by Pierson, who claims Denison's primary motive in the scheme was to shore up the bank's balance sheet by getting the bad debt from The Bluffs off its books.

Borrowing against the Kleinpeter Trace mortgage was the perfect solution, according to Gladney's allegations. At the time, the Millerville property still had a $12 million offer pending, and had the sale closed, Note Four would have been repaid without Gladney ever finding out, the suit alleges. Meanwhile, Tanner could pay off his loan on The Bluffs and cash out his CDs, and Denison could erase bad debt from his bank's books.

“So all of a sudden, Kleinpeter Trace ends up with another $2 million encumbrance but nothing in return,” Pierson says. “Tanner gets his money and Denison gets a bad loan off the books. Kleinpeter Trace gets nothing.”

What's more troubling, Pierson alleges, is the way the bank manipulated the transfer of funds, moving the money directly from the Kleinpeter Trace mortgage to Tanner's loan on The Bluffs.

“The bank wrote checks to themselves ... and didn't pay Kleinpeter Trace,” Pierson explains. “That prevented anyone at Kleinpeter Trace from realizing they had this $2 million debt. Gladney never knew.”

Perhaps he never would have—if the buyer had not gotten tired of waiting on approvals for the onramp and let the option on the property expire, killing the deal.

Battle with a bank

Gladney remained in the dark about Tanner's alleged use of the Kleinpeter Trace loan, at least until 2008. By then, the real estate market had collapsed, the Millerville project was in limbo, and Tanner's financial problems were spiraling out of control. In December, he transferred his ownership in Kleinpeter Trace—along with the books—to Gladney. Still, it took months for Gladney to sort through the financial records and uncover the existence of Note Four.

At first, Gladney says he had no idea where the money had gone, only that Tanner had created more debt for Kleinpeter Trace. He says in his lawsuit that he assumed Tanner had stolen the money but never dreamed the bank had been in on the alleged scheme. He says he went to see Denison, who also claimed to be in the dark and who assured Gladney the bank would work with him—as long as he renewed all four notes on the mortgage.

“Denison kept saying, 'Windy, Windy; we're going to work with you; just keep renewing these loans,” Pierson explains. “So Windy signed them.”

Throughout 2009 and early 2010, Gladney kept paying on the loans, too, periodically meeting with Denison, whom he says continued to play dumb. Gladney finally got to the bottom of where the additional money had gone in mid-2010, when his new CPA found a paper trail documenting the transfer of funds directly from the Kleinpeter Trace mortgage to Tanner's loan on The Bluffs.

“Thereafter, Gladney was also advised for the first time that most of the advances on Note Number Three were directly made to Tanner or his wife, personally, and not to Kleinpeter,” court records allege.

Gladney was livid and went to see Denison the next day in an admittedly heated confrontation.

“I said, 'Fix it or deal with it,' ” Gladney recalls.

At that point, he stopped paying on all four notes Kleinpeter Trace had with BancorpSouth. He now says he didn't want to give another dime to the bank until he could get to the bottom of what had happened and how. Less than two months later, BancorpSouth sued him as well as Tanner and Kleinpeter Trace for defaulting on the mortgage. Gladney countersued Tanner, Denison and BancorpSouth with the bank fraud and conspiracy charges.

“I trusted the bank with this huge privilege of a mortgage on my property,” says Gladney. “I never dreamed the bank was scheming against me.”

Who owes whom?

As the suit and countersuit jointly work their way through the justice system, Gladney has tried to negotiate with the bank and offered to pay any legitimate debt Kleinpeter Trace may owe, Pierson says. He refuses, however, to pay on what he calls the toxic loans—the ones that allegedly went to Tanner. According to Pierson, the bank has refused the offers.

For its part, BancorpSouth argues in court documents that Gladney is liable for the debt for two reasons. First, he gave Tanner the authority to act on behalf of Kleinpeter Trace when they signed their original loan agreement. Second, he renewed all four notes in 2009, after Tanner had left the partnership, so his signature is on them all.

“On October 18, 2009, Gladney, acting in his capacity as the manager of Kleinpeter Trace, executed Note Three and Note Four,” the bank's pleadings allege. “Each of them are signed by Gladney on behalf of Kleinpeter Trace.”

Those who know him say Gladney has a sterling reputation in the community. But some question how such a seasoned developer could have been so oblivious to the alleged misconduct of his partner and his bank for so long. What's more, they point out, his signature is on all four notes.

Pierson says that's a bogus argument. Remember, she says, Gladney didn't know about or renew Note Four until 2009—after Tanner was out of Kleinpeter Trace, after Denison had assured him the bank would work with him, and before he learned Denison had been in on the alleged conspiracy. She also notes that while, yes, Tanner initially had the authority to act on behalf of Kleinpeter Trace, “that didn't give him the right to take that money for himself.”

In the meantime, she points out, the bank has foreclosed on the property and forced a sheriff's sale. It sold last summer for $4 million, acquired by a group that includes some of Gladney's family members and friends, who are planning to develop it. (See related story here.)

“They've already gotten back what they were owed,” she says.

A clear name

Given the damaging nature of the charges in the suit against the bank, one might question why Gladney isn't going after Denison and Tanner in criminal court. After all, bank fraud and conspiracy are crimes under the law. Pierson, who has considerable experience in white-collar crimes as a defense attorney, says her rationale is basically mercenary: There's no money in it.

“I could send this over to Hillar (Moore III, the district attorney for East Baton Rouge Parish) or to the U.S. attorney, but our obligation right now is to Windy and Kleinpeter Trace,” she says. “It's in our client's best interest to focus on what is beneficial to him. I think we can prove what we can prove and collect the damages. He (Windy) gets nothing out of a criminal proceeding.”

What Gladney might get out of a civil trial is anyone's guess, though his suit seeks unspecified damages. But at the very least he'll have an opportunity to clear his name, something he says is very important to him.

“I deal with banks all the time and have a good reputation with all of them except this one,” he says. “This is about my reputation and my good name.”

As for Tanner, court documents from countless unrelated lawsuits suggest he is in serious financial trouble. At least seven regional banks have pending lawsuits or final judgments against him. He has been evicted from local properties and has had his Range Rover repossessed. (See related story here.)

Out of the box

Should the case go to trial, which is where Pierson now says it is headed, BancorpSouth will be going up against one of the experts in the field of lender liability lawsuits. She fought and won two major suits against Louisiana banks in the early 1990s, both of which were landmark cases in their field, legal experts say. Since then, the Credit Reform Act of 1994 and changes to federal and state banking laws have made it harder to blame banks for the problems of their borrowers. Pierson says the facts in the case are so mind-boggling, she had no choice but to sue on Gladney's behalf.

“I've seen a lot of conduct and I've seen a lot of misconduct,” she says. “The charges here are really out of the box.”

J. Michael Woody, a Florida-based banking consultant, agrees the charges are outrageous. Particularly troubling and potentially criminal, he says, is the allegation the bank directly deposited funds from the Kleinpeter Trace mortgage to The Bluff's loan, without ever passing the money through the Kleinpeter Trace account.

“That's weird, if, in fact, that is true,” he says. “The bank had to have a part of that. I have seldom seen that before.”

Despite the unusual allegations against the bank in this suit, the case otherwise serves as a reminder of the headaches commercial real estate loans have caused for so many community banks. BancorpSouth is not alone in this respect, according to Briggs, the New Orleans banking consultant, though Louisiana banks in general have fared better than their counterparts in other states.

However, he notes that BancorpSouth's ratio of non-accrual loans to total loans—its percentage of bad loans, in other words—increased considerably, from .29% in 2008 to 3.72 in 2010, before coming back down to 2.72% this year. That ratio isn't alarming, he says, but it's not comforting either.

“A ratio of 3.72% would've been terrible five or six years ago,” he says. “By today's standards, it's not so bad.”

More importantly, Briggs notes, BancorpSouth's percentage of non-accrual loans is coming down—a sign the bank is getting a handle on its bad-debt problem, to the extent it has had one. What's more, the bank does not appear to be overinvested in commercial real estate.

“Industry standards say a bank should have no more than 300% of its capital tied up in commercial real estate loans,” Briggs says. “BancorpSouth has less than 200%, which is a good ratio.”

Whether that may be relevant to Gladney's charges that the bank was motivated in the alleged conspiracy to get a bad loan off its books remains to be seen. Still, the suit is something of an allegory about the kind of deals that get done when times are good and the questions that people don't ask until later, when circumstances have changed.

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