(Reuters) - When Esquire Bank went public in 2017, it pitched itself to investors as a new kind of financial institution, tailoring bespoke banking services to mass torts and class action lawyers who need reliable cash flow. “We believe the litigation industry has significant growth potential for us across the lending and depository spectrum,” Esquire said in its prospectus. The bank promised to leverage the relationships of the prominent trial lawyers on its board of directors and advisory board – among them Russ Herman of Herman Herman & Katz, a pre-IPO investor in Esquire - to capitalize on the surge in litigation finance as an alternative asset class.
The market likes what Esquire is selling. The bank went public on June 27, 2017, at just $14 a share but the share price has since nearly doubled to $26.79. The bank’s first-quarter 2018 results showed business is booming by just about every metric: Deposits were up by 30 percent on an annualized basis, assets were up by 27 percent, net income was up by 140 percent. The bank’s chairman hailed “record earnings and returns as we approach $1 billion in combined deposits and off-balance sheet funding.”
That $1 billion milestone for Esquire seems to have receded today. In court Tuesday morning, according to two lawyers who were there, U.S. District Judge Eldon Fallon of New Orleans said he would order Esquire to transfer out about $200 million in deposits the bank has been holding for plaintiffs’ lawyers in consolidated litigation against Chinese makers of defective drywall. Judge Fallon said he would direct Esquire to move the $200 million to the clerk of the court. His order would reduce Esquire’s deposits by about 20 percent.
Judge Fallon’s sua sponte order was not yet posted in the docket of the Chinese drywall case as of Tuesday afternoon but was confirmed by Russ Herman, the Esquire board member who is also liaison plaintiffs’ counsel in the drywall litigation.
Esquire Bank president and CEO Andrew Sagliocca said late Tuesday that Judge Fallon’s proposed order involves non-core bank deposits that are “not part of our deposit base and not used for growth.” Transfer of the $200 million Chinese drywall fund, he said, is not material to Esquire’s prospects.
Sagliocca also said the bank plans to submit an affidavit to Judge Fallon to explain that it has followed the court’s instruction to sweep the Chinese drywall funds into off-balance sheet accounts invested in secure U.S. Treasury instruments.
The judge’s resolve to transfer the $200 million out of Esquire’s control was prompted by an explosive May 18 motion filed by Tucker Yance of the Yance Law Firm, one of the legion of plaintiffs’ lawyers waiting for payouts from the $200 million attorneys’ fee fund. In 2013, Judge Fallon appointed Esquire, then a very small, private institution, to serve as the depositor bank for the funds. (Herman was already on the Esquire board at the time.) Yance alleged in last month’s motion that Esquire proceeded to take advantage of the $200 million in deposits from the drywall attorneys’ fee account to position itself for an initial stock offering.
Yance’s brief alleged that Esquire has paid almost nothing – .02 percent – in annual interest on the $200 million over the past four years. Meanwhile, Yance alleged, Esquire is using the $200 million to secure loans and other financing for plaintiffs’ lawyers who are being charged about 7 percent interest.
“Esquire is making loans secured by the very deposit this court ordered it to hold,” Yance told me in an interview Tuesday, after confirming that Judge Fallon said he would order the funds transferred to the clerk of the court. “They’re using court-appointed money to market their stock.”
Yance’s brief claimed that Russ Herman, as an Esquire board member and shareholder, has conflicting interests: He’s obligated, as a lead lawyer in the Chinese drywall case, to push for the $200 million to be paid out to the lawyers entitled to it, yet, according to Yance, Herman has “a significant personal financial incentive to see Esquire Bank prosper and maintain and/or grow its stock price.”
Regardless of the appearance of a conflict and exceedingly low interest rate Esquire paid on the $200 million, Yance said, the bank is simply too small an institution to hold the $200 million fund, which comprises a disproportionate share of the bank’s deposits. He asked Judge Fallon to order the transfer of the fund out of Esquire’s control.
Herman and Chinese drywall lead plaintiffs’ counsel Arnold Levin of Levin Sedran & Berman did not file a formal opposition to Yance’s motion. But in an interview Tuesday after the hearing before Judge Fallon, Herman vehemently disputed Yance’s assertions, which he called “inaccuracies and false statements.”
Herman said Esquire did not make loans or advances based on the $200 million Chinese drywall deposit. “Esquire Bank has never lent money out of the $200 million fund,” he said flatly. The interest rates the bank pays the fund is the same as it pays to depositors whose primary consideration is security. Those interest payments, he added, have been fully disclosed to the drywall settlement administrator and a court-appointed accountant who monitors the fund. Neither of them has expressed concern.
Herman said he has no conflict of interest because of his role at Esquire. He said he has received less than $30,000 in compensation from the bank over his decade-long term on its board, and he directed nearly all of that money to charity before he ever saw it. (He said the company has repaid his travel costs to and from board meetings.) Herman said he does own shares in the bank, for which he said he paid less than $500,000. He disputed Yance’s account that the shares are worth $1.4 million. Herman also said he does not sit on any Esquire board committees that addressed the drywall deposit. He also fully disclosed his relationship with Esquire to Judge Fallon before the judge appointed Esquire as depositor.
Moreover, Herman said, he has a serious financial interest in expediting payouts to lawyers in the drywall litigation since his firm is due for a big payday. “I don’t believe elephants should step on flies,” he said of Yance’s allegations, “but I have much more than he does at stake in that account. I have no need, no reason, nothing to prolong it.”
Judge Fallon said, according to Yance and Herman, that he would order the transfer of the funds from Esquire to the court clerk sua sponte, rather than granting Yance’s motion. The judge gave Herman two weeks to file a response to Yance. Herman told me he plans to submit a brief “to correct the record.”
Esquire president Sagliocca echoed Herman’s comments about the propriety of the bank’s handling of the Chinese drywall fund. He said the $200 million was not used to securitize lending and was invested in accord with instructions from the court. “I don’t believe Mr. Yance understood the facts,” Sagliocca said. “We don’t need for his motion to create misunderstanding.”
The drywall fund issue is important on its own, of course, but it also raises tough questions about Esquire’s role in cases in which trial lawyers who have a stake in the bank are simultaneously leading mass or class action litigation. In the NFL concussion case, for instance, third-party lenders to NFL retirees have questioned a court order that voids their contracts but not loans advanced by Esquire. Co-lead counsel Chris Seeger of Seeger Weiss, who urged U.S. District Judge Anita Brody of Philadelphia to invalidate predatory third-party contracts, served on Esquire’s board of directors until 2016. He has said Esquire’s advances to NFL retirees were structured differently than those offered by other third-party lenders.
Litigation finance is still a young industry. I have a feeling we’re going to see more tussling over the line between lawyers-as-lawyers and lawyers-as-financiers in years to come.