Lake Maxinkuckee Its Intrigue History & Genealogy Culver, Marshall, Indiana

State Exchange Finance Company (SEFCO) - What Happned?  



The State Exchange Finance Co. of Culver, filed for bankruptcy reorganization in December, the recession, poor farm economy and rumors of collapse were blamed. This is a series of stories examining allegations of 'what went on behind the scenes. From the Indianapolis Star - By MYRTA PULLIAM And RICHARD E. CADY - Star Staff Reporters Plymouth, Ind.


Sun, May 8, 1983

Bank crisis What happened to finance company in Culver?

On the afternoon of Jan. 10, Fred E. Adams drove into the bird sanctuary of Culver Military Academy here, walked about 25 feet from his car, placed a Browning 12-gauge shotgun against his chest, and pulled the trigger.

Fred Adams was 57, the father of four children, and one of the most active and popular people in this friendly Marshall County community of 1,600 persons. His suicide shocked Culver. Hundreds of people from cities and towns around Indiana came to the funeral.

Adams also was the chairman of the State Exchange Finance Company Culver. Indiana First in a series the board and chief executive officer of one of the most distinctive banks in the Midwest, the Culver-based State Exchange Bank, and of its financially troubled sister company, the State Exchange Finance Co.(SEFCO).

LESS THAN two weeks before his suicide, SEFCO had filed for reorganization protection under federal bankruptcy laws.

And this, friends and associates of Adams said, was what drove Adams into the bird sanctuary the dreadful realization that one of the financial institutions for which he had become a symbol was in turmoil.

SEFCO was forced into bankruptcy reorganization 12 days before Adams' death because of false rumors of impending collapse, a spokesman said.

THERE WAS no evidence of mismanagement, embezzlement or fraud, the public was told.

But the public and the thousands of shareholders, borrowers and other customers of SEFCO were not told the truth.

On the morning of the suicide, Adams, another SEFCO officer, a former officer, and a SEFCO attorney were informed they might be guilty of a federal criminal violation for misapplication of bank assets.

The irony is that the alleged misapplication apparently was only a technical violation.

BUT THAT allegation was part of a series of transactions and events throughout 1981 82 that contributed to the financial crisis at Culver.

Although SEFCO's troubles were originally blamed on the recession, the poor farm economy and rumors of failure.

The Indianapolis Star learned:
    * Dozens of "insider" loans to SEFCO officers, directors, shareholders and their relatives are under examination, including loans SEFCO officials used in private businesses.

    * A transaction involving a financially troubled seed company and the acquisition of 2,600 acres of land in the state of Washington led to accusations of misrepresentation and misuse of funds.

    * Several other companies with extensive SEFCO loans went into bankruptcy protection, as did a lawyer from Lafayette who represented them.

    * The attorney was a consultant to SEFCO, a heavy SEFCO borrower, a bank shareholder, and a business partner of a bank officer.

    *A close relationship between SEFCO, State Exchange Bank and American Fletcher National Bank in Indianapolis extended to transactions not only between the institutions but also between officials of both banks. Several of these are under investigation.


THREE KEY officers of the State Exchange Bank and SEFCO have resigned or were fired since last fall.

For months, examiners from the Federal Deposit Insurance Corp., Federal Reserve Board and Indiana Department of Financial Institutions have studied State Exchange and SEFCO records.

More recently, a confidential, independent audit has been under way as part of a proposed reorganization.

AND AN Indianapolis law firm has been retained to conduct an investigation to determine whether there was any wrongdoing.

Joseph L. Currens, a Culver businessman who is chairman of the creditors committee established under the Federal Bankruptcy Court at South Bend, said: "In my opinion, all the facts must be brought out, good or bad. The sooner this happens, the better. I'm definitely bnot interested in any whitewash, coverup or anything else. I think people want to know the truth."

SEFCO OFFICIALS would not comment. Nor would John J. Deery, former senior loan officer."I just : don't see what good it would do," he said.

Alfred E. McClure, the Lafayette attorney who is a central figure in the controversy, said he believes his inside knowledge of what really hap-pened has made him an "enemy" of SEFCO.

"I even worry about my physical safety," said McClure. "There are millions at stake here."

A FORMER SEFCO employee who asked not to be identified said - he believed inside dealings, incompetence, mismanagement and internal bickering put SEFCO on a disaster course following the 1981 death of its legendary founder, William O. Osborn.

Osborn, known as "W.O.," was 96 when he died Dec. 26, 1981. He had been active in the bank operation until a disabling stroke forced him to become chairman emeritus in 1980. Adams, his nephew, succeeded him as chairman.

It was Osborn who was almost personally' responsible for building State Exchange from a small-town bank into a unique "tiny giant"

WHEN TOTAL assets were judged in relation to the population the bank served. State Exchange ranked among the top 10 banks in the state.

Osborn, who started there in 1906, accomplished this through a unique combination of liberal lending policies, personal dealings with customers, and a variety of special services. Osborn was a lawyer as well as a banker.

The week after his death, the State Exchange Bank closed its books on 1981 showing offices at Culver, Plymouth and Argos, deposits of more than $128 million, and total assets of more than $143 million.

JUST AS the State Exchange Bank was unique, so in a different way was the State Exchange Finance Co.

Incorporated in 1930, SEFCO functioned as a loan company which could make the larger loans with less security that the bank could not make and offer higher interest rates. SEFCO also became a bank holding company, owning the Farmers State Bank at LaPaz as well as the State Exchange Insurance Agency.

At the close of business for 1981, SEFCO listed total assets of $43.4 million. The bulk of this $34.3 million was in outstanding loans and accounts receiveable.

IT ALSO had $39 million in investment notes and accounts payable.

Many people did not know there was any difference between State Exchange and SEFCO and in some ways there wasn't.

Both had the same directors and the same shareholders as well as some of the same officers.

But bank deposits were guaranteed by the Federal Deposit Insurance Corp. (FDIC); SEFCO investments weren't.

THE MORE than 300 shareholders included investors from throughout the U.S. Even former Gov. Otis Ft. Bowen, a longtime resident of Bremen in Marshall County, had stock.

The thousands of customers who took out investment notes ranged from individuals to service clubs to Northern Indiana corporations, trusts and retirement plans. For many persons, their investments represented life savings.

On the surface, SEFCO appeared to be a safe, reliable repository, as good or better than W.O. Osborn's word, with a long record of stability and growth.

INTERNALLY, however, there was dissension. In 1976, an internal auditing department was created, 'but it was disbanded two years later amid quiet talk that "uncommon" procedures had been used in some SEFCO loans.

There also were questions of whether the board of directors was kept fully informed of all loans made by SEFCO and to whom they went.

In addition, the need for SEFCO to continue at all became a further question after government regulations on bank loans and interest rates were amended in 1979 so State Exchange Bank could, in effect, make larger loans and offer high rates.

THIS WAS part of the background as the worsening national economy sent interest rates skyrocketing, compounding the problems on SEFCO loans that already had high interest rates.

Finally, the farm economy itself depressed as market rates sank and many of SEFCO's loans were to northern Indiana' farmers.

These were factors when rumors began circulating that SEFCO was in trouble. Currens said he first heard them as early as a year before the bankruptcy petition.

ALTHOUGH NO one knows how the rumors began, they were fueled in part by the fact that examiners from the FDIC and the State Department of Financial Institutions had begun studying the records of SEFCO and State Exchange Bank.

On Aug. 11, 1982, the resignation of Deery as executive vice-president and senior loan officer of the bank and executive vice-president of SEFCO was accepted, effective a month later.

Deery said later he resigned because a five-year employment contract was refused. Allen H. Cummins, who was a director but had spent most of his time as president of Farmers State Bank, succeeded Deery.

ROBERT CULTICE SR., vice president of the bank and vice president and treasurer of SEFCO, was fired after 27 years.

Cultice said recently he could not answer questions on advice of his attorney, but commented, "They ruined it. It will never come back."

In this same period, Glenn Overmyer, a Marshall County farmer, resigned from the board of directors after serving more than two decades. Overmyer did not return recent telephone messages. He has otherwise refused to comment on his resignation, but is known to have been critical of loan procedures.

ALL OF this contributed apparently to a growing line of SEFCO investors who wanted their money.

But despite these changes, growing loan difficulties, and the swirl of rumors, what happened on Dec. 30 stunned Culver. Without any warning, SEFCO filed in Federal Bankruptcy Court at South Bend a petition for protection under Chapter 11 of the bankruptcy laws.

IN THE preceding two weeks, Cummins revealed, investors had withdrawn more than $4 million.

SEFCO would list debts of $33.1 million and assets of $28.7 million most of the assets in property.

On the day after the filing, Adams, Cummins and some directors met in the bank cafeteria where they told businessmen and investors SEFCO was sound the finance company just needed time to reorganize.

MORE IMPORTANTLY, they emphasized that while SEFCO admittedly had problems, the State Exchange Bank was financially sound and unthreatened.

The weekly Culver Citizen, in a lengthy Jan. 5 editorial entitled "Rumor Mill 1, State Exchange 0," blamed the problems on fear rumors and fear feeding upon each other.

Among the rumors, the editorial noted, was that "one of the bank officials had committed suicide; an but without a shred of truth." FIVE DAYS later, Fred Adams attended a special meeting at the State Exchange Bank.

About 12:15 p.m., he left the bank to go out to lunch.

That afternoon, the board of directors was meeting when the announcement came: Adams' body had been discovered at 2:58 p.m.






Mon, May 09, 1983

Foreclosure on seed firm raises doubts.

Until last year, Tom Ross Syler owned a Marshall County seed company that had been in his family for more than 30 years.

Today that company no longer exists except as a defendant in a dozen lawsuits.

But there is a successor company doing business. Known as Pilgrim Seeds Inc, it is owned by a former consultant and auditor for the State Exchange Bank and State Exchange Finance Co. (SEFCO) at nearby Culver.

How Syler's seed company ended up with a former SEFCO consultant figures in the circumstances that led to the finance company's Dec. 30 request for bankruptcy shelter.

THE INDIANAPOLIS Star learned:
    *Some seed customers claimed they were fraudulently misled about Syler's solvency when the finance company created the new seed company.

    * SEFCO put Syler's assets in Pilgrim Seeds but not the liabilities.

    * Bank examiners discovered that bank assets apparently were Ever seen the town misapplied as part of the acquisition of a 2,600-acre Washington State seed ranch.

    * At least one of the sellers of that land believes the bank and finance company deceived him.


Syler himself said he never was fully informed by SEFCO and its representatives of what was going on.

BUT THE attorney who arranged the transactions said, "I have no apologies on these things." Everything was conducted properly under the circumstances, he maintained.

Syler's company, Syler Inc., had borrowed regularly from State Exchange Bank and its sister organization, SEFCO, ever since Syler's father founded the seed company in Plymouth.

Most of the seed was grown in the Pacific Northwest, and in the early 1970s Syler joined four other seed dealers in buying a huge tract of land near Yakima, Wash., to grow seeds. This property was known as the Cold Creek Ranch.

The partners borrowed money from a Washington bank, drilled wells and began raising alfalfa and wheat By 1981, several partners wanted out for a variety of reasons.

IN THE meantime, Syler said, his own Indiana company was in financial trouble because of soaring interest rates and the havoc the national recession had caused in the farm market.

Syler said he had mentioned to Fred E. Adams, chairman of the board of SEFCO and the State Exchange Bank, that some of his Washington partners were negotiating to sell their interests.

One day in 1981, he said, the bank proposed "out of the blue" that Syler Inc. buy out the other four partners, even though Syler Inc. owed SEFCO or the bank more than $3 million.

"Frankly, I wasn't sure why I should buy," Syler said. "They said it was a good investment Now I'm beginning to wonder."

SYLER SAID Adams told him that acquisition of the land would enhance Syler Inc's assets and the bank planned to provide additional financing to grow fruit on the land and turn it into a vineyard.

The negotiations were handled by Alfred E McClure, a Lafayette attorney retained by the bank, and Craig Weeks, vice-president and controller.

The discussions started in the fall of 1981 and the sale was concluded in February 1982, with the Cold Creek Ranch land conveyed to Syler Inc. in exchange for separate financial deals with each of the other partners.

To accomplish the sale, SEFCO provided financing to Syler Inc., either as cash for the sale or as guarantees such as promissory notes. Syler in turn signed documents prepared by McCIure to acquire the land.

McCLURE SAID SEFCO officials believed and he agreed that the Cold Creek Ranch would be a strong asset in Syler Inc.'s distressed loan portfolio.

But Syler remembered, "they weren't even done buying out the partners a week and they called all my notes."

Syler said he was summoned to the bank and told to bring his corporate records.

At this meeting attended by Adams, McClure, and John J.Deery, the bank's executive vice-president and senior loan officer Syler was informed that the bank had decided to assume the assets of Syler Inc. because it was in such shaky financial condition.

THIS AMOUNTED to a peaceful foreclosure of Syler Inc. At that point it had an inventory of slightly more than $1 million and accounts receivable of about $750,000. SEFCO also assumed all of Syler Inc.'s stock.

According to Syler and various records, Syler was made chairman of the board but John Thieling was appointed president and given effective operational control while McClure became the secretary.

Thieling at the time was a 135,000-a-year consultant to SEFCO. Like SEFCO controller Weeks, Thieling had been an auditor for a Plymouth accounting firm that had worked for SEFCO.

Syler said the bank officials told him the plan was to liquidate his company.

BUT, ON April 8, 1982, Pilgrim Seeds Inc. was registered with the secretary of state by McClure's law firm. SEFCO was identified as the sole stockholder.

Said Syler "Instead of liquidating, they formed Pilgrim. Why, I don't know. It looks real strange. I doubt if we'll get any answers until we go to court"

McClure said the decision to take over Syler came when it did because of a decision early in the Cold Creek Ranch negotiations to have an independent audit conducted to determine the exact financial condition of Syler Inc.

The audit report, issued in February 1982, showed Syler Inc. in worse financial shape than anyone imagined, including substantially less inventory than had been thought and raised serious questions' whether Syler himself should stay in control.

AT THAT point McClure said, SEFCO was the senior-creditor under the law. "It was my view and Weeks' view the bank had no business funding all of Syler's unsecured creditors.

"We wrote a memo to Adams and Deery that Syler Inc. had to stop. We had to collect receivables, not fund the accounts payable, and exercise rights over the inventory."

When this was done, McClure said, it left SEFCO with more than $1 million worth of seeds. So Pilgrim was formed as an operating company to sell them.

However, SEFCO contended in its bankruptcy reorganization petition that the Washington land had been acquired "pursuant to a workout of a problem loan" when, in fact the negotiations had started months earlier.

ALTHOUGH SEFCO maintained the interest in the Cold Creek Ranch land, Syler Inc.'s other assets were sold to Pilgrim Seeds.

McClure said that while other creditors found this harsh, SEFCO had a right to collect on Syler's previous debts.

But SEFCO continued as owner of Pilgrim Seeds for only six months. On Oct 1.

SEFCO sold Pilgrim to Thieling with financing from SEFCO.

Thieling's purchase price was said to be $430,000 payable at $6,000 a month at a rate of 1 percent more than the prime rate, with a maximum of 12 percent.

This transaction was arranged through Allan H. Cummins, who had succeeded Deery as executive vice-president a few weeks earlier.

McCLURE SAID he opposed the sale because of the proposed price but "Al (Cummins) made a decision to go with it"

"I wanted a higher interest rate, but I think Al just wanted out of it" said McClure.

Cummins declined to answer questions, referring reporters to an attorney conducting an investigation for SEFCO. The attorney did not return telephone calls.

That sale arrangement included a now-disputed provision in which SEFCO purported to indemnify Thieling against claims filed against Syler Inc. property that SEFCO sold to Pilgrim.

Those claims included a series of lawsuits that began accumulating last year against Syler Inc., Pilgrim Seeds, and SEFCO.

THE LAWSUITS generally are over nonpayment for shipments and trade agreements of various kinds of seeds originally ordered by Syler Inc. and in part turned over or consigned to Pilgrim.

In the case of one Oregon supplier, the suit charged that Syler's solvency was "fraudulently misrepresented" because the order was placed even though the principals knew Syler Inc. was in financial trouble.

The misrepresentation included misleading trade announcements issued when SEFCO took over Syler Inc., the suit charged.

Questions about what had happened in the Syler-Pilgrim transactions were among increasing rumors about what was going on inside SEFCO last fall.

THE RUMORS led to a "run" on SEFCO during which investors withdrew more than $4 million in a two-week period, forcing the finance company to file for reorganization protection in Federal Bankruptcy Court at South Bend.

The Cold Creek Ranch land is carried as a property asset valued at $1.3 million.

But three of Syler's former partners are creditors, and one of them, Charles B.Scott of Portland, Ore., called the land sale "a bad deal. It was very disappointing."

Another former partner, J.D. Tramel of Canby, Ore., said he believed that someone had planned all along to get the Cold Creek Ranch land so it could be controlled by SEFCO rather than Syler.

"IT WAS deceitful the way they did it" Tramel maintained.

Syler said he never knew whether he was dealing with the bank, the finance company or their subsidiaries. On previous loans, he noted, "we never knew where the paper was going to be, and they would change it without telling us."

Syler said he was informed at the last minute on the Cold Creek Ranch sale that SEFCO rather than the bank would guarantee the payments.

One of these guarantees is under investigation.

It involves the purchase of the one-fifth interest in Cold Creek Ranch from the estate of Roy T. Ramy, a former executive of a Minnesota seed company.

RAMYS INTEREST was sold to Syler Inc.for $200,000. Cash of $60,000 was paid, and the remainder was to be backed by U.S. government securities.

A $200,000 Treasury note, escrowed at American Fletcher National Bank in Indianapolis, was used as security, but the note was owned by State Exchange Bank rather than SEFCO.

McClure said he believes what happened on the Treasury note led to Adams' suicide on Jan. 10.

"The bond belongs to the bank, not SEFCO. But to those of us around there, they were the same," McClure said.

Examiners for the Federal Deposit Insurance Co. (FDIC) notified the State Exchange/SEFCO directors Jan. 10 that the transaction was an apparent misapplication of bank assets and a possible federal criminal violation.

THE DIRECTORS were told that the matter was being referred to the U.S. attorney's office.

Adams committed suicide that afternoon.

Weeks, who since has resigned from the bank, said the failure to transfer the treasury note from SEFCO to the bank was an oversight.

"It was a bank asset that should have been transferred to the finance company, and it wasn't through an error."

But Weeks said he did not think the FDIC notification was the reason Adams took his own life that day. He said Adams had been under tremendous pressure, "both external and internal."






Tue, May 10, 1983

Loans for luxurious lakefront condos questioned

On the western shore of beautiful Lake Maxinkuckee the second largest natural lake in the state the Harbour Condominiums rise almost from the heart of Culver, offering as the promotional brochures say, a "luxurious escape."

The luxury development, selling a limited number of private lakefront condominiums, has been financed through American Fletcher National Bank in Indianapolis and the Culver-based State Exchange Bank and State Exchange Finance Co (SEFCO).

Some of the SEFCO loans are being studied as part of the examination of why the Culver finance company was forced to seek bankruptcy protection four months ago.

The Indianapolis Star learned:
    * The condominiums are being built by Harbour Development Co., a corporation owned by the former senior loan officer of State Exchange Bank. Harbour Development received a number of SEFCO loans.

    * An attorney for the bank also invested $100,000 in the condominium project with a loan from SEFCO.

    * The attorney also received a SEFCO loan to buy stock in State Exchange bank and SEFCO.


THE PROPERTY itself has been the topic of controversy here, including two lawsuits. Harbour Development principal John J. Deery, the former No. 2 man at the bank, declined to be interviewed.

The attorney, Alfred E. McClure of Lafayette, said he eventually got out of the condominium project and lost money in his dealings with State Exchange Bank and SEFCO.

The Harbour Condominiums, which were started two years ago. are located at the eastern end of Washington Street, one of the main thoroughfares in this Marshall County community of 1,600 persons.

Records in the secretary of state's office show that Harbour Development Co. Inc. was registered Dec. 31, 1981, by Deery and McClure.

AT THE TIME, Deery was executive vice president and senior loan officer of the bank and executive vice president of the finance company. McClure had been retained by State Exchange to assist on problem loans.

According to SEFCO records. Harbour Development Co. received at least $120,000 in SEFCO loans last year, some of which were renewed later at prime rate. Deery resigned from the bank and SEFCO last summer.

McClure himself carried more than $300,000 in SEFCO loans last year.

Disputes struck the project almost from the time Deery purchased land on the south side of Washington Street where it dead ends into Lake Maxinkuckee.

RUNNING BETWEEN his land and the lake was abandoned Penn Central track. Deery "purchased" the right of

way land from the railroad and bought some right of way on the other side of Washington and another tract near the Culver train depot When Deery asked for zoning approval to build the condominiums on his land and on the right of way land across Washington, two homeowners filed suit, complaining they would be blocked from the lake.

They contended that the railroad land had belonged all along to adjacent landowners because the railroad had an easement granted in 1883.

That case was settled when Deery deeded the right of way to the homeowners.

THE SECOND lawsuit was filed in April 1981 after Deery offered to sell to the town of Culver the right of way he had purchased adjacent to the depot When the town was unable to raise the money Plymouth attorney Marshall Kizer filed a taxpayers' suit against Deery, asking the court to name the town the owner of the land.

Kizer said SEFCO also was named as a defendant because Deery had used SEFCO money to buy the land. Kizer said that suit was dismissed on a technicality and he is appealing.

McClure, who represented Deery in the lawsuits, said Deery had, received a major loan commitment for financing from American Fletcher National Bank in Indianapolis, where Deery had worked in the late 1960s.

THE ATTORNEY also said he believed that the SEFCO loans he and Harbour Development received had been approved by Fred E. Adams, chairman of the board of SEFCO and State Exchange Bank.

Adams, who committed suicide Jan. 10, 12 days after SEFCO filed for bankruptcy protection, had substantial loans himself from AFNB. "Harbour development looked like a pretty good deal," McClure said. "I saw an opportunity to make some money myself and I was willing to go into Harbour. John (Deery) sold some of his land to Harbour, - and I lent money to Harbour, to buy John's land."

McCLURE EXPLAINED that since he and Deery were equal partners in Harbour Development he bought Deery's land in behalf of Harbour, with a $100,000 SEFCO loan as down payment, so Deery would not have to make a capital contribution himself.

However, when financing problems arose later, McClure said, he changed his loan to reflect a capital contribution in Harbour, Development while Deery accomplished the same thing by reducing the price of the land Harbour had bought from him.

McCLURE SAID he decided to get out of the project because he had wanted at least five sales secured before construction began while Deery wanted to go ahead with the construction.

In February, Deery and Harbour Development executed a mortgage to McClure, covering the $100,000 investment McClure had made at 10 percent interest

McClure said he believed Deery had since settled the $100,000 loan with SEFCO and other loans Deery had by obtaining an $800,000 loan from First National Bank of Elkhart.

SEFCO records show that in 1982, Harbour Development received new loans of $25,000 in January; $10,000 each in March, April, May and June; and $20,000 in July. A $10,000 note a;sp was renewed in July.

DEERY RESIGNED reportedly in a contract dispute in August, effective in September, and renewed Harbour Development loan notes totaling $120,000 in the fall. No other details were available.

However, Salvatore Barbatano, a Chicago attorney representing SEFCO creditors in the bankruptcy proceedings, confirmed that all of Deery's SEFCO loans have been paid since then.

Deery reportedly had to move a substantial amount of previous SEFCO loans from SEFCO to AFNB in Indianapolis in 1981.

Records show Deery mortgaged some Culver property to AFNB in October 1981 to cover a $350,000 promissory note due a year later.

THIS WAS the same period when McClure first bought stock in the bank and SEFCO with a SEFCO loan.

McClure said he first received 200 shares in October 1981 for $95,000 and an additional 300 shares for $24,000 in May of 1982.

The attorney said Adams first proposed the stock purchase and he had been borrowing SEFCO for several years before then.






Wed, May 11, 1983

Probe focuses on 229 'insider' loans

In 1982 the State Exchange Finance Co.(SEFCO) recorded 229 loan transactions with "insiders" officers, directors, employees and their relatives.

These transactions new loans and renewals of loan notes covered well over $2 million. In addition, loans to persons holding stock in SEFCO and its sister company, the State Exchange Bank, totaled more than $2 7 million.

These loans are being examined to determine whether any were fa vorably renegotiated before the fi nance company filed for bankruptcy reorganization Dec. 30.

THE CHAIRMAN of the bankruptcy creditors' committee and its two attorneys notified creditors last month an "in depth investigation" is targeted on the operation of the bank and finance company and the con duct of officers and directors.

SEFCO attorneys also plan to:
    * Recover any "preferential" payments made to SEFCO note holders who withdrew notes in October, November and December 1982, if the withdrawals allowed them to recover a greater percentage of their money than other noteholders.

    * Determine whether any "insiders" knew SEFCO was insolvent when they withdrew funds last year.


The Indianapolis Star also learned:
    * The largest number of new "insider" loan transactions was with John J. Deery, the bank's senior loan officer.

    * Fred E.Adams, the chairman of the board, who committed suicide Jan. 10, had 15 personal loan transactions himself. SEFCO creditors have filed a $5 million claim against his estate.

    * An attorney who had more than $500,000 in SEFCO loans, owned stock, and worked for the bank, has filed for Chapter 11 bankruptcy protection in Lafayette.


The attorney, Alfred E.McClure, said he was forced to seek bankruptcy shelter after two "goons" came to ' his Lafayette home and tried to provoke him.

"Frankly, if you're going to have those kinds of incidents where people's lives may be in danger, with those kinds of tactics, then the safest place to be is in Chapter 11," said McClure.

"Insider" loans reportedly were the target of criticism from state and federal bank examiners at least since 1977, when they totaled only about $580,000.

AT THAT time, the Federal Reserve Board is said to have "strongly recommended" to bank directors that all such loans be "well-documented" in the directors' records.

Since the bankruptcy petition was filed. State Exchange Bank directors resigned from their dual roles as directors of the finance company.

As recently as the fall of 1981 and spring of 1982, Adams and Deery had to transfer part of their loans from SEFCO because of criticism by examiners.

According to SEFCO records, the 57-year-old Adams received eight new loans from the finance company last year. A number of these loans, plus earlier loans, were renewed at various times.

THE LARGEST transactions were on Feb.25 when notes for $119,000 and $25,000 were renewed, each at 15 1/2 percent interest.

That was the interest rate Adams and many other borrowers paid early in the year, while his loan renewals later in the year were at 13 percent and 12 percent.

The status of the Adams loans could not be determined. But the $5 million claim was placed against his estate in Marshall County to "keep the doors open" because of possible lawsuits against former bank officers and directors, according to Jere Humphrey, one of the attorneys representing the creditors' committee.

THE CLAIM, filed late last week, accused Adams of negligence,' breach of fiduciary duties and "fraudulently" misrepresenting not only SEFCO's financial picture but also the finance company's relationship with the bank.

Deery, who declined to be interviewed, resigned as executive vice-president of the bank and finance company and senior loan officer of the bank last September.

SEFCO records show Deery had 10 new loan transactions in 1982 as well as eight other transactions in behalf of a Culver condominium company he and McClure formed. Harbour Development. Many of these notes were renewed later in the year.

FOR THE first half of the year, the records list transactions totaling more than $200,000. Besides the loans to Harbour and personal loans, Deery borrowed in connection with a partnership.

In the second half of the year, many of the notes were renewed, several at the prime rate, the interest rate lending institutions provide for their best customers.

Salvatore Barbatano, a SEFCO attorney, said all of Deery's loans have been paid.

Another key officer, Craig Weeks, who was vice-president and controller until his resignation earlier this year, was listed with a total of 32 loan transactions during 1982, most of them loan renewals. The largest transactions were new loans in February for a total of $75,000 at 14 percent interest.

WEEKS DECLINED to discuss the loans. Bankruptcy records show some of them wee secured by mortgages and made for selling a home on contract or purchase of an automobile, and most or all of them have been resolved.

SEFCO did not classify McClure's loans as "insider" loans because he was not an officer or direct employee of the bank.

But they were listed with loans to shareholders because several loans the attorney received were provided so he could buy bank stock.

McClure said he had been a SEFCO borrower for at least six years before then.

According to SEFCO records, Mc Clure received seven new loans last year and also renewed six notes.

IN THE beginning of the year, the notes were carried at as much as 24 percent interest but in August the bulk of them were written down to 10 percent interest or the prime rate.

All of the loans were made to McClure except one to McTol Inc., a Lafayette company McClure incorporated in 1980 for real estate business.

McClure said SEFCO had called all of his loans and he believed an April 24 incident at his home was an attempt to intimidate him. The attorney said when he pulled into the driveway of his Lafayette home with his wife and three children in the car, two men, one of them armed, were there to repossess property on which SEFCO had a lien.

MCCLURE SAID the m

en showed him a letter signed by Allen H. Cummins, who succeeded Adams as chairman, but would not let him read what it said. "They did everything they could to induce me to take a swing at them. I managed after about half an hour to get rid of them. When they left, they said they'd be back."

McClure filed his bankruptcy reorganization petition in Federal Court at Lafayette the next day.

It covers him personally, his law firm, two shopping centers and an apartment complex.

McClure said he suspected the incident might have happened because of inside knowledge he has about what happened at SEFCO before the finance company itself filed for protection.

THE ATTORNEY said he be lieved this in part because he had paid back some $350,000 to SEFCO in the last five months, reduced his total indebtedness by $650,000. and had informed SEFCO he planned to sell some personal business interests "so there was no question the indebtedness would be paid off."

Cummins declined to answer reporters' questions.

Cummins, who succeeded Deery as executive vice-president, took out four SEFCO loans in 1982 - the largest was $14,736 and renewed three notes.

Loans to Cummins Farms Inc. of Plymouth also were classified as insider loans because it is owned by Cummins' relatives. The farm corporation debt reached $45,000. and notes for part of this were renewed several times during the year.






Thu, May 12, 1983

SEFCO's loans to 2 borrowers raise questions

At one time. Danny Lee Overmyer owned nearly 5.000 farm acres in White, Jasper and Pulaski counties.

Today, he is under the shelter of bankruptcy.

At one time, James R. Crain was expanding heavily in the restaurant business around Lafayette.

Today, he is under the shelter of bankruptcy.

Overmyer and Crain have several other things in common besides Chapter 11 bankruptcy reorganization cases in Federal Court at Lafayette.

BOTH WERE heavy borrowers from the Culver based State Ex change Finance Co. (SEFCO), itself under bankruptcy protection. Both are involved in continuing disputes with SEFCO. And both are represented by Lafayette attorney Alfred E. McClure,a former SEFCO attorney.

McClure himself was a heavy SEFCO borrower and now is under bankruptcy shelter, just like the clients and loan company he worked for at various times.

"I make a delightful enemy for those guys." McClure said of the SEFCO management appointed since SEFCO's Dec. 30 bankruptcy petition.

In Overmyer's case, the interest rate explosion and declining farm economy admittedly were factors in his financial difficulties.

AND IN Crain's case, his own decision to expand in the restaurant business contributed to present financial woes.

But how their loans were put together and why are now part of various investigations of how the loan company ended up in financial trouble.

One question is how Overmyer's loans more than doubled in a four-year period, reaching a staggering $7 million.

This forced SEFCO, essentially a tiny finance operation, to take control of a huge, three-county farm operation.

SEFCO since has been attempting to sell Overmyer's land for more than $11 million.

OVERMYER, . Francesville. said he had never dealt with SEFCO or its sister company, the State Ex change Bank, before 1977.

This was when he learned the bank was offering for sale, for about $3 million, a huge farm near North Judson known as the Gumz property

Overmyer bought the property through State Exchange Bank financing arranged by Fred E. Adams, who later became chairman of the board of the bank and finance company.

With McClure's assistance, Overmyer also received, in June 1980. a $2.5 million John Hancock Insurance mortgage covering 1,480 Pulaski County acres.

OVERMYER SAID as he bought additional farm land with bank financing, his total indebtedness with the bank and SEFCO eventually surpassed $6 million. And, as the recession worsened, he began having trouble paying the notes.

It was also in 1980, Overmyer remembered, that Adams and John J. Deery, then executive vice president, suggested he sell some of the property, but no buyers could be found because of the worsening farm economy.

By December 1981, Overmyer owed the bank and finance company $6,489,254.

This was when SEFCO was forced to begin working out compromise agreements to take over much of Overmyer's operation in order to avoid total collapse. Among other things, the bank assumed control of Overmyer's company, the D L.Overmyer Co. KEY AGREEMENTS in June and July 1982 provided for Overmyer to convey to the bank much of his property as part of a plan for partial liquidation.

By then, Overmyer also had encumbered Overmyer Farms Inc., a farm operation Overmyere worked with his family; taken a personal mortgage on his home, and signed another 200,000 promissory note.

In effect, SEFCO was forgiving $7 million in loans and taking possession of the farm land, which had other liens totaling more than $4 million.

Exactly what else the agreement provided is now disputed.

A document dated July 16. 1982, gave Overmyer an option to purchase part of the real estate for $6.1 million and provided for him to receive $30,000 yearly as a consultant on the day-to-day operations of the farms.

BUT OVERMYER and McClure contend that SEFCO reneged on all of the agreements, while SEFCO creditors have charged that Overmyer and McClure reneged.

The Federal Bankruptcy Court at South Bend, which has control of the SEFCO bankruptcy, has been asked to settle the dispute.

Creditors' attorneys said McClure and Overmyer now claim that, instead of yielding title to the land in last year's agreements, they only gave SEFCO an "equitable" mortgage.

The attorneys also charged that Overmyer was attempting to lease some of the property to others, in violation of the agreements.

McCLURE SAID Overmyer's problems with the bank were aggravated when SEFCO began backing down on the earlier agreements after Deery resigned in September but before SEFCO filed for bankruptcy reorganization in December.

Among other things, McClure claimed, SEFCO failed to properly distribute the proceeds from the sale of some equipment; undervalued Overmyer's property by $2 million and failed to give Overmyer right of first refusal if the land was sold.

McClure and Overmher both said they believed that SEFCO had temporarily transferred all or part of Overmyer's problem loan package to American Fletcher National Bank in Indianaplis.

SEFCO officials would not comment.

OVERMYER ADDED that he believes all of the farm operations eventually could be put on a profitable basis, if the 1982 agreements are followed.

Overmyer's petition for bankruptcy protection was filed in November, listing property valued at $1.1 million more than his debts of $2.8 million.

Crain, a longtime Lafayette restaurateur, is caught up in a checking account controversy with SEFCO as well as bankruptcy reorganization.

Crain operates Barefoot Boy Inc., which owns Morris Bryant Smorgasbord; Morris Bryant Inc., which owns the Muncie Quality Inn; and Northwest Smorgasbord, which has Duff's Famous Smorgasbord.

McClure filed the Chapter 11 petition for Barefoot Boy last December showing nearly $1 million in debts to State Exchange Bank.

CRAIN SAID he was forced into bankruptcy reorganization because he became overextended in the restaurant operations. "My problems are my own fault," he said.

Crain said the poor national economy and rising interest rates hampered his efforts to expand from the Lafayette smorgasbord restaurant his father, now retired, started in the early 1950s.

The senior Crain had borrowed from State Exchange Bank (or years through its former chairman, William O. Osborn, who died in 1981.

The son said he himself dealt with Adams and Deery and became friends with Deery.

After Deery's resignation last September, "They called all my loans due, and that was one reason for declaring Chapter 11."

THE BANKRUPTCY petition lists substantial State Exchange loans in December and January, two of them after SEFCO itself filed for bankruptcy reorganization.

Crain said this was incorrect; the last loan was made in October 1982.

Crain said he employed McClure as his attorney because McClure had worked for SEFCO and Crain knew him from other legal proceedings. "He (McClure) has his share of problems with them now, too," Crain added. "He is like me he is a victim of being friends with those who are no longer there."

Adams committed suicide Jan. 10.

On Jan. 19, the Industrial Trust and Savings Bank of Muncie filed a $75,000 lawsuit against the State Exchange Bank in behalf of Crain's Muncie Quality Inn.

THE SUIT charged that in De cember. State Exchange refused to honor Quality Inn checks drawn on a State Exchange checking account and deposited in an Industrial Trust checking account.

Instead of honoring the checks.State Exchange seized and closed the Culver account, which, the law suit charged, was "fraudulent misrepresentation, wrongful conversion of funds."

Allen H. Cummins, who succeeded Adams as chairman, said publicly at the time that State Exchange had uncovered a check kiting scheme by Crain that involved floating funds between six different accounts at four banks.

CUMMINS SAID the discovery came in the same period when Crain filed bankruptcy.

Eugene Chipman, an attorney for Industrial Trust, disputed this, saying the Muncie bank believes there was enough money in the Culver account to cover the checks.

McClure also said he doubted there was any scheme, only a time lag on deposits because Crain had businesses in three different cities.






Fri, May 13, 1983

Misdeeds linked to banker suicide

Why did Fred E. Adams kill himself?

What will happen now to the State Exchange Bank and State Exchange Finance Co. (SEFCO)?

From the street corners of this quiet community to the countryside and farms of Marshall County and surrounding counties, these two questions- have been repeated ever since the popular 57 year-old banker's body was found Jan. 10 on the grounds of Culver Military Academy.

THE ANSWER to the first question is not as simple as some people want to believe, though these facts are known:
    * On Dec. 30, 1982, SEFCO, the finance company of which Adams was chairman, filed for bankruptcy protection. Adams had handled many of its troubled loans personally. Some of the customers were friends people he had known most of his life.

    * On Jan. 10, the day Adams fired a shotgun into his chest, he had been notified by the Federal Deposit Insurance Corp. (FDIC) that he and other bank officers would be investigated for a possible federal criminal violation misapplication of bank assets.

    * Adams himself had financial difficulties.He owed at least $125,000 to his own company. On the day after SEFCO filed for bankruptcy shelter, 10 days before his death, Adams received a $252,000 loan from American Fletcher National Bank (AFNB) in Indianapolis.
BUT THERE was more.

What few people knew was that a $200,000 loan Adams had approved two years earlier for a top AFNB executive was under investigation by AFNB, and questions had been raised about a memo put in the loan file at Culver.

That loan and memo now are part of an FBI investigation.

The loan was disbursed through a State Exchange Bank check on Dec. 30, 1980, at an interest rate of 19 percent, to Larry J. Hannah and Thomas M. Tuttle.

Hannah at the time was an AFNB executive vice-president whose responsibilities included AFNB's relationships with correspondent banks such as State Exchange. He also was responsible for Deer Creek, a luxury condominium development AFNB owned at Deerfield Beach, Fla. Hannah became president of AFNB's holding company, American Fletcher Corp., in January 1982.

TUTTLE, FORMER owner of the State Bank of Syracuse in neighboring Kosciusko County, was a friend of Hannah's and the manager of the Deer Creek Country Club. After Tuttle left Deer Creek under controversial circumstances last year, he claimed Hannah was a secret investor in several Deer Creek developments.

Last November, AFNB created a special investigating committee to look into allegations that Hannah had quietly invested in Deer Creek projects. Hannah was fired on Jan. 6.

As part of this investigation, Tuttle gave extensive statements to the AFNB committee, and later to the FBI.

Tuttle himself accused of skimming funds from the Deer Creek golf club, told the committee he and Hannah had borrowed the $200,000, through Adams, to invest in a Deer Creek condominium project.

THE AFNB committee reportedly examined several State Exchange documents in connection with the loan, including a renewal note that said "original funds used as down payment on real estate in Florida."

Tuttle is said to have given the AFNB committee a copy of a letter Hannah wrote to Adams on Nov. 18, 1980. in connection with the loan.

Two key parts of the letter were: * Hannah referred to a telephone conversation with Adams "several weeks ago" about borrowing money.

* Hannah's letter also said "these monies would be used as down pay ments on ten (10) living units in Deer Creek, Florida."

Tuttle told the committee that he went to the Culver bank last November to talk to Adams and examine the loan file.

TUTTLE CLAIMED that he found in the file a questionable memo purportedly written by Adams and dated Nov. 15, 1980 three days before Hannah's letter.

Referring to the loan application, the memo said. "We have been requested by the above parties to extend a line of credit of $200,000.00 to enable them to make certain investments in Florida in connection with golf cart purchases and other investments."

Since the loan had been for real Budget estate, not golf carts, Tuttle told the committee, he confronted Adams, and Adams allegedly admitted Hannah had dictated the memo to Adams' secretary in November, 1982 not 1980 and Adams had put it in the loan file.

TUTTLE LATER gave the memo to the committee, saying he had retrieved it from Adams' wastebasket while Adams was gone from his office.

Hannah reportedly told the AFNB committee he knew nothing about the memo.

Don A. Tabbert, Hannah's attorney, said Thursday that Hannah never told Adams to change any records. Tabbert also said Hannah was unaware of any AFNB loans to Adams in 1982.

AFNB officials would not comment. Esther Reed, Adams' secretary, refused to comment.

State Exchange officials have refused to comment on when and why Adams borrowed money from AFNB or anything else about his administration. However, one source said Adams had to borrow as much as $300,000 from AFNB in the spring of 1982 after state and federal bank examiners questioned the large amount of loans Adams had with State Exchange. THE ONLY available public documentation is a promissory note Adams and his wife signed with AFNB on Dec.31, 1982, the day after the State Exchange bankruptcy filing.

Whether that loan was a renewal of an earlier note is not known. The loan note was signed by John L McCreary, an assistant vice-president in AFNB's Correspondent Banking and Agribusiness section. McCreary would not comment

The note covered a $252,000 loan at AFNB's prime rate, due July 1, 1983, and was marked "personal and confidential" in care of State Exchange Bank.

On April 1, AFNB filed a claim against Adams' estate for the $252,000 plus interest.

That claim and a related claim are part of the answer to the second question: what will happen to the State Exchange Bank and SEFCO?

THE RELATED claim is for $5 million and was filed last Friday by the SEFCO creditors' committee in bankruptcy.

It contends Adams was guilty of breach of fiduciary duties and violation of the state securities law.

But it makes two other claims that go to the heart of what was really happening behind the scenes at the Culver institutions. It says Adams:
    * Fraudulently misrepresented the status of SEFCO and the finance company's relationship with the bank.

    * Caused, allowed, or acquiesced in the transfer of "troubled loans" from the State Exchange Bank to SEFCO at their face value when he knew the actual value was less.


WHAT THIS alleges is that shaky bank loans were put on the books of the finance company with more valuation than they were worth.

But, The Indianapolis Star learned, just the opposite allegedly occurred too - - troubled finance company loans were carried over to the bank with inflated valuations.

Why this is important is that the bank and finance company were separate entities, governed by separate regulations.

Bank deposits are insured by the FDIC. SEFCO investments were not.

But SEFCO in effect was operated out of the bank, used some of the same officers, had the same directors, and shareholders in the bank also were shareholders in the finance company.

ORIGINALLY, SEFCO had been established to make the kinds of loans the bank could not make under the law.

At some point it is now alleged, "bad paper," a banking term for shaky loans, was switched between the two institutions, apparently to enhance the bank or SEFCO's public financial picture.

This is now a central point in SEFCO's bankruptcy reorganization because of the question of how SEFCO investors can recover all or part of their investments. Bankruptcy attorneys have discussed lawsuits against former bank and SEFCO officers.

And, said Jere Humphrey, one of the attorneys, "It is our theory that the bank is liable for the debts of the finance company."

Harold Wyland, another creditors' attorney, added, "They are one in the same. Everyone wore the same hats."

THE ATTORNEYS said if ar rangements can be worked out so that SEFCO investors can recover the full amounts of their investments, then this would avoid potentially complicated legal arguments that would involve the FDIC as well.

Already, a plan has been proposed under which the State Exchange Bank would acquire SEFCO's assets, but numerous details have to be worked out.