MILA Bankruptcy Trustee Sues Former CEO

MILA’s trustee, Geoffrey Groshong, has filed an adversarial suit against former CEO Layne E. Sapp as part of the company’s federal bankruptcy, which was filed on July 2, 2007, in the U.S. Bankruptcy Court in Seattle, Wash. Sapp is accused of manipulating and looting the company for his personal gain during its last two years in operation.

In 2006, the Mountlake Terrace, Wash.-based lender did business with more than 40,000 mortgage brokers. But by April 2007, MILA closed down.

The lawsuit claims Sapp appropriated for himself tens of millions of dollars.

“As the CEO, sole director, and controlling shareholder of MILA, Sapp caused MILA to enter into several transactions with other companies he owned and controlled,” the lawsuit states. “None of these transactions was fair to MILA.”

According to the suit, Sapp took MILA’s own mortgage origination software and used it for free with his own software company, Next Online. 

In addition, Sapp caused MILA to purchase land for a new parking lot and to lease certain office space in Washington State.  The owner of the land and office lease that MILA purchased:  Layne Sapp’s shell companies.

Groshong also alleges that Sapp used MILA to sustain a lavish lifestyle, including private jets, a yacht and a multi-million dollar dividend payment while the company’s financials worsened.

“Because of MILA’s rapid financial deterioration,” the complaint states, “Sapp had the duty to emphasize short-term enhancement of value for MILA, its creditors, and those who formed the community of interest in MILA so that MILA could be sold for the highest possible price, because there was no basis for pursuing any long term strategy.  Sapp failed to fulfill these obligations.”

Instead of fixing problems, Sapp began working with investment bankers in 2005 to place the company in private hands. 

But he was not trying to sell MILA as the subprime lender it was. MILA began to describe itself as an “e-commerce mortgage solution provider.”

The private placement was not successful.

Groshong v. Sapp
07-13059-SJS (U.S. Bankruptcy Court, W.D. Wash.)

Scott Burke, a former federal prosecutor, is a litigation associate with the Washington, D.C.-based firm of Weiner Brodsky Sidman Kider PC.

e-mail Scott at Burke@WBSK.com