Guaranty liquidation trustee lawsuit blames Temple-Inland for failure

By Caroline Salls

Pittsburgh, Aug. 23 - Temple-Inland Inc. and some of its affiliates, officers and directors have been accused of causing the failure of Guaranty Financial Group and its Guaranty Bank wholly owned subsidiary, according to an 8-K filed with the Securities and Exchange Commission.

The lawsuit was filed Monday in the U.S. District Court for the Northern District of Texas by GFGI liquidation trustee Kenneth L. Tepper.

Temple-Inland said it does not believe that it has any liability related to the spin-off of Guaranty Financial Group, and it believes the claims made in the lawsuit have no merit.

"GFG's ultimate parent corporation, Temple-Inland, and its affiliates, several of Temple-Inland's directors, and GFG's directors caused the failure of GFG and the bank by fraudulently looting GFG and the bank of assets exceeding one billion dollars," Tepper said in the lawsuit.

Specifically, the trustee alleged that the defendants took $170 million in dividends from the company and bank in 2006 and 2007, "just as the bank and GFG were facing historically bad market conditions and while they were being forced to borrow hundreds of millions of dollars from the Federal Home Loan Bank to support a highly risky, highly leveraged mortgage-backed securities acquisition scheme."

Tepper said Temple-Inland also transferred roughly $335 million in real estate assets from Guaranty Financial Group for little or no consideration; forced the company to incur over $305 million in debt obligations to trust preferred securities holders to fund the buyout of preferred stockholders to whom Temple-Inland had guaranteed payment; and imposed tax restrictions on Guaranty's right to carry back net operating losses on its federal income tax returns, forcing the company to forego $300 million to $350 million in tax refunds.

The trustee said holders of $305 million in trust preferred securities issued by Guaranty Financial Group were among the creditors most victimized by the alleged fraudulent scheme. A significant portion of the securities are managed by Holdco Advisors LP, through its principals Vik Ghei and Misha Zaitzeff.

"Temple-Inland exerted total control and dominance over its subsidiaries, including GFG and Guaranty Bank, and operated the bank not as a traditional bank, but rather as a captive finance arm of Temple-Inland's manufacturing operation and to provide support to, and create demand and generate profits for, its core building products business," Tepper said in the complaint.

Cross-default danger

According to the lawsuit, Temple-Inland had its own debt obligations containing cross-default covenants under which Temple-Inland's own debt would default "with catastrophic results including bankruptcy" if Guaranty or the bank became insolvent or failed to make payments.

As a result, the trustee said Temple-Inland had an incentive to provide capital support to Guaranty Financial and the bank as long as they remained subsidiaries.

Tepper said this provided an enormous benefit to the company and the bank that resulted in no consideration upon the occurrence of the spin-off.

The trustee said Temple-Inland "attempted to avoid the clear and present danger of a disastrous cross default" on its own debt and any potential liability for its obligation to maintain the bank's capital "by spinning off the fatally crippled and doomed-to-fail GFG and its subsidiaries as separate stand-alone corporations."

Tepper said this left Guaranty's creditors, the FDIC and the American taxpayers to suffer enormous losses.

Capital obligations

The trustee said Temple-Inland, its affiliates and the defendant directors schemed to strip Guaranty Financial of its value and avoid the capital maintenance obligation because they knew the company and the bank "were headed for financial disaster."

"Temple-Inland caused the bank to heavily invest in high-risk, private-label MBS collateralized by toxic residential mortgages known as Option ARMs," the trustee said in the complaint.

"These MBS were dramatically overvalued on the bank's and Temple-Inland's consolidated financial statements, as Temple-Inland well knew."

In addition, Tepper alleged that Temple-Inland caused the bank to incur excessive exposure to loans for construction and real estate development or home builder loans.

Guaranty Financial, a Dallas-based unitary thrift holding company, emerged from bankruptcy in May.

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