Monday, June 26, 2006

For over 14 months now, the members of one of the richest families around Cincinnati have been locked in a dispute. Later this week, The Enquirer reports, Judge Norbert Nadel will resume a preliminary injunction hearing involving Allen Davis and his two sons.

Davis, is former Indian Hill millionaire and banker now living in Sarasota, Fla. His sons, David and Jared, control a payday loan company named Check 'n Go. It's nation's second biggest player in the payday loan industry.

Inside the payday loan feud

Family relations began to crumble when Allen and his wife, Judith, separated in 1999 and divorced three years later, ending a 39-year marriage. But when his repurchase of her stock in CNG Financial (which owns Check 'n Go) was routed through the company, reissued as a stock option and booked as compensation - sticking him with a $13 million federal income tax bill - Allen hired Stan Chesley and filed suit against his sons.

His case boils down to this: CNG's borrowing from banks, in part to pay millions of dollars in dividends to its three principal shareholders - David and Jared, who each own about 32 percent of CNG's stock, and Allen, who owns about 28 percent - will ruin the company, he says. Allen wants Nadel to enjoin CNG from making further dividend payments on its payday loan business.

The two sides are not close to a resolution. Despite their proximity in Nadel's courtroom, father and sons haven't been seen exchanging a single word.

"It's a sad story," said Bob Kramer, a Fairfield business consultant and motivational speaker who sat in on two sessions last year. "It's kind of like a divorce, where it's lose-lose. Whatever they end up with in a settlement, they'll reducetheir cumulative family net worth by $3 million or $4 million because of legal fees. The longer the attorneys can keep the ball in play, the more ka-ching, ka-ching they hear. But the Davises will still be millionaires."

 

Supported by the testimony of two accounting experts, Allen Davis depicts CNG as a pay day loan company in trouble. He alleges CNG has borrowed liberally from banks to fund excessive dividend payouts since 2002, leaving it to face a "doomsday" in September 2007 when a combination term loan-credit line of $102.6 million comes due.

"As we got into the case, we saw that they were doing everything they could to make sure they were distributing all the money and making decisions that put the company in jeopardy," Chesley said. "The emergency is now, because they don't have the ability to pay back the loan."

A different viewpoint

David and Jared Davis scoff at those characterizations. As a privately owned company, CNG has no obligation to share its financial results with the world. But to defuse their father's accusations, the brothers disclosed in court that CNG had revenue of $280 million and net income of $52 million in 2005 - giving it a better net profit margin than Exxon Mobil.

Their main banking agent, senior vice president Michael Durbin of National City Bank, testified Feb. 23 that there was nothing worrisome about CNG's practice of borrowing from banks to make pay day loans to customers who pay $15 for every $100 they borrow.

Durbin said he expects CNG to refinance its debt - as it has several times before - before September 2007. Jared said the company's financial condition is a non-issue.

As for the dividend payouts, CNG says corporate papers drawn in 2002 - co-signed by Allen - require the payout of 60 percent of company profits in the form of dividends. About 48 percent would go toward the Davises' tax obligations on behalf of CNG, a subchapter S corporation whose taxes are borne by its shareholders. CNG's chief financial officer, Roger Dean, said 46 percent of CNG's net income last year was paid out in dividends.

Numerous delays, dirty pieces of laundry

Frustrated by the length of the proceeding, CNG asked the Ohio First District Court of Appeals in February to intervene.

"The preliminary injunction hearing here is nothing more than a filibuster, designed to keep pressure on CNG so that Mr. (Allen) Davis can try to orchestrate a buyout of his stock," CNG said in a memo to the appeals court.

Nadel has tried in vain to persuade the two sides to settle out of court. But this payday advance feud is growing uglier instead.

The hearing, which commenced as an emergency proceeding, is now of astounding duration. Normally, requests for preliminary injunctions are given priority treatment and are granted or rejected right away.'

Meanwhile, Allen and his sons ignore each other, refraining from the slightest contact. But in legal filings, they scorch each other with accusatory bombs.

Allen contends that David and Jared use their lavish dividend payouts to build homes in Indian Hill and fund outside business ventures. His son accuse him of having an affair with his secretary while married to his first wife.

Jared opened the first Check 'n Go in Covington in 1994 while his father was CEO of the former Provident Bank. CNG ended 2005 with 1,322 quick cash advance stores, up from 1,176 in 2004, and 3,490 employees, up from 2,678.

This entry was posted on Monday, June 26th, 2006 at 6:27 am and is filed under Ohio.