Until WaMu failed, the biggest local business brought down by the mortgage crisis was subprime lender MILA, which closed abruptly in April...

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Until WaMu failed, the biggest local business brought down by the mortgage crisis was subprime lender MILA, which closed abruptly in April 2007.

Now, new questions are being raised about how MILA met its death. Bankruptcy court serves as the autopsy room.

A lawsuit filed by the trustee in MILA’s Chapter 11 case says founder and CEO Layne Sapp — who allegedly collected $32 million in salary, dividends and bonuses from MILA in 3-½ years before its collapse — improperly drained the Mountlake Terrace company’s assets as its fortunes declined.

“I think the executives at MILA knew by 2004 that this bubble was bursting and did their best to take out as much money as they could before it became obvious to everyone else,” says Brian Esler, who represents the bankruptcy trustee in the suit.

At its peak, MILA had 700 employees and ranked among the nation’s top 30 subprime lenders, borrowing money to make mortgage loans, then bundling the loans into packages that were sold to big investors.

The suit claims Sapp, who owned about 90 percent of MILA, paid himself more than $10 million in dividends in 2004 and 2005 when the company was already “functionally insolvent,” meaning it had insufficient capital to continue normal operations and should have been preserving cash.

It also alleges he took $11.5 million in salary for each of those years, though “by March 2005, MILA was already delaying payments, even to important customers, to conserve cash.”

The trustee’s suit also claims that Sapp damaged MILA — and its creditors — in other ways:

He “surreptitiously seized” the mortgage software MILA developed and had another of his companies bill MILA for using it; charged MILA exorbitant amounts for his private yacht and business jets; and, in a “theft of corporate opportunity,” created separate companies to own a four-story office building and a parking lot that were leased to MILA, rather than having MILA buy the properties.

Sapp’s attorney, Jack Cullen, declined to discuss the allegations in detail but said: “We consider the claims nonsense. We don’t think they are founded in law or fact.”

Sapp did not return a call to his Hunts Point home.

Esler is asking the court to freeze $12 million in cash belonging to Sapp, to keep it available to creditors.

To recover the dividends Esler says were improper, he’ll have to convince the court that MILA should have been considered insolvent more than two years before its 2007 collapse.

As evidence, the suit cites MILA’s eroding capital base and “the alarming growth in bad loans it was required to repurchase” from the institutional buyers of its securitized mortgages: $37.7 million in 2004, up 12-fold from 2002.

MILA’s rising volume of loans masked its deteriorating margins, and the losses on repurchased loans weren’t properly reflected on its books, Esler claims.

To protect creditors, the suit says, as early as 2005 “Sapp should have attempted to sell, liquidate or reorganize MILA at a time when it still had significant value, instead of continuing to manipulate and loot it for personal gain for another two years.”

The suit also takes a microscope to transactions among the various entities owned by Sapp. One example: The company that owned his 130-foot yacht billed MILA $395,374 over two years — although “MILA used that yacht only twice for asserted business reasons,” the suit says.

As bankruptcy trustee Geoffrey Groshong examines MILA’s corporate cadaver, liabilities have piled up. When it filed for Chapter 11 protection in July 2007, MILA reported $7.8 million in assets against $175 million in liabilities.

As more mortgages went bad, Groshong says creditors’ claims have ballooned to nearly $2 billion.

What happened

to WaMu’s board?

Looking for someone to blame in WaMu’s collapse, the largest bank failure in U.S. history? The company’s board of directors — which passed on an offer to sell WaMu for $8 a share last spring — was no doubt the direction some people looked.

But shortly after the bank’s seizure by federal regulators was announced on the evening of Sept. 25, the page listing those directors on WaMu’s Web site went blank.

Other portions of the WaMu investor-relations site were still operational even a week later: the news releases chronicling its financial spiral; the vision statement outlining its goal “to be the nation’s leading retailer of financial services for consumers and small businesses;” and so on.

For the record, board members when the company was seized were Stephen I. Chazen; Charles M. Lillis; Stephen E. Frank; Phillip D. Matthews; William G. Reed, Jr.; Regina T. Montoya; Orin C. Smith; Thomas C. Leppert; Michael K. Murphy; James H. Stever; Margaret Osmer McQuade; CEO Alan Fishman (joined Sept. 8) and David Bonderman of private equity firm TPG.

CEO Kerry Killinger left the board when he was replaced by Fishman.

Comments? Send them to Rami Grunbaum: rgrunbaum@-

seattletimes.com or 206-464-8541.