LUBBOCK, TX (KCBD) - According to documents filed earlier this week, Vista Bank is suing FirstCapital Bank, Brad Burgess and Kenneth Burgess Jr. to recover more than $6 million in damages. It claims FirstCapital inflicted the damages on Vista through inside information they obtained through their close relationship with Rick Dykes. Dykes is an insider of both Reagor-Dykes and FirstCapital. The documents say the inside information allowed FirstCapital to benefit from the Reagor-Dykes' check kiting scheme at Vista's expense.
The documents say Rick Dykes, a co-owner of Reagor-Dykes Auto Group, served as a member of FirstCapital's Board of Advisors until just a few days ago. Dykes also previously held a seat as a Director on FirstCapital's Board of Directors. The court documents say, "In fact, FirstCapital transitioned Dykes from a Director to its Board of Advisors to avoid banking regulatory scrutiny and potentially to increase the amount FirstCapital could lend Reagor-Dykes. Further, Dykes is a large FirstCapital shareholder, holding more than 350,000 of FirstCapital shares."
The lawsuit says Reagor-Dykes "perpetrated a multi-million dollar check kiting scheme and conspired with FirstCapital to impose the resulting losses, totaling over $6,000,000."
The lawsuit claims Reagor-Dykes wrote multi-million dollar checks from FirstCapital accounts, deposited these checks into Vista accounts and then issued payments from the Vista accounts to cover obligations or make deposits to their accounts at another financial institution.
Vista says the scheme was revealed when Reagor-Dykes filed bankruptcy, cutting the cycle and revealing the fraud. Vista then immediately froze its Reagor-Dykes accounts.
The court documents say, "Vista would return the items Reagor-Dykes wrote on its Vista accounts and initiate returns on the FirstCapital checks Reagor-Dykes deposited to prevent unauthorized credit advances. And that's exactly what happened—except that FirstCapital found a way to use its insider access to Dykes to channel over $6,000,000 in losses and damages to Vista, allowing FirstCapital to knowingly profit from the scheme. "
Vista says "prior to Dykes providing FirstCapital key insider information on the Reagor-Dykes fraud, bankruptcy planning and related insolvency, FirstCapital timely cleared and paid Reagor-Dykes items deposited with Vista during normal hours, in normal volume, with no chargebacks or anomalies. On July 31, 2018, FirstCapital took Dykes' information and systematically targeted Vista with a flood of irregular returned and unpaid Reagor-Dykes items."
The court documents say, "Acting on the damning inside information FirstCapital received from Dykes on July 31st, FirstCapital blew up the standard process and "worked all night" in a greedy attempt to ram return items onto Vista."
"In essence, FirstCapital weaponized the check clearance process and systematically foisted over $6,000,000 in damages onto Vista to FirstCapital's and the Burgess Brother Defendants' benefit."
Vista is demanding a trial by jury on all issues and also asking the court to set a case for trial.
FirstCapital released a statement on Thursday afternoon, saying this case is without merit:
Check Kiting. Check kiting is a form of check fraud that exploits the chargeback time frame. When a collecting bank (Bank 2) receives deposit of an item, it increases the available balance in the customer's account by the item amount; however, the collecting bank will not receive actual funds on account of the item until the check clearing process is completed through cash letters with the Federal Reserve and payment by the payor bank (Bank 1). If the account holder withdraws funds credited to her account for an item before the payor bank receives the incoming return cash letter returning that item, the account holder can receive cash on the account of the returned item, even where the item has no cash value due to Bank 1's refusal to pay on the item.
Check kiting allows the account holder to withdraw non-existent funds from their account. In this way, instead of being used as a negotiable instrument, checks are misused as a form of unauthorized and fraudulently procured credit.
Check kiters use accounts at two or more banks, intentionally writing worthless checks from their unfunded account at the payor bank (Bank 1) and depositing these "bad" checks into their account at the collecting bank (Bank 2). In the two to three days before Bank 1 returns the deposited item, Bank 2 has increased the balance in Ms. Smith's account, allowing Ms. Smith to withdraw $100.00 on the account into which the item was deposited. When Bank 2 receives the incoming return cash letter and charges back Ms. Smith's account, there is nothing in the account to fund the chargeback. As a result, Bank 2 has extended Ms. Smith $100.00 of credit on the account of the returned item.