Seven years after a Bend financial firm collapsed and left dozens of investors on the hook for millions of dollars, a lawsuit has been filed seeking $10.4 million.

Kevin Padrick, a trustee overseeing the bankruptcy of Summit 1031, filed suit on Jan. 7 against Mark Neuman, one of the original owners of Summit 1031, in Deschutes County Circuit Court. Neuman is incarcerated at the Sheridan Federal Corrections Institution in Sheridan and is due to be released in late 2019.

Neuman is one of three people sentenced to prison for their activities with the company named for the “1031 exchange” service it provided to customers.

A 1031 exchange is used by real estate investors that have sold one property and are in the process of purchasing another. By parking the proceeds of the sale with the 1031 exchange, the investor can avoid capital gains tax that would otherwise be due, provided they close on a replacement property within 180 days.

In the case of Summit 1031, customers were led to believe their funds were being held to complete the transfer process with their new property. Instead, between 1999 and 2008, more than $44 million was unlawfully transferred and used for, among other things, real estate investments by the company’s management. The misuse of funds caused serious liquidity problems for the company.

“The only way Summit was able to continue meeting its payment obligations to current clients was to bring in new clients, essentially engaging in a classic Ponzi scheme of using new money to pay off old obligations,” the filing reads.

When Summit 1031 filed for bankruptcy protection in December 2008, 91 customers whose exchanges had not been completed lost $13.7 million.

Although the company was based in Bend, it did business across the Western United States.

Padrick said Friday he had previously won a $7.5 million judgment against Neuman in his effort to collect funds owed to former Summit 1031 customers.

The $10.4 million sought in his suit is not on top of the $7.5 million judgment won previously, Padrick said, but instead represents the sum of all losses suffered by Summit 1031 customers that have not yet been compensated. He said the figure includes losses beyond those funds misdirected by the company, attorneys’ fees paid by the victims and taxes paid when the victims were unable to complete their 1031 exchanges as expected.

The suit seeks to acquire a property purchased with funds allegedly misdirected from Summit 1031 customers, a roughly 10-acre parcel northeast of Bend. Padrick said until recently, it was unclear whether the property was eligible to be seized and sold to compensate Summit 1031 customers.

— Reporter: 541-383-0387,

shammers@bendbulletin.com