Even now, Ted Babiy and his wife, Anne Marie Quinn, remain the picture of entrepreneurial success.
Their tastefully restored and decorated 19th-century farmhouse on a verdant hillside in Devon is graced with classic touches: wide pine irregular-width floors; a cedar shake roof; and beautifully manicured gardens and brick pathways that offset the old stone barn and other picturesque outbuildings.
These are the remaining signs of a life they once had, and honestly earned, but went up in smoke. Starting with nothing, they created a thriving company on the Main Line that built homes for some of the region's most prosperous people.
But that was before the September 2008 bankruptcy filing of Lehman Bros.,the Wall Street brokerage, and the ensuing chaos, when everyonein the financial worldran for the exits. Those who fled the scene included the couple's lender, Continental Bank, since taken over by Bryn Mawr Trust. Continental reneged onabout $1 million in funding for the couple's spec home-building project, after providing oral assurances that the money would be available.
For Babiy and Quinn, the consequences of that have been catastrophic. They lost their business, their retirement savings, their credit rating, and working capital accumulated over decades.
They now have a negative net worth, and are struggling to keep their home.
In the end, Babiy and his wife say, they were crushed by their bank and a pitiless litigation system that consumed $1 million in legal fees and left them with nothing. Theirs is a cautionary tale of what can happen to a small business that perhaps didn't do enough to protect itself, and overnight got caught in the backwash of a huge financial crisis.
"We have been completely wiped out," Babiy said. "We have no capital. Our stock-in-trade was our good credit and our working capital and through all of this litigation . . . we don't have credit anymore and we don't have any working capital."
His lawyer, Jim Sargent of Lamb McErlane in West Chester, is equally pointed.
"The bank made more money by putting this loan into default than if they followed through on the loan," Sargent said.
Bryn Mawr Trust general counsel Lorie Goldman said the company would not comment, adding only that the company had inherited the matter from Continental Bank.
The Babiy and Quinn travails, as outlined in court documents, began in late 2007, just as the housing market was ratcheting downward. The couple entered into a $1.8 million loan agreement with Continental Bank in which the bank would provide $825,000 in initial funding to purchase a building lot with a house, to be torn down, in Easttown Township. Once construction began, the bank agreed, it would begin funding the balance of the loan, enabling the couple to complete the spec house.
In early 2008, Babiy approached Continental Vice President Frank Ashmore, suggesting construction be delayed until he completed and sold another spec house nearby. He reasoned that having two spec houses on the market at the same time didn't make sense, and Ashmore agreed.
Babiy finally sold the first house in June of 2008, and spent the next several months obtaining permits and preparing for the second. But in December of 2008, one day before the start of that project, Ashmore summoned Babiy to a meeting with bank President H. Wayne Griest, who told Babiy the bank had decided not to fund the balance. A short time later, the bank offered new financing, but on terms Babiy couldn't afford.
Babiy eventually sued, and Chester County Common Pleas Court Judge Edward J. Griffith, after a three-day trial in November 2010, heaped withering criticism on Continental Bank.
"The bank induced . . . Babiy to believe that the failure to commence construction on the Fairfield Road property (the spec house) would not constitute a violation of the loan agreement," Griffith wrote. "The bank's decision not to fund the loan was arbitrary, unreasonable and reckless."
Added Griffith: Babiy's "failure to start construction was nothing more than a trumped-up excuse to justify a decision to rewrite the terms of the loan agreement. . . . Babiy had every reason to believe that the bank had agreed to delay the start of construction based upon his interactions with Ashmore."
Yet Griffith then ordered Babiy to repay the bank the original amount borrowed, at that point $782,263, plus interest of $90,351. The judge said the couple suffered no significant loss in not having the balance of the loan funded. Babiy and his lawyer, Sargent, say that finding was nonsensical.
In any case, Babiy and Quinn insisted they could not repay the loan because the bank's failure to provide the balance of funding made it impossible for them to finish and sell their project.
Then things got worse. They appealed and in December of 2012, a three-judge panel of Pennsylvania Superior Court, a mid-level appeals court, found that while the bank made oral assurances that the project deadline could be extended, that extension was time-limited. The appeals court not only upheld the lower-court opinion but also ordered Babiy and his wife to pay the bank's legal fees - about $500,000. The couple had spent $500,000 on their own legal representation.
They appealed, but the state Supreme Court declined to hear the case.
David A. Hoffman, a business and transactional law professor at Temple University law school, said real-estate deals often are amended orally and, in most cases, they move to completion without litigation.
When there is a lawsuit, courts typically rely heavily on the contract language, as the Superior Court did in the Babiy dispute with Continental. All the more reason, he said, for businesspeople to make sure contract changes are in writing and reviewed by a lawyer. The bank may have had a legal basis for what it did, but it nonetheless treated Babiy and Quinn shabbily, Hoffman said.
Babiy said he didn't have a lawyer advising him on the changes because he trusted his lenders.
"There is no question here that if a bank always behaved this way, no one would ever do business with the bank," Hoffman said. "He ran into a firestorm and a buzz saw caused by the Lehman collapse."