Developer Valerie E. Kaan used $468,000 provided by Cypress Bank of Palm Coast, Fla., to buy the above land parcel and two others in Bay Communities’ Sanctuary development.

As in most legal matters, the ongoing imbroglio between developer Valerie E. Kaan and the federal government comes down to a question of credibility, and in the case of at least one Florida institution, it appears that Kaan has won out in that regard.

Despite knowing that the Federal Deposit Insurance Corp. has charged that Kaan’s real estate empire is actually controlled by felon William W. Lilly, Ocean Bank of Miami recently approved a $33.9 million loan to allow her company to build a luxury condominium project near Daytona Beach, Fla. The FDIC is among several federal agencies claiming that Kaan is merely a straw for Lilly, the self-described “Condo King” who served five years in prison after causing the collapse of two FDIC-insured banks, including one in West Palm Beach, Fla.

Ocean Bank spokesman Armando Rodriguez would not discuss the matter last week, refusing to say whether a loan has been issued for the so-called Surf Club II project in Palm Coast, Fla. “We are not allowed to comment on any customer matters,” Rodriquez said, citing company policy. Nonetheless, records on file at the Flagler County Registry of Deeds in Bunnell, Fla., indicate that the loan was approved in February on behalf of Palm Coast Blue Water International. That entity is one of several companies operating under Kaan’s Bay Communities corporate umbrella.

FDIC spokesman David Barr said there is little that can be done regarding the loan, and declined comment about the ongoing civil action. The FDIC is trying to recoup $5 million owed by Lilly for real estate crimes committed in Massachusetts during the late 1980s and early 1990s. Both Massachusetts natives, Kaan and Lilly today live in a $3.6 million mansion in Boca Raton, Fla.

One issue emanating from the Ocean Bank agreement and millions of dollars in other bank loans provided to Bay Communities in the past three years is whether the FDIC should have been more proactive in alerting its member banks about the ongoing action against Lilly and Kaan. Alex Hager, director of the Florida Division of Banking, said last week that his agency has not been informed of the allegations. He did add that state banking officials have launched an investigation into Bay Communities following last week’s Banker & Tradesman article about several unusual transactions conducted by Kaan and her companies in Florida during the past few years.

“It seems suspicious,” Hager said of the dealings, in which Kaan has acquired condominiums and land sites that her companies had already purchased. In some cases, a third company formed by Kaan has subsequently purchased assets previously acquired by another Bay Communities firm and then by Kaan herself.

Kaan’s attorney, Thomas E. Dwyer Jr., refused to answer questions regarding his client’s practices, citing the ongoing legal matter. After negotiations which would have had Kaan repay her boyfriend’s $5 million fine broke down last month, a hearing is set for this Thursday in Boston to reopen the civil case against Kaan, Lilly, and several others, including Bay Communities principal William F. Harkins, also a former Massachusetts resident.

Several Boston banking experts and others familiar with Lilly and his legal travails expressed surprise that Bay Communities could receive such extensive funding given the circumstances. Michael Moore, a private investigator based in Braintree, said the Internet has increased the ability to review an individual’s background. “That’s just unbelievable,” Moore added when told that Ocean Bank provided a loan despite knowing of the FDIC charges against Bay Communities. The bank had been informed of the charges in January by Banker & Tradesman as part of its ongoing coverage of the case.

A local investment banker, who requested anonymity, also expressed surprise that Ocean Bank provided the funding.

“Frankly, it amazes me, because lending officers tend not to be a very risk-oriented group,” said the banker. “It’s really puzzling they would do that.”

Although he would not discuss the Ocean Bank loan specifically, the head of the group spearheading the effort against Kaan and Lilly defended the government’s actions. “We feel very confident about the ultimate success of the case, and the allegations set out in the complaint,” said Assistant U.S. Attorney Christopher Alberto. Operating from U.S. Attorney Donald K. Stern’s in Boston, Alberto oversees the Justice Enforcement Team, a group of federal agencies charged with enforcing restitution owed to the government.

Financing Flurry
Regardless, Bay Communities certainly has had little difficulty getting financial backing for its various real estate dealings, with Florida registry records identifying more than a dozen banks that have financed the company’s activities, as well as Kaan’s subsequent transactions. The institutions range from tiny Putnam State Bank up to California-based Washington Mutual Bank, one of the largest financial institutions in the country.

One repeat backer has been Cypress Bank of Palm Coast, a small institution that has helped Kaan buy several lots from one of her companies at the Sanctuary development in Palm Coast. In one deal, Cypress provided $468,000 for Kaan to acquire three lots at the Sanctuary, including one that was recently purchased by Recovery LLC, a company which lists Kaan as director.

In a brief meeting at Cypress Bank’s Palm Coast branch late last month, and in subsequent phone calls, President Bruce E. Page told Banker & Tradesman that he could not recall details regarding the Sanctuary loans, but said he was familiar with both Bay Communities and Kaan. He was vague, however, when asked whether he knew that Kaan is listed as Bay Communities president, or her relationship with Lilly.

Other Florida banks, such as Harbor Federal Savings, Southtrust Bank and Crown Bank, have either not returned phone calls to discuss the issue or have cited customer confidentiality in declining comment. The latest deal uncovered by Banker & Tradesman is a $5 million loan recently provided by Washington Mutual Bank. The monies are being used to finance the acquisition of a land site in Ponce Inlet, Fla., just south of Daytona Beach. Although the loan is for $5 million, the purchase price appears to be $3.5 million, according to records on file at Volusia County’s registry of deeds.