Koger Faces Cancellation

Koger Faces Cancellation

Continental Insurance Company wants to cancel firm under investigation’s policy.

Continental Insurance Company and Continental Casualty Company said in a federal bankruptcy court filing last week that they want to "rescind" three of Koger Management Group, Inc.’s insurance policies "based on material misstatements in the insurance application."

Lawyers for the insurance carriers asked a federal bankruptcy court judge for "relief from the automatic stay" imposed on Koger actions to allow them to seek a "declaratory judgment that they are entitled to rescind the policies based on material misstatements in the insurance application."

Between 2003 through 2008, the two companies, operating as CNA Insurance Companies, issued a series of $1 million annual "crime policies," to insure Koger Management from "loss of money, securities, or property other than money or securities resulting directly from dishonesty" by Koger’s employees.

The application asked whether bank accounts are reconciled by someone "not authorized to deposit or withdraw there from," assuring that a third party was checking the accounts who could neither put money in nor remove money from the accounts. The application was signed by Robert Koger in 2003 and forwarded in subsequent years by Jeffrey Koger, the firm’s chief financial officer.

On April 16, 2007, Robert Koger provided a claim to CNA "estimated at $1 million."

CNA’s claim investigation disclosed that Jeffrey Koger "allegedly embezzled the debtor’s clients’ funds by electronically transferring the funds to his personal account and an account of a separate business, Tri Fitness, Inc. that was owned by Jeffrey Koger’s wife."

CNA said it was disclosed by Koger Management that Jeffrey Koger could both deposit and withdraw funds from the accounts and was the official who would also reconcile the accounts. CNA said it would not have issued the policy or would have issued one with other requirements had it known.

Jeffery Koger’s ability to reconcile the accounts delayed the discovery of his alleged embezzlement.

CNA said the bankruptcy court should consider this before continuing with the distribution of assets because if the policies are rescinded, CNA will not pay the $1 million claim and Koger Management Group’s resources will be diminished.

Meanwhile, Thomas P. Gorman, the Alexandria lawyer who filed the Chapter 11 bankruptcy petition on behalf of Koger Management asked the court to allow it to withdraw from the case. It cited that Robert Koger’s testimony at a hearing revealed a firm not listed as an asset or a creditor in the first bankruptcy filing, KMG, LLC, which had to file a second bankruptcy petition on Oct. 9.

Koger Management Group, Inc. is a creditor of KMG, LLC. There is also a landlord-tenant relationship between the two debtors.

Gorman’s filing said "Counsel believes that in light of the Debtor-Creditor and Landlord Tenant relationships that they are potentially no longer sufficiently disinterested to represent either Debtor in Possession." A hearing has been set for Nov. 6.

Koger Management Group, which now conducts business as Tri-State Management, has been under investigation since January, when Robert Koger reported to the Fairfax City Police that someone within the company had embezzled $800,000 by electronic transfer. Koger’s offices are located in the City of Fairfax, although its business extends across multiple jurisdictions in the Washington, D.C. area. The police announced an investigation on Jan. 11, 2007 and have made no public statement since.

On July 26, Robert Koger filed under Chapter 11 of the federal bankruptcy code, which permits the company to reorganize and try to continue its business under the direction of the court.

Last week, Koger Management Group won approval to hire two former attorneys of the group to represent it.

Anyone with information on Koger Management Group, Inc. may call Connection reporter Nicholas Horrock at 703-403-2035.