A national bank is accusing local biotech entrepreneur Cate Dyer of fraud and is suing her Folsom company StemExpress LLC over outstanding debt.
Dyer, in an interview, court filings and written responses to the Business Journal, denied wrongdoing or that her company is in financial distress. She said that StemExpress has never missed a payment on its loans, and suggested that the conflict stems from the bank's own challenges and those of the banking industry over the past year.
Zions Bancorporation N.A. has sued StemExpress over a series of loans the company took out in order to expand to meet the demand for Covid-19 testing during the pandemic.
Dyer founded StemExpress in 2010, to provide human tissues and other specimens for medical research. The company is in the process of rebranding into a network of companies that includes CGT Global, CGT Clinics and CGT Healthcare.
When the lawsuit was filed in June, the bank claimed that the company owed around $4.9 million in outstanding debt.
Zions Bancorporation (Nasdaq: ZION) is a Salt Lake City-based bank holding company that owns California Bank & Trust. StemExpress first opened an account with California Bank & Trust in 2021. It took out several lines of credit and a $2.2 million loan, according to the lawsuit. The debt on the first line of credit — which had a $10 million limit — was set to mature a year later, in February 2022, and the rest were set to mature a few years from now, according to loan documents attached to the lawsuit. Dyer signed on as guarantor for the loans.
By the end of 2021, the suit claims, the company defaulted on the loans, by failing to maintain various ratios of debt to income and net worth outlined in the loan documents. The company also allegedly failed to pay back the full amount owed on the first line of credit when it matured the following year. The lawsuit does not state how much was owed at that time.
Request for receiver
The bank agreed to forbear from collecting on the loan, and extended the maturity date three times, through February of this year, the lawsuit claims. When the third forbearance agreement was made in December, StemExpress allegedly owed $822,911 on the principal of the past-due line of credit, and $5.6 million on the other loans. The company did not fully pay the past-due amount by the deadline, the lawsuit claims. The bank is now demanding all the money the company owes, and is asking the court to allow the bank to appoint a receiver over the company and Dyer’s assets.
At the time the lawsuit was filed, StemExpress allegedly owed $322,911 on the principal of the past-due line of credit, $4.5 million on the principal of the other loans and a total of $216,900 in interest.
In addition to the full amount of the company’s debt, the bank is also asking the court to allow it to appoint a receiver over Dyer and the company to protect the bank’s collateral. According to the lawsuit, the bank believes that the company "is not cash flowing properly in its business operations, thereby placing the collateral at risk."
The bank is also accusing Dyer of lying on her personal financial statements submitted to the bank as guarantor of the loan. Last year, Dyer transferred three residential properties that she owns from being held in her name to being in the names of limited liability companies she started. The lawsuit claims she concealed these transfers from the bank, in an effort to keep them out of its reach after StemExpress defaulted.
“It’s absurd,” Dyer said. “It’s an absurd statement.”
Dyer said she disclosed the transfer of the properties to the bank in the financial statements she submitted regularly. Her attorneys made these statements available to the Business Journal.
“It states it right in the documents I provided the bank,” Dyer said. “So this idea that somehow they were confused what was happening well, then I would argue they weren’t reading documents. It’s not a lack of us providing them.”
Never missed a payment
Dyer also said she doesn’t know where the bank got the idea that the company is having cash-flow problems. In a statement, she said StemExpress has drastically overpaid the loans, and never missed a payment.
“If you saw a company in crisis, the way they want to paint a picture, you would see a company maxing out their lines of credit, not owing only $330,000 on a $10 million line of credit,” she said.
Dyer declined to disclose StemExpress' revenue to the Business Journal.
Dyer said the company first opened its account with California Bank & Trust while it was getting a flurry of new contracts to perform Covid-19 testing for clients that included local governments, hospitals, nursing homes and other large organizations. StemExpress had to scale up quickly to meet the demand and its existing bank wasn’t able to provide a large enough loan, she said.
“All of the sudden Sacramento County was running at about $6 million a month of accounts receivable with us, and we had to carry that amount of growth while we were doing this incredibly important work,” Dyer said, in a statement. “Unfortunately, our other bank couldn’t adjust up our receivables line in the middle of Covid.”
The bank set the loan covenants during that time of rapid growth, based on the numbers the company reported at the time, Dyer said.
But after the peak of the pandemic, the demand for testing dropped dramatically.
“As we wound down the massive amount of Covid testing that we were doing for the community we had to pull back,” Dyer said, in a statement.
That was when the company triggered its technical defaults on its debt.
“It’s not abnormal for a business to hit technical defaults on occasion, especially in an economic crisis such as Covid,” Dyer said, in a statement. “I think as business owners, we all look at our banks as a partner that will work with our businesses to help us succeed. California Bank & Trust is not that kind of bank.”
Dyer said the bank did continue to work with StemExpress after that, until this year. She said she believes the recent conflict stems from Zions Bancorporation's own challenges.
“I think this is, personally, just to be frank, more about the bank running out of money than anything with us,” Dyer told the Business Journal. “I think this is about them putting pressure campaigns on small businesses to try to not run out of cash.”
Dyer said that February is when the bank really started putting pressure on the company to pay its outstanding debt.
That was around the same time Silicon Valley Bank collapsed, which drew new scrutiny to the challenges facing the banking industry from the rapid inflation over the previous years followed by a sharp rise in interest rates. Zions Bancorporation was one of 11 regional banks whose credit rating Moody’s Investors Service downgraded in April, citing an erosion in capital that limited its flexibility in dealing with the new, challenging market conditions.
Shares of Zions Bancorporation have fallen 33% over the past year. On Oct. 18, the bank reported a third-quarter profit that fell short of Wall Street analysts' expectations, Reuters reported. And Zions Bancorporation CEO Harris Simmons said in September that the bank plans to reduce its headcount by 3% over the next year, the trade publication American Banker reported. Zions had $87.3 billion in assets at the end of the third quarter.
Neither the bank nor its attorneys responded to requests for comment.
“I truly, in my gut, feel that this is a pressure campaign because the bank needs money,” Dyer said, in a statement. “This is not about us not fulfilling our obligations with them. We have very positive relationships with our other banks.”
StemExpress has filed court documents denying the bank’s claims. The next court hearing is set for May of next year.
