- Associated Press - Sunday, January 31, 2016

Two brothers involved in a failed Atlantic City loan program filed a counterclaim in a court battle over $3 million, saying the problem was created when the struggling resort town reneged on its deal to fund the program that promised to lend as much as $40 million to struggling homeowners and businesses.

Gary and Michael Lax said the city is at fault because it demanded that the money used to seed the loan fund be returned before the end of a five-year agreement. Their lawyer said that money was spent to set up the loan fund “in anticipation of receiving the loan funds and lending the funds to qualified individuals.”

Their counterclaim filed last week demands judgment against the city and for damages and legal costs.

The Lax brothers and a Tennessee financial firm they were associated with were added in September to the city’s lawsuit over the loan program, which has never made a loan and instead led to a legal fight that has been ongoing for more than a year and a half.

The city sued W. Wesley Drummon and his ZeMurray Street Capital in August 2014, saying he failed to deliver promised services and didn’t honor requests to return the money. The company used most of the city money to buy TN Bidco, which later had management of more than $6.6 million in government-backed loans taken away by the Small Business Administration, an Associated Press review found. Drummon has denied the city’s claims and said the city’s lawyers reviewed the deal.

Michael Lax, of Spring Hill, Tennessee, was listed in documents as the registered agent for TN Bidco after the purchase and was later paid $4,000 a month as a consultant, while Gary Lax, a finance attorney in Washington D.C., became chairman of the board of TN Bidco, according to company documents. He was also the trustee of a family trust with an ownership stake in ZeMurray. Their brother Eddie served as an aide and spokesman for former Atlantic City Mayor Lorenzo Langford, whose administration launched the program.

The Lax brothers and their attorney did not respond to requests for comment.

The $3 million is a blip on Atlantic City’s financial struggles, but the money and the legal expenses associated with the case are another issue it has to deal with as it faces down potential bankruptcy. Gov. Chris Christie last week joined with Mayor Don Guardian and state Senate President Steve Sweeney to back a plan to have the state take over most of the city’s decision-making power, including its finances and the right to sell city assets and land.

An outside attorney for Atlantic City referred requests for comment to city officials, but they didn’t respond to phone messages and emails.

As the city has battled in federal court to get back the money it says it’s owed, it’s also been forced to fight for information in the case.

After first going to court to wrangle records from Drummon, the city was also forced to seek a court order to require Drummon to testify at a deposition scheduled for next month after he previously refused to answer any questions, citing his Fifth Amendment right against self-incrimination.

Felix Gonzalez, Drummon’s attorney, said in a previous filing that he had advised him to plead the fifth after he was told by an attorney for the city that the U.S. attorney’s office has launched a criminal investigation. A spokesman for the U.S. attorney’s office said it does not confirm or deny the existence of investigations.

Gonzalez declined to comment this week.

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Cornfield reported from Trenton.

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Follow Cornfield at https://www.twitter.com/JoshCornfield

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