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Receivers rush in when firms flame out

Receivers rush in when firms flame out

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They are the emergency responders of America’s free enterprise system.

In legal parlance, they’re known as receivers and trustees. They race into the business world’s equivalent of a house fire to douse the flames, treat the wounded and, if possible, save the building.

Working in both state and federal courts, their ranks include lawyers and business experts called upon in such failures as the Cascades Grandview apartment debacle on West Market Street, the ZeekRewards penny-auction scandal, the SJK Investment Management fraud and the Renegade Tobacco bankruptcy that ate the famed collection of art and collectibles at Chinqua Penn Plantation.

“It’s stressful; I can’t tell you how stressful it is,” said Peter Tourtellot, the Greensboro turnaround specialist who got Renegade Tobacco back on track. “You have people’s lives at stake, not in terms of life and death, but in terms of their livelihoods.”

Receivers and trustees have been in the news a lot lately, partly because their business is really good when the economy isn’t.

“When the economy goes bad, we do spend our time on the road,” said Nick Hice, owner of Greensboro-based Amrex Receivers, which specializes in failed hotels and motels.

“Receivers are solutions people,” added Hice, whose 28-year-old firm works in 43 states and has branch offices in Dallas. “We come up with solutions, we fix things back up, and then we get out of the way.”

The job sometimes involves helping unravel an alleged fraud, such as the ZeekRewards and SJK crackups. The receiver plays financial sleuth, combing bank records and intricate transactions to get as much money as possible for those done wrong.

Receivers often are appointed in the midst of a lawsuit. Trustees get the job after a company goes bankrupt. But both are selected by judges, get their power from court orders and perform similar tasks.

Sometimes they breathe life back into a company that just needs better management, and sometimes they must close down a hopeless company or investment, with an eye toward liquidating the assets.

“As soon as you get in there, you have to look around to see who can help you. You either have to decide, yes, we can bring this company back or we’re going to liquidate,” said Tourtellot, of Anderson Bauman Tourtellot Vos & Co., which has held receiverships in such industries as textiles and apparel, wood products, retirement centers and golf courses.

The hot seat

The first few weeks on the job qualify as the very definition of life in the hot seat, Tourtellot said.

“You’re hearing from everybody — employees, creditors, lawyers, tenants, everybody,” he said.

“If you’re that guy living at the Cascades with no air conditioning and none of the other things you were supposed to have, you don’t care about anything else.”

Sometimes, the court-appointed steward makes creditors happy by paying more than they expected on bills long since consigned to the bad-debt pile. Other times, repayment amounts to mere pennies on the dollar.

Cases involving fraud get the most media attention, but simple business busts and disagreements are more common.

A bank or loan company might ask a judge to appoint a receiver for the struggling owner of an apartment complex who bought the property with that lender’s money.

The trigger typically gets pulled when the troubled owner starts missing mortgage payments and the lender loses faith in his customer’s business acumen, said William P. Miller, a lawyer based in High Point and an expert on receivership and trustee law.

Many times, the receiver enters to “stabilize” the situation by making renovations and attracting more tenants, so the property can be sold to a new owner with deeper pockets, he said.

Something like that could happen at the Cascades Grandview, Miller said of the privately owned student aprtment complex that went into receivership last month after financial woes led to its electricity being temporarily cut off and the building briefly condemned.

Receivers and trustees run the gamut in the businesses they encounter, Miller said.

“I’ve had golf courses, commercial shopping centers, apartments, even a pheasant farm,” said Miller, whose best-known assignment probably was the controversial bankruptcy of Greensboro’s Project Homestead.

The nonprofit, low-income homebuilder went haywire after questionable business practices came to light and its charismatic founder, the Rev. Michael King, committed suicide.

‘The things we see’

Hice, the hospitality-industry receiver, sees the same mistakes repeated time and again. Hotel operators borrow heavily in good times, then milk profits from the property for years while ignoring maintenance and renovations.

Suddenly, a recession hits or their hotel chain demands on-site improvements pronto, and there’s no gas in the tank, Hice said.

“You wouldn’t believe the things we see,” he said. “By the time we get there, the property is in really bad shape.”

Such court-appointed stewards ride to the rescue with sweeping power. Backed by the judge, they change door locks, take possession of bank accounts and other assets, show current owners the exit, and assume every power of the ousted leadership.

The process can drag on for years because it takes time to revive a troubled company or, if there’s no hope of survival, to sell all property and other assets. That’s something jilted investors and other creditors don’t like to hear.

“It shouldn’t take more than a year if they do their due diligence,” said Perry Calhoun, a Greensboro business owner who invested in the Lexington-based ZeekRewards hours before the Securities and Exchange Commission shut it down.

But in a conference call with reporters last week, newly appointed ZeekRewards receiver Kenneth Bell wouldn’t even hazard a guess how long it might take to unwind the mess linked to Lexington businessman Paul Burks.

“We’re going after every dollar held by someone who ought not to have it,” said Bell, a lawyer in Charlotte .

Calhoun hasn’t heard a word personally from Bell, but that’s OK if the receiver has nothing of substance to communicate. Just keep tracking down those hidden pools of cash, Calhoun said.

80 cents on the dollar

The SEC lawsuit against SJK and former Greensboro businessman Stan Kowalewski took about 18 months to reach a near resolution, with the Atlanta-based receiver likely to recover more than 80 cents on the dollar for former SJK clients.

Kowalewski put about 75 percent of their money in legitimate hedge funds but misapplied roughly $16 million and ultimately profited wrongly from $8.4 million, the SEC proved.

The misused money went for such items as a $3.9 million beach house in Pawleys Island, S.C., which the SEC said was as much for Kowalewski as it was a business investment.

“The vast majority of the money that will be returned to investors already has been distributed,” said David Dantzler, an Atlanta lawyer representing the SJK receivership. “Several assets still must be sold, the largest of which is the beach house.”

Receivers and trustees get paid on terms laid out by the judge who appoints them.

For example, in the Cascades Grandview case, Atlanta-based receiver Strategic Management Partners earns 3.5 percent of the building’s monthly revenue — a prod to operate the business efficiently and sign more tenants.

In bankruptcy cases, a trustee feels most fulfilled when he can steer a company out of hot water and back to solid financial status, Tourtellot said.

That’s what he seems poised to accomplish with Mocksville-based Renegade Tobacco, a once-thriving company started by businessman Calvin Phelps, who helped bankrupt it with lavish spending.

Tourtellot entered the fray shortly after the company emerged from bankruptcy but fell back under court supervision when prosecutors unveiled their criminal investigation of Phelps for dodging taxes on tobacco shipments.

The ensuing fallout consumed the exquisite Chinqua Penn collection, raising more than $3 million at auction to pay back creditors because Phelps used company money to buy it.

But that was the least of Tourtellot’s challenges.

The new job thrust him into a complex industry in which he had no experience.

He survived by immediately rehiring three executives Phelps fired shortly before the second bankruptcy, by working hard to win the trust of rank-and-file employees and by regaining the business of wary wholesale buyers, Tourtellot said.

Now, he plans to bring Renegade back from the dead with a four-year transitional period, during which all creditors will be repaid and new investors found.

It’s the best that can happen in a situation that began badly. Many cases don’t end so well, and wronged investors and unsecured creditors usually brace for a loss.

ZeekRewards victim Calhoun said last week that he knows just what he would do if his receiver matches the SJK case and recovers 80 percent of his lost $10,000.

“I’d kiss him.”

Contact Taft Wireback at 373-7100 or taft.wireback

@news-record.com

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