Bankruptcy and Private Companies and Commercial Real Estate and Lauth Property Group and Retail Development and Real Estate & Retail

Lender alleges Lauth insiders backdated loan documents

January 16, 2010

The largest creditor for Lauth Group Inc. has asked a bankruptcy judge to appoint a trustee after evidence in a related case suggested Lauth insiders may have backdated documents to thwart creditors.

An affiliate of Chicago-based Inland American Real Estate Trust cited the testimony of former Lauth CFO Thomas Peck in arguing the principals of Lauth have “significant disabling conflicts of interest” that prevent them from carrying out a duty to act in the interest of creditors “as opposed to their own selfish interests.”

Lauth

Inland, which invested $228 million in 2007 for an ownership stake in dozens of Lauth properties, had been talking with Lauth officials about a potential settlement for months. But those talks came to a standstill late last year after Peck described a pattern of “self-dealing” by Lauth insiders including Chairman Bob Lauth and a flurry of backdated indemnity agreements insiders signed several months before the company’s bankruptcy.

In a Nov. 23 deposition, Peck described the circumstances surrounding an agreement that relieved him of loan guarantees on Lauth projects that potentially could have allowed lenders to go after his personal assets. The agreement essentially was a promise that, should a lender pursue Peck’s assets, a Lauth corporate entity would reimburse him.

Peck said he signed the agreement in December 2008—almost 18 months after the document’s listed effective date of July 2007—and after some of the company’s properties already had begun to default.

Other Lauth executives signed similar so-called indemnification agreements personally and on behalf of Lauth subsidiaries. The deals effectively reduced the amount available for Inland and other creditors to recover in the bankruptcy proceedings. The agreements, meanwhile, let insiders off the hook for as much as $400 million in personal guarantees on loans for properties Lauth developed.

Legality questioned

Inland points out Lauth’s own document-numbering system backs up its contention that the company backdated indemnification agreements. Documents actually signed in July 2007 are numbered from 3761 to 3813, while indemnifications for subsidiaries LIP-D and LIP-I—both now in bankruptcy—state they were entered into “as of” July 2007 but are numbered between 18034 and 18048.

Lauth maintains Inland agreed to indemnify Lauth executives as part of its 2007 investment deal. Lauth attorney Vernon Back chalked up the months that passed before the documents were signed to a simple oversight.

“Some were executed as early as June 2007 and others as late as December 2008 when it was learned that they had not been signed as part of the original documentation of the transaction,” Back wrote in an e-mail.

Peck, the former executive, said he questioned the legality of the documents at the time he signed them in December 2008. The documents were not shared with Inland.

“I was concerned about whether or not this document would be legally enforceable,” Peck said in the deposition. “Not being an attorney, I wondered as to the ability of the Lauth organization to have indemnities like this signed without Inland being a party to the document.”

A local bankruptcy attorney not involved in the case said delays between effective dates and executed dates aren’t unusual in contracts, but an 18-month delay raises concerns.

“I’ve never heard of a deal that was legitimate of that nature,” said the attorney, who spoke on condition of anonymity fearing a backlash from potential clients. “It sounds like a lawyer got involved, took a look at the mess they had and said, ‘Look, the only way you’re going to get out of this personally is have this occur by this date.’ It sounds like they were scrambling.”

Trustee needed?

Inland said in a Dec. 23 filing that the secret indemnification agreements show Lauth’s insiders are not capable of carrying out their legal duty to maximize the company’s remaining assets for the benefit of creditors.

If Inland prevails in its motion, a trustee would take control of the business from the Lauth insiders.

“The debtors should not be allowed to continue to run these bankruptcy cases for the primary benefit of the indemnified insiders,” Inland said in the filing.

Lauth, in a response filed Jan. 8, offered a blistering critique of Inland’s courtroom maneuvering but did not deny the allegations that it backdated documents. Lauth called the appointment of a trustee an “extraordinary remedy” that first would require substantial discovery spread out over several months.

“Having slumbered for over five months while it sought to extract a deal, [Inland] should not be permitted to cry ‘fire!’ in a last-ditch effort to derail the substantial restructuring efforts conducted by the debtors,” Lauth’s attorneys wrote.

Lauth’s troubles began in early 2008 as demand dried up for the speculative office, industrial and retail developments that had fueled its rapid growth. The company doubled its revenue from 2004 to 2005, then doubled it again from 2005 to 2006. During the same period, Lauth’s project lineup jumped from $143 million to $592 million.

The company started 2008 with about 450 employees, but layoffs have shrunk the staff to about 40.

Lauth defaulted on its agreement to pay dividends to Inland in late 2008, and several Lauth subsidiaries filed for Chapter 11 bankruptcy reorganization in May 2009.

Inland initially challenged Lauth’s bankruptcy filing by claiming it had taken control of the subsidiary above the entities that filed, LIP Holdings LLC, after Lauth defaulted.

But Lauth pointed to a section of the original agreement with Inland that required approval from at least one Lauth representative and one Inland representative for major company decisions, including a change in control. The judge agreed with Lauth’s interpretation.

Malfeasance alleged

A separate Inland entity in July 2009 filed suit against Lauth principals Robert Lauth, Michael S. Curless, Gregory Gurnik and Lawrence Palmer—along with former CFO Thomas Peck—alleging fraud, conspiracy and racketeering.

The suit accuses the Lauth executives of diverting more than $18 million of the Inland investment for unauthorized purposes and of secretly rewriting contracts to let themselves off the hook for personal guarantees on struggling real estate projects.

Lauth and Gurnik, the firm’s top two executives, had guaranteed loans of more than $120 million each.

Their personal guarantees were a big factor in Inland’s decision to invest—since the company believed Lauth owners’ personal stakes would add incentive to ensure success of the projects. But Lauth changed the terms three weeks after accepting the funds, the suit alleges.

Inland made similar but vague allegations earlier in the bankruptcy proceedings, but the company sees Peck’s testimony as strong evidence their suspicions were correct.

Peck, who initiated and helped negotiate the original investment deal with Inland, said he believes Inland named him in its lawsuit as leverage against the owners of Lauth. He left the company in January 2009.

“I was very upset and disappointed and frustrated and scared … that I was part of this lawsuit,” he said in his deposition.

He described a pattern of self-dealing by Lauth’s insiders—a theme Inland has repeated since the bankruptcy filing. Examples Peck cited: Company principals often stood on both sides of deals, and collected development and construction fees early.

Wells Fargo also sued Lauth, in June 2009, alleging company principals transferred millions of dollars in cash and properties to their wives and family trusts in an attempt to shield the assets from lenders.

Lauth has denied the allegations in both cases.•

 

 

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