Dozens of Idaho businesses will soon find they could owe tens of millions of dollars as Meridian-based DBSI Inc.‘s bankruptcy case continues to unfold.
The trustee in the case, James Zazzali, filed a slew of documents in U.S. Bankruptcy Court for the District of Delaware on Nov. 10, seeking money from sign companies, restaurants, construction firms, title companies and other firms that did business with DBSI.
The trustee is pursuing an aggressive strategy to recover as much money as he can for creditors, by going after just about any company that DBSI paid between 2004 and 2008.
Zazzali, former chief justice of the New Jersey Supreme Court, is seeking to use two sections of bankruptcy code – one that deals with fraud and another that regulates payments 90 days before filing bankruptcy – to strike at a wide array of businesses that had little to do with the Meridian real estate investment firm.
The trustee filed close to 1,000 complaints against DBSI investors, vendors and suppliers.
The targets include Idaho businesses like Angell’s Bar & Grill, the Arid Club, The Potting Shed, Action Couriers and The Sign Center.
The Blind Gallery of Meridian, for example, is on the hook for $13,500, according to documents filed by the trustee.
Jason Monks, president, said his window treatment company may have to file for bankruptcy protection itself if it has to pay that money, even though DBSI actually owed his company before it filed for bankruptcy.
“If someone was asking [$13,000] from me, right now, we’d go under,” he said.
The bankruptcy case
DBSI filed for Chapter 11 bankruptcy protection in November 2008, when it held more than $2 billion in property nationwide and managed other assets worth more than $2.65 billion.
Almost 10,000 investors and creditors filed claims totaling billions of dollars in the case.
The company, founded in 1979, rode the real estate boom and became a national leader in tenant-in-common transactions, which are when two or more people buy fractional shares of a property. A 2002 change in tax law made those investments particularly attractive.
A court-appointed examiner in DBSI’s bankruptcy case concluded in a 264-page report that DBSI executives ran “an elaborate shell game” that included improper and fraudulent use of investor money to prop up the company, to spend on pet projects and to enrich themselves.
Attorneys say Zazzali’s actions are typical in large bankruptcy cases involving fraud allegations.
Matt Christensen, an attorney at Boise-based Angstman Johnson who represents a Chapter 7 trustee in Idaho bankruptcy court, said a trustee has wide latitude to go after vendors that might have unwittingly received payments from a firm that engaged in fraud. The trustee can also file against businesses that were paid just before a bankruptcy filing.
Businesses can defend against the claims only if an attorney represents them in court, Christensen said.
“It stinks, but that’s what the bankruptcy code is,” he said.
If the businesses don’t protect themselves, the court can grant default judgments, and the trustee can hire collections agencies or file liens against them.
The ‘shotgun approach’
Some of the trustee’s biggest targets are the title companies that worked with DBSI. He’s seeking $223 million from them, including $32.9 million from Boise-based Pioneer Title Co., $5.3 million from Boise-based First American Title Co. and $62.9 million from Transnation Title & Escrow (now Fidelity National Title Co.).
Jesse Hamilton, senior vice president/general counsel at Pioneer, said the trustee seems to be targeting any person or company that received a check or wire transfer from DBSI between 2004 and 2008 in a “shotgun approach.”
Pioneer Title’s only involvement with DBSI was to provide escrow services in the purchase and sale of DBSI properties, he said. DBSI would deposit money into Pioneer’s escrow account, and the title company would later pay that to the appropriate party.
Hamilton was confident Pioneer’s innocence would quickly come to light, but he said he worried about smaller businesses unfamiliar with the legal system.
“Pioneer has no connection whatsoever with the state of Delaware and one can only assume that is also true of many of the other defendants,” he said. “Regardless, we all get to start this battle in a jurisdiction nearly 2,400 miles away from the Treasure Valley.”
That’s a concern for companies like The Sign Center Inc., which is listed as owing more than $20,000. Shane O’Harra, managing member, acquired the company in March 2009. He doesn’t know anything about DBSI, but he said he’d probably have to talk to an attorney to check into his liability.
“I don’t know how much I have to worry about it,” he said.
Strength in numbers
The best hope for defendants to keep legal costs low appears to be a joint defense. Thousands of investors banded together earlier in the bankruptcy case to advance their arguments.
Under a liquidation plan confirmed Oct. 26, most creditors will receive a fraction of what they are owed as part of a complicated process to distribute money from a trust. Some secured creditors will get 100 percent of their money back, though most investors will receive 18.5 percent, 6 percent or nothing.
Firms like Meridian-based accounting firm Nelson & Minert are now trying to organize the more than 300 vendors and suppliers that have been sued.
Principals Ryan Minert and Roy Nelson, who both worked in DBSI’s tax department until November 2008, helped organize five separate groups of hundreds of investors earlier in the case, and they’re looking to offer their services again. Attorneys face restrictions on what they can do to solicit business.
If the firms acted alone, they’d each have to hire an attorney licensed to practice in Delaware, typically for a $10,000 retainer, Minert said. If they join together, their costs might be limited to only several hundred or a thousand dollars, he said.
“It’s pretty obvious that if they don’t do something, they’re up a creek,” he said.