The Bottom Line:
As Plan Administrator of the $75 million liquidating Chapter 11 bankruptcy estate, Stapleton Group quickly overcame the contentious and litigious shareholder’s challenges to recover approximately 67% of investor claims by:
- Providing executive leadership and operational oversight of approximately 20 real estate entities located in the U.S. and Canada, including condominium, office, retail and industrial properties and vacant land;
- Marketing and monetizing intellectual property assets of a shuttered technology business established to commercialize the shareholder’s inventions;
- Representing the estate in numerous, significant lawsuits brought against it by its shareholder; and
- Achieving a tax opinion that $15 million of $35 million provided by investors had been misused by the defendant, resulting in a $7 million ordinary income tax credit for the investors.
The Business Issue:
Over the course of 30 years, multiple generations of families had invested approximately $35 million in an entrepreneur’s real estate empire in exchange for promissory notes paying interest at about 8% per annum. After the 2008 real estate market crash, the debtor could not afford 8% interest and reduced it to approximately 2% before ceasing payments altogether. The properties in his portfolio were encumbered by millions of dollars in secured debt, but not over-leveraged. The borrower had misappropriated approximately $15 million of investors’ capital to patent, manufacture and commercialize personal inventions.
Genesis of Stapleton’s Engagement:
Serving as debtor-in-possession in a confirmed Ch. 11 bankruptcy, the entrepreneur failed to sell assets to pay creditors and continued investing in personal inventions. After 12 to 24 months, the creditors’ committee petitioned the court for a plan administrator and Stapleton Group was appointed.
Obstacles and Stapleton’s Solutions:
- The debtor had structured and signed promissory notes, then sued his investors for usury in an attempt to reduce $35 million in notes to $18 million.
- Stapleton proposed a successful compromise to the bankruptcy court, achieving a long-awaited distribution for the investors and avoiding expensive, lengthy litigation.
- The bankruptcy estate included intellectual property assets funded by the debtor’s misappropriation of investors’ capital to create and patent his inventions.
- Stapleton obtained a tax opinion that the $15 million of investor cash used for a purpose other than the purchase of real estate was a theft, and therefore an ordinary income loss instead of a capital loss. This resulted in a $7 million tax benefit for the investors.
- Stapleton hired IP appraisers and liquidated the IP assets through sales and auctions.
- The debtor sued the creditors’ committee and plan administrator (Stapleton) numerous times, including a $5 billion lawsuit after all of the assets were successfully sold.
- Stapleton, the creditors’ committee and counsel spent significant time in bankruptcy court in multiple jurisdictions.
- The debtor lost the $5 billion lawsuit and two subsequent appeals.
- The creditors’ committee was restless, having spent over a year waiting for the debtor to sell assets to pay his creditors.
- Stapleton quickly deployed management strategies to take control of all property, related bank accounts and accounting.
- Stapleton immediately completed a disposition analysis to determine the best exit strategy for each property, including: thorough review of existing data, procuring new valuation information, and working closely with the post-confirmation creditors’ committee to gain consensus.
- Stapleton identified and deployed best-in-class leasing and marketing services for the real property to maximize returns prior to liquidation.
- Stapleton successfully negotiated the sale of diverse real property located in the U.S. and Canada, including hotels, apartment buildings, land, office buildings, warehouses, and high-end personal residences.
- Individual real estate properties were owned by separate LLCs put into bankruptcy by the debtor, resulting in multiple bankruptcies within the Chapter 11 and creating a risk for the investors that lenders could foreclose on individual properties.
- Stapleton sold assets and negotiated aggressively with secured lenders to satisfy them so they would not foreclose, thereby establishing a path to financial recovery for the investors.
- Businesses and assets located in Canada complicated the bankruptcy resolution process.
- Stapleton interacted with Canadian brokers, lawyers and other parties through conclusion of the process.
- Stapleton resolved significant tax issues in Canada, the debtor’s residence for 5 years prior to filing bankruptcy, resulting from his failure to file Canadian taxes.
- The debtor remained an employee of the businesses during the bankruptcy, earning $25,000 per month.
- Stapleton initially tried to work with the debtor, then terminated him when he proved to be an impediment to recovery.