The Portland company asks a Delaware court for relief from lawsuits filed against it by labor union trust funds
By Jeff Manning and James Long of The Oregonian staff
Sunday, December 17, 2000
One of the many players in the ongoing drama of Capital Consultants has launched a legal gambit that could thwart efforts by union trust funds to recover the more than $200 million in failed investments with Capital Consultants LLC.
Wilshire Financial Services Group of Portland is asking a bankruptcy judge in Delaware to block lawsuits against it by labor union trust funds. Wilshire, which reorganized in a Chapter 11 bankruptcy proceeding in June 1999, says the union trusts are trying to collect on debts that were discharged in the bankruptcy and that the lawsuits violate the court's prohibition on further claims.
Wilshire Financial contends in the Dec. 8 filing that Capital Consultants officials signed documents on behalf of its union clients pledging not to pursue claims against Wilshire Financial or anyone else connected with the company's reorganization.
Despite the ban imposed by the bankruptcy court, 28 union trusts in recent weeks have filed three lawsuits against Wilshire Financial as well as Capital Consultants and dozens of connected companies and executives. Capital Consultants collapsed in September as the U.S. Labor Department and the Securities and Exchange Commission filed fraud suits in federal court in Portland accusing the company of running a "Ponzi-like scheme" to conceal the loss of more than $200 million of client money.
Wilshire Financial's attack on the trust funds' lawsuits further complicates an already sprawling legal free-for-all, opening a new battlefront in a court 3,000 miles away. If Wilshire succeeds in stopping the union claims against it, it could prove pivotal to union members' hopes of recovering their lost pension money.
Portland financiers Andrew Wiederhorn and Lawrence Mendelsohn, who along with two of the owners of Capital Consultants are primary targets of the union trusts' lawsuits, also could claim that they are shielded by the legal releases the parties signed in the Wilshire Financial bankruptcy.
Capital Consultants' financial crisis began in the fall of 1998, when the former Wilshire Credit Corp., solely owned by Wiederhorn and Mendelsohn, defaulted on $160 million that Capital Consultants had loaned the company from the trust funds. In the bankruptcy, the former Wilshire Credit was treated as a subsidiary of Wilshire Financial.
The trusts have since claimed that Wiederhorn and Mendelsohn, and Jeffrey and Barclay Grayson as owners and top executives of Capital Consultants, had "an undisclosed corrupt relationship" marked by bribes and kickbacks.
Wilshire Financial and the former Wilshire Credit were two of dozens of Wilshire-related companies operated, owned or controlled by Wiederhorn and Mendelsohn. Wilshire Financial has been under new management since the summer of 1999. Wiederhorn and Mendelsohn now run Wilshire Real Estate Investment Inc.
Wiederhorn and Mendelsohn have not responded to the union trusts' charges. Wiederhorn's lawyer, Robert Shlachter, however, has told The Oregonian repeatedly that his client is protected by the same bankruptcy restructuring that Wilshire Financial claims shields it.
The court wrangling over the trust funds is complicated by an ongoing federal grand jury investigation that could result in criminal charges against some of the players.
Steve English, an attorney for eight Oregon-based union trusts and one of the leaders in the trusts' legal effort, said his side will provide sufficient evidence of fraud to persuade the courts to set aside the legal releases signed in the bankruptcy.
"We believe if a bankruptcy judge was presented with the contentions in our lawsuit, the judge would not have released at least some of the entities from liability," English said.
Judith Elkin, a Dallas, Texas, lawyer who co-chairs the Bankruptcy and Insolvency Litigation Committee of the American Bar Association, said English faces an uphill fight but that he could succeed if he proves that Capital Consultants and Wilshire had an "incestuous" business relationship that they failed to disclose to the bankruptcy judge.
"If there was some kind of scheme that wasn't disclosed, and they got all these clean little releases out of the bankruptcy, that's going to be something that the court would consider," Elkin told The Oregonian.
Wilshire Financial, which bought and sold mortgages and mortgage-backed securities, began staggering toward insolvency late in 1998 as its major lenders demanded additional collateral for their loans to Wilshire.
Although Capital Consultants never loaned any of its clients' money to Wilshire Financial, it did lend $160 million to the former Wilshire Credit, which was closely entangled with Wilshire Financial. Capital Consultants was forced to renegotiate the debt during Wilshire Financial's bankruptcy, partly because Wilshire Financial had guaranteed $35 million of the debt owed by the former Wilshire Credit.
As in any Chapter 11 bankruptcy, Wilshire Financial's intent was to get out from under its burdensome debt load and start afresh. Wilshire Financial proposed to give stock in the company to the main creditors. Debt-for-stock swaps are a common practice in reorganizations.
Under a complex plan approved by the court, Capital Consultants gave up on the $160 million that the former Wilshire Credit owed and released Wiederhorn and Mendelsohn from their personal guarantees of the debt. In return, Capital Consultants accepted, on behalf of the trust funds, the rights to as much as 42 percent of the publicly traded Wilshire Financial stock.
Capital Consultants' stake in Wilshire Financial, which it can claim in 2001, is worth about $9.9 million based on the current stock price, a far cry from the lost $160 million.
Kenneth R. Heitz, a Los Angeles lawyer representing Wilshire Financial, argues that Capital Consultants got the best deal available to it and that he believes the trust funds' stake in Wilshire Financial has a chance of increasing in value.
The only other alternative for the creditors, he said, was to force Wilshire out of business and liquidate the assets. Under that scenario, Capital Consultants' $160 million in loans was worth about $6.45 million, according to a liquidation analysis included in Wilshire's bankruptcy documents.
The Wilshire restructuring plan is chock full of legal releases, in which the company and its creditors promise never to sue one another over the terms of the reorganization.
Capital Consultants, for instance, agreed to release from all liabilities "Wiederhorn, Mendelsohn, their spouses, children, other relatives, and all entities owned or controlled by any of the former."
But it's unclear whether the union trusts even own the rights to the Wilshire Financial stock. Grayson told the trusts that he had transferred the rights to the stock to companies in New Jersey and Florida, in return for their assumption of Wilshire Credit's debt to Capital Consultants' clients.
Federal investigators allege that Sterling Capital and Brooks Financial, of New Jersey and Florida, respectively, paid the monthly interest due on the Wilshire Credit loans with union money secretly funneled to them by Grayson.
The bankruptcy court's ban on claims against the participants in the restructuring already has been upheld once -- by a Multnomah County judge who presided over a lawsuit by the reorganized Wilshire Financial against Wiederhorn and Mendelsohn.
Wilshire's new board of directors fired the two executives in August 1999 and later sued them, claiming they had improperly spent company funds during the bankruptcy. The judge ruled that the lawsuit violated the releases signed during bankruptcy, and threw the case out of court.
Jeff Manning can be reached at 503-294-7606 or by e-mail at firstname.lastname@example.org.
James Long can be reached at 503-221-4351 or by e-mail at email@example.com