Metropolitan Mortgage & Securities Inc. is filing for bankruptcy next week, seeking relief from mounting debts and angry investors. The company will attempt to reorganize under Chapter 11 bankruptcy law, according to a press release issued Friday.
It’s the latest development in the stunning collapse of a Spokane business giant that once employed almost 700 people.
The bankruptcy filing will include a reorganization proposal that would turn ownership of the company to creditors - the thousands of investors who bought stocks and unsecured bonds called debentures, the press release said.
Metropolitan, headquartered in a gleaming 18-story white high-rise in downtown Spokane, was a made-in-Spokane success story. Started 50 years ago by the late C. Paul Sandifur Sr. as a thrifty little company that bought up family home mortgages, the firm grew into a $2 billion conglomerate under the leadership of Sandifur’s son, C. Paul Sandifur Jr.
But the expansion was fueled by indebtedness.
In the early 1990s, Metropolitan’s debt was about $250 million. By last summer, the company’s debts - largely assumed by issuing preferred stocks and debentures - ballooned to more than $600 million.
Metropolitan used the money to repay older, maturing debts and to fund new investments.
But the apparatus began falling apart last summer when the National Association of Securities Dealers determined that Metropolitan used fraudulent sales practices.
The aftermath of that finding, which included fines and restitution topping $4 million, stopped cold a business model dependent on issuing new debts as a primary source of cash. A cash crunch ensued and Metropolitan began missing dividend and interest payments.
That in turn has prompted lawsuits from investors who claim Metropolitan was really a carefully camouflaged Ponzi scheme.
To stop the unraveling, the company will check into federal bankruptcy court next week, where legal protections kick in to blunt the damage.
William Smith, the company’s chief financial officer, said in the press release that both Metropolitan and its sister company in Idaho, Summit Securities Inc., will file for bankruptcy and submit a “debt for equity” arrangement.
Under the plan briefly outlined in the press release, the two companies would merge into one large firm.
The sweeping restructuring effort would wipe out Sandifur’s ownership stake, leaving him on the outside of the company he used to flex considerable civic muscle, whether it was shaping local politics, funding the arts, or developing land.
It would also render Metropolitan’s preferred stock and debentures moot as the new company would issue new shares of stock to creditors.
The thousands of stockholders would then be able to sell or keep their new shares.
The company has been talking to several law firms representing debenture holders. Among them is Randall & Danskin in Spokane.
Doug Siddoway, a lawyer in the firm, has helped assemble a committee, including hundreds of debenture holders, looking for the best way to recoup investments.
He said he wasn’t privy to the plan’s details, but that investors may be best advised to consider Metropolitan’s reorganization rather than sue.
Already, two class-action lawsuits have been filed in federal district court in Spokane. They allege securities fraud stemming from the NASD investigation.
One was amended Friday to include Ernst & Young LLP, Metropolitan’s former independent auditor, as a defendant. The firm quit Metropolitan last week and disavowed nearly three years of audits.
The firm suggested Metropolitan’s books were inaccurate and said it couldn’t trust the representations of senior managers.
The firm said at least two real estate transactions may have been inflated on the books. The findings have sent Metropolitan on the difficult hunt for a new auditor.
Sandifur has since resigned as chairman, president and CEO of the company, and Tom Turner was fired as president of Summit.
Next week’s bankruptcy filing will likely lead to an automatic stay, preventing the suits from moving forward without the approval of a bankruptcy judge.
Smith said in the press release that the bankruptcy would preserve Metropolitan’s assets and operations.
“The reorganization will also afford us with the opportunity to regain our financial health and focus, and to allow the business to operate with the highest level of integrity,” he said.
Smith, who could not be reached after Friday night’s announcement, said the bankruptcy filings will exclude the three insurance affiliates of Metropolitan and Summit.
The insurance companies are under the administrative supervision of regulators in three states. Smith said they will continue normal operations.
“The companies look forward to working with their bondholders and creditors to emerge from bankruptcy under a debt-for-equity plan as quickly as possible,” Smith said.
“Based on our recent discussions, we believe the creditors are supportive of our efforts to use the bankruptcy process to implement a consensual plan and take all necessary actions to protect and preserve the value of the company’s operation and assets.”
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