Metropolitan Mortgage & Securities Co. may sue former chairman and CEO C. Paul Sandifur Jr. and his ex-wife, Helen Sandifur, for millions of dollars, alleging that they profited even as the company began to fail.
The $2.7 billion financial services conglomerate filed for bankruptcy last year amid accounting problems and federal investigations. Now under new management, the company is duty-bound to pursue every possible cash recovery for creditors, says Maggie Lyons, acting CEO of Metropolitan.
Part of the company’s strategy could be to “unwind” $6.7 million in special stock redemptions, dividends and salaries paid to the Sandifurs, according to a draft plan of reorganization filed in U.S. Bankruptcy Court.
To make it stick, Metropolitan would need to show that the company was insolvent years before it filed for bankruptcy protection or that the money transfers were outside the normal course of business, said Barry Davidson, a bankruptcy attorney who’s been hired by Metropolitan to weigh that course of action.
It would be a difficult task, he acknowledged. If successful, the company could then set its sights on $4 million in payments made to Paul Sandifur. That figure includes $2.07 million in salary and bonuses paid between 2000 and 2003, an amount creditors say is exorbitant and unwarranted considering the company was mismanaged, according to a Bankruptcy Court examination.
More troubling, said Davidson, is the $1.93 million awarded Sandifur in stock dividends from Metropolitan and its sister company in Idaho, National Summit Corp., parent company of Summit Securities.
“An insolvent company has no right to pay dividends or redeem stock,” Davidson said.
Under that premise, Metropolitan also will consider going after Helen Sandifur for about $2.29 million.
The Sandifurs separated in 1994 and Paul Sandifur eventually petitioned for divorce. In May 2000, Helen Sandifur accused him of grossly underpaying himself to reduce the amount of his assets that would be subject to Washington’s community property provisions, according to divorce records.
In 2002 the couple signed a separation and property settlement that resolved most of the financial disagreements. The divorce wasn’t final until Feb. 17, 2004.
The settlement divided up the couple’s property and declared Helen Sandifur owned 382 shares of National Summit, which she redeemed in 2002 for $2.07 million.
The agreement also provided Helen Sandifur with a $55,000-a-year salary, basically an exchange for a lifetime promise not to compete with Metropolitan.
Lyons, at Metropolitan, said the company paid the salary for four years and preserves the right to pursue a claim to have the $220,000 repaid.
Helen Sandifur, through her attorney Gene Hamilton, said she had not heard of the potential claims.
Hamilton, who reviewed several pages outlining Metropolitan’s assertion that money may be owed, said he didn’t want to respond other than to say that the company has a heavy burden to show anything wrong with Helen Sandifur’s divorce settlement.
Paul Sandifur’s attorney couldn’t be reached for comment. Sandifur has reportedly moved away from Spokane.
Metropolitan also plans to challenge $870,000 paid to Paul Sandifur and two siblings.
Of that, $275,000 was paid to a trust in common-stock dividends. Another $495,000 was paid to Sandifur’s brother, William Sandifur, for redeeming preferred shares in the year 2000. And the company also will scrutinize the $100,000 paid to Sandifur’s sister, Sara Quinn, for her sale of preferred stock back to the company.
Another potential source of recovery for creditors promises to be more controversial.
The company may go after all dividends paid on preferred stocks during the past four years.
That action would pit against each other two classes of investors: the company’s debenture-bond holders versus the preferred stockholders. In many cases, investors owned both kinds of securities.
If such a case matures, it would be another blow to preferred stockholders, whose equity investments already have been rendered worthless in the bankruptcy proceedings.
Lyons said Metropolitan has an obligation to creditors to aggressively pursue all potential recoveries, and that could include the more than $28.3 million paid to Metropolitan and Summit preferred stockholders from 2000 to 2003. From the year 2000 through June 2003, Metropolitan paid preferred stock dividends of $19.3 million. During the same time, Summit paid preferred stock dividends totaling $9 million.
Davidson cautioned that Met doesn’t want to alarm investors as it considers whether to reach back in time to collect money. But it has to ensure that money was properly transferred.
“(Preferred stockholders) purchased these securities as an investment instrument which has risks associated with it,” he said. “Those risks include a loss of value if the company can’t maintain its solvency.”
Often, such recovery claims are resolved in what are called adversary proceedings – basically lawsuits within the larger bankruptcy case. Such actions are not uncommon, and Davidson said state and federal laws establish how such claims may be pursued.
The claims would not represent the only recovery actions against Sandifur.
He is a defendant, along with other executives and board members, in a class-action lawsuit brought by investors in U.S. District Court in Spokane.
However, widespread investor concerns that Sandifur may have looted his company before it went bankrupt appear to be unfounded, said P.J. Grabicki, attorney for the creditors’ committee.
Thorough investigations by forensic accounting experts, a special court-appointed examiner, and reviews by attorneys in the case have not uncovered the sort of executive thievery that marked the bankruptcies of WorldCom and Enron, for example.
“That inquiry will continue” Grabicki said, “but it appears unlikely that we will discover such evidence.”