Originally published by Steve Green, Vegas Inc.
Monday, May 14, 2012 – 2 a.m.
Creditors in the Rhodes Homes bankruptcy case in Las Vegas are suing company founder Jim Rhodes in hopes of seizing his valuable land holdings near Red Rock and recovering hundreds of millions of dollars in losses.
The creditors claim in a lawsuit-like adversary complaint filed Friday in U.S. Bankruptcy Court that before putting his Rhodes Homes home-building empire into bankruptcy in 2009, Jim Rhodes harmed them by:
• Encumbering Rhodes Homes with too much debt, causing it to fail.
• Stripping it of assets in part by creating competing homebuilder Harmony Homes.
• Diverting to his non-bankrupt companies key land holdings along with $132 million in cash involving “misappropriations” and “wrongful transfers.”
Jim Rhodes’ attorneys issued a statement in which Rhodes denied wrongdoing and vowed to fight the charges.
The attorneys at the law office of Fabian & Clendenin P.C. said the “assertions made are a rehash of claims and allegations that have been floating around for years.”
They said the key loan at issue, a $500 million credit agreement arranged by Credit Suisse, was a non-recourse loan, meaning Jim Rhodes signed it with the understanding he wasn’t personally liable for repayment.
“Now, many years after the market crashed, the lenders are attempting, through litigation, to have Jim Rhodes guarantee the loan,” the statement sad.
“I don’t see how transactions that were disclosed to lenders and openly provided for in the credit agreement can be claimed to be fraudulent,” Jim Rhodes said in the statement.
“Any money taken out of the company was done when it was extremely healthy. The transactions were approved by the lenders, allowed for under the credit agreement and appropriately recorded – and taxed – as permitted distributions,” the law firm’s statement said. “Mr. Rhodes is looking forward to the opportunity to vindicate these business dealings.”
Jim Rhodes has said Rhodes Homes was forced into bankruptcy not by wrongdoing, but by the recession.
Even after taking over two of the old Rhodes Homes developments, Rhodes Ranch in Las Vegas and Tuscany Village in Henderson, as part of the bankruptcy, the creditors say their losses in the Rhodes Homes bankruptcy total some $317 million.
Friday’s complaint is part of their effort to recover some or all of their losses.
Rhodes Ranch and Tuscany are now owned by Dallas home builder Dunhill Homes.
The creditors are represented by the Litigation Trust of the Rhodes Companies LLC, which was created as part of the Rhodes Homes bankruptcy reorganization plan.
The land the creditors want to seize is held by Rhodes’ company Gypsum Resources LLC, which has proposed a controversial, large home building project on Blue Diamond Hill near the Red Rock National Conservation Area.
Besides the home-building plan, mining has been under way at the site.
The creditors say their loans to Rhodes should have encumbered the Gypsum Resources property consisting of 2,656 acres, but that Rhodes held on to it through the bankruptcy process with techniques including “improper commingling” of assets and liabilities and “sham accounting.”
Their complaint seeks cancellation of a deal transferring Gypsum Resources out of the Rhodes Home umbrella. Cancellation of the transfer could put Gypsum Resources under the control of the bankruptcy court along with the rest of the bankrupt Rhodes Homes entities.
“As a result of the various breaches of fiduciary duties, fraudulent transfers, and other misconduct, James Rhodes and his (non-bankrupt) affiliates misappropriated many valuable assets, including substantial land holdings such as the former gypsum mine on Blue Diamond Hill overlooking Red Rock National Conservation Area near Las Vegas,” Friday’s complaint says.
“Rhodes entities such as Gypsum Resources were thereby enabled to hold valuable parcels such as the Blue Diamond property free and clear of any encumbrances, while the debtors were burdened with crippling debt,” the complaint says.
As for Harmony Homes, the creditors say it was created by Rhodes even as his Rhodes Homes company was heading towards bankruptcy.
“By early 2008, the (Rhodes Homes) debtors were insolvent. But rather than file for bankruptcy protection, James Rhodes wrongfully prolonged the debtors’ operations outside of bankruptcy in order to divert debtor resources for the purpose of launching Harmony Homes as a profitable, new home-building company,” the creditors’ complaint says.
They claim that in late 2005, Jim Rhodes and his affiliates that ultimately did not file for bankruptcy “crippled” Rhodes Homes by entering into the new $500 million Credit Suisse credit facility.
Of the $500 million, $132 million was obtained for Rhodes and his affiliates that ultimately were not involved in the bankruptcy case, the creditors say.
After some of the remaining proceeds were used to refinance debt benefiting the non-bankrupt Rhodes’ entities, Rhodes Homes was left with just $93 million for its benefit, the creditors claim.
Yet Rhodes Homes, the entity that ultimately wound up in bankruptcy, was on the hook for principal and interest payments for the entire $500 million loan, the creditors say.
Those payments amounted to $75 million per year – far more than the company could afford to pay, the complaint says.
But Jim Rhodes’ attorneys, in their statement, said: “The transactions at issue go back long before anyone was anticipating the collapse of the Las Vegas real estate market.”
“The banks and real estate lenders represented by the Texas law firm (Diamond McCarthy LLP of Dallas) that filed the complaint bet on the Las Vegas real estate market – and lost,” the statement said. “Now they want Jim Rhodes personally and several companies he has been involved with or has done business with (including Harmony Homes) to make them whole. Essentially, they are trying to change the terms of the deal.”
Adversary complaints like the one filed Friday in big bankruptcy cases are not unusual – and they’re often extensively litigated.