That was the eye-popping prediction by the business consultant now running Sunwest, the Salem-based operator of senior housing facilities accused of fraud by the U.S. Securities and Exchange Commission.
News of the legal fees has generated howls of protest from some Sunwest investors, who fear that the odds of recovering the nearly $400 million they poured into the company decline with each additional dollar paid to litigate.
More importantly, it puts additional financial pressure on Sunwest, which is responsible for the housing, care and feeding of thousands of elderly and vulnerable residents of their retirement communities.
The company has routinely failed to pay its bills.
"After 18 months to two years of this level of professional fees, I'm just afraid that nothing is going to be left," said Gary Grenley, a Portland attorney representing some investors.
Clyde Hamstreet, the Portland consultant appointed last fall to lead Sunwest, said his $90 million prediction is a worst-case scenario.
"If we want to continue to fight and screw around, this is what it is going to cost us," he said. "It's a big number. It's not a necessary number. I'm optimistic that we could bring it in for 40 percent of that. There's a lot of pressure from the judges to get things moving."
In fairness to the lawyers, the case is hugely complex, involving hundreds of Sunwest affiliate companies, multiple state and federal agencies, an estimated 2,000 investors and 115 lenders owed $2 billion.
But Lynn LoPucki, a professor at the UCLA School of Law who has studied legal costs of corporate bankruptcies, said $90 million is "very high" for a company the size of Sunwest.
"That's 5 percent of the total assets," LoPucki said. "It should be closer to 1 to 2 percent."
The company's legal woes began last spring when the tightening credit market plunged Sunwest into a cash-flow crisis. Sunwest began to put individual retirement facilities, each owned by a separate company, into bankruptcy to fend off lenders' foreclosure efforts.
Sunwest affiliates stopped making promised monthly interest payments to investors last summer, which drew a number of lawsuits. In December, Sunwest's controversial CEO Jon Harder resigned and filed personal Chapter 11 bankruptcy.
The SEC entered the fray March 2, accusing Sunwest and Harder of defrauding investors.
At each step, more lawyers got involved.
Looming in the background is the specter of criminal charges against Sunwest executives. Some have hired civil and criminal defense lawyers.
The company and individual executives have hired 31 law firms so far. Sunwest's professional fees topped $2 million in March alone and have averaged nearly $1.8 million the past four months.
Even the company's 115 lenders can incorporate their legal costs into the debt they're owed by Sunwest affiliates, though it's unclear to what extent the court will allow the banks to do so.
Hamstreet's job at this point is to stabilize Sunwest and prevent it from disintegrating under the pressure of the legal battle. He is developing a plan to sell the poorer-performing assisted-living facilities and keep hold of the stronger operations.
Hamstreet is convinced that if he's given sufficient time to stabilize the company, he could generate $400 million to $600 million more than in a fire-sale liquidation.
The SEC and court-appointed receiver Michael Grassmueck back Hamstreet, as does a key committee of investors to which Hamstreet reports. They say Hamstreet's plan has merit and is the most fair to the investors.
But many aren't convinced.
Some lenders simply want to foreclose on the properties put up as collateral for their loans. Sunwest lawyers, with the help of the SEC, have managed to keep the lenders at bay.
"In order for the company to survive, the reorganization plan needs time," said Steve English, a Portland attorney representing Harder. "Some of the lenders were unwilling to give us that time. That's why we sought protection from the court."
The investors are split. Some back Hamstreet. But others, particularly those who put money in the more profitable assisted-living centers, are pushing to take control of their facilities and leave Sunwest behind.
"The only hope for most of these senior living facilities is to allow those that can to escape the quicksand engulfing this organization," Grenley said in an April 20 brief.
Fueling the general discontent is what Grenley called "sweetheart deals" Hamstreet cut with Harder and the other two senior executives at Sunwest, Darryl Fisher and J. Wallace Gutzler.
Hamstreet has agreed to pay monthly allowances of $22,000 to Harder, $10,000 to Fisher and $5,000 to Gutzler. That's in addition to the salaries Sunwest continues to pay to Fisher, Gutzler and Harder's wife, plus their legal fees.
The SEC objected to the Harder deal last month, noting that one reason it sued Sunwest and Harder in March was after learning of an earlier agreement to pay Harder $54,000 a month.
"It is particularly galling that Harder has secured an agreement for these payments when investors -- the victims of his fraud -- saw their payments of monthly rent owed to them stop in July 2008," the SEC said.
Some investors have wondered why Harder remains involved in any capacity. But Mark Fickes, the SEC's lead attorney in the case, said Harder's unique knowledge of the complex Sunwest structure gives him an ongoing role.
"Unlike a pure Ponzi scheme, Sunwest is a legitimate business," Fickes said. "I don't think it started out as a fraud. I think that's what it became as money got tight."
Lawyers investigate lawyers
While Sunwest Management's collapse has been a gravy train for some law firms, it might be a problem for others.
Court-appointed receiver Michael Grassmueck has requested copies of documents from four law firms in Portland that did legal work for Sunwest, what he says is the first step in analyzing potential legal claims.
The firm drawing the most attention is Davis Wright Tremaine, which worked with Sunwest preparing offering memoranda and other documents used to raise nearly $400 million from about 2,000 investors. The receiver also requested files from KL Gates, Thompson & Knight and Lane Powell.
Pursuing claims against professional firms connected to a company accused of improper activity is a well-trod path for victims of failed investment schemes. Tapping into professional firms' liability insurance is often one of the few ways to recover money.
"The firm believes that it advised its clients appropriately," said Joe Arellano, a Portland attorney representing Davis Wright. "What we're seeing is the inevitable rounding up of all the usual suspects, to try to get a large pot for recovery."
Grassmueck has hired forensic accountants to analyze Sunwest's files and its relationships with third-party brokers, lenders, broker-dealers and others.
Sunwest continued to raise money from investors as late as June 2008 and failed to disclose the depths of its financial problems, allege investors, who stopped getting promised monthly interest payments from Sunwest in July.
Davis Wright has been sued twice by Sunwest investors. A similar suit has been filed against KL Gates.
Grassmueck said in his first interim report that Davis Wright has been "dilatory and creative in erecting hurdles to the receiver's access to client files." Where other firms have voluntarily produced files, Davis Wright said it needed clarification from the court before it would do so. The firm also said it would charge the receiver $250,000 in copying fees, Grassmueck said.
-- Jeff Manning; jmanning@news.oregonian.com
Link to Source:
http://www.oregonlive.com/business/index.ssf/2009/05/sunwest_investors_angered_by_2.html
rhttp://www.oregonlive.com/business/index.ssf/2009/05/sunwest_investors_angered_by_2.html
Check Out www.ObsidianFinanceSucks.com for more on the Oregon Bankruptcy Courts.
r
