19920220a Ht Trustee 2nd Interim Report
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- Words: 15,876
- Pages: 59
•
• • 1
FELDMAN, WALDMAN & KLINE
A Professional Corporation
•
2
PATRICIA S. MAR
)
L. J. CHRIS MARTINIAX 2700 Russ Building
4 5
• •
6
235 Montgomery street San Francisco, CA 94104 Telephone: (415) 981-1300 Attorneys for Frederick S. Wyle,
Trustee
7
s
UNITED STATES BANKRUPTCY COURT
9
NORTHERN DISTRICT OF CALIFORNIA
10 11
In re
)
13
) )
14
•
)
12
15
HAMILTON TAFT & COMPANY KNIGHTSBRIDGE COMPANIES, INC. THE REMINGTON COMPANIES, INC. DRESDNER PETROLEUM, INC. DRESDNER ENTERPRISES, INC.
16
Debtors. 17
Chapter 11 Substantively Consolidated or Jointly Administered
) )
No. 91-3-1077 LK No . 91- 3 - '2 4 4 8 LK
) ) ) ) )
No. 91-3-2449 LK No. 91-)-2450 LK No. 9l-3-2451 LK
------------------------_______ l
IS
•
•
19 20
SECOND INTERIK REPORT OF FREOERICR S. WYLE, TRUSTEE
21
February 20, 1992
22 23 24
• •
25 26
•
• •
1
2
•
• •
3
4
I.
INTRODUCTION AND SCOPE OF THIS REPORT ......•..•.....•. 1
5
II.
STATUS OF THE BANKRUPTCY CASES .............•.•........ 2
6
A.
7
B.
8
c.
The Texas Debtors and Substantive Consolidation .................................... 3
o.
by Hamilton Taft. as Debtor .............. 6
9
10
III.
11
A. B.
IV. 14
V.
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6
B.
Dresdner Petro leum ...•.......................... 12
Es ta t e
&
II-
..
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..
4
If>
'"
..
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.........
~
II
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,
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10
RECOVERY AND LIQUIDATION OF ASSETS ......••......••... 12
17
PhysicQl Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1. __ Double C Cattle Ranch • • • • . . . . . . • . • . . . • . . . . . 13
19 2.
Seventh
Sonterr a ...••.....•••••••.•••••. 16
20
Meadows and Glade
:3 • 11
10
..............
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III
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.........
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1B
22
4.
Oil and Gas Leases ......................... 18
23
s.
Luxury Automobiles ....................... , .19
24
B.
Promissory Notes and Guarantees ................. 20 Mohamed
25 26
2•
d .••.•..•••••••••••••••••.•••.• 2Q
Stanley Rosenberg ....... , ...... __ .......... 22
-i-
•
...............
Texas Debtors . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . • . . . • . S
21
•
.....
Consol
A.
•
if
A.
1S
•
Ta f t ....
FINANCIAL CONDITION OF THE ESTATES . . . . . . . . . . . . . . . '" .10
15
•
of
STATUS OF OPERATIONS .......•...............•....•..... 6
1.2
16
Entry of order for Relief . . . . • . . . . . . . . . . . . . . . . . . . 2
•
• • c.
2
• •
Parker Automot i ve ................ , ......... 23
J.
1
Other
Parties .....•.....•.. 26
Against Thi
1 Fees. _ •
Criminal Defense
3
It
"
,.
4
•
•
II>
......
,2
I
,
6
4
2.
McCall Notes .•.....••••..•.•••....••....... 27
5
3.
Potential To Be Investigated ..•...•..•.....•...........•... 29
6
D.
Assets
ll·in Armstrong's Possession •••....... 31
7
Interests .....................•...... ) 1 8
•
2.
Texas Stadium Box .................•....•... 32
J.
Coffea Internet
9
1 ....................... J 3
10
Plaza
Note .......................... 33
11
5.
Personal Possessions ...•................... 35
12
VI.
LITIGATION AGAINST ARMSTRONG ................••....... 35
13
A.
Analysis of Armstrong's Personal ial Transactions .......................... 35
B.
status of
14
•
c.
16 17
1.
•
• •
••••••...••• 4 1
TROs and
••
"
.....
6
.....
41
contempt Proceedings ......•................ 43 D.
19 ;20
............. 40
unctions and Contempt
18
•
Settl~ment
tion and
VIr.
Cr
1
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A
..
),
II'
....
Q
Q
II
10
....
"
"
~
..........
".
..
110
...
44
OTHER CLAIMS AND LITIGATION •.•..••...........•....... 45
21
A.
22
B.
Preference
23
c.
Sandia Refund .•...........................•..... 47
24
D.
Ta'lt Pena
25
E.
other Potential CIa
Bonds ..
II'
..
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....
44
es ..
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....
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............
26
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. · . ····· ........ ~ ..... 46
................
......................
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49
50
c
• • 1
•
A.
Claims Against Consolidated Estate .............. 51
3
B.
Claims Against Dresdner Petroleum . . . . . . . . . . . . . . . 52
c.
steven Solodoff Claim ........................... 52
IX.
CONCLUSION AND FUTURE ACTIVITIES ............•.•... . .. 54
6 7 B
•
CRED ITORS CLAIMS ANALY SIS .•.......•........ . ......... 50
:2
5
•
VIII .
•
APPENDICES
APPENDIX A:
STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS FOR THE DEBTORS AS OF DECEMBER 31, 1991
APPENDIX B:
ACCOUNTANT'S REPORT ON SOURCE AND APPLICATION OF FUNDS FOR CONNIE C. ARMSTRONG, JR. JANUARY 1, 1989 - JULY 15, 1991
APPENDIX C:
CREDITORS CLAIMS
9
10 11
12 13 14
15
•
16 17
18
•
19 20 21
•
22 23 24
•
25
26
-iii-
•
•
• • 1
1.
2
• • •
3
On May 28, 1991, Frederick
• • •
Wyle, trustee of Hamilton
Taft & company ("Hamilton Taft"), filed a First Interim Report.
5
At that time the Hamilton Taft bankruptcy case was two months old.
6
The report focused on the background and business of Hamilton
7
Taft, the diversions of Hamilton Taft funds from customers'
8
payroll
9
principal, Connie
ta~
deposits to the Texas enterprises of Hamilton Taft's
c.
Armstrong, Jr., the resulting $90'million in
10
unpaid payroll tax liabilities, and the preliminary analysis of
11
the trustee's accountant as to how Armstrong used over $50 million
12
of Hamilton Taft funds for his other business ventures and for
13
personal expenditures. At the time of the filing of the First Interim Report,
15
only Hamilton Taft was under the control of the trustee.
16
Second Interim Report .is filed by Frederick S. Wyle as trustee not
17
only of Hamilton Taft, but also of Knightsbridge Companies, Inc.
1a
(
19
Dresdner Petroleum
20
Inc.
21
substantively consolidated or jointly administered with the
22
Ha~ilton
23
information on the status of the bankruptcy cases, the trustee's
24
efforts to recover and liquidate assets, the multi-faceted
2S
litigation that has been undertaken to pursue claims from various
26
parties, and the financial status of the estates.
\I
Kn ightsbr idge "), The Remington Compani as, Inc. I
(OIEnterprises ll )
Taft case.
Inc.
This
( tI Remi ngton") ,
( II Petro leum" ) and Dresdner Enterprises I
whose bankruptcy cases are now either
I
The Second Interim Report will provide
SECOND INTERIM REPORT
•
s.
4
14
•
INTRODUCTION AND SCOPE OF THIS REPORT
-1-
•
• •
• •
•
1
This Second Interim Report will also contain an analysis
2
by the trustee's accountant of the personal financial transactions
3
of Connie c. Armstrong, Jr., from January 1, 1989 to June 15,
4
1991, which includes the period that he was in control of Eamilton
5
Taft.
6
not have access to any of the personal financial records of
7
Armstrong, which had been withheld on Fifth Amendment grounds.
s
certain financial records of Armstrong have now been made
9
available to the trustee, which enables the trustee and his
10
accountants to trace the disposition of Hamilton Taft funds
11
through Armstrong
At the time of the First Interim Report, the trustee did
•
13
bankruptcy case, much of the focus of the trustee's attention was
14
on learning what Armstrong did with Hamilton Taft's money and on
15
recovering assets under Armstrong's control that had been acquired
16
with Hamilton Taft's money.
17
been completed, by the end of 1991 the focus of the bankruptcy
18
case had expanded to pursuing claims against other parties, and to
19
realizing on assets that have already been
20
Armstrong.
21
• •
II.
Although that program has not yet
~ecovered
from
STATUS OF THE BANKRUPTCY CASES Entry of order for Relief
22
A.
23
On May 31, 1991, the Bankruptcy Court issued an order
24
for relief in the Hamilton Taft bankruptcy case, which was
25
commenced through the filing of an involuntary Chapter 11 petition
26
on March 20, 1991.
In granting a motion for summary judgment
SECOND INTERIM REPORT
•
as well as through his corporations.
During the first few months of the Hamilton Taft
12
•
perso~ally,
-2-
•
• •
• •
•
•
• • •
•
1
filed by the petitioning creditors, Federal Express Corporation,
2
Stanford university and stanford University Hospital, the
J
Bankruptcy Court rejected the arguments of Hamilton Taft as Debtor
4
that a "bona fide" dispute existed as to the petitioning
5
creditors' claims against Hamilton Taft.
6
B.
Appointment of Creditors committee
7
After the order for relief was entered, the Office of
8
the U.S. Trustee appointed a-Committee of Unsecured Creditors
9
("Creditors cOI1'l1llittee") consisting of the following 11 creditors:
10
Federal Express Corporation (chair), Scott Paper Co.; Signetic5
11
company, R.R. Donnelley & Sons, Castle & Cook (now Dole Foods),
12
Stanford university Hospital, Neiman-Marcus Group, Tandem
13
computers, Advo-System, Inc., Covia Partnership, and Blue Cross
14
and Blue Shield of Texas.
15
collectively hold claims of approximately $67 million against
16
Hamilton Taft, or about two-thirds of the total claims.
17
Creditors Committee has employed Murphy. weir and Butler of San
1S
Francisco as its counsel.
The members of the Creditors Committee
The
19
C.
The Texas Debtors and Substantive Consolidation
20
The bankruptcy cases of Knightsbridge, Remington,
21
Enterprises and Petroleum (sometimes collectively referred to as
22
the IITe:l{as Oebtorsll), 'were commenced by voluntary Chapter 11
23
petitions filed in the Bankruptcy Court for the Northern District
24
of Texas, Dallas Division, on April 19 and 29, 1991.
25
1991, on motion of the trustee, the Bankruptcy Court in San
26
Francisco ordered the bankruptcy cases of the Texas Debtors
SECOND INTERIM REPORT
-J-
On June 7,
I
•
~
I
• • I .
•
•
•
•
• •
•
1
transferred to the Northern District of california, pursuant to
2
Bankruptcy Rule l014(b), which provides that bankruptcy cases of
3
affiliated entities may be transferred to a single court. Following the change of venue of the Texas cases, the
4
5
trustee on June 26, 1991 filed a motion for substantive
6
consolidation of the Knightsbridge and Remington cases with the
7
Hamilton Taft case.
B
means of recovering for the Hamilton Taft estate the assets which
9
had been transferred from, or acquired with funds transferred
This appeared to be the most expeditious
10
from, Hamilton Taft to the Texas Debtors.
11
a showing that all of the assets of the Texas Debtors were
12
traceable to Hamilton Taft funds, and their liabilities were
13
primarily intercompany payables, which ultimately ended up as
14
payables to Hamilton Taft.
15
stock of the other
16
well as other SUbsidiary entities.
17
consolidation of Knightsbridge and Remington with Hamilton Taft
18
would enable the trustee of Hamilton Taft to control not only the
19
entities being consolidated, but all of their subsidiaries as
20
well.
21
11 trustee for all four Texas Debtors.
Te~as
The motion was based on
Knightsbridge and Remington owned the
Debtors, Enterprises and Petroleum, as Therefore, substantive
Alternatively, the trustee sought appointment of a Chapter
22
On July 22, 1991, the Court, with the consent of the
2)
Texas Debtors, ordered the intermediate step of appointment of
24
Frederick S. Wyle as interim trustee of Knightsbridge, Remington,
25
Petroleum and Enterprises.
26
request of the Creditors Committee, so that a claims bar date
SECOND INTERIM REPORT
I
The intermediate step was taken at thel
-4-
I
I
•
•
•
•
1
could be established and claims reviewed before a substantive
2
consolidation decision was made.
l
as a claims har date for all five Debtors, Hamilton Taft as well
4
as the Texas Debtors.
The Court set september 30, 1991
(See section VIII.) /
The trustee subsequently amended the substantive
5
• •
6
consolidation motion to include Enterprises in the consolidation.
7
Petroleum was not included in the consolidation, because the oil
B
and gas operations of Petroleum contain at least some inherent
9
risks of liability such that consolidation of Petroleum's assets
10
and liabilities with those-of the other Debtors would not be
11
prudent. On November 4, 1991, the Court ordered substantive
12
13
consolidation of the Hamilton Taft, Knightsbridge, Remington, and
14
Enterprises estates, effective October 31, 1991.
The
15- consolidation was not opposed by any party, including any of the
• •
•
Frederick 5. Wyle was appointed trustee of the
16
Debtors.
17
consolidated estate, and his appointment as trustee of Petroleum
18
was made permanent.
19
As a result of substantive consolidation, all assets and
20
liabilities of the four consolidated Debtors were combined and are
21
now treated as if the Debtors were a single entity.
22
assets and liabilities remain separate, but its bankruptcy case is
23
jointly administered with that ot the consolidated estate.
Petroleum IS
The
24 ' trustee believes that substantive consolidation has resulted in
•
25
significant savings to the consolidated estate in administrative
26
costs, as well as substantial savings in litigation costs that
SECOND INTERIM REPORT
•
-5-
•
• •
• • •
1
otherwise
2
Te~as
~ould
have been required to obtain the assets of the
entities. Appeals by Hamiltpn Taft. as Debtor
3
D.
4
Hamilton Taft, as Debtor, filed appeals to the District
5
Court from the order appointing a trustee entered on March 26,
6
1991, from the order approving the appointment of Frederick S.
7
Wyle as trustee entered on March 26, 1991 1 from the order for
8
relief entered on May ll, 1991, and from the order- authorizing the
9
trustee to shut down Hamilton Taft's business entered on June 21,
10
1991.
The appeals were all assigned to Judge John P. Vukasin of
11
the District Court. On February 13, 1992, the District Court dismissed all
12
I
•
13
the appeals as moot, on motion of the appellees (Federal Express,
14
Stanford University and Stanford university Hospital as to three
15
of the appeals and the trustee as to the fourth appeal).
16
District Court ruled that the Debtor's failure to seek a stay of
17
the orders and the sUbstantial changes of circumstances that had
The
18 I_occurred in the bankruptcy case since the orders were entered made
•
• •
19
it inequitable to consider the appeals.
20
to be acting on authority of Armstrong as "Chairman of the Board"
21
of Hamilton Taft, has indicated that it plans to appeal the
22
dismissals to the Ninth circuit.
23
III.
STATUS OF OPERATIONS
24
A.
25
Following a hearing on ---May 16,-:.--1991, ... ...-'. the Bankruptcy
26
Hamilton Taft -~
~
Court authoriz~d the trustee to close Hamilton Taft's business
SECOND INTERIM REPORT
•
The Debtor, which claims
-6-
•
•
•
• •
•
• •
• •
Hamilton Taft had not conducted any significant
1
operations.
:2
payroll ta)( processing business since the public disclosure of the
3
missing funds, the consequent abrupt cessation of funds
.4
transferred to Hal'lilton Taft by its customers, and the filing of
5
the Chapter 11 petition on March 2O, 1991.
6
authority to close the business
7
clients and ascertaining that few clients would continue a
8
business relationship with Hamilton Taft even under the
9
supervision of a court-appointed trustee.
10
canvassing the Hamilton Taft
After the Court approval was obtained, the trustee
11
commenced an orderly shutdown of Hamilton Taft's operations which
12
took place over the next several months.
1J
operations and terminated employees progressively, at a rate that
14
would permit the processing of client records, establish what
15
deposits were made and what taxes were paid and not paid, respond
16
to inquiries from
17
enable them to be retrieved as needed, secure-computer records,
IB
and dispose of tangible assets of the company.
ta~
The trustee ceased
agencies, organize and store records tD
Hamilton Taft closed its 1 Market Plaza, San Francisco
19 20
offices on June 30, 1991. and moved its remaining staff to smaller
21
offices.
22
tangible assets of Hamilton Taft were sold at auction on
23
August 17, 1991.
24
office staff of three full-time employees in San Francisco, for
25
accounting purposes, to perform data studies, to monitor
26
activities in Texas, and to provide support services for the
Most of the office equipment, furniture and other
At present Hamilton Taft maintains a small
SECOND INTERIM REPORT
•
afte~
The trustee requested
-7-
- -,
['.."
•
• • -1 2
• •
•
• •
• • •
bankruptcy case and litigation. maintained in Texas
j
Four additional employees are
three of them at the Double C Ranch.
Texas Debtors
)
8.
4
At the time of the trustee's interim appointment on
5
July 22, 1991, Remington maintained a large suite of offices with
6
some 16 employees at 3Bl1 Turtle Creek Boulevard in Dallas.
7
Remington provided administrative, accounting and payroll services
8
for all of the Armstrong entities in Texas.
9
infusion of Hamilton Taft money to pay its operating costs,
Without the continued
10
Remington was running out of money and unable to pay even its
11
Chapter 11 trade debts.
12
Remington had not paid its rent or insurance premiums
13
since the filing of its Chapter 11 petition in April, 1991 , and
14
was under a Bankruptcy Court order, obtained by the landlord, to
15
vacate its offices by July 31, 1991.
16
relocating the offices.
17
appointment/ new offices had to be found and a move of Remington's
18
offices arranged and completed.
19
No plans had been made for
Within one week after the trustee's
The trustee within days of his appointment reduced the
20
Remington payroll trom 16 to 10, and further staff reductions took
21
place over the next three months.
22
and the other Texas Debtors did not have, and had not had,
23
operations requiring the level of staff and administrative
24
expenses that Remington had maintained.
25
conducted by the Texas Debtors was Enterprises' efforts to sell
26
SECOND INTERIM REPORT
-8-
It was apparent that Remington
The only ongoing activity
•
•
•
•
• •
•
1
townhouses in San Antonio (see section V.A.2) and Petroleum's
2
unprofitable oil and gas operations {See Section V.A.4).
3
•
• •
a~
be more economically managed by
s
that Enterprises required" only one employee on site in San
6
Antonioi and that the rest of Remington's administrative and
7
accounting services could be combined with that of Hamilton Taft
B
in San Francisco, thereby eliminating the need for a Dallas office
9
and achieving substantial savings.
10
On October 31, 1991,
Remington's offices in Dallas were closed. Remington's office equipment, furniture and furnishings
12
have been sold or moved to the Double C Ranch,
13
over by the trustee on August 1, 1991.
14
files have been, or will be, moved to San Francisco.
15
the VOluminous files and records located at Remington's offices
16
and at a storage facility has taken and continues to take
17
substantial effort.
18
over which records belonged to Armstrong personally or Armstrong
19
entities not under the control of the trustee.
~hich
was taken
Remington's records and Sorting out
It also required negotiations with Armstrong
20
Records retained by Armstrong have been made available
21
to the trustee for copying, except for documents which have been
22
withheld by Armstrongls criminal defense counsel as subject to a
23
Fifth Amendment or attorney-client privilege.
24
seeking to work out with Armstrong's counsel any remaining
25
disputes over documents claimed to be privileged.
25
•
outside management companYi
4
11
•
The trustee determined that Petroleumls operations could
SECOND INTERIM REPORT
-9-
The trustee is
Any unresolved
•
• •
1 \ disputes will be sUbmitted to the Bankruptcy Court for resolution 2
• • •
3
pursuant to an order previously obtained by the
IV.
•
• •
•
FINANC!AL CONDITION OF THE ESTATES
4
A.
5
Appendi~
Consolidated Estate A contains schedules of the postpetition
6
receipts and disbursements of the Debtors in the consolidated
7
estate, i.e., Hamilton Taft, Knightsbridge, Remington and
8
Enterprises, as of December 31, 1991.
9
also been prepared for receipts and disbursements during the
Separate schedules have
10
period of the trustee's administration, which commenced on,
11
July 22, 1991 for the Texas Debtors.
12
•
truste~.
The postpetition revenue of the Debtors comprising the
13
consolidated estate totalled S2,193,513, as of December 31, 1991.
14
For the period of the trusteels administration, total revenues
15
were $2,097,101.
16
a townhouse by Enterprises prior to the trustee's appointment.)
17
The major sources of postpetition receipts have been sales of
18
townhouses ($£51,438),
19
and luxury automobiles, office equipment, furniture and
20
furnishings ($342,048); a
21
defense counsel for recovery of legal fees ($400 / 000); and bank
22
account interest ($lB3,141).
23
activities prnducing them are provided in other sections of this
24
report.
25
26
(The difference is due primarily to the sale of
livestock at the Double C Ranch
settle~ent
($331,623),
with Armstrongls criminal
Details of these receipts and the
Postpetition disbursements by the
D~btors
comprising the
consolidated estate totalled $2,8J7,484, as of December 31, 1991.
SECOND lNTERIM REPORT
-10-
•
•
• •
•
&
• 1
Disbursements during the period of the trustee's administrai
2
totalled $2,699,129.
J
operating
4
appointment.)
5
were for operating expenses, including sUbstantial employee
6
salaries, primarily for Hamilton Taft operations in the early
7
stages of the bankruptcy case before the trustee closed the
B
Hamilton Taft business.
9
substantial continuing costs of the Double C Ranch since August 1,
e~penses
(The difference is due primarily to
paid by Remington prior to the trustee's
Of the total postpetition disbursements l
$1,357,741
The operating expenses include the
1991, when the trustee took over the ranch.
10
11
Professional fees of the trustee and his attorneys and
1-\,6
12
accountants account for Sl, oao, 891 of the post-petition
13
disbursements.
14
appraisers and consultants employed by the trustee, and attorneys
Additional professional fees were paid to
15' employed by the Creditors committee and the Texas Debtors.
•
16 17
• • •
professional fees do not include fees accrued but not paid as of I
December 31, 1991.
18
The beginning cash balances for the Debtors in the
19
consolidated estate, at the commencement of their respective
20
bankruptcy cases, totalled $5,930,642, of which $5,856,509 was for
21
Hamilton Taft and $74,133 for Knightsbridge, Remington and
22
Enterprises combined.
23
by $643,971, the consolidated estate had a cash balance of
24
$5,288,401 as of December 31, 1991.
25
26
with total disbursements exceeding receipts
The trusteels goal is maintain a level of operating expenses (i.e., rent, employee salaries and other office expenses)
SECOND INTERIM REPORT
•
The
-11-
I'
&
•
•
• •
•
• •
for the consolidated estate,
2
be funded from current interest income.
3
however, include the professional fees and expenses, which will be
4
the primary Chapter
5
diminish the existing funds of the estate unless substantial new
6
rec.overies are had,
•
•
~l
Such expenses would not,
costs in the future, and which will in time
and sales are made.
7
B.
8
A summat:y of Petroleum's postpetition cash receipts and
9
Dresdner Petroleum
disbursements through December 31, 1991, is also contained in
The postpetition revenue from oil and gas production
10
Appendix A.
11
totalled $667,915 through December 31, 1991.
12
total cash receipts exceeded total disbursements by $22/136 for
13
the postpetition period, the cash receipts
14
advanced from Remington.
15
Petroleum had a negative cash flow from operations during the
16
postpetition pet:iod, through December 31, 1991.
17
Section V.A.4
1B
balance, as of December 31, 1991, was $47,159.
19
v.
belo~
i~clude
$60,000
Without the interc_'?.!lIQ..~~. Y_3~JtY"ance...
for current situation.)
RECOVERY AND
While Petroleum's
LI~UIDATION
h'P';'
i:J.,v~/f..J/
(However, see
Petroleum's cash
OF ASSETS
Through substantive consolidation, most of the assets
20
•
if possible, on a level which could
1
21
acquired by Armstrong and his companies with Hamilton Taft funds
22
have been recovered, to the extent that they are available to be
23
recovered.
24
substantial portion of the funds diverted from
25
spent for investments which became defunct within months of the
26
investments or for other reason have no realizable value,
As discussed in the First Interim Report,
SECOND INTERIM REPORT
-12-
a
~amilton
Taft were
for
(
•
•
•
• •
•
•
•
1
unrecoverable operating costs of Armstrong's Texas operations, and
2
for personal expenditures of Armstrong.
3
held by the Texas Debtors or their subsidiaries, the trustee has
4
also recovered the najor asset that had been held by Armstrong
5
personally I the Texas ranch.
6
control are discussed in section V.D below.)
7
•
(The assets remaining in Armstrong's
The assets that have been recovered are a collection of
8
physical assets which Armstrong bought with Hamilton Taft funds as
9
tlinvestments," and promissory notes and other contract rights against third parties.
11
assets are expected to require litigation to collect.
12
time, the trustee cannot provide any estimate of the amount that
13
will be realized from the assets Which have been turned over by
14
Armstrong or through the takeover of the Texas companies.
lS
will depend on the outcome of litigation against third parties to
16
whom Armstrong and the Armstrong entities transferred funds
17
through lIinvestments," loans and other advances, and on the
19
financial ability of these third parties to respond to judgments.
19
Most of the necessary litigation has been commenced and the
20
remainder will be commenced shortly.
21
third party liability continues.
22 23
A.
All
of
lO
24
•
In addition to the assets
the assets other than physical At this
Much
Investigation into potential
Physical Assets 1.
Double C Cattle Ranch
The single most expensive acquisition by Armstrong was a
25
1,700 acre ranch l which he called the "Double C Ranch."
26
purchased by Armstrong in February, 1990 as a "hobby ranch," by
SECOND INTERIM REPORT
-13-
It was
•
•
•
• •
•
• •
• •
1
Armstrong's own description, meaning a combination cattle and
2
horse operation and personal residence.
3
13,000 square feet in size, with indoor swimming pool, sauna, and
4
exercise facilities.
5
Hamilton Taft's funds on the ranch,
6
purchase price, $1.1 million for capital improvements,
7
tor livestock and equipment, and $1 million to fund operating
8
deficits of the cattle operation.
9
Armstrong spent over $9.3 million of including $6.5 million for the $600,000
To acquire the ranch, Armstrong had Hamilton Taft
10
advance $9.B million to Winthrop Realty Company ("Winthrop"), one
11
of his Texas companies.
12
the $9.8 million to Armstrong, who acquired the ranch
13
name.
14
the ranch.
15
Hamilton Taft, secured by a lien on Armstrong's note to Winthrop.
16
Winthrop,
in turn, simultaneously loaned
in his own
Armstrong gave Winthrop a note for $9.9 million,
secured by
Winthrop, in turn, executed a $9.8 million note to
In June, 1991, the trustee declared a default on
17
Winthrop's note ·to Hamilton Taft and foreclosed on the collateral,
IS
namely Armstrong's note to Winthrop.
19
note to winthrop, the trustee then commenced foreclosure
20
proceedings on the ranch, which secured the note.
21
foreclosure, Armstrong offered to transfer the ranch to the
22
trustee through a deed in lieu of foreclosure.
23
transferred the livestock on the ranch, consisting of
24
approximately 600 head of cattle and 2S horses collateraliZed to
25
Hamilton Taft, ranch equipment and vehicles and other personal
26
property associated with the ranch, and the ranch bank accounts.
SECOND INTERIM REPORT
•
The residence is over
-14-
As holder of the Armstrong
Facing
He also
•
•
• •
•
The
took
2
although
1e was not recorded until September.
4
substantial deficit, which was funded by Hamilton Taft money
5
funnelled through
6
Armstrong owned the ranch, the the hous
7
•
•
expenses for
IS
residence)
10
and horses over a several month per
11
after direct costs of sale, of $331,623
12
to seU ranch
and
U
me.
and furn
14
other structures will not be sold until the ranch is sold..
obtain
cles not needed for full
ing5 in the main residence and
16
year listing agreement with Town and
1'7
Texas, to serve as broker for the
18
the nature of the
for what
an exclusive one Estates of Center,
of the ranch.
Because of
and the economic conditions and
in Texas, the trustee cannot predict
real estate
19
net proceeds,
The trustee also intends
In December, 1991, the trustee
, the ranch
11 be sold.
The carrying costs of the ranch are estimated at
21
•
deficit of the ranch, not
After acquiring the ranch, the trustee sold the cattle
9
20
•
the IS-month period that
totalled over $1 million.
15
•
at a
The cattle operations on the ranch
3
S
•
session of the ranch effective August 1, 1991,
1
22
approximately $300,000 per year, of which
If is for
23
and property taxes and half for ma
costs.
24
maintenance of the ranch
25
essent
26
res
and improvements is costly. but
1 for the sale of the ranch.
In addition to the main
of more than 13,000 square feet, the ranch
SECOND INTERIM REPORT
-15-
•
• • 1
include a guest house with 3,4QO square feet, three foremen's each with three bedrooms, and a large lIstate of the
2
• • •
J
art" show horse arena, which also canta
4
saloon
5
as well as several
6
recruire maintenance.
7
considerably, three
s
and security purposes.
9
graz
10
Approximately 75,000 scruare feet of
•
•
lit
While the ranch staff has been reduced rema
at the ranch for maintenance
The trustee
to exchange
pa
the
also owned a 121 acre adjoining parcel, known
12
as the stiefer property, which he
13
in December, 1989 for $72,429 cash (from
14
a $181,912 note, secured by the property.
15
that the
ble value of the stiefer
16
balance
on the note
17
not enhance the sale value of the
18
therefore declined to take
l
from Julius D. Stiefer Taft funds) and The trustee determined was less than the
and ownership of the small ranch.
WOll
The trustee
to the Stiefer property and
to Armstrong
19
a deed in 1
of foreclosure to
property to Stiefer. 2.
21
•
and other ranching
estate.
20
•
les of
for consulting services
11
•
a
off
Seventh of SQnterra
The Seventh of Sonterra project consists of 23 single-
22
2)
family townhouses and 28
24
the seventh hole of the Sonterra
25
Texas.
26
Resolution Trust Corporation for $1.9
The
ect was
SECOND INTERIM REPORT
family pad sites near Club in San Antonio, .by
-16-
ises from the ~illion
J
•
•
•
• •
• •
•
1
The acquisition was financed with Hamilton Taft funds,
2
through Knightsbridge.
J
on July 22, 1991 1 only two townhouses had been sold.
4
• •
•
At the time of the Trustee's appointment
The trustee has continued to sell the single family
5
townhouses individually to retail buyers, having determined that
6
the net revenue to the estate would probably be greater than from
7
a bulk sale, although a bulk offer for the entire project would
B
also be considered.
9
appraised at $118,000 to $142,00 each, after repair and buildout
The townhouses have been individually
work (at $8,000 to $15 OOO per townhouse)
11
23 townhouses, eight have been sold, seven of them post petition.
12
Several more townhouses are under contracts for sale.
13
November, 1991, the
14
general authority to sell the townhouses, without the necessity of
15
a court order for each sale, provided that the gross sales price
16
is for an amount not less than 90 percent of the appraised value
17
of the particular townhouse.
j
t~stee
are completed.
Of the
10
18
•
funnelled
In
obtained a Bankruptcy Court order for
During the post petition period,
net proceeds from
19
townhouses sales, after deduction of direct selling costs, total
20
$651,438 through December, 1991, representing proceeds of
21
townhouses.
22
out work and repairs required for each townhouse, which work is
23
performed by subcontractors of Enterprises at the time of sale.
24
The townhouse sales program and construction work are supervised
25
by one remaining Enterprises employee on site in San Antonio.
si~
Selling costs include the S8,000 to $15,000 of finish
26
SECOND INTERIM REPORT
-17-
•
• •
1
3.
•
4
respectively, near Dallas.
5
Enterprises from the Resolution Trust Corporation, Whispering
6
Meadows in
7
of $1.1 million was spent on the projects.
9
~pril,
• •
The properties were both purchased by
1990, and Glade Meadows in May, 1990.
Both properties are for sale.
A total
There has been
considerable interest in the properties, and several offers have
10
been made and accepted, subject to court approval after
11
contingencies are removed.
12
feasibility or financing contingencies which have not been met.
13
Tnus, the two projects, while again under contract, remain unsold. 4.
15
•
and Glade Meadows
residential tracts located in Arlington and Grapevine,
~4
•
~eadows
3
8
•
Whispering
Whispering Meadows and Glade Meadows are undeveloped
2
•
•
However, all the offers have included
Oil and Gas Leases
Dresdner Petroleum owns oil and gas leasehold interests
16
on a 560 acre tract in Howard County, and on a 1,000 acre tract in
17
Fisher County, in Texas.
18
an exploration project, with minor
19
producing well.
20
substantial new investment.
21
Fisher County property
22
The Fisher county interest producti~n
is primarily
to date on one
Continuing the exploration program would require
The trustee intends to sell the
if a reasonable price can be obtained.
The Howard County property is a leasehold which has had
23
its primary recovery.
The profit potential of the field is
24
dependent on the results of an ambitious "secondary recovery"
25
program to be accomplished by water injection into the underlying
26
area.
Meanwhile, there is some production at this time, which
SECOND INTERIM REPORT
-18-
•
•
• •
• •
• •
•
1
provides gross revenue of $75,000 to $100,000 per month.
2
Petroleum had operated at a loss since its inception; the
J
continuing operational loss} the trustee believes, was due largely
4
to excessive overhead and salary costs (including a salary of
5
$200,000 per year for the president of Petroleum). Effective November 1, 1991, when the Remington offices
6
7
were closed, the trustee turned over management of Petroleum'S oil
B
and gas operations to an outside contractor, KCM Management, Inc.,
9
of Dallas.
KCM is providing production, accounting, contract
10
administration, reporting, tax and other services at a
~1
substantially lesser cost than Petroleum was incurring in
12
performing these services with in-house employees.
13
savings in administrative costs, the trustee expects Petroleum to
14
show a small operating profit, except for professional fees.
15
delinquent post-petition trade debts have now been retired out of
16
the savings of administrative costs, except for professional fees.
17
Petroleum also has not yet repaid
18
postpetition advances.
19
The
for S60,000 in
20
e~pected
21
completion of that program, when the flow of oil resulting from it
22
can be properly evaluated, the trustee intends to sell the Howard
23
County property.
to be completed in six months to a year.
s.
26
After the
Luxury Automobiles
At the time Armstrong deeded the ranch to the trustee,
25
he also transferred two automobiles, a 1990 Rolls Royce Silver
SECOND
•
Re~ington
With the
The "secondary recovery" water injection program is
24
•
•
I~TERIM
REPORT
-19-
•
•
• •
•
1
Spur II and a 1990 Jaguar ·XJS, both of which were purchased at
2
charity auctions with Hamilton Taft funds and used by Armstrong as
J
personal vehicles.
4
Lincoln stretch
5
were sold by the trustee for a total of $139,000.
B.
6
9
•
•
owned by Remington.
The three vehicles
Promissory Notes and GUarantees Mohamed Hadid
Bankruptcy Court against Mohamed Hadid, a Washington, D.C. real
10
estate developer, and other persons and entities, arising out of
11
loans totalling approximately $8.8 million by Hamilton Taft and
12
Remington to Hadid. In March, 1988, when Hamilton Taft was owned by
14
Ma~Pharma,
15
~as
16
the same lawsuit against MaxPharma through which he acquired
17
ownership of
IS
Hadid had·conspired with other defendants to convert funds from
19
Ha~ilton
20
from Hamilton Taft.
21
•
li~ou5ine
The trustee has filed an adversary proceeding in the
13
•
The trustee also took possession of a 1989
1.
7
B
•
•
Inc., Hamilton Taft loaned $3 million to Hadid, which
to be repaid in )0 days, but was never repaid.
Ha~ilton
Armstrong, in
Taft in 1989, also sued Hadid, claiming that
Taft by, among other things, borrowing the $3 million
In September, 1990 Armstrong settled the litigation
22
against Hadid for cash of $50,000 and a new $1.75 million note,.
23
with principal payable in two installments in September, 1991 and
24
september, 1992.
25
Hadid an additional $6.5 million, notwithstanding his failure to
26
repay the earlier $3 million loan.
Armstrong also agreed in September, 1990 to lend
SECOND INTERIM REPORT
-20-
- - - - - - - - - --- -
-
•
•
•
• 1
• • •
2
1990 to Remington for $6.5 million, which was guaranteed by his
l
wife, Mary Butler Hadid.
4
and his wife executed a security agreement pledging all of their
5
interests in numerous corporations and partnerships which
6
purportedly owned, among other real property, four Ritz Carlton
7
hotels located or under construction in Washington, D.C., New York
8
City, Houston and Aspen, Colorado.
9
UCC-l financing statements for the security interests, despite his
10
11
• • • •
Hadid executed a promissory note dated September 11,
However, Hadid never executed
representation that he would do so. Despite Hadid's refusal to execute and deliver
finan~ing
12
statements, Armstrong authoriZed the funding of the $6.5 million
13
promissory note.
14
occurred on March 13, 1991, Remington advanced a total of
15
$5,796,300 to Hadid.
16
either these advances or the $1.75 million note.
In a series of transfers l the last of which
No repayment has been made by Radid of
11
The trustee has tiled suit against Hadid, Mary Butler
18
Hadid and certain Hadid entities to collect on the $6.5 million
19
note, the $1.75 million and the original $3 million and to enforce
20
Remington's lien rights under the security agreement.
21
has learned that in June.
22
interest in the collateral to a business associate, Abdulaziz bin
23
Ibrahim Al-Ibrahim of Saudi Arabia, commonly referred to as the
24
lithe Sheik".
25
seeks a determination that any rights of the Sheik in the property
26
transferred by Hadid are subject to Remington's security interest.
The trustee
1991, Radid may have transferred his
The trustee has joined the Sheik as a defendant and
SECOND INTERIM REPORT
•
To secure the $6.5 million note, Hadid
-21-
•
•
Media reports as well as reports of the trustee's
1
• •
•
•
2
investigators indicate that Hadid is being pursued by numerous
3
creditors, his Washington, D.C. office has been closed,
-4
his real property interests (including his Washington, D.C. home)
5
have been foreclosed, and he may no longer be residing in the
6
United states.
7
United states, but the trustee does not have any information as to
B
whether she has independent assets to satisfy a judgment.
10
the defendants through various means.
11
yet responded to the lawsuit.
12
discovery from third parties to obtain information on the assets
13
in which Hadid purportedly held an ownership interest and granted
14
Remington a security interest.
15
estimate what recovery, if any, will be obtained on the Hadid
16
notes. 2.
•
19
The trustee also intends to seek
At present, the trustee cannot
Stanley Rosenberg
Stanley Rosenberg, a San Antonio attorney and businessman, on a $1
20 ' million guarantee he executed in favor of Remington on
21
September 19, 1989.
Rosenberg was involved in promoting and
22
developing a combined restaurant and gambling facility known as
23
River city Fair in San Antonio.
24
invested S2 million in the project, of which $1 million was for
2S
purchase of a 49% interest in the stock of River City Fair, Inc.
.26
(IRFer")
Through Remington, Armstrong
and $1 million for a loan to RFCI, guaranteed by
SECOND INTERIM REPORT
•
None of tbe defendants have
The trustee has filed an adversary proceeding against
18
•
Mary Butler Hadid appears to be residing in the
The trustee is seeking to effectuate service on all of
9
17
•
certain of
-22-
•
•
•
•
• •
•
1
Rosenberg.
2
petition.
•
4
denied liability on his guarantee.
5
agreed to release him from the guarantee, that Armstrong agreed to
6
and failed to subsidize all necessary expenses to keep the project
7
operational, and that Rosenberg advanced additional money to the
B
project in reliance on Armstrong's representations, all of which,
9
Rosenberg contends, discharges his obligations under the
• •
Be claims that Armstrong
Rosenberg has also filed a motion requesting that the
10
guarantee.
11
Bankruptcy Court abstain from jurisdiction over the claim on the
12
ground that it should be filed as a state court action in Texas. The trustee cannot predict at this time the likely
14
outcome of the Rosenberg adversary proceeding.
15
defenses he has asserted, Rosenberg has communicated to the
16
trustee that there are other claims and judgments against
17
Rosenberg and that he will not be able to satisfy any judgment
18
obtained by the trustee.
19
trustee, Rosenberg has not provided any documentation of his
20
financial condition.
21
•
In response to the trustee's lawsuit, Rosenberg has
3
13
•
The restaurant failed and RFCI filed a Chapter 7
22
3.
Parke~
In addition to the
However, despite a request by the
Automotive
In February. 1991, Armstrong invested $3
mi~liDn,
23
through Remington, in Parker Automotive Corporation, a publicly
24
traded company in costa Mesa, California, which manufactured and
25
distributed a machine and chemical compound designed to clean
26
automobile engines, and which was in serious financial
SECOND INTERIM REPORT
-23-
•
•
•
•
•
•
difficulties.
2
lien on all assets of Parker, junior to a lien for approximatelY
3
$700,000 owed to Home Bank.
4
stock options and voting rights which gave it immediate control of
5
Parker and the right to acquire up to 66 percent of the stock of
6
the company.
7 8
•
•
9
•
•
Upon the closing on February 14, 1991, krmstrong
Ibecame chairman
of the board and chief executive officer of
Parker. Despite Remington's infusion of $J million in cash, Parker remained in financial difficulty.
11
resigned as CEO, and he and other Remington nominated
12
representatives resigned from the Parker board.
13
facing numerous lawsuits by unpaid vendors, Parker filed a Chapter
14
11 petition in the Bankruptcy Court for the Central District of
15
California.
16
closed Parker's business shortly thereafter.
In June, 1991, Armstrong
On July 26, 1991,
A Chapter 11 trustee was appointed in September, and
The Parker trustee has contracted for sale of most of
1B
Parker's assets, including its manufacturing equipment, domestic
19
inventory located in the United states and patent and trademark
20
rights, for $1.5 million, payable $500,000 at closing and the rest
21
over a one-year period, secured by the assets to be sold.
22
Inventory located in Europe and accounts receivable are not
23
included in the sale and may bring additional revenue.
24
•
Remington was also granted certain
10
17
•
Remington received "a convertible note, secured by a
1
If the pending sale is completed, and the maximum amount
25
is collected under the sale, Remington could realize up to
26
S700,DQO from the sale proceeds, based on its second priority lien
SECOND INTERIM REPORT
-24-
•
•
•
•
•
• •
1
on Parker assets.
2
sale of the foreign inventory.
3
first position with respect to the Parker patent, without which
4
Parker's tangible assets have substantially reduced value, as Horne
5
did not perfect a security interest in the patent.
6
• • •
However, Remington's secured position is being challenged by the Parker trustee, who seeks equitable
a
subordination of Remington's interest on the ground of inequitable
9
conduct by Armstrong in acquiring Remington's interest and/or in
10
managing the company.
11
Remington may not be secured as to part of its debt (which is of
12
little importance as Remington's debt exceeds the likely value of
13
Parker's assets)
14
in the inventory located in Europe.
r
The Parker trustee also claims that
and may not have perfected a security interest
The parties have agreed to expedited discovery and
16
resolution of Remington's claim in the Parker bankruptcy case
17
through relief from stay proceedings that have been filed on
1B
behalf of both Remingt-on- and Home--8ank.
19
have reached a tentative agreement, which has not been finalized
20
or approved by the Bankruptcy Court, on allocation between them of
21
any proceeds received by either of them from the Parker assets.
22
An agreement between Remington and Home Bank would eliminate any
23
disputes between them on lien priorities or the allocation of sale
24
proceeds to the patent, and enable Remington and Home to cooperate
25
in pursuing their mutual interest as secured creditors.
26
SECOND INTERIM REPORT
•
Furthermore, Remington may be in
7
15
•
Additional amounts may be realized from the
-25-
Remington and Home Bank
•
•
•
• 1
•
• •
The trustee cannot estimate at this time what,
2
anything, the estate will recover from the Parker investment.
J
Protecting the estate's interest in Parker has consumed
4
substantial time and legal expense, and has been one of the most
5
costly activities of the estate in relation to the potential
6
recovery.
7
potential for significant recovery for the estate, the trustee
B
believes that the time and resources devoted to Parker is
9
necessary and justified.
Nevertheless, because the Parker asset does have the
10
C.
11
• • •
•
Other Claims Against Third Parties I.
Criminal Defense Legal Pees
12
Dn September 4, 1991, the trustee filed an adversary
13
proceeding against Armstrongts criminal defense attorneys, the
l~
Dallas firm of Meadows, Owens, collier, Reed and Coggins, for
15
recovery of $735,000 in legal fees paid to the firm, of which
16
~700/000
17
appointed.
18
proceeds of a sale of a helicopter by Winthrop, an Armstrong owned
19
company, on March 25, 1991.
20
less than a month before, with funds advanced by Knightsbridge,
21
which in turn obtained the funds from Hamilton Taft.
was paid on March 27, 1991, the day after the trustee was
The trus t ee traced the S700, 000 p"aY1llen t to the
Winthrop had purchased the helicopter
The trustee sought recovery of the payments to the
22
fir~
23
Meadows
on the ground that the payments came from fraudulent
24
conveyances from Hamilton Taft and Knightsbridge and were
25
recoverable from the law firm as a subsequent transferee of an
26
avoidable transfer under Section 550 of the Bankruptcy Code.
SECOND INTERIM REPORT
•
it
-26-
------ - -- ----
•
•
•
• •
1
Under section 550, the trustee may recover fraudulently
.2
transferred
3
also from a
4
without
5
transfer.
•
• •
•
2.
9
25, 1991, Knightsbridge transferred a total
On
10
11
of $600,000 to three members of the McCall family, David McCall,
12
Jr., and his sons, David Mccall, III and
13
the McCalls executed a $200,000 note to
14
a
date of January 25, 1992. the notes of his sons.
Mccall.
certain real estate
17
an insurance agency owned by
18
friends of
personally, with
David MCCall, Jr. also
All three notes are secured
McCall, Jr.
The McCalls are
and
The trustee recently learned that on
19 violat
20
of a
Each of
sts in Plano, Texas, as well as stock in
16
27,1991,
iminary injunction then in effect (See executed an agreement to transfer the
21
section VI.C.l),
22
$600,000 McCall notes to Dav
23
to Armstrong of $275,000,
24
for his own benefit.
25
in
26
Armstrong now conducts business, $55,000 in october,
McCall, III in return for
ch
rece
The $275/000 was
-27-
pav~,~nr
and retained
id as follows: S120,000
, 1991 to Chenal Corporation, a new
SECOND INTERIM REPORT
•
00,000 cash, which was
the Meadows firm in December, 1991.
15
•
but
was filed, the trustee
to a settlement of the claim for
paid
I
transferee who received the
After the
7 B
1
and with knowledge of the fraudulent
6
•
not only from
under which ~991
to
•
• • • •
•
• •
• •
• (The form
1
Armstrong, and $100,000 in November, 1991 to Armstrong.
2
of the transaction
3
McCall, III notes for the $175,000 transfers in July and october
4
1991.
5
MCCall, and the $175,000 in notes were cancelled.)
6
~as
that Armstrong and Chenal gave David
In November, 1991, Armstrong obtained another $100,000 from
A letter agreement of November 27, 1991, signed by me~orializing
7
Armstrong and_David MCCall, III
B
conditioned the transfer of the S6DO,OOO notes on Armstrong
9
reaching a settlement with the trustee. (See section VI.B.)
the transaction,
That settlement did not
10
occur.
11
cash and returned the notes to David MCCall, III at the time the
12
letter agreement was signed, when obviously no settlement with the
13
trustee had been reached.
14
purporting to extend the maturity date of the McCall notes from
15
January 1992 to January 1994.
16
Armstrong nevertheless received the
Armstrong also signed documents
Upon learning of the transactions between Armstrong and
17
David Mccall, III, the trustee commenced contempt proceedings on
18
February 10, 1992 against Armstrong for violation of the
19
preliminary injunction and obtained a temporary restraining order
20
prohibiting any further transfers of funds or assets by Armstrong
21
and Chenal, except for certain limited expenditures, pending the
22
contempt hearing.
23
subpoenaed the financial records of Armstrong and Chenal to
24
determine what
25
McCall in return for the McCall notes.
(See Section VI.C.l.)
~rrnstrong
did with the $275,000 obtained from
26
SECOND INTERIM REPORT
The trustee has
-28-
•
•
•
• •
•
• •
• •
1
•
The trustee also filed an adversary proceeding against
2
the MCCalls an February 7, 1992, seeking recovery of the $600,000
3
they received from Knightsbridge as fraudulent conveyances from
4
Knightsbridge,
5
security interests, guarantees and other contract rights Armstrong
6
received from the McCalls, and for declaratory relief that
7
Armstrong's November 27, 1991, agreement vith David McCall, III is
8
invalid because "it violates the preliminary injunction and the
9
automatic stay.
10
imposition of a constructive trust on the notes,
3.
Potential Recoveries To Be Investigated
11
The trustee is continuing to investigate other potential
12
claims that the estate may have against third parties for recovery
13
of funds or other assets transferred to them by Armstrong or the
14
Armstrong entities, or for other reasons.
15
SUch recoveries to the extent it would be cost effective to do so.
16
Among the transfers that will be reviewed are retainers
17
paid to attorneys by Hamilton Taft and Remington in March and
18
April, 1991, after the Hamilton Taft involuntary petition was
19
filed.
20
criminal defense attorneys/ ne caused $480 1 000 in retainers to be
21
paid by Hamilton Taft or Remington to four other law firms, for a
22
total of $1,215,000 in advance payments to lawyers representing
23
Armstrong's interests.
24
$145,000 in retainers paid to Creel and Atwood of Dallas,
25
bankruptcy counsel for the Texas Debtors, which retainers were
In addition to the
~735,000
paid by Armstrong to his
The $1,215,000 total does not include
26
SECOND INTERIM REPORT
•
The trustee vill pursue
-29-
•
•
• •
•
• •
• •
•
1
subsequently returned to the Debtors' estates or credited against
2
earned fees approved by the Bankruptcy Court. The trustee has already settled with Armstrong's
3
4
criminal defense attorneys for return of a portion of their fees
5
to the estate.
6
the remaining $480/000 were Johnson & Gibbs of Dallas, attorneys
7
for Hamilton Taft as Debtor
a
Francisco, attorneys for both Hamilton Taft as Debtor and
9
Armstrong personally ($175,000), Eppright and Golembeck of Dallas,
(See Section V.C.1.)
($200~OQO),
Long & Levit of San
10
attorneys for Armstrong, Remington and other Armstrong entities
II
($80,000), and Hance and Gamble of Dallas, who have identified
12
themselves as attorneys for Knightsbridge and Remington ($25,000).
13
None of these attorneys have been approved as counsel for a Debtor
14
in the bankruptcy cases, nor have they filed disclosures of their
15
fee arrangements as required by Section 329 of the Bankruptcy Code
16
ana
17
or approved by the Court, although all or a portion of their
18
services were performed postpetition.
Bankruptcy Rule 2016, nor have their retainers been reviewed
19
The trustee has not yet sought return of the retainers,
20
or any portion of them, to the estate, or made any decision to do
21
so.
22
retainers paid to the attorneys should be reviewed by the Court,
23
And an accountinq required of the services performed and applied
24
against the retainers.
25
accounting and review by the Court under Section )29 of the
26
Bankruptcy Code and Bankruptcy Rule 2017, regardless of whether
However, the trustee believes that, at a minimum,
SECOND INTERIM REPORT
•
The four law firms receiving
the
The trustee intends to request such an
-30-
•
• • •
1
the trustee decides to seek recovery of the retainers, or any
2
portion thereof.
3
attorneys involved may seek additional fees from the estate,
4
beyond their retainers.
5
•
•
•
•
The trustee has been advised that some of the
Hance and Gamble received a $25,000 retainer not only in
6
April, 1991, but also for each of the months of January, February
7
~nd
B
trustee's inquiry, Hance and Gamble has stated that the firm was
9
retained to perform legislative lobbying services tor a flat fee
March, 1991, for a total of $100,000.
In response to the
of $25,000 per month.
11
Hance, a former congressman who received substantial political
12
contributions from Armstrong in his unsuccessful campaign for
13
governor of
14
supporting information to show that it performed services
15
commensurate with the $100,000 fees it received, and has advised
16
the firm of his intention to seek recovery of the fees if such
17
backup is not provided.
19
-D.
Te~as.
One of the principals of the firm is
~ent
10
18
•
•
The trustee has asked Hance and Gamble for
Assets still in Armstrong's Possession
Armstrong still has possession of a number of assets
20
which were purchased with Hamilton Taft funds and which are held
21
in his name or in the name of Armstrong companies not under the
22
control of the trustee.
23
notes, such assets include the following:
In addition to the McCall promissory
Rodeo Interests
•
25 26
Armstrong owns a 49% stock interest in Pro Rodeo, Inc" and either Armstrong or Winthrop owns a 33% limited partnership
SECOND INTERIM REPORT
•
-31-
•
•
•
• • •
•
1
interest in Rodeo PartnerS.
2
Mesquite, Texas} near Dallas.
3
Pro Rodeo is controlled by a rodeo performer, Don Gay,
4
and its primary business is supplying livestock for rodeos,
5
principally at the Mesquite Arena, a rodeo arena serving the
6
Dallas area.
7
to acquire a 49% percent interest in Pro Rodeo in January, 1991.
8
Rodeo Partners is a closely held limited partnership which owns
9
the Mesquite Arena.
11
1990. The trustee has obtained financial and operating
13
information on Pro Rodeo and Rodeo Partners througn the subpoena
14
process available under Bankruptcy Rule 2004.
15
operating businesses, but their current profitability and value
16
are uncertain. 2.
•
Texas Stadium Box
19
at Texas Stadium, home of the Dallas Cowboys football team, from a
20
bankruptcy estate £or a total of $390,000.
21
to the stadium boxes personally, and the purchase price was
22
as a loan from Remington to hrrnstrong.
23
Remington also paid for improvements for the stadium boxes.
Armstrong took title boo~ed
After the acquisition,
In March and April, 1991, Armstrong sold two of the
24
•
Both entities have
In March, 1990, Remington purchased three stadium boxes
1B
•
Armstrong invested $1.5 million, also
obtained from Hamilton Taft, in Mesquite Partners in September,
17
•
Armstrong invested $350,000 of Hamilton Taft's money
10
12
•
Both entities are located in
25
stadium boxes for a total of $265,000, which was paid to
26
Remington.
Armstrong retained the third box, which, according to
SECOND INTERIM REPORT
-32-
•
•
•
•
•
1
deposition testimony of his assistant, Teri Robins, ne treated as
2
his "personal" box.
3
Texas Stadium boxes, the trustee understands that the remaining
4
box has a resale value of at least
5
• •
•
•
3.
6
• •
Coffe~
$~50,OOO.
International
In 1989 and 1990 Remington loaned a total of $B9,000 to
7
Armstrong's brother, Robert Chad Armstrong, and to Coffea
8
International, Inc., a distributor of imported coffee beans
9
controlled by Robert Chad Armstrong.
On February, 11, 1991,
10
Knightsbridge advanced an additional $250,000 to Chad Armstrong or
11
Coffea International. The $250,000 advance, plus the prior
12
advances of $99,000 with interest, were then booked as a $341,225
13
investment by Remington in the stock of Coffea International.
14
stock appears on the books of Remington as an asset of Remington,
15
but the trustee has been advised that Armstrong also claims the
16
stock as his personal asset.
17
obtaining information on the financial status and operations of
lB
Coffea International through the subpoena process, and does not at
19
this time have information on the value of Remington or
20
Armstrong's interest in Coffea International.
21
•
Based on information from a broker who sells
4.
22
The
The trustee is in the process of
Plaza Realty Note
CCAJ corporation, an Armstrong company still under the
23
control of Armstrong, holds a $5 million note of plaza Realty
24
company (IIPlaZa Realty"), an affiliate of Gulftex Financial
25
Corporation and its principals, Jimmy E. Nix and Richard F.
26
Watkins.
Armstrong (through CCAJ) and MaxPharma, prior owner of
SECOND INTERIM REPORT
-33-
•
• •
Iton Taft. invested a total of $6 mill
1
• •
•
• of Hamilton Taft
2
funds in 1989 in a joint venture
3
Investment Fund (IIPlptl)
-4
In February, 1990, CCAJ sold its interest in PIF to
5
for $1 mill
owned
and Watkins.
B
after
one $400,000
filed suit in Texas state
In 1990, CCAJ
court against Plaza Real
11
and Watkins and related entities for fraud aris
12
or
in PIF.
1
Plaza
defaulted on the note
Plaza Rea
10
13
Realty
ip interests
by certain stock and
7
9
ng center
in cash and a $5 million note executed
and
6
owned
I
onal
Gulftex, called
on the note and against Gulftex, N
the su
After
did little to
out of the I
CCAJ
In December,
the
14
1991, with a trial date
21
recovering from Plaza Realty or the collateral
22
Realty note are not promising.
but no capacity or intention in
• •
•
23
•
collateral.
Nor has
Gulftex, Nix and
SECOND INTERIM
•
al cond
of
za Realty
trustee yet
or merits of the fraud claim against
25 26
However} the trustee has not yet
the f
24
the Plaza
~EPORT
-)4-
•
• •
5.
1
•
3
of his luxury automobiles, he still retains two personal
4
automobiles purchased by Remington and booked to Armstrong as
5
"advances".
6
1990 Jaguar returned to the trustee) and a 1990 Ford Lariat pickup
7
truck, which were appraised in ttid-1991 at $37,000.
B
•
9
They are a 1989 Jaguar (not to be confused with a
Armstrong also has furniture and home furnishings which Knightsbridge purchased for $)5,000 for a four bedroom Aspen,
10
Colorado condominium which Armstrong had contracted to purchase
1l
jointly with Mohamed Hadid (see section V.B.l.)
12
purchase was not completed, Armstrong forfeited $300,000 in down
13
payments (paid by Remington), and shipped the furniture and
14
furnishings to Dallas. VI.
•
Personal Possessions
Although Armstrong has turned over to the trustee wost
2
•
•
16
The condominium
LITIGATION AGA1NST ARMSTRONG
A.
Analysis of Armstrong's Personal Financial Transactions
17
At the time of the First Interim Report, the trustee did 18
•
not have access to any of Armstrongls personal financial records, 19 as compared to those of corporate entities controlled by him. 20 21
•
22
Armstrong had refused to produce any personal records on Fifth Amendment grounds. In late July and August, 1991, Armstrong produced his
23
personal bank account records and certain supporting documentation 24
for the period of January 11 1989 through June 15, 1991.
•
25
(Armstrong acquired Hamilton Taft in March, 26
SECOND INTERIM REPORT
•
-35-
1999.)
With the
I
•
I.
•
•
•
1
personal financial records, together with the records of the
2
Armstrong entities which show transfers of funds to or on
3
of Armstrong, the trustee's accountants have prepared an analysis
4
of Armstrong's personal receipts and
5
1989 through June 15, 1991.
6
Appendix B.
• •
for January 1,
The analysis is contained in
s
period of Armstrong's ownership of Hamilton Taft, over $16.5
9
million of Hamilton Taft funds, mostly routed
th~ough
10
Knightsbridge, Remington or WinthroPJ was paid to Armstrong or by
11
the Armstrong entities to third parties for Armstrong's benefit.
12
of the $16.5 million,
13
Armstrong.
14
entities for assets, investments and other expenditures which
15
Armstrong held in his own name, including over $9 million related
16
to the Double C Ranch.
The
about $4.7 million was cash paid to
re~aining
$11.9 million was paid by the Armstrong
Of the $4.7 million in cash transferred to Armstrong,
IS
$1.2 million was booked as compensation or directors' fees
19
($852,385 net of withholding taxes) or reimbursement of expenses
20
($396,703).
21
cash "advances" from Remington, Knightsbridge or WinthroPI Which
22
Armstrong has never repaid, or as repayments to Armstrong of a
23
$1.5 million "loan" he purportedly made to Remington in February,
24
1990.
25
obtained from Winthrop, which in turn obtained the funds from
26
Hamilton Taft.
Most of the money, over $3 million, was recorded as
Armstrong made the "loan " to Remington with funds he
In the first three months of 1991 alone, just
SECOND INTERIM REPORT
I-
e~penditures
beh~lf
During the two and a half year period, which covers the
17
•
I I
7
•
•
I
-36-
I
•
•
• • •
•
•
1
before the public disclosure of Armstrongts diversions of Hamilton
2
Taft money, over $1 million in cash was transferred from
3
Knightsbridge to Armstrong's personal accounts. Armstrong's personal financial records verify that he
4
5
had no significant source of income or receipts, other than
6
Hamilton Taft money, during the two and half year period.
7
$4.8 million in total cash flow through his personal bank accounts
8
OVer the two and a half year period, all but $127,6Q6 can be
9
definitely traced to Hamilton Taft and the Armstrong entities who,
• • •
Of
10
in turn, received their funds from Hamilton Taft.
11
he received in the first quarter of 1989, before he acquired
12
Hamilton Taft, can be traced to Hamilton Taft funds.
13
in the Accountant's Report, during the first quarter of 1989, as
14
well as earlier, Remington, which was the primary source of
15
Armstrong's funds, obtained its money from loans which were repaid
16
with Hamilton Taft money atter Armstrong's acquisition of Hamilton
17
Taft.
Even the money
As discussed
Likewise, all but an estimated $78 1 °00 of the
18
•
•
19
approximately S4.7 million that Armstrong received in cash from
20
Hamilton Taft and the Armstrong entities appears to have been
21
deposited into and can be traced through his personal accounts.
22
On January 1, 1989, he had $52B in his accounts.
23
1991, the last date for which the trustee has bank account
24
information for Armstrong, he had an estimated $85,000 in his
25
account.
On June 15,
Between those dates, nearly $4.7 million of Hamilton
26
SECOND INTERIM REPORT
-37-
•
• • •
~ent
1
Taft funds
2
expenditures.
3
The
• •
•
into and out of his accounts for personal
withdra~als
~ithdrawals
($175,138~
include sUbstantial cash
5
payments ($465,398) for which supporting documentation has not
6
been provided and the trustee's accountants therefore cannot
7
provide further analysis.
8
expenditures from Armstrong's personal accounts were by check
9
transactions or wire transfers, for which the payee is identified.
10
and credit card
However, most of the transfers and
Among Armstrong's significant personal expenditures,
11
paid from his personal accounts during the January 1, 1989 through
12
June 15, 1991 period out of funds traceable to Hamilton Taft,
13
were: political and charitable contributions totalling
15
$964,701.
16
contributions and $361,000 was for political contributions.
17
Payments characterized as charitable contributions in Arrnstrongls
1S
records include $200,000 paid at-a charity auction for a 1990
19
Rolls Royce and $100,000 paid to the Dallas Opera Ball.
20
largest political contribution was to Texas gubernatorial
21
candidate Clayton Williams, who received $100,000.
22
Of this amount, $603,701 was for charitable
2.
The
Professional fees of $742,735, of which $735,000 Meado~sj
23
was paid in March and April, 1991, to
24
Reed and Coggins, Armstrong's criminal defense attorneys.
25
Section V.C.l.)
26
SECOND INTERIM REPORT
•
from Armstrong's personal accounts
4
1.
•
•
•
•
-38-
Owens, Collier, (See
•
•
•
• 3.
•
2
was for purchase of a 49%
J
which
4
classif
not identified in the Armstrong
7
trustee. 4.
• •
made available to the
totalling $295 / 571, inc
,301 to
his ex-wife (exclusive of payments identified as child
11
child care)
12
his personal assistant at
13
$J7,lB6 for h
I
5,
's
$46.575 for an automobile loan and
or payments to
2,500 to his fiance, and
motherls med
1 expenses.
Household expenses totalling $274,089 for residence, including
9,352 for
and
enance, $56,121 for domestic payroll, $40,734 for ut
16
ma
11
$15,354 for interior decorating,
18
beverages and $10,329 for flowers. Purchases from
,SB3 for
jewele~s,
es and
clothiers, furriers.
19
6.
20
and other retailers totalling over $183,000, not which may have been made
21
•
of which was
10
IS
•
V.D.l.)
Gifts, loans and other transfers to friends,
relatives and
14
•
(See
Inc., a company
check dated November 5, 1990, the rec
6
9
Pro-Rodeo~
as an "investment expense" was a payment for a $105,000 IS
S
•
in for rodeos.
1
5
•
Investments totalling $494,017, of which $350,000
cred
Acquisitions, investments or
22
23
the $11.9 million which
24
benefit with Hamilton Taft
25
ranch,
26
Hamilton Taft (consist
cards.
financed by Armstrong's addition to the
47,738 for costs associated with his acquisition of
SECOND INTERIM REPORT
primarily of $615,000
-39-
d to Stanley
•
•
•
•
•
• •
•
• •
Rosenberg, a former
2
MaxPharma settlement, and $232,730 for legal fees), $390,000 for
3
the Texas stadium skyboxes, $600,000 for loans to the McCalls,
4
$335,000 for the down payment and furniture for a condominium in
5
Aspen, Colorado (which Armstrong did not ultimately purchase),
6
$295,000 for investments in cotfea International, Armstrong's
7
brother's company, and $132,767 for automobiles.
8
B.
9
commen~ing
Ma~Pharma
status of Litigation and Settlement in June, 1991, the trustee has hed
LO
substantial and ongoing discussions with Armstrong regarding
11
settlement of the Hamilton Taft estate's claims against Armstrong.
12
Such settlement discussions have generally involved a
13
under which most assets still remaining in the possession of
14
Armstrong and entities under his control would be returned to the
15
Hamilton Taft estate, and Armstrong would stipulate to a
16
nondischargeable judgment for a specified amount, with forbearance
17
on execution if Armstrong paid an agreed upon portion of his
18
futUre income and receipts to the estate for a specified period of
19
years.
20
frame~ork
While the parties appeared clcse to reaching a settle~ent
21
settlement from time to time, the
22
terminated in late January, 1992.
23
unable to reach agreement on several aspects of the settlement
24
that were of importance to one party or the other.
2S
26
discussions were
The trustee and Armstrong were
No further settlement discussions are planned.
The
trustee intends to proceed with the pending adversary proceeding
SECOND INTERIM REPORT
I-
shareholder, as part of the
1
-40-
--------
•
•
•
•
• • •
1
against Armstrong to seek recovery of all remaining assets in
2
Armstrong's possession traceable to Hamilton Taft funds, or to
3
transfers from any of the other Debtors.
4
will seek a money judgment against Armstrong for the full amount
5
of Hamilton Taft's loss, after adjustment for any amounts realized
6
from recovered assets.
7
Armstrong sought to
re~ove
In addition, the trustee
the adversary proceeding from
B
the Bankruptcy Court to the District Court on the ground that he
9
had demanded a jury and the Bankruptcy Court could not conduct
10
jury trials.
11
withdrawal of reference, ruled that the Bankruptcy Court could
12
conduct jury trials in "core" proceedings, which included the
13
trustee's main claims for fraudulent conveyance, constructive
14
trust, turnover orders and injunctive relief.
The District Court, on Armstrong's motion for
However, the non-
15- core claims included in the trustee's complaint, namely the breach
•
16
of fiduciary duty, conversion and breach of contract causes of
17
action, were removed to the District Court.
IS
•
•
In-',unctions and Cont.empt Proceedi.ngs
1.
19 20
•
c.
TROs and preliminary Injunctions
On April 4/ 1991, after the adversary proceeding against
21
Armstrong and related entities was filed, the Bankruptcy Court
22
issued a temporary restraining order (·'TRO") prohibiting any
23
transfers, encumbrances or other dispositions of assets by
24
Armstrong or any Armstrong companies "e:xcept to meet day to day
25
ordinary operating expenses".
26
several times.
SECOND INTERIM REPORT
•
The TRO was extended by agreement
-41-
•
•
•
• 1
•
• •
•
2
trustee of the Texas Debtors, Armstrong agreed to entry of a
3
preliminary injunction against him, with the TRO continued as to
4
the remaining Armstrong entities not under the control of the
5
trustee.
6
eKisting as of July 22, 1991, and any proceeds and products
7
thereof (called the "pre-existing
8
income of Armstrong, and assets acquired from future earnings
9
(called the "new assets").
• • •
The preliminary injunction differentiated between assets
assets~),
and future earnings or
The preliminary injunction provided an
10
absolute prohibition against any transfers, encumbrances and
11
dispositions of pre-existing assets, except that Armstrong was
12
allowed to use his remaining cash, up to S100,ODO, for "ordinary
13
day to day operating expenses and reasonable living expenses tl
14
Arro~trong's
15
future earnings and income, were released from the TRO and not
16
subject to the preliminary injunction.
17
•
On July 22, 1991, when the trustee was appointed interim
•
future earnings and income, and assets acquired with
On November 4, 1991, the TRO against the remaining
18
Armstrong entities (which for practical purposes consisted of
19
Winthrop), was converted to a preliminary injunction.
20
preliminary injunction against the entities was substantially the
21
same as the TRO,
22
except for "ordinary day to day operating expenses."
23
preliminary injunctions, the July 22, 1991 injunction against
24
Armstrong personally and the November 4, 1991 injunction against
25
the remaining Armstrong entities, are currently in effect.
The
i.e., it prohibited all transfers of assets
26
SECOND INTERIM REPORT
-42-
The two
•
• •
• •
1
2
Court issued a new TRO against Armstrong, which supplements but
3
does not replace the July 22, 1991 preliminary injunction.
4
new TRO prohibits all transfers, encumbrances or other disposition
5
of assets, including any so-called "new assets", by Armstrong, his
6
new company, Chenal Corporation, and any other companies
7
controlled by Armstrong, except for a specified list of approved
B
expenditures and other expenditures approved in advance of payment
9
by the trustee or the court.
• •
•
The TRO, which is in place until a
preliminary injunction and contempt hearing scheduled for
11
March 13, 1992, was imposed after the trustee learned that
12
Armstrong and Chenal had received and likely spent $275,000 in
13
promissory note proceeds which were subject to the July 22, 1991
14
preliminary injunction.
16
2.
(See Section V.C.2.)
contempt Proceedings
The trustee has filed two contempt motions for
17
Armstrong's violation of the April 4, 1991 TRO and the July 22/
18
1991 preliminary injunction.
19
In December, 1991, the trustee and the creditors
20
Committee jointly filed a motion to hold Armstrong in contempt for
21
violation of the TRO.
22
eKpenditures by Armstrong as not for "ordinary day to day
23
operating expenses/II including $9,000 to his fiance,
24
brother, $5,715 to a womenls dress designer for merchandise
25
ordered by his fiance; and $4,000 for the glasses of a country
26
music star purchased at a charity auction.
SECOND INTERIM REPORT
•
The
10
15
•
On February 22, 1992, on application of the trustee, the
The motion challenged several personal
-43-
$B,OOO to his
The trustee also
•
• •
• • •
• •
• •
•
1
sought recovery of $11,000 from proceeds of cattle sales which
2
Armstrong transferred from the ranch operating account to his
J
personal account.
4
After a hearing on January 24, 1992 1 the Bankruptcy
5
Court ruled that Armstrong had violated the TRD and ordered him to
6
pay $37,725 to the trustee over a 90 day period.
7
provides that if payment is not made, the Bankruptcy Court will
8
recommend that the District court issue an order of contempt.
9
The second contempt proceeding
filed by the trustee
10
on February 10, 1992 arising out of Armstrong's transactions with
11
respect to the McCall promissory notes.
12
trustee contends that Armstrong violated the preliminary
13
injunction by (i) spending or otherwise disposing of $275,000
14
received fron David Mccall, III,
15
sell the notes,
16
exchange for the 5275,000 he received from McCall, and (iii)
17
executing an agreement to extend the maturity date on the notes by
18
two years.
19
order requiring Armstrong to show cause on March 13, 1992 why he
20
should not be held in contempt for violating the
21
injunction.
~hich
(Section V.C.2.)
The
(ii} executing an agreement to
total $600,000 , to David Mccall,
III in
On February 11, 1992, the Bankruptcy Court issued an
preli~inary
Criminal Investigation
22
D.
23
The trustee has been advised that the
u.s.
Department of
24
Justice is conducting an investigation to determine whether
25
criminal charges should be filed against Armstrong or other
26
persons on account of the transfers of Hamilton Taft funds.
SECOND INTERIM REPORT
•
~as
The order
-44-
The
•
•
• • • •
1
trustee has cooperated with law enforcement officials in their
2
investigation, by providing information and documents in his
3
possession or under his control,
4
officials.
5
results or timing of the criminal investigation.
6
VII.
•
• •
and as requested by such
The trustee has no control or influence over the
OTHER
C~IMS
AND LITIGATION
A.
B
The estate's largest potential recovery is on fidelity
9
Fidelity Bonds
bonds issued by Underwriters of Lloyd's covering loss to Hamilton
10
Taft from theft by employees.
11
primary coverage and $30 million umbrella coverage, for a total of
12
$50 million, subject to certain deductibles.
13
were a requirement of most
14
customers.
The policies contain $20 million
The fidelity bonds
ot Hamilton Taft's contracts with its
The trustee gave written notice of a claim to the
16
underwriters on April 25, 1991.
17
commenced, through their San Francisco attorneys,
18
1991.
19
They have requested access to voluminous records of Hamilton Taft
20
and the Texas Debtors to investigate the claim, and the trustee is
21
in the process of responding to these requests.
22
denied or not acknowledged after the underwriters have had a
23
reasonable opportunity to investigate, the trustee intends to file
24
suit on the bonds.
25 26
Discussions with the underwriters in November,
The underwriters have neither admitted nor denied coverage.
If coverage is
The trustee cannot predict at this time the likely outcome of the claim on the fidelity bond.
SECOND INTERIM REPORT
•
~hen
7
15
•
•
-45-
Substantial legal
•
• • •
• •
• • •
•
•
1
issues are likely to be raised relating to coverage or the amount
2
of recovery under the bonds.
]
Reflecting the importance of the fidelity bond claim to
4
the estate, both the trustee and the Creditors Committee have
5
retained special insurance counsel.
6
law firm of Mound, cotton and Wolan of New York City to assist in
7
pursuing the claim.
8
Bronson and McKinnon of San Francisco. B.
9
The creditors committee has retained Bronson,
Preference claims
The trustee has commenced an analysis of potential
10 11
preference actions against customers of Hamilton Taft for whom
12
payroll tax deposits were made under circumstances that the
13
payments would constitute preferential transfers under Section 547
14
of the Bankruptcy Code.
l5
the "ordinary course of business", the trustee is analyzing only
16
celinquent payments made by Hamilton Taft during the 90 days pr_ior
17
to the filing of the involuntary petition on March 20, 1991.
19
delinquent payments were generally made in two time periods, on or
19
about January 31, 1991, when Hamilton Taft paid over $50 million
20
in tax liabilities which were due in the first part of October,
21
1990, and on or about March B, 1991, when customers learned that
22
Hamilton Taft had diverted tax deposits to the Armstrong entities
23
and made demands on Hamilton Taft for confirmation that their
24
ta~es
25
complete, the trustee estimates that transfers meeting the
had been paid.
Because of the exclusion for transfers in
While the trustee's analysis is not
26
SECOND INTERIM REPORT
•
The trustee has retained the
-46-
Such
•
•
• • •
1
preference criteria may exceed $40 million, after deduction of
~
"new value" payments. The trustee has thus far made demands for return of
3
4
payments from, and has filed adversary proceedings against, two
5
parties, Volume Shoe corporation (aka Payless SnoeSource)
6
~illion
7
million.
8
in both January and March, 1991.
9
customers to confront Hamilton Taft on March 8, 1991, as a result
• •
(aka Shop and Save) for $12.5
Delinquent taxes were paid on behalf of these customers They were among the first
of
11
taxes, and they have relatively small claims against Hamilton Taft
12
for unpaid taxes.
Hamilton Taft covered the shortfall on their delinquent
Additional preference actions are expected to be filed
14
by the trustee on a case by case basis.
15
will be filed against any customer
16
communicating a written demand.
17
•
~hich
and S&S Credit co., Inc.
No adversary proceedings
~ithout
the trustee first
Because of the circumstances under which Hamilton Taft's
18
bankruptcy was filed, the trustee does not expect any significant
19
preference claims to be asserted on account of payment of vendor
20
debts during the 90 day preference period.
21
generally paying its trade debts as they became due, and the
22
"ordinary course of business" exception will like.ly apply to most
23
payments to vendors.
Hamilton Taft was
24
c.
25
The trustee has settled a dispute with a former Hamilton
Sa."!o.ie Refund
26 . Taft client, Sandia Corporation, also known as Sandia National I
SECOND INTERIM REPORT
_J._ )_
for $3.4
10
:.3
•
•
-47-
•
•
• •
•
•
•
•
ta~es
paid by
1
Laboratories, over a $938,007 IRS refund for payroll
2
Hamilton Taft on Sandials behal.f.
3
trustee received $744,198 from Sandia on February 6, 1992, and is
-4
expected to receive an additional sum of approximately $187,000 on
5
or about March 8, 1992, for a total of approximately $931,200,
6
including interest.
7
reflected in the cash receipts and disbursements schedules shawn
B
in Appendix A, which covers only transactions as of December 31,
9
1991. )
Under the settlement, the
(The $744,198 payment already received is not
The dispute arose out of a $917,876 payment which
10 11
Hamilton Taft paid to the IRS on Sandia's behalf on March 8,
12
On that day, pursuant to its contract with sandia, Hamilton Taft
13
initiated an electronics funds transfer from Sandiats bank account
14
to cover the payment.
15
the same day, and made its
16
resulted
1991.
Sandia, however, reversed the payment on o~n
deposit with the IRS, which
in duplicate payments for Sandia1s account. Sandia applied for and obtained a refund from the IRS of
17
•
•
18
$938,.007, w~ich included $20,131 in interest.
19
not dispute that the refund belonged to Hamilton Taft, Sandia
20
claimed the right to offset against the refund any amounts
21
Hamilton Taft owed to Sandia for unpaid taxes,
22
penalties.
23
completed an internal audit and received confirmation, direct from
24
the taxing agencies. of all payroll taxes which it had remitted to
25
Ha~ilton
26
Taft.
While Sandia did
interest and
Sandia wanted to retain the IRS refund until it had
Taft during the life of Sandia's contract with Hamilton
The trustee was unwilling to wait indefinitely until Sandia
SECOND INTERIM REPORT
-48-
•
•
•
•
1
received confirmation from each taxing agency, which may never
2
occur.
3
taxes for which Hamilton Taft was respons
4
state
unpaid
Hamilton Taftts own records show that the
ta~es
which were not due at the
were
,051 in
Sandia terminated its
I
•
•
5
contract, but for which
6
Taft.
•
to pay to the trustee all of the IRS refund,
8
Sandia
9
including any interest accrued thereon
10
except for $22,051 for the
11
and $160,106,
12
which will be
13
1992.
Sandia's
taxes, which Sandia will retain, the
unconfirmed state tax payments,
an interest bear
account until March 8,
If Sandia is able to find any additional unpaid taxes interest and penalties, it will be allowed to pay such J. ""..1. e.;:,
from the IRS refund.
On March at 1992, all
rema~l}.I.."Y
15
l.J.cu.J.I...l
16
funds from the IRS refund, and accrued interest, which
17
to total approximately $lB7,OOO, will be released to the trustee,
18
regardless of whether
19
Taft's
20
confirmation of Hamilton
D, of December, 1989 to the
in March, 1991,
22 23
has
of its taxes.
21
•
Ha~ilton
The trustee and Sandia reached a settlement, under which
7
14
•
had advanced funds to
Taft:
Ilion in penalties to the IRS on account of late
of the
over $7 of
customers' payroll taxes, which resulted from Armstrong's program
•
25
of diverting tax
/~he
trustee is
/'
26
analyzing whether such SECOND INTERIM REPORT
•
to his Texas entities.
may be recoverable -49-
the trustee
• •
• •
1
or the customers under the Internal Revenue Code, which provides
2
that penalties may be excused if
3
was due to reasonable cause and not willful
4
trustee believes that the unusual circumstances surroundinq
5
late
6
penalties
7
penalties abated.
•
9
The trustee also bel
11
Approximately $1.5
12
the 90 day preference
11
of the tax penalties were paid during
13
E.
14
The trustee and his a
15
claims against persons and entit
are cant
in9 to analyze ch may be 1
ing in, contributing to , or
16
relat
18
Hamilton Taft.
19
such claims.
VIII.
e
to
to the improper transfers of money
The trustee has not reached any conclusions
CREDITORS CLAIMS ANALYSIS Dn
22, 1991, the Bankruptcy Court set a deadl
22
September 3D, 1991 for fil
23
Debtors.
24
of the Debtors and was publ
25
(National Ed
of claim against the f
of the bar date was sent to all known
in the Wall Street Journal
ion), the San
Chronicle and
News.
SECOND INTERIM REPORT
•
Hamilton
Taft may be recoverable by the estate as
26
es paid within
of the filing of the
90
21
•
that any
lO
20
•
should be recoverable, as well as unpaid
pa
17
•
rise to a reasonable argument that
taxes
B
•
to make timely
-50-
Callas
of
•
• •
• • •
~.
2
Proofs o£ claim totalling $205.3 million. unduplicated,
3
were filed against the Debtors constituting the consolidated
4
estate, i.e., Hamilton Taft, Knightsbridge, Remington and
5
Enterprises.
6
the Debtors acknowledge are liquidated, non-contingent and not
7
subject to dispute) are added, the
8
against the consolidated estate total $210.2 million.
9
all claims against the consolidated estate is contained in
10
• •
c~aims
potential
A list of
12
claim, filed by steven Solodoff, Hamilton Taft's former
13
controller, accounts for $110
14
believes that Solodoff's claim is not meritorious.
15
VIII.C below.)
16
potential claims against the consolidated estate total $100.2
17
million. This compares to scheduled claims for the four Debtors of
18
$94.4 million, or a difference of only 6 percent.
~illion
of the total.
The trustee (See Section
If Solodoff's claim is disregarded, the maximum
19
Claims of Hamilton Taft customers for unpaid taxes
20
account for $95.1 million of the $100.2 million total claims
21
(compared to $91.9 million acknowledged in Hamilton Taft's
22
schedules).
2]
and employees total $1.7 million.
Total potential claims of Hamilton Taft trade vendors
For the
Te~as
Debtors, claims against Remington total
including both proofs of
clai~s
and scheduled claims,
25
$970,665,
26
unduplicated, as compared to $505,932 in scheduled debts.
SECOND INTERIM REPORT
•
ma~imum
However, the claims total is distorted, because one
24
•
When non-duplicative scheduled claims (i.e., claims
Appendix C.
11
•
claims
~gainst
Consolidated Estate
1
-51-
Claims
•
• •
• • •
• •
• •
1
against Enterprises total $47,332.
2
Knightsbridge, other than duplicates of claims filed against other
J
Debtors.
4
claims of affiliated entities which are not included in the
5
consolidated estate.
All claims totals e~clude intercompany claims, including
6
B.
7
Proofs of claim filed against Petroleum total $651,060.
Claims Against Dresdner Petroleum
8
Scheduled claims total $371,376.
9
against Petroleum, with duplications deleted, total $731,286.
The maximum potential claims The
10
claims against Petroleum consist almost entirely of vendor claims
11
for goods and services provided to Petroleum's oil and gas
12
operations.
13
in Appendix C.
A list of all claims against Petroleum is contained
steven Solodoff Claim
14
C.
15
steven Solodoff, the Hamilton Taft controller whose
16
public disclosure to customers and the news media of the diversion
17
of Hamilton Taft funds led to the tiling of the bankruptcy, has
IB
filed a $110 million proof of claim against Hamilton Taft and the
19
other Debtors based on the federal False Claims Act.
20
Claims Act allows a private citizen
21
the United States for fraud committed against the government, with
22
the private citizen retaining up to 30% of any recovery.
23
claims that Hamilton Taft violated the False Claims Act by
24
knowingly using false records or statements to conceal or avoid an
25
obligation to transmit money to the United states and fraudulently
26
converting government trust funds.
SECOND INTERIM REPORT
•
No claims were filed against
-52-
The False
to bring actions on behalf of
Solodoff
Solodoff also alleges that he
• • •
•
•
1
~as
2
FBI about Hamilton Taft's diversion of tax deposits.
3
Prior to the commencement of the
wrongfully terminated by Hamilton Taft because he notified the
• • • •
Taft
4
bankruptcy case, Soladaff filed a False Claims Act complaint in
5
the
6
declined to take over the lawsuit, as it is entitled to do, but
7
the
B
complaint be dismissed because any claims stated would be income
9
tax claims, which are expressly excluded from the False Claims
10
u.s. u.s.
District Court.
The United states government not only
Attorney filed a brief recommending that Solodoff's
Act. In November, 1991, Solodoff filed a motion for relief
11
•
Ha~ilton
12
from stay in the Bankruptcy Court seeking a determination that his
13
District Court lawsuit was exempt from the automatic stay as an
l.4
exercise of the "police power".
15
Solodoff's motion, ruling that Salodof! was not a "gove.rnmental
16
llni til enti tied to assert the "police power" exception under
17
Section 362 of the Bankruptcy Code.
The Bankruptcy Court denied
18
The denial of relief from stay to pursue a District
19
Court action does not affect Solodoff's proof of claim in the
20
Bankruptcy Court.
21
Solodoff's claim, purporting to assert relief on behalf of the
22
United states, which has suffered no loss, has any significant
23
likelihood of success.
24
personal claim for wrongful termination is barred by a release he
25
executed at the time of his termination, for which he received
26
four months of severance pay.
SECOND
I~TERIM
However, the trustee does not believe that
REPORT
The trustee believes that Solodoff's
-53-
-
-----~
- --.-.- . - - - - - . - - - - - - - - - - - -
•
•
•
1
IX.
Identification of the main problems, claims, potential
2
• •
J
assets and litigation requirements of the estate is now
4
substantially complete.
5
heavy litigation activity, as the claims brought by the estate are
6
pursued, and presumably also resisted.
7
also be brought by the estate.
S
•
• •
• •
CONCLUSION AND FUTURE ACTIVITIES
9
Additional claims will
The trustee expects that a liquidating Chapter 11 plan will ultimately be filed and confirmed for the consolidated
10
estate, there being no possibility of a rehabilitation of the
11
business.
12
depend upon the prospects of the disposition of its assets.)
13
the point of view of creditors, the questions are, obviously, how
14
much of their claims they will receive, and when they will receive
15
any funds.
16
(Whether a plan will also be filed for Petroleum will From
From this report, creditors and other parties in
17
interest will understand that the trustee cannot now provide very
18
specific answers to these questions.
19
however, on the determinants of the amount of pDtential recovery_
20
Some comments may be made,
Based on the proofs of claim filed against the estate,
21
it does not appear that resolution of claims against the estate
22
will be a major concern.
23
proofs of claim filed and the estate records do not appear to
24
differ sufficiently so as to make any major difference in the
25
potential percentage of payment to creditors on their claims.
26
trustee will in due time review the claims in greater detail, and
SECOND INTERIM REPORT
•
The next six months to a year will see
Except for the Soloaoff claim} the
-54-
The
•
• -.oJ
,~
•
1
file objections as appropriate, but on the basis of a first review
2
and current information, there does not appear to be any
3
likelihood of a major impact on percentage of recovery from any
4
potential correction and disallowance of claims (except for the
5
Solodoff claim). The physical assets of the Hamilton Taft estate together
6
•
•
•
7
with the cash on hand, while substantial, would in them.selves be
a
unlikely under the best of assumptions to yield any more than 10
9
cents on the dollar for prepetition unsecured creditors, perhaps
10
substantially less.
The key to what creditors will receive will
11
be the recovery on the estate's Claims, primarily the claims on
12
the fidelity bonds and for return of preferences, and to a
13
substantially lesser extent, on the success and collectibility of
14
various claims against transferees of Hamilton Taft funds and
is
possibly other third parties.
16
outcome or degree of success on the claims at this time.
What is
17
certain is that litigation and pursuit of claims will be
e~ensive
18
and time consuming.
19
trustee.
The claims will be vigorously pursued by the
This is the major task for the estate in the future.
20
21
•
Da.ted:
It is not possible to predict the
February 20, 1992
22
Freder~e~ee
23 ;!4
•
25 26
SECOND INTERIM REPORT
•
-55-
• • 1
FELDMAN, WALDMAN & KLINE
A Professional Corporation
•
2
PATRICIA S. MAR
)
L. J. CHRIS MARTINIAX 2700 Russ Building
4 5
• •
6
235 Montgomery street San Francisco, CA 94104 Telephone: (415) 981-1300 Attorneys for Frederick S. Wyle,
Trustee
7
s
UNITED STATES BANKRUPTCY COURT
9
NORTHERN DISTRICT OF CALIFORNIA
10 11
In re
)
13
) )
14
•
)
12
15
HAMILTON TAFT & COMPANY KNIGHTSBRIDGE COMPANIES, INC. THE REMINGTON COMPANIES, INC. DRESDNER PETROLEUM, INC. DRESDNER ENTERPRISES, INC.
16
Debtors. 17
Chapter 11 Substantively Consolidated or Jointly Administered
) )
No. 91-3-1077 LK No . 91- 3 - '2 4 4 8 LK
) ) ) ) )
No. 91-3-2449 LK No. 91-)-2450 LK No. 9l-3-2451 LK
------------------------_______ l
IS
•
•
19 20
SECOND INTERIK REPORT OF FREOERICR S. WYLE, TRUSTEE
21
February 20, 1992
22 23 24
• •
25 26
•
• •
1
2
•
• •
3
4
I.
INTRODUCTION AND SCOPE OF THIS REPORT ......•..•.....•. 1
5
II.
STATUS OF THE BANKRUPTCY CASES .............•.•........ 2
6
A.
7
B.
8
c.
The Texas Debtors and Substantive Consolidation .................................... 3
o.
by Hamilton Taft. as Debtor .............. 6
9
10
III.
11
A. B.
IV. 14
V.
"
4>
'"
..
"
...
..
..
Ii
,.
Ii
~
..
'"
...
'"
..
..
......
II-
6
B.
Dresdner Petro leum ...•.......................... 12
Es ta t e
&
II-
..
~
..
4
If>
'"
..
1>
~
..
~
'"
II-
'"
.........
~
II
..
II
.,
.,
•
,
..
10
RECOVERY AND LIQUIDATION OF ASSETS ......••......••... 12
17
PhysicQl Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1. __ Double C Cattle Ranch • • • • . . . . . . • . • . . . • . . . . . 13
19 2.
Seventh
Sonterr a ...••.....•••••••.•••••. 16
20
Meadows and Glade
:3 • 11
10
..............
'"
..
"
g
"
III
.....
~
..
a
III>
.........
&
......
"
'"
"
I>
'"
1B
22
4.
Oil and Gas Leases ......................... 18
23
s.
Luxury Automobiles ....................... , .19
24
B.
Promissory Notes and Guarantees ................. 20 Mohamed
25 26
2•
d .••.•..•••••••••••••••••.•••.• 2Q
Stanley Rosenberg ....... , ...... __ .......... 22
-i-
•
...............
Texas Debtors . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . • . . . • . S
21
•
.....
Consol
A.
•
if
A.
1S
•
Ta f t ....
FINANCIAL CONDITION OF THE ESTATES . . . . . . . . . . . . . . . '" .10
15
•
of
STATUS OF OPERATIONS .......•...............•....•..... 6
1.2
16
Entry of order for Relief . . . . • . . . . . . . . . . . . . . . . . . . 2
•
• • c.
2
• •
Parker Automot i ve ................ , ......... 23
J.
1
Other
Parties .....•.....•.. 26
Against Thi
1 Fees. _ •
Criminal Defense
3
It
"
,.
4
•
•
II>
......
,2
I
,
6
4
2.
McCall Notes .•.....••••..•.•••....••....... 27
5
3.
Potential To Be Investigated ..•...•..•.....•...........•... 29
6
D.
Assets
ll·in Armstrong's Possession •••....... 31
7
Interests .....................•...... ) 1 8
•
2.
Texas Stadium Box .................•....•... 32
J.
Coffea Internet
9
1 ....................... J 3
10
Plaza
Note .......................... 33
11
5.
Personal Possessions ...•................... 35
12
VI.
LITIGATION AGAINST ARMSTRONG ................••....... 35
13
A.
Analysis of Armstrong's Personal ial Transactions .......................... 35
B.
status of
14
•
c.
16 17
1.
•
• •
••••••...••• 4 1
TROs and
••
"
.....
6
.....
41
contempt Proceedings ......•................ 43 D.
19 ;20
............. 40
unctions and Contempt
18
•
Settl~ment
tion and
VIr.
Cr
1
'IIJ!
A
..
),
II'
....
Q
Q
II
10
....
"
"
~
..........
".
..
110
...
44
OTHER CLAIMS AND LITIGATION •.•..••...........•....... 45
21
A.
22
B.
Preference
23
c.
Sandia Refund .•...........................•..... 47
24
D.
Ta'lt Pena
25
E.
other Potential CIa
Bonds ..
II'
..
"
....
44
es ..
..
""
..
""
....
""
......
............
26
ii-
...
II
_
..
""
),
.,
a~·"·
""
""
....
..
1
to
II.
to
"
"
.....
or.
"
..........
JI<
....
'"
..
"
45
. · . ····· ........ ~ ..... 46
................
......................
""
.........
~ ~
"
....
Ii;
'"
"
..
Ii;
....
Ii
....
"
....
49
50
c
• • 1
•
A.
Claims Against Consolidated Estate .............. 51
3
B.
Claims Against Dresdner Petroleum . . . . . . . . . . . . . . . 52
c.
steven Solodoff Claim ........................... 52
IX.
CONCLUSION AND FUTURE ACTIVITIES ............•.•... . .. 54
6 7 B
•
CRED ITORS CLAIMS ANALY SIS .•.......•........ . ......... 50
:2
5
•
VIII .
•
APPENDICES
APPENDIX A:
STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS FOR THE DEBTORS AS OF DECEMBER 31, 1991
APPENDIX B:
ACCOUNTANT'S REPORT ON SOURCE AND APPLICATION OF FUNDS FOR CONNIE C. ARMSTRONG, JR. JANUARY 1, 1989 - JULY 15, 1991
APPENDIX C:
CREDITORS CLAIMS
9
10 11
12 13 14
15
•
16 17
18
•
19 20 21
•
22 23 24
•
25
26
-iii-
•
•
• • 1
1.
2
• • •
3
On May 28, 1991, Frederick
• • •
Wyle, trustee of Hamilton
Taft & company ("Hamilton Taft"), filed a First Interim Report.
5
At that time the Hamilton Taft bankruptcy case was two months old.
6
The report focused on the background and business of Hamilton
7
Taft, the diversions of Hamilton Taft funds from customers'
8
payroll
9
principal, Connie
ta~
deposits to the Texas enterprises of Hamilton Taft's
c.
Armstrong, Jr., the resulting $90'million in
10
unpaid payroll tax liabilities, and the preliminary analysis of
11
the trustee's accountant as to how Armstrong used over $50 million
12
of Hamilton Taft funds for his other business ventures and for
13
personal expenditures. At the time of the filing of the First Interim Report,
15
only Hamilton Taft was under the control of the trustee.
16
Second Interim Report .is filed by Frederick S. Wyle as trustee not
17
only of Hamilton Taft, but also of Knightsbridge Companies, Inc.
1a
(
19
Dresdner Petroleum
20
Inc.
21
substantively consolidated or jointly administered with the
22
Ha~ilton
23
information on the status of the bankruptcy cases, the trustee's
24
efforts to recover and liquidate assets, the multi-faceted
2S
litigation that has been undertaken to pursue claims from various
26
parties, and the financial status of the estates.
\I
Kn ightsbr idge "), The Remington Compani as, Inc. I
(OIEnterprises ll )
Taft case.
Inc.
This
( tI Remi ngton") ,
( II Petro leum" ) and Dresdner Enterprises I
whose bankruptcy cases are now either
I
The Second Interim Report will provide
SECOND INTERIM REPORT
•
s.
4
14
•
INTRODUCTION AND SCOPE OF THIS REPORT
-1-
•
• •
• •
•
1
This Second Interim Report will also contain an analysis
2
by the trustee's accountant of the personal financial transactions
3
of Connie c. Armstrong, Jr., from January 1, 1989 to June 15,
4
1991, which includes the period that he was in control of Eamilton
5
Taft.
6
not have access to any of the personal financial records of
7
Armstrong, which had been withheld on Fifth Amendment grounds.
s
certain financial records of Armstrong have now been made
9
available to the trustee, which enables the trustee and his
10
accountants to trace the disposition of Hamilton Taft funds
11
through Armstrong
At the time of the First Interim Report, the trustee did
•
13
bankruptcy case, much of the focus of the trustee's attention was
14
on learning what Armstrong did with Hamilton Taft's money and on
15
recovering assets under Armstrong's control that had been acquired
16
with Hamilton Taft's money.
17
been completed, by the end of 1991 the focus of the bankruptcy
18
case had expanded to pursuing claims against other parties, and to
19
realizing on assets that have already been
20
Armstrong.
21
• •
II.
Although that program has not yet
~ecovered
from
STATUS OF THE BANKRUPTCY CASES Entry of order for Relief
22
A.
23
On May 31, 1991, the Bankruptcy Court issued an order
24
for relief in the Hamilton Taft bankruptcy case, which was
25
commenced through the filing of an involuntary Chapter 11 petition
26
on March 20, 1991.
In granting a motion for summary judgment
SECOND INTERIM REPORT
•
as well as through his corporations.
During the first few months of the Hamilton Taft
12
•
perso~ally,
-2-
•
• •
• •
•
•
• • •
•
1
filed by the petitioning creditors, Federal Express Corporation,
2
Stanford university and stanford University Hospital, the
J
Bankruptcy Court rejected the arguments of Hamilton Taft as Debtor
4
that a "bona fide" dispute existed as to the petitioning
5
creditors' claims against Hamilton Taft.
6
B.
Appointment of Creditors committee
7
After the order for relief was entered, the Office of
8
the U.S. Trustee appointed a-Committee of Unsecured Creditors
9
("Creditors cOI1'l1llittee") consisting of the following 11 creditors:
10
Federal Express Corporation (chair), Scott Paper Co.; Signetic5
11
company, R.R. Donnelley & Sons, Castle & Cook (now Dole Foods),
12
Stanford university Hospital, Neiman-Marcus Group, Tandem
13
computers, Advo-System, Inc., Covia Partnership, and Blue Cross
14
and Blue Shield of Texas.
15
collectively hold claims of approximately $67 million against
16
Hamilton Taft, or about two-thirds of the total claims.
17
Creditors Committee has employed Murphy. weir and Butler of San
1S
Francisco as its counsel.
The members of the Creditors Committee
The
19
C.
The Texas Debtors and Substantive Consolidation
20
The bankruptcy cases of Knightsbridge, Remington,
21
Enterprises and Petroleum (sometimes collectively referred to as
22
the IITe:l{as Oebtorsll), 'were commenced by voluntary Chapter 11
23
petitions filed in the Bankruptcy Court for the Northern District
24
of Texas, Dallas Division, on April 19 and 29, 1991.
25
1991, on motion of the trustee, the Bankruptcy Court in San
26
Francisco ordered the bankruptcy cases of the Texas Debtors
SECOND INTERIM REPORT
-J-
On June 7,
I
•
~
I
• • I .
•
•
•
•
• •
•
1
transferred to the Northern District of california, pursuant to
2
Bankruptcy Rule l014(b), which provides that bankruptcy cases of
3
affiliated entities may be transferred to a single court. Following the change of venue of the Texas cases, the
4
5
trustee on June 26, 1991 filed a motion for substantive
6
consolidation of the Knightsbridge and Remington cases with the
7
Hamilton Taft case.
B
means of recovering for the Hamilton Taft estate the assets which
9
had been transferred from, or acquired with funds transferred
This appeared to be the most expeditious
10
from, Hamilton Taft to the Texas Debtors.
11
a showing that all of the assets of the Texas Debtors were
12
traceable to Hamilton Taft funds, and their liabilities were
13
primarily intercompany payables, which ultimately ended up as
14
payables to Hamilton Taft.
15
stock of the other
16
well as other SUbsidiary entities.
17
consolidation of Knightsbridge and Remington with Hamilton Taft
18
would enable the trustee of Hamilton Taft to control not only the
19
entities being consolidated, but all of their subsidiaries as
20
well.
21
11 trustee for all four Texas Debtors.
Te~as
The motion was based on
Knightsbridge and Remington owned the
Debtors, Enterprises and Petroleum, as Therefore, substantive
Alternatively, the trustee sought appointment of a Chapter
22
On July 22, 1991, the Court, with the consent of the
2)
Texas Debtors, ordered the intermediate step of appointment of
24
Frederick S. Wyle as interim trustee of Knightsbridge, Remington,
25
Petroleum and Enterprises.
26
request of the Creditors Committee, so that a claims bar date
SECOND INTERIM REPORT
I
The intermediate step was taken at thel
-4-
I
I
•
•
•
•
1
could be established and claims reviewed before a substantive
2
consolidation decision was made.
l
as a claims har date for all five Debtors, Hamilton Taft as well
4
as the Texas Debtors.
The Court set september 30, 1991
(See section VIII.) /
The trustee subsequently amended the substantive
5
• •
6
consolidation motion to include Enterprises in the consolidation.
7
Petroleum was not included in the consolidation, because the oil
B
and gas operations of Petroleum contain at least some inherent
9
risks of liability such that consolidation of Petroleum's assets
10
and liabilities with those-of the other Debtors would not be
11
prudent. On November 4, 1991, the Court ordered substantive
12
13
consolidation of the Hamilton Taft, Knightsbridge, Remington, and
14
Enterprises estates, effective October 31, 1991.
The
15- consolidation was not opposed by any party, including any of the
• •
•
Frederick 5. Wyle was appointed trustee of the
16
Debtors.
17
consolidated estate, and his appointment as trustee of Petroleum
18
was made permanent.
19
As a result of substantive consolidation, all assets and
20
liabilities of the four consolidated Debtors were combined and are
21
now treated as if the Debtors were a single entity.
22
assets and liabilities remain separate, but its bankruptcy case is
23
jointly administered with that ot the consolidated estate.
Petroleum IS
The
24 ' trustee believes that substantive consolidation has resulted in
•
25
significant savings to the consolidated estate in administrative
26
costs, as well as substantial savings in litigation costs that
SECOND INTERIM REPORT
•
-5-
•
• •
• • •
1
otherwise
2
Te~as
~ould
have been required to obtain the assets of the
entities. Appeals by Hamiltpn Taft. as Debtor
3
D.
4
Hamilton Taft, as Debtor, filed appeals to the District
5
Court from the order appointing a trustee entered on March 26,
6
1991, from the order approving the appointment of Frederick S.
7
Wyle as trustee entered on March 26, 1991 1 from the order for
8
relief entered on May ll, 1991, and from the order- authorizing the
9
trustee to shut down Hamilton Taft's business entered on June 21,
10
1991.
The appeals were all assigned to Judge John P. Vukasin of
11
the District Court. On February 13, 1992, the District Court dismissed all
12
I
•
13
the appeals as moot, on motion of the appellees (Federal Express,
14
Stanford University and Stanford university Hospital as to three
15
of the appeals and the trustee as to the fourth appeal).
16
District Court ruled that the Debtor's failure to seek a stay of
17
the orders and the sUbstantial changes of circumstances that had
The
18 I_occurred in the bankruptcy case since the orders were entered made
•
• •
19
it inequitable to consider the appeals.
20
to be acting on authority of Armstrong as "Chairman of the Board"
21
of Hamilton Taft, has indicated that it plans to appeal the
22
dismissals to the Ninth circuit.
23
III.
STATUS OF OPERATIONS
24
A.
25
Following a hearing on ---May 16,-:.--1991, ... ...-'. the Bankruptcy
26
Hamilton Taft -~
~
Court authoriz~d the trustee to close Hamilton Taft's business
SECOND INTERIM REPORT
•
The Debtor, which claims
-6-
•
•
•
• •
•
• •
• •
Hamilton Taft had not conducted any significant
1
operations.
:2
payroll ta)( processing business since the public disclosure of the
3
missing funds, the consequent abrupt cessation of funds
.4
transferred to Hal'lilton Taft by its customers, and the filing of
5
the Chapter 11 petition on March 2O, 1991.
6
authority to close the business
7
clients and ascertaining that few clients would continue a
8
business relationship with Hamilton Taft even under the
9
supervision of a court-appointed trustee.
10
canvassing the Hamilton Taft
After the Court approval was obtained, the trustee
11
commenced an orderly shutdown of Hamilton Taft's operations which
12
took place over the next several months.
1J
operations and terminated employees progressively, at a rate that
14
would permit the processing of client records, establish what
15
deposits were made and what taxes were paid and not paid, respond
16
to inquiries from
17
enable them to be retrieved as needed, secure-computer records,
IB
and dispose of tangible assets of the company.
ta~
The trustee ceased
agencies, organize and store records tD
Hamilton Taft closed its 1 Market Plaza, San Francisco
19 20
offices on June 30, 1991. and moved its remaining staff to smaller
21
offices.
22
tangible assets of Hamilton Taft were sold at auction on
23
August 17, 1991.
24
office staff of three full-time employees in San Francisco, for
25
accounting purposes, to perform data studies, to monitor
26
activities in Texas, and to provide support services for the
Most of the office equipment, furniture and other
At present Hamilton Taft maintains a small
SECOND INTERIM REPORT
•
afte~
The trustee requested
-7-
- -,
['.."
•
• • -1 2
• •
•
• •
• • •
bankruptcy case and litigation. maintained in Texas
j
Four additional employees are
three of them at the Double C Ranch.
Texas Debtors
)
8.
4
At the time of the trustee's interim appointment on
5
July 22, 1991, Remington maintained a large suite of offices with
6
some 16 employees at 3Bl1 Turtle Creek Boulevard in Dallas.
7
Remington provided administrative, accounting and payroll services
8
for all of the Armstrong entities in Texas.
9
infusion of Hamilton Taft money to pay its operating costs,
Without the continued
10
Remington was running out of money and unable to pay even its
11
Chapter 11 trade debts.
12
Remington had not paid its rent or insurance premiums
13
since the filing of its Chapter 11 petition in April, 1991 , and
14
was under a Bankruptcy Court order, obtained by the landlord, to
15
vacate its offices by July 31, 1991.
16
relocating the offices.
17
appointment/ new offices had to be found and a move of Remington's
18
offices arranged and completed.
19
No plans had been made for
Within one week after the trustee's
The trustee within days of his appointment reduced the
20
Remington payroll trom 16 to 10, and further staff reductions took
21
place over the next three months.
22
and the other Texas Debtors did not have, and had not had,
23
operations requiring the level of staff and administrative
24
expenses that Remington had maintained.
25
conducted by the Texas Debtors was Enterprises' efforts to sell
26
SECOND INTERIM REPORT
-8-
It was apparent that Remington
The only ongoing activity
•
•
•
•
• •
•
1
townhouses in San Antonio (see section V.A.2) and Petroleum's
2
unprofitable oil and gas operations {See Section V.A.4).
3
•
• •
a~
be more economically managed by
s
that Enterprises required" only one employee on site in San
6
Antonioi and that the rest of Remington's administrative and
7
accounting services could be combined with that of Hamilton Taft
B
in San Francisco, thereby eliminating the need for a Dallas office
9
and achieving substantial savings.
10
On October 31, 1991,
Remington's offices in Dallas were closed. Remington's office equipment, furniture and furnishings
12
have been sold or moved to the Double C Ranch,
13
over by the trustee on August 1, 1991.
14
files have been, or will be, moved to San Francisco.
15
the VOluminous files and records located at Remington's offices
16
and at a storage facility has taken and continues to take
17
substantial effort.
18
over which records belonged to Armstrong personally or Armstrong
19
entities not under the control of the trustee.
~hich
was taken
Remington's records and Sorting out
It also required negotiations with Armstrong
20
Records retained by Armstrong have been made available
21
to the trustee for copying, except for documents which have been
22
withheld by Armstrongls criminal defense counsel as subject to a
23
Fifth Amendment or attorney-client privilege.
24
seeking to work out with Armstrong's counsel any remaining
25
disputes over documents claimed to be privileged.
25
•
outside management companYi
4
11
•
The trustee determined that Petroleumls operations could
SECOND INTERIM REPORT
-9-
The trustee is
Any unresolved
•
• •
1 \ disputes will be sUbmitted to the Bankruptcy Court for resolution 2
• • •
3
pursuant to an order previously obtained by the
IV.
•
• •
•
FINANC!AL CONDITION OF THE ESTATES
4
A.
5
Appendi~
Consolidated Estate A contains schedules of the postpetition
6
receipts and disbursements of the Debtors in the consolidated
7
estate, i.e., Hamilton Taft, Knightsbridge, Remington and
8
Enterprises, as of December 31, 1991.
9
also been prepared for receipts and disbursements during the
Separate schedules have
10
period of the trustee's administration, which commenced on,
11
July 22, 1991 for the Texas Debtors.
12
•
truste~.
The postpetition revenue of the Debtors comprising the
13
consolidated estate totalled S2,193,513, as of December 31, 1991.
14
For the period of the trusteels administration, total revenues
15
were $2,097,101.
16
a townhouse by Enterprises prior to the trustee's appointment.)
17
The major sources of postpetition receipts have been sales of
18
townhouses ($£51,438),
19
and luxury automobiles, office equipment, furniture and
20
furnishings ($342,048); a
21
defense counsel for recovery of legal fees ($400 / 000); and bank
22
account interest ($lB3,141).
23
activities prnducing them are provided in other sections of this
24
report.
25
26
(The difference is due primarily to the sale of
livestock at the Double C Ranch
settle~ent
($331,623),
with Armstrongls criminal
Details of these receipts and the
Postpetition disbursements by the
D~btors
comprising the
consolidated estate totalled $2,8J7,484, as of December 31, 1991.
SECOND lNTERIM REPORT
-10-
•
•
• •
•
&
• 1
Disbursements during the period of the trustee's administrai
2
totalled $2,699,129.
J
operating
4
appointment.)
5
were for operating expenses, including sUbstantial employee
6
salaries, primarily for Hamilton Taft operations in the early
7
stages of the bankruptcy case before the trustee closed the
B
Hamilton Taft business.
9
substantial continuing costs of the Double C Ranch since August 1,
e~penses
(The difference is due primarily to
paid by Remington prior to the trustee's
Of the total postpetition disbursements l
$1,357,741
The operating expenses include the
1991, when the trustee took over the ranch.
10
11
Professional fees of the trustee and his attorneys and
1-\,6
12
accountants account for Sl, oao, 891 of the post-petition
13
disbursements.
14
appraisers and consultants employed by the trustee, and attorneys
Additional professional fees were paid to
15' employed by the Creditors committee and the Texas Debtors.
•
16 17
• • •
professional fees do not include fees accrued but not paid as of I
December 31, 1991.
18
The beginning cash balances for the Debtors in the
19
consolidated estate, at the commencement of their respective
20
bankruptcy cases, totalled $5,930,642, of which $5,856,509 was for
21
Hamilton Taft and $74,133 for Knightsbridge, Remington and
22
Enterprises combined.
23
by $643,971, the consolidated estate had a cash balance of
24
$5,288,401 as of December 31, 1991.
25
26
with total disbursements exceeding receipts
The trusteels goal is maintain a level of operating expenses (i.e., rent, employee salaries and other office expenses)
SECOND INTERIM REPORT
•
The
-11-
I'
&
•
•
• •
•
• •
for the consolidated estate,
2
be funded from current interest income.
3
however, include the professional fees and expenses, which will be
4
the primary Chapter
5
diminish the existing funds of the estate unless substantial new
6
rec.overies are had,
•
•
~l
Such expenses would not,
costs in the future, and which will in time
and sales are made.
7
B.
8
A summat:y of Petroleum's postpetition cash receipts and
9
Dresdner Petroleum
disbursements through December 31, 1991, is also contained in
The postpetition revenue from oil and gas production
10
Appendix A.
11
totalled $667,915 through December 31, 1991.
12
total cash receipts exceeded total disbursements by $22/136 for
13
the postpetition period, the cash receipts
14
advanced from Remington.
15
Petroleum had a negative cash flow from operations during the
16
postpetition pet:iod, through December 31, 1991.
17
Section V.A.4
1B
balance, as of December 31, 1991, was $47,159.
19
v.
belo~
i~clude
$60,000
Without the interc_'?.!lIQ..~~. Y_3~JtY"ance...
for current situation.)
RECOVERY AND
While Petroleum's
LI~UIDATION
h'P';'
i:J.,v~/f..J/
(However, see
Petroleum's cash
OF ASSETS
Through substantive consolidation, most of the assets
20
•
if possible, on a level which could
1
21
acquired by Armstrong and his companies with Hamilton Taft funds
22
have been recovered, to the extent that they are available to be
23
recovered.
24
substantial portion of the funds diverted from
25
spent for investments which became defunct within months of the
26
investments or for other reason have no realizable value,
As discussed in the First Interim Report,
SECOND INTERIM REPORT
-12-
a
~amilton
Taft were
for
(
•
•
•
• •
•
•
•
1
unrecoverable operating costs of Armstrong's Texas operations, and
2
for personal expenditures of Armstrong.
3
held by the Texas Debtors or their subsidiaries, the trustee has
4
also recovered the najor asset that had been held by Armstrong
5
personally I the Texas ranch.
6
control are discussed in section V.D below.)
7
•
(The assets remaining in Armstrong's
The assets that have been recovered are a collection of
8
physical assets which Armstrong bought with Hamilton Taft funds as
9
tlinvestments," and promissory notes and other contract rights against third parties.
11
assets are expected to require litigation to collect.
12
time, the trustee cannot provide any estimate of the amount that
13
will be realized from the assets Which have been turned over by
14
Armstrong or through the takeover of the Texas companies.
lS
will depend on the outcome of litigation against third parties to
16
whom Armstrong and the Armstrong entities transferred funds
17
through lIinvestments," loans and other advances, and on the
19
financial ability of these third parties to respond to judgments.
19
Most of the necessary litigation has been commenced and the
20
remainder will be commenced shortly.
21
third party liability continues.
22 23
A.
All
of
lO
24
•
In addition to the assets
the assets other than physical At this
Much
Investigation into potential
Physical Assets 1.
Double C Cattle Ranch
The single most expensive acquisition by Armstrong was a
25
1,700 acre ranch l which he called the "Double C Ranch."
26
purchased by Armstrong in February, 1990 as a "hobby ranch," by
SECOND INTERIM REPORT
-13-
It was
•
•
•
• •
•
• •
• •
1
Armstrong's own description, meaning a combination cattle and
2
horse operation and personal residence.
3
13,000 square feet in size, with indoor swimming pool, sauna, and
4
exercise facilities.
5
Hamilton Taft's funds on the ranch,
6
purchase price, $1.1 million for capital improvements,
7
tor livestock and equipment, and $1 million to fund operating
8
deficits of the cattle operation.
9
Armstrong spent over $9.3 million of including $6.5 million for the $600,000
To acquire the ranch, Armstrong had Hamilton Taft
10
advance $9.B million to Winthrop Realty Company ("Winthrop"), one
11
of his Texas companies.
12
the $9.8 million to Armstrong, who acquired the ranch
13
name.
14
the ranch.
15
Hamilton Taft, secured by a lien on Armstrong's note to Winthrop.
16
Winthrop,
in turn, simultaneously loaned
in his own
Armstrong gave Winthrop a note for $9.9 million,
secured by
Winthrop, in turn, executed a $9.8 million note to
In June, 1991, the trustee declared a default on
17
Winthrop's note ·to Hamilton Taft and foreclosed on the collateral,
IS
namely Armstrong's note to Winthrop.
19
note to winthrop, the trustee then commenced foreclosure
20
proceedings on the ranch, which secured the note.
21
foreclosure, Armstrong offered to transfer the ranch to the
22
trustee through a deed in lieu of foreclosure.
23
transferred the livestock on the ranch, consisting of
24
approximately 600 head of cattle and 2S horses collateraliZed to
25
Hamilton Taft, ranch equipment and vehicles and other personal
26
property associated with the ranch, and the ranch bank accounts.
SECOND INTERIM REPORT
•
The residence is over
-14-
As holder of the Armstrong
Facing
He also
•
•
• •
•
The
took
2
although
1e was not recorded until September.
4
substantial deficit, which was funded by Hamilton Taft money
5
funnelled through
6
Armstrong owned the ranch, the the hous
7
•
•
expenses for
IS
residence)
10
and horses over a several month per
11
after direct costs of sale, of $331,623
12
to seU ranch
and
U
me.
and furn
14
other structures will not be sold until the ranch is sold..
obtain
cles not needed for full
ing5 in the main residence and
16
year listing agreement with Town and
1'7
Texas, to serve as broker for the
18
the nature of the
for what
an exclusive one Estates of Center,
of the ranch.
Because of
and the economic conditions and
in Texas, the trustee cannot predict
real estate
19
net proceeds,
The trustee also intends
In December, 1991, the trustee
, the ranch
11 be sold.
The carrying costs of the ranch are estimated at
21
•
deficit of the ranch, not
After acquiring the ranch, the trustee sold the cattle
9
20
•
the IS-month period that
totalled over $1 million.
15
•
at a
The cattle operations on the ranch
3
S
•
session of the ranch effective August 1, 1991,
1
22
approximately $300,000 per year, of which
If is for
23
and property taxes and half for ma
costs.
24
maintenance of the ranch
25
essent
26
res
and improvements is costly. but
1 for the sale of the ranch.
In addition to the main
of more than 13,000 square feet, the ranch
SECOND INTERIM REPORT
-15-
•
• • 1
include a guest house with 3,4QO square feet, three foremen's each with three bedrooms, and a large lIstate of the
2
• • •
J
art" show horse arena, which also canta
4
saloon
5
as well as several
6
recruire maintenance.
7
considerably, three
s
and security purposes.
9
graz
10
Approximately 75,000 scruare feet of
•
•
lit
While the ranch staff has been reduced rema
at the ranch for maintenance
The trustee
to exchange
pa
the
also owned a 121 acre adjoining parcel, known
12
as the stiefer property, which he
13
in December, 1989 for $72,429 cash (from
14
a $181,912 note, secured by the property.
15
that the
ble value of the stiefer
16
balance
on the note
17
not enhance the sale value of the
18
therefore declined to take
l
from Julius D. Stiefer Taft funds) and The trustee determined was less than the
and ownership of the small ranch.
WOll
The trustee
to the Stiefer property and
to Armstrong
19
a deed in 1
of foreclosure to
property to Stiefer. 2.
21
•
and other ranching
estate.
20
•
les of
for consulting services
11
•
a
off
Seventh of SQnterra
The Seventh of Sonterra project consists of 23 single-
22
2)
family townhouses and 28
24
the seventh hole of the Sonterra
25
Texas.
26
Resolution Trust Corporation for $1.9
The
ect was
SECOND INTERIM REPORT
family pad sites near Club in San Antonio, .by
-16-
ises from the ~illion
J
•
•
•
• •
• •
•
1
The acquisition was financed with Hamilton Taft funds,
2
through Knightsbridge.
J
on July 22, 1991 1 only two townhouses had been sold.
4
• •
•
At the time of the Trustee's appointment
The trustee has continued to sell the single family
5
townhouses individually to retail buyers, having determined that
6
the net revenue to the estate would probably be greater than from
7
a bulk sale, although a bulk offer for the entire project would
B
also be considered.
9
appraised at $118,000 to $142,00 each, after repair and buildout
The townhouses have been individually
work (at $8,000 to $15 OOO per townhouse)
11
23 townhouses, eight have been sold, seven of them post petition.
12
Several more townhouses are under contracts for sale.
13
November, 1991, the
14
general authority to sell the townhouses, without the necessity of
15
a court order for each sale, provided that the gross sales price
16
is for an amount not less than 90 percent of the appraised value
17
of the particular townhouse.
j
t~stee
are completed.
Of the
10
18
•
funnelled
In
obtained a Bankruptcy Court order for
During the post petition period,
net proceeds from
19
townhouses sales, after deduction of direct selling costs, total
20
$651,438 through December, 1991, representing proceeds of
21
townhouses.
22
out work and repairs required for each townhouse, which work is
23
performed by subcontractors of Enterprises at the time of sale.
24
The townhouse sales program and construction work are supervised
25
by one remaining Enterprises employee on site in San Antonio.
si~
Selling costs include the S8,000 to $15,000 of finish
26
SECOND INTERIM REPORT
-17-
•
• •
1
3.
•
4
respectively, near Dallas.
5
Enterprises from the Resolution Trust Corporation, Whispering
6
Meadows in
7
of $1.1 million was spent on the projects.
9
~pril,
• •
The properties were both purchased by
1990, and Glade Meadows in May, 1990.
Both properties are for sale.
A total
There has been
considerable interest in the properties, and several offers have
10
been made and accepted, subject to court approval after
11
contingencies are removed.
12
feasibility or financing contingencies which have not been met.
13
Tnus, the two projects, while again under contract, remain unsold. 4.
15
•
and Glade Meadows
residential tracts located in Arlington and Grapevine,
~4
•
~eadows
3
8
•
Whispering
Whispering Meadows and Glade Meadows are undeveloped
2
•
•
However, all the offers have included
Oil and Gas Leases
Dresdner Petroleum owns oil and gas leasehold interests
16
on a 560 acre tract in Howard County, and on a 1,000 acre tract in
17
Fisher County, in Texas.
18
an exploration project, with minor
19
producing well.
20
substantial new investment.
21
Fisher County property
22
The Fisher county interest producti~n
is primarily
to date on one
Continuing the exploration program would require
The trustee intends to sell the
if a reasonable price can be obtained.
The Howard County property is a leasehold which has had
23
its primary recovery.
The profit potential of the field is
24
dependent on the results of an ambitious "secondary recovery"
25
program to be accomplished by water injection into the underlying
26
area.
Meanwhile, there is some production at this time, which
SECOND INTERIM REPORT
-18-
•
•
• •
• •
• •
•
1
provides gross revenue of $75,000 to $100,000 per month.
2
Petroleum had operated at a loss since its inception; the
J
continuing operational loss} the trustee believes, was due largely
4
to excessive overhead and salary costs (including a salary of
5
$200,000 per year for the president of Petroleum). Effective November 1, 1991, when the Remington offices
6
7
were closed, the trustee turned over management of Petroleum'S oil
B
and gas operations to an outside contractor, KCM Management, Inc.,
9
of Dallas.
KCM is providing production, accounting, contract
10
administration, reporting, tax and other services at a
~1
substantially lesser cost than Petroleum was incurring in
12
performing these services with in-house employees.
13
savings in administrative costs, the trustee expects Petroleum to
14
show a small operating profit, except for professional fees.
15
delinquent post-petition trade debts have now been retired out of
16
the savings of administrative costs, except for professional fees.
17
Petroleum also has not yet repaid
18
postpetition advances.
19
The
for S60,000 in
20
e~pected
21
completion of that program, when the flow of oil resulting from it
22
can be properly evaluated, the trustee intends to sell the Howard
23
County property.
to be completed in six months to a year.
s.
26
After the
Luxury Automobiles
At the time Armstrong deeded the ranch to the trustee,
25
he also transferred two automobiles, a 1990 Rolls Royce Silver
SECOND
•
Re~ington
With the
The "secondary recovery" water injection program is
24
•
•
I~TERIM
REPORT
-19-
•
•
• •
•
1
Spur II and a 1990 Jaguar ·XJS, both of which were purchased at
2
charity auctions with Hamilton Taft funds and used by Armstrong as
J
personal vehicles.
4
Lincoln stretch
5
were sold by the trustee for a total of $139,000.
B.
6
9
•
•
owned by Remington.
The three vehicles
Promissory Notes and GUarantees Mohamed Hadid
Bankruptcy Court against Mohamed Hadid, a Washington, D.C. real
10
estate developer, and other persons and entities, arising out of
11
loans totalling approximately $8.8 million by Hamilton Taft and
12
Remington to Hadid. In March, 1988, when Hamilton Taft was owned by
14
Ma~Pharma,
15
~as
16
the same lawsuit against MaxPharma through which he acquired
17
ownership of
IS
Hadid had·conspired with other defendants to convert funds from
19
Ha~ilton
20
from Hamilton Taft.
21
•
li~ou5ine
The trustee has filed an adversary proceeding in the
13
•
The trustee also took possession of a 1989
1.
7
B
•
•
Inc., Hamilton Taft loaned $3 million to Hadid, which
to be repaid in )0 days, but was never repaid.
Ha~ilton
Armstrong, in
Taft in 1989, also sued Hadid, claiming that
Taft by, among other things, borrowing the $3 million
In September, 1990 Armstrong settled the litigation
22
against Hadid for cash of $50,000 and a new $1.75 million note,.
23
with principal payable in two installments in September, 1991 and
24
september, 1992.
25
Hadid an additional $6.5 million, notwithstanding his failure to
26
repay the earlier $3 million loan.
Armstrong also agreed in September, 1990 to lend
SECOND INTERIM REPORT
-20-
- - - - - - - - - --- -
-
•
•
•
• 1
• • •
2
1990 to Remington for $6.5 million, which was guaranteed by his
l
wife, Mary Butler Hadid.
4
and his wife executed a security agreement pledging all of their
5
interests in numerous corporations and partnerships which
6
purportedly owned, among other real property, four Ritz Carlton
7
hotels located or under construction in Washington, D.C., New York
8
City, Houston and Aspen, Colorado.
9
UCC-l financing statements for the security interests, despite his
10
11
• • • •
Hadid executed a promissory note dated September 11,
However, Hadid never executed
representation that he would do so. Despite Hadid's refusal to execute and deliver
finan~ing
12
statements, Armstrong authoriZed the funding of the $6.5 million
13
promissory note.
14
occurred on March 13, 1991, Remington advanced a total of
15
$5,796,300 to Hadid.
16
either these advances or the $1.75 million note.
In a series of transfers l the last of which
No repayment has been made by Radid of
11
The trustee has tiled suit against Hadid, Mary Butler
18
Hadid and certain Hadid entities to collect on the $6.5 million
19
note, the $1.75 million and the original $3 million and to enforce
20
Remington's lien rights under the security agreement.
21
has learned that in June.
22
interest in the collateral to a business associate, Abdulaziz bin
23
Ibrahim Al-Ibrahim of Saudi Arabia, commonly referred to as the
24
lithe Sheik".
25
seeks a determination that any rights of the Sheik in the property
26
transferred by Hadid are subject to Remington's security interest.
The trustee
1991, Radid may have transferred his
The trustee has joined the Sheik as a defendant and
SECOND INTERIM REPORT
•
To secure the $6.5 million note, Hadid
-21-
•
•
Media reports as well as reports of the trustee's
1
• •
•
•
2
investigators indicate that Hadid is being pursued by numerous
3
creditors, his Washington, D.C. office has been closed,
-4
his real property interests (including his Washington, D.C. home)
5
have been foreclosed, and he may no longer be residing in the
6
United states.
7
United states, but the trustee does not have any information as to
B
whether she has independent assets to satisfy a judgment.
10
the defendants through various means.
11
yet responded to the lawsuit.
12
discovery from third parties to obtain information on the assets
13
in which Hadid purportedly held an ownership interest and granted
14
Remington a security interest.
15
estimate what recovery, if any, will be obtained on the Hadid
16
notes. 2.
•
19
The trustee also intends to seek
At present, the trustee cannot
Stanley Rosenberg
Stanley Rosenberg, a San Antonio attorney and businessman, on a $1
20 ' million guarantee he executed in favor of Remington on
21
September 19, 1989.
Rosenberg was involved in promoting and
22
developing a combined restaurant and gambling facility known as
23
River city Fair in San Antonio.
24
invested S2 million in the project, of which $1 million was for
2S
purchase of a 49% interest in the stock of River City Fair, Inc.
.26
(IRFer")
Through Remington, Armstrong
and $1 million for a loan to RFCI, guaranteed by
SECOND INTERIM REPORT
•
None of tbe defendants have
The trustee has filed an adversary proceeding against
18
•
Mary Butler Hadid appears to be residing in the
The trustee is seeking to effectuate service on all of
9
17
•
certain of
-22-
•
•
•
•
• •
•
1
Rosenberg.
2
petition.
•
4
denied liability on his guarantee.
5
agreed to release him from the guarantee, that Armstrong agreed to
6
and failed to subsidize all necessary expenses to keep the project
7
operational, and that Rosenberg advanced additional money to the
B
project in reliance on Armstrong's representations, all of which,
9
Rosenberg contends, discharges his obligations under the
• •
Be claims that Armstrong
Rosenberg has also filed a motion requesting that the
10
guarantee.
11
Bankruptcy Court abstain from jurisdiction over the claim on the
12
ground that it should be filed as a state court action in Texas. The trustee cannot predict at this time the likely
14
outcome of the Rosenberg adversary proceeding.
15
defenses he has asserted, Rosenberg has communicated to the
16
trustee that there are other claims and judgments against
17
Rosenberg and that he will not be able to satisfy any judgment
18
obtained by the trustee.
19
trustee, Rosenberg has not provided any documentation of his
20
financial condition.
21
•
In response to the trustee's lawsuit, Rosenberg has
3
13
•
The restaurant failed and RFCI filed a Chapter 7
22
3.
Parke~
In addition to the
However, despite a request by the
Automotive
In February. 1991, Armstrong invested $3
mi~liDn,
23
through Remington, in Parker Automotive Corporation, a publicly
24
traded company in costa Mesa, California, which manufactured and
25
distributed a machine and chemical compound designed to clean
26
automobile engines, and which was in serious financial
SECOND INTERIM REPORT
-23-
•
•
•
•
•
•
difficulties.
2
lien on all assets of Parker, junior to a lien for approximatelY
3
$700,000 owed to Home Bank.
4
stock options and voting rights which gave it immediate control of
5
Parker and the right to acquire up to 66 percent of the stock of
6
the company.
7 8
•
•
9
•
•
Upon the closing on February 14, 1991, krmstrong
Ibecame chairman
of the board and chief executive officer of
Parker. Despite Remington's infusion of $J million in cash, Parker remained in financial difficulty.
11
resigned as CEO, and he and other Remington nominated
12
representatives resigned from the Parker board.
13
facing numerous lawsuits by unpaid vendors, Parker filed a Chapter
14
11 petition in the Bankruptcy Court for the Central District of
15
California.
16
closed Parker's business shortly thereafter.
In June, 1991, Armstrong
On July 26, 1991,
A Chapter 11 trustee was appointed in September, and
The Parker trustee has contracted for sale of most of
1B
Parker's assets, including its manufacturing equipment, domestic
19
inventory located in the United states and patent and trademark
20
rights, for $1.5 million, payable $500,000 at closing and the rest
21
over a one-year period, secured by the assets to be sold.
22
Inventory located in Europe and accounts receivable are not
23
included in the sale and may bring additional revenue.
24
•
Remington was also granted certain
10
17
•
Remington received "a convertible note, secured by a
1
If the pending sale is completed, and the maximum amount
25
is collected under the sale, Remington could realize up to
26
S700,DQO from the sale proceeds, based on its second priority lien
SECOND INTERIM REPORT
-24-
•
•
•
•
•
• •
1
on Parker assets.
2
sale of the foreign inventory.
3
first position with respect to the Parker patent, without which
4
Parker's tangible assets have substantially reduced value, as Horne
5
did not perfect a security interest in the patent.
6
• • •
However, Remington's secured position is being challenged by the Parker trustee, who seeks equitable
a
subordination of Remington's interest on the ground of inequitable
9
conduct by Armstrong in acquiring Remington's interest and/or in
10
managing the company.
11
Remington may not be secured as to part of its debt (which is of
12
little importance as Remington's debt exceeds the likely value of
13
Parker's assets)
14
in the inventory located in Europe.
r
The Parker trustee also claims that
and may not have perfected a security interest
The parties have agreed to expedited discovery and
16
resolution of Remington's claim in the Parker bankruptcy case
17
through relief from stay proceedings that have been filed on
1B
behalf of both Remingt-on- and Home--8ank.
19
have reached a tentative agreement, which has not been finalized
20
or approved by the Bankruptcy Court, on allocation between them of
21
any proceeds received by either of them from the Parker assets.
22
An agreement between Remington and Home Bank would eliminate any
23
disputes between them on lien priorities or the allocation of sale
24
proceeds to the patent, and enable Remington and Home to cooperate
25
in pursuing their mutual interest as secured creditors.
26
SECOND INTERIM REPORT
•
Furthermore, Remington may be in
7
15
•
Additional amounts may be realized from the
-25-
Remington and Home Bank
•
•
•
• 1
•
• •
The trustee cannot estimate at this time what,
2
anything, the estate will recover from the Parker investment.
J
Protecting the estate's interest in Parker has consumed
4
substantial time and legal expense, and has been one of the most
5
costly activities of the estate in relation to the potential
6
recovery.
7
potential for significant recovery for the estate, the trustee
B
believes that the time and resources devoted to Parker is
9
necessary and justified.
Nevertheless, because the Parker asset does have the
10
C.
11
• • •
•
Other Claims Against Third Parties I.
Criminal Defense Legal Pees
12
Dn September 4, 1991, the trustee filed an adversary
13
proceeding against Armstrongts criminal defense attorneys, the
l~
Dallas firm of Meadows, Owens, collier, Reed and Coggins, for
15
recovery of $735,000 in legal fees paid to the firm, of which
16
~700/000
17
appointed.
18
proceeds of a sale of a helicopter by Winthrop, an Armstrong owned
19
company, on March 25, 1991.
20
less than a month before, with funds advanced by Knightsbridge,
21
which in turn obtained the funds from Hamilton Taft.
was paid on March 27, 1991, the day after the trustee was
The trus t ee traced the S700, 000 p"aY1llen t to the
Winthrop had purchased the helicopter
The trustee sought recovery of the payments to the
22
fir~
23
Meadows
on the ground that the payments came from fraudulent
24
conveyances from Hamilton Taft and Knightsbridge and were
25
recoverable from the law firm as a subsequent transferee of an
26
avoidable transfer under Section 550 of the Bankruptcy Code.
SECOND INTERIM REPORT
•
it
-26-
------ - -- ----
•
•
•
• •
1
Under section 550, the trustee may recover fraudulently
.2
transferred
3
also from a
4
without
5
transfer.
•
• •
•
2.
9
25, 1991, Knightsbridge transferred a total
On
10
11
of $600,000 to three members of the McCall family, David McCall,
12
Jr., and his sons, David Mccall, III and
13
the McCalls executed a $200,000 note to
14
a
date of January 25, 1992. the notes of his sons.
Mccall.
certain real estate
17
an insurance agency owned by
18
friends of
personally, with
David MCCall, Jr. also
All three notes are secured
McCall, Jr.
The McCalls are
and
The trustee recently learned that on
19 violat
20
of a
Each of
sts in Plano, Texas, as well as stock in
16
27,1991,
iminary injunction then in effect (See executed an agreement to transfer the
21
section VI.C.l),
22
$600,000 McCall notes to Dav
23
to Armstrong of $275,000,
24
for his own benefit.
25
in
26
Armstrong now conducts business, $55,000 in october,
McCall, III in return for
ch
rece
The $275/000 was
-27-
pav~,~nr
and retained
id as follows: S120,000
, 1991 to Chenal Corporation, a new
SECOND INTERIM REPORT
•
00,000 cash, which was
the Meadows firm in December, 1991.
15
•
but
was filed, the trustee
to a settlement of the claim for
paid
I
transferee who received the
After the
7 B
1
and with knowledge of the fraudulent
6
•
not only from
under which ~991
to
•
• • • •
•
• •
• •
• (The form
1
Armstrong, and $100,000 in November, 1991 to Armstrong.
2
of the transaction
3
McCall, III notes for the $175,000 transfers in July and october
4
1991.
5
MCCall, and the $175,000 in notes were cancelled.)
6
~as
that Armstrong and Chenal gave David
In November, 1991, Armstrong obtained another $100,000 from
A letter agreement of November 27, 1991, signed by me~orializing
7
Armstrong and_David MCCall, III
B
conditioned the transfer of the S6DO,OOO notes on Armstrong
9
reaching a settlement with the trustee. (See section VI.B.)
the transaction,
That settlement did not
10
occur.
11
cash and returned the notes to David MCCall, III at the time the
12
letter agreement was signed, when obviously no settlement with the
13
trustee had been reached.
14
purporting to extend the maturity date of the McCall notes from
15
January 1992 to January 1994.
16
Armstrong nevertheless received the
Armstrong also signed documents
Upon learning of the transactions between Armstrong and
17
David Mccall, III, the trustee commenced contempt proceedings on
18
February 10, 1992 against Armstrong for violation of the
19
preliminary injunction and obtained a temporary restraining order
20
prohibiting any further transfers of funds or assets by Armstrong
21
and Chenal, except for certain limited expenditures, pending the
22
contempt hearing.
23
subpoenaed the financial records of Armstrong and Chenal to
24
determine what
25
McCall in return for the McCall notes.
(See Section VI.C.l.)
~rrnstrong
did with the $275,000 obtained from
26
SECOND INTERIM REPORT
The trustee has
-28-
•
•
•
• •
•
• •
• •
1
•
The trustee also filed an adversary proceeding against
2
the MCCalls an February 7, 1992, seeking recovery of the $600,000
3
they received from Knightsbridge as fraudulent conveyances from
4
Knightsbridge,
5
security interests, guarantees and other contract rights Armstrong
6
received from the McCalls, and for declaratory relief that
7
Armstrong's November 27, 1991, agreement vith David McCall, III is
8
invalid because "it violates the preliminary injunction and the
9
automatic stay.
10
imposition of a constructive trust on the notes,
3.
Potential Recoveries To Be Investigated
11
The trustee is continuing to investigate other potential
12
claims that the estate may have against third parties for recovery
13
of funds or other assets transferred to them by Armstrong or the
14
Armstrong entities, or for other reasons.
15
SUch recoveries to the extent it would be cost effective to do so.
16
Among the transfers that will be reviewed are retainers
17
paid to attorneys by Hamilton Taft and Remington in March and
18
April, 1991, after the Hamilton Taft involuntary petition was
19
filed.
20
criminal defense attorneys/ ne caused $480 1 000 in retainers to be
21
paid by Hamilton Taft or Remington to four other law firms, for a
22
total of $1,215,000 in advance payments to lawyers representing
23
Armstrong's interests.
24
$145,000 in retainers paid to Creel and Atwood of Dallas,
25
bankruptcy counsel for the Texas Debtors, which retainers were
In addition to the
~735,000
paid by Armstrong to his
The $1,215,000 total does not include
26
SECOND INTERIM REPORT
•
The trustee vill pursue
-29-
•
•
• •
•
• •
• •
•
1
subsequently returned to the Debtors' estates or credited against
2
earned fees approved by the Bankruptcy Court. The trustee has already settled with Armstrong's
3
4
criminal defense attorneys for return of a portion of their fees
5
to the estate.
6
the remaining $480/000 were Johnson & Gibbs of Dallas, attorneys
7
for Hamilton Taft as Debtor
a
Francisco, attorneys for both Hamilton Taft as Debtor and
9
Armstrong personally ($175,000), Eppright and Golembeck of Dallas,
(See Section V.C.1.)
($200~OQO),
Long & Levit of San
10
attorneys for Armstrong, Remington and other Armstrong entities
II
($80,000), and Hance and Gamble of Dallas, who have identified
12
themselves as attorneys for Knightsbridge and Remington ($25,000).
13
None of these attorneys have been approved as counsel for a Debtor
14
in the bankruptcy cases, nor have they filed disclosures of their
15
fee arrangements as required by Section 329 of the Bankruptcy Code
16
ana
17
or approved by the Court, although all or a portion of their
18
services were performed postpetition.
Bankruptcy Rule 2016, nor have their retainers been reviewed
19
The trustee has not yet sought return of the retainers,
20
or any portion of them, to the estate, or made any decision to do
21
so.
22
retainers paid to the attorneys should be reviewed by the Court,
23
And an accountinq required of the services performed and applied
24
against the retainers.
25
accounting and review by the Court under Section )29 of the
26
Bankruptcy Code and Bankruptcy Rule 2017, regardless of whether
However, the trustee believes that, at a minimum,
SECOND INTERIM REPORT
•
The four law firms receiving
the
The trustee intends to request such an
-30-
•
• • •
1
the trustee decides to seek recovery of the retainers, or any
2
portion thereof.
3
attorneys involved may seek additional fees from the estate,
4
beyond their retainers.
5
•
•
•
•
The trustee has been advised that some of the
Hance and Gamble received a $25,000 retainer not only in
6
April, 1991, but also for each of the months of January, February
7
~nd
B
trustee's inquiry, Hance and Gamble has stated that the firm was
9
retained to perform legislative lobbying services tor a flat fee
March, 1991, for a total of $100,000.
In response to the
of $25,000 per month.
11
Hance, a former congressman who received substantial political
12
contributions from Armstrong in his unsuccessful campaign for
13
governor of
14
supporting information to show that it performed services
15
commensurate with the $100,000 fees it received, and has advised
16
the firm of his intention to seek recovery of the fees if such
17
backup is not provided.
19
-D.
Te~as.
One of the principals of the firm is
~ent
10
18
•
•
The trustee has asked Hance and Gamble for
Assets still in Armstrong's Possession
Armstrong still has possession of a number of assets
20
which were purchased with Hamilton Taft funds and which are held
21
in his name or in the name of Armstrong companies not under the
22
control of the trustee.
23
notes, such assets include the following:
In addition to the McCall promissory
Rodeo Interests
•
25 26
Armstrong owns a 49% stock interest in Pro Rodeo, Inc" and either Armstrong or Winthrop owns a 33% limited partnership
SECOND INTERIM REPORT
•
-31-
•
•
•
• • •
•
1
interest in Rodeo PartnerS.
2
Mesquite, Texas} near Dallas.
3
Pro Rodeo is controlled by a rodeo performer, Don Gay,
4
and its primary business is supplying livestock for rodeos,
5
principally at the Mesquite Arena, a rodeo arena serving the
6
Dallas area.
7
to acquire a 49% percent interest in Pro Rodeo in January, 1991.
8
Rodeo Partners is a closely held limited partnership which owns
9
the Mesquite Arena.
11
1990. The trustee has obtained financial and operating
13
information on Pro Rodeo and Rodeo Partners througn the subpoena
14
process available under Bankruptcy Rule 2004.
15
operating businesses, but their current profitability and value
16
are uncertain. 2.
•
Texas Stadium Box
19
at Texas Stadium, home of the Dallas Cowboys football team, from a
20
bankruptcy estate £or a total of $390,000.
21
to the stadium boxes personally, and the purchase price was
22
as a loan from Remington to hrrnstrong.
23
Remington also paid for improvements for the stadium boxes.
Armstrong took title boo~ed
After the acquisition,
In March and April, 1991, Armstrong sold two of the
24
•
Both entities have
In March, 1990, Remington purchased three stadium boxes
1B
•
Armstrong invested $1.5 million, also
obtained from Hamilton Taft, in Mesquite Partners in September,
17
•
Armstrong invested $350,000 of Hamilton Taft's money
10
12
•
Both entities are located in
25
stadium boxes for a total of $265,000, which was paid to
26
Remington.
Armstrong retained the third box, which, according to
SECOND INTERIM REPORT
-32-
•
•
•
•
•
1
deposition testimony of his assistant, Teri Robins, ne treated as
2
his "personal" box.
3
Texas Stadium boxes, the trustee understands that the remaining
4
box has a resale value of at least
5
• •
•
•
3.
6
• •
Coffe~
$~50,OOO.
International
In 1989 and 1990 Remington loaned a total of $B9,000 to
7
Armstrong's brother, Robert Chad Armstrong, and to Coffea
8
International, Inc., a distributor of imported coffee beans
9
controlled by Robert Chad Armstrong.
On February, 11, 1991,
10
Knightsbridge advanced an additional $250,000 to Chad Armstrong or
11
Coffea International. The $250,000 advance, plus the prior
12
advances of $99,000 with interest, were then booked as a $341,225
13
investment by Remington in the stock of Coffea International.
14
stock appears on the books of Remington as an asset of Remington,
15
but the trustee has been advised that Armstrong also claims the
16
stock as his personal asset.
17
obtaining information on the financial status and operations of
lB
Coffea International through the subpoena process, and does not at
19
this time have information on the value of Remington or
20
Armstrong's interest in Coffea International.
21
•
Based on information from a broker who sells
4.
22
The
The trustee is in the process of
Plaza Realty Note
CCAJ corporation, an Armstrong company still under the
23
control of Armstrong, holds a $5 million note of plaza Realty
24
company (IIPlaZa Realty"), an affiliate of Gulftex Financial
25
Corporation and its principals, Jimmy E. Nix and Richard F.
26
Watkins.
Armstrong (through CCAJ) and MaxPharma, prior owner of
SECOND INTERIM REPORT
-33-
•
• •
Iton Taft. invested a total of $6 mill
1
• •
•
• of Hamilton Taft
2
funds in 1989 in a joint venture
3
Investment Fund (IIPlptl)
-4
In February, 1990, CCAJ sold its interest in PIF to
5
for $1 mill
owned
and Watkins.
B
after
one $400,000
filed suit in Texas state
In 1990, CCAJ
court against Plaza Real
11
and Watkins and related entities for fraud aris
12
or
in PIF.
1
Plaza
defaulted on the note
Plaza Rea
10
13
Realty
ip interests
by certain stock and
7
9
ng center
in cash and a $5 million note executed
and
6
owned
I
onal
Gulftex, called
on the note and against Gulftex, N
the su
After
did little to
out of the I
CCAJ
In December,
the
14
1991, with a trial date
21
recovering from Plaza Realty or the collateral
22
Realty note are not promising.
but no capacity or intention in
• •
•
23
•
collateral.
Nor has
Gulftex, Nix and
SECOND INTERIM
•
al cond
of
za Realty
trustee yet
or merits of the fraud claim against
25 26
However} the trustee has not yet
the f
24
the Plaza
~EPORT
-)4-
•
• •
5.
1
•
3
of his luxury automobiles, he still retains two personal
4
automobiles purchased by Remington and booked to Armstrong as
5
"advances".
6
1990 Jaguar returned to the trustee) and a 1990 Ford Lariat pickup
7
truck, which were appraised in ttid-1991 at $37,000.
B
•
9
They are a 1989 Jaguar (not to be confused with a
Armstrong also has furniture and home furnishings which Knightsbridge purchased for $)5,000 for a four bedroom Aspen,
10
Colorado condominium which Armstrong had contracted to purchase
1l
jointly with Mohamed Hadid (see section V.B.l.)
12
purchase was not completed, Armstrong forfeited $300,000 in down
13
payments (paid by Remington), and shipped the furniture and
14
furnishings to Dallas. VI.
•
Personal Possessions
Although Armstrong has turned over to the trustee wost
2
•
•
16
The condominium
LITIGATION AGA1NST ARMSTRONG
A.
Analysis of Armstrong's Personal Financial Transactions
17
At the time of the First Interim Report, the trustee did 18
•
not have access to any of Armstrongls personal financial records, 19 as compared to those of corporate entities controlled by him. 20 21
•
22
Armstrong had refused to produce any personal records on Fifth Amendment grounds. In late July and August, 1991, Armstrong produced his
23
personal bank account records and certain supporting documentation 24
for the period of January 11 1989 through June 15, 1991.
•
25
(Armstrong acquired Hamilton Taft in March, 26
SECOND INTERIM REPORT
•
-35-
1999.)
With the
I
•
I.
•
•
•
1
personal financial records, together with the records of the
2
Armstrong entities which show transfers of funds to or on
3
of Armstrong, the trustee's accountants have prepared an analysis
4
of Armstrong's personal receipts and
5
1989 through June 15, 1991.
6
Appendix B.
• •
for January 1,
The analysis is contained in
s
period of Armstrong's ownership of Hamilton Taft, over $16.5
9
million of Hamilton Taft funds, mostly routed
th~ough
10
Knightsbridge, Remington or WinthroPJ was paid to Armstrong or by
11
the Armstrong entities to third parties for Armstrong's benefit.
12
of the $16.5 million,
13
Armstrong.
14
entities for assets, investments and other expenditures which
15
Armstrong held in his own name, including over $9 million related
16
to the Double C Ranch.
The
about $4.7 million was cash paid to
re~aining
$11.9 million was paid by the Armstrong
Of the $4.7 million in cash transferred to Armstrong,
IS
$1.2 million was booked as compensation or directors' fees
19
($852,385 net of withholding taxes) or reimbursement of expenses
20
($396,703).
21
cash "advances" from Remington, Knightsbridge or WinthroPI Which
22
Armstrong has never repaid, or as repayments to Armstrong of a
23
$1.5 million "loan" he purportedly made to Remington in February,
24
1990.
25
obtained from Winthrop, which in turn obtained the funds from
26
Hamilton Taft.
Most of the money, over $3 million, was recorded as
Armstrong made the "loan " to Remington with funds he
In the first three months of 1991 alone, just
SECOND INTERIM REPORT
I-
e~penditures
beh~lf
During the two and a half year period, which covers the
17
•
I I
7
•
•
I
-36-
I
•
•
• • •
•
•
1
before the public disclosure of Armstrongts diversions of Hamilton
2
Taft money, over $1 million in cash was transferred from
3
Knightsbridge to Armstrong's personal accounts. Armstrong's personal financial records verify that he
4
5
had no significant source of income or receipts, other than
6
Hamilton Taft money, during the two and half year period.
7
$4.8 million in total cash flow through his personal bank accounts
8
OVer the two and a half year period, all but $127,6Q6 can be
9
definitely traced to Hamilton Taft and the Armstrong entities who,
• • •
Of
10
in turn, received their funds from Hamilton Taft.
11
he received in the first quarter of 1989, before he acquired
12
Hamilton Taft, can be traced to Hamilton Taft funds.
13
in the Accountant's Report, during the first quarter of 1989, as
14
well as earlier, Remington, which was the primary source of
15
Armstrong's funds, obtained its money from loans which were repaid
16
with Hamilton Taft money atter Armstrong's acquisition of Hamilton
17
Taft.
Even the money
As discussed
Likewise, all but an estimated $78 1 °00 of the
18
•
•
19
approximately S4.7 million that Armstrong received in cash from
20
Hamilton Taft and the Armstrong entities appears to have been
21
deposited into and can be traced through his personal accounts.
22
On January 1, 1989, he had $52B in his accounts.
23
1991, the last date for which the trustee has bank account
24
information for Armstrong, he had an estimated $85,000 in his
25
account.
On June 15,
Between those dates, nearly $4.7 million of Hamilton
26
SECOND INTERIM REPORT
-37-
•
• • •
~ent
1
Taft funds
2
expenditures.
3
The
• •
•
into and out of his accounts for personal
withdra~als
~ithdrawals
($175,138~
include sUbstantial cash
5
payments ($465,398) for which supporting documentation has not
6
been provided and the trustee's accountants therefore cannot
7
provide further analysis.
8
expenditures from Armstrong's personal accounts were by check
9
transactions or wire transfers, for which the payee is identified.
10
and credit card
However, most of the transfers and
Among Armstrong's significant personal expenditures,
11
paid from his personal accounts during the January 1, 1989 through
12
June 15, 1991 period out of funds traceable to Hamilton Taft,
13
were: political and charitable contributions totalling
15
$964,701.
16
contributions and $361,000 was for political contributions.
17
Payments characterized as charitable contributions in Arrnstrongls
1S
records include $200,000 paid at-a charity auction for a 1990
19
Rolls Royce and $100,000 paid to the Dallas Opera Ball.
20
largest political contribution was to Texas gubernatorial
21
candidate Clayton Williams, who received $100,000.
22
Of this amount, $603,701 was for charitable
2.
The
Professional fees of $742,735, of which $735,000 Meado~sj
23
was paid in March and April, 1991, to
24
Reed and Coggins, Armstrong's criminal defense attorneys.
25
Section V.C.l.)
26
SECOND INTERIM REPORT
•
from Armstrong's personal accounts
4
1.
•
•
•
•
-38-
Owens, Collier, (See
•
•
•
• 3.
•
2
was for purchase of a 49%
J
which
4
classif
not identified in the Armstrong
7
trustee. 4.
• •
made available to the
totalling $295 / 571, inc
,301 to
his ex-wife (exclusive of payments identified as child
11
child care)
12
his personal assistant at
13
$J7,lB6 for h
I
5,
's
$46.575 for an automobile loan and
or payments to
2,500 to his fiance, and
motherls med
1 expenses.
Household expenses totalling $274,089 for residence, including
9,352 for
and
enance, $56,121 for domestic payroll, $40,734 for ut
16
ma
11
$15,354 for interior decorating,
18
beverages and $10,329 for flowers. Purchases from
,SB3 for
jewele~s,
es and
clothiers, furriers.
19
6.
20
and other retailers totalling over $183,000, not which may have been made
21
•
of which was
10
IS
•
V.D.l.)
Gifts, loans and other transfers to friends,
relatives and
14
•
(See
Inc., a company
check dated November 5, 1990, the rec
6
9
Pro-Rodeo~
as an "investment expense" was a payment for a $105,000 IS
S
•
in for rodeos.
1
5
•
Investments totalling $494,017, of which $350,000
cred
Acquisitions, investments or
22
23
the $11.9 million which
24
benefit with Hamilton Taft
25
ranch,
26
Hamilton Taft (consist
cards.
financed by Armstrong's addition to the
47,738 for costs associated with his acquisition of
SECOND INTERIM REPORT
primarily of $615,000
-39-
d to Stanley
•
•
•
•
•
• •
•
• •
Rosenberg, a former
2
MaxPharma settlement, and $232,730 for legal fees), $390,000 for
3
the Texas stadium skyboxes, $600,000 for loans to the McCalls,
4
$335,000 for the down payment and furniture for a condominium in
5
Aspen, Colorado (which Armstrong did not ultimately purchase),
6
$295,000 for investments in cotfea International, Armstrong's
7
brother's company, and $132,767 for automobiles.
8
B.
9
commen~ing
Ma~Pharma
status of Litigation and Settlement in June, 1991, the trustee has hed
LO
substantial and ongoing discussions with Armstrong regarding
11
settlement of the Hamilton Taft estate's claims against Armstrong.
12
Such settlement discussions have generally involved a
13
under which most assets still remaining in the possession of
14
Armstrong and entities under his control would be returned to the
15
Hamilton Taft estate, and Armstrong would stipulate to a
16
nondischargeable judgment for a specified amount, with forbearance
17
on execution if Armstrong paid an agreed upon portion of his
18
futUre income and receipts to the estate for a specified period of
19
years.
20
frame~ork
While the parties appeared clcse to reaching a settle~ent
21
settlement from time to time, the
22
terminated in late January, 1992.
23
unable to reach agreement on several aspects of the settlement
24
that were of importance to one party or the other.
2S
26
discussions were
The trustee and Armstrong were
No further settlement discussions are planned.
The
trustee intends to proceed with the pending adversary proceeding
SECOND INTERIM REPORT
I-
shareholder, as part of the
1
-40-
--------
•
•
•
•
• • •
1
against Armstrong to seek recovery of all remaining assets in
2
Armstrong's possession traceable to Hamilton Taft funds, or to
3
transfers from any of the other Debtors.
4
will seek a money judgment against Armstrong for the full amount
5
of Hamilton Taft's loss, after adjustment for any amounts realized
6
from recovered assets.
7
Armstrong sought to
re~ove
In addition, the trustee
the adversary proceeding from
B
the Bankruptcy Court to the District Court on the ground that he
9
had demanded a jury and the Bankruptcy Court could not conduct
10
jury trials.
11
withdrawal of reference, ruled that the Bankruptcy Court could
12
conduct jury trials in "core" proceedings, which included the
13
trustee's main claims for fraudulent conveyance, constructive
14
trust, turnover orders and injunctive relief.
The District Court, on Armstrong's motion for
However, the non-
15- core claims included in the trustee's complaint, namely the breach
•
16
of fiduciary duty, conversion and breach of contract causes of
17
action, were removed to the District Court.
IS
•
•
In-',unctions and Cont.empt Proceedi.ngs
1.
19 20
•
c.
TROs and preliminary Injunctions
On April 4/ 1991, after the adversary proceeding against
21
Armstrong and related entities was filed, the Bankruptcy Court
22
issued a temporary restraining order (·'TRO") prohibiting any
23
transfers, encumbrances or other dispositions of assets by
24
Armstrong or any Armstrong companies "e:xcept to meet day to day
25
ordinary operating expenses".
26
several times.
SECOND INTERIM REPORT
•
The TRO was extended by agreement
-41-
•
•
•
• 1
•
• •
•
2
trustee of the Texas Debtors, Armstrong agreed to entry of a
3
preliminary injunction against him, with the TRO continued as to
4
the remaining Armstrong entities not under the control of the
5
trustee.
6
eKisting as of July 22, 1991, and any proceeds and products
7
thereof (called the "pre-existing
8
income of Armstrong, and assets acquired from future earnings
9
(called the "new assets").
• • •
The preliminary injunction differentiated between assets
assets~),
and future earnings or
The preliminary injunction provided an
10
absolute prohibition against any transfers, encumbrances and
11
dispositions of pre-existing assets, except that Armstrong was
12
allowed to use his remaining cash, up to S100,ODO, for "ordinary
13
day to day operating expenses and reasonable living expenses tl
14
Arro~trong's
15
future earnings and income, were released from the TRO and not
16
subject to the preliminary injunction.
17
•
On July 22, 1991, when the trustee was appointed interim
•
future earnings and income, and assets acquired with
On November 4, 1991, the TRO against the remaining
18
Armstrong entities (which for practical purposes consisted of
19
Winthrop), was converted to a preliminary injunction.
20
preliminary injunction against the entities was substantially the
21
same as the TRO,
22
except for "ordinary day to day operating expenses."
23
preliminary injunctions, the July 22, 1991 injunction against
24
Armstrong personally and the November 4, 1991 injunction against
25
the remaining Armstrong entities, are currently in effect.
The
i.e., it prohibited all transfers of assets
26
SECOND INTERIM REPORT
-42-
The two
•
• •
• •
1
2
Court issued a new TRO against Armstrong, which supplements but
3
does not replace the July 22, 1991 preliminary injunction.
4
new TRO prohibits all transfers, encumbrances or other disposition
5
of assets, including any so-called "new assets", by Armstrong, his
6
new company, Chenal Corporation, and any other companies
7
controlled by Armstrong, except for a specified list of approved
B
expenditures and other expenditures approved in advance of payment
9
by the trustee or the court.
• •
•
The TRO, which is in place until a
preliminary injunction and contempt hearing scheduled for
11
March 13, 1992, was imposed after the trustee learned that
12
Armstrong and Chenal had received and likely spent $275,000 in
13
promissory note proceeds which were subject to the July 22, 1991
14
preliminary injunction.
16
2.
(See Section V.C.2.)
contempt Proceedings
The trustee has filed two contempt motions for
17
Armstrong's violation of the April 4, 1991 TRO and the July 22/
18
1991 preliminary injunction.
19
In December, 1991, the trustee and the creditors
20
Committee jointly filed a motion to hold Armstrong in contempt for
21
violation of the TRO.
22
eKpenditures by Armstrong as not for "ordinary day to day
23
operating expenses/II including $9,000 to his fiance,
24
brother, $5,715 to a womenls dress designer for merchandise
25
ordered by his fiance; and $4,000 for the glasses of a country
26
music star purchased at a charity auction.
SECOND INTERIM REPORT
•
The
10
15
•
On February 22, 1992, on application of the trustee, the
The motion challenged several personal
-43-
$B,OOO to his
The trustee also
•
• •
• • •
• •
• •
•
1
sought recovery of $11,000 from proceeds of cattle sales which
2
Armstrong transferred from the ranch operating account to his
J
personal account.
4
After a hearing on January 24, 1992 1 the Bankruptcy
5
Court ruled that Armstrong had violated the TRD and ordered him to
6
pay $37,725 to the trustee over a 90 day period.
7
provides that if payment is not made, the Bankruptcy Court will
8
recommend that the District court issue an order of contempt.
9
The second contempt proceeding
filed by the trustee
10
on February 10, 1992 arising out of Armstrong's transactions with
11
respect to the McCall promissory notes.
12
trustee contends that Armstrong violated the preliminary
13
injunction by (i) spending or otherwise disposing of $275,000
14
received fron David Mccall, III,
15
sell the notes,
16
exchange for the 5275,000 he received from McCall, and (iii)
17
executing an agreement to extend the maturity date on the notes by
18
two years.
19
order requiring Armstrong to show cause on March 13, 1992 why he
20
should not be held in contempt for violating the
21
injunction.
~hich
(Section V.C.2.)
The
(ii} executing an agreement to
total $600,000 , to David Mccall,
III in
On February 11, 1992, the Bankruptcy Court issued an
preli~inary
Criminal Investigation
22
D.
23
The trustee has been advised that the
u.s.
Department of
24
Justice is conducting an investigation to determine whether
25
criminal charges should be filed against Armstrong or other
26
persons on account of the transfers of Hamilton Taft funds.
SECOND INTERIM REPORT
•
~as
The order
-44-
The
•
•
• • • •
1
trustee has cooperated with law enforcement officials in their
2
investigation, by providing information and documents in his
3
possession or under his control,
4
officials.
5
results or timing of the criminal investigation.
6
VII.
•
• •
and as requested by such
The trustee has no control or influence over the
OTHER
C~IMS
AND LITIGATION
A.
B
The estate's largest potential recovery is on fidelity
9
Fidelity Bonds
bonds issued by Underwriters of Lloyd's covering loss to Hamilton
10
Taft from theft by employees.
11
primary coverage and $30 million umbrella coverage, for a total of
12
$50 million, subject to certain deductibles.
13
were a requirement of most
14
customers.
The policies contain $20 million
The fidelity bonds
ot Hamilton Taft's contracts with its
The trustee gave written notice of a claim to the
16
underwriters on April 25, 1991.
17
commenced, through their San Francisco attorneys,
18
1991.
19
They have requested access to voluminous records of Hamilton Taft
20
and the Texas Debtors to investigate the claim, and the trustee is
21
in the process of responding to these requests.
22
denied or not acknowledged after the underwriters have had a
23
reasonable opportunity to investigate, the trustee intends to file
24
suit on the bonds.
25 26
Discussions with the underwriters in November,
The underwriters have neither admitted nor denied coverage.
If coverage is
The trustee cannot predict at this time the likely outcome of the claim on the fidelity bond.
SECOND INTERIM REPORT
•
~hen
7
15
•
•
-45-
Substantial legal
•
• • •
• •
• • •
•
•
1
issues are likely to be raised relating to coverage or the amount
2
of recovery under the bonds.
]
Reflecting the importance of the fidelity bond claim to
4
the estate, both the trustee and the Creditors Committee have
5
retained special insurance counsel.
6
law firm of Mound, cotton and Wolan of New York City to assist in
7
pursuing the claim.
8
Bronson and McKinnon of San Francisco. B.
9
The creditors committee has retained Bronson,
Preference claims
The trustee has commenced an analysis of potential
10 11
preference actions against customers of Hamilton Taft for whom
12
payroll tax deposits were made under circumstances that the
13
payments would constitute preferential transfers under Section 547
14
of the Bankruptcy Code.
l5
the "ordinary course of business", the trustee is analyzing only
16
celinquent payments made by Hamilton Taft during the 90 days pr_ior
17
to the filing of the involuntary petition on March 20, 1991.
19
delinquent payments were generally made in two time periods, on or
19
about January 31, 1991, when Hamilton Taft paid over $50 million
20
in tax liabilities which were due in the first part of October,
21
1990, and on or about March B, 1991, when customers learned that
22
Hamilton Taft had diverted tax deposits to the Armstrong entities
23
and made demands on Hamilton Taft for confirmation that their
24
ta~es
25
complete, the trustee estimates that transfers meeting the
had been paid.
Because of the exclusion for transfers in
While the trustee's analysis is not
26
SECOND INTERIM REPORT
•
The trustee has retained the
-46-
Such
•
•
• • •
1
preference criteria may exceed $40 million, after deduction of
~
"new value" payments. The trustee has thus far made demands for return of
3
4
payments from, and has filed adversary proceedings against, two
5
parties, Volume Shoe corporation (aka Payless SnoeSource)
6
~illion
7
million.
8
in both January and March, 1991.
9
customers to confront Hamilton Taft on March 8, 1991, as a result
• •
(aka Shop and Save) for $12.5
Delinquent taxes were paid on behalf of these customers They were among the first
of
11
taxes, and they have relatively small claims against Hamilton Taft
12
for unpaid taxes.
Hamilton Taft covered the shortfall on their delinquent
Additional preference actions are expected to be filed
14
by the trustee on a case by case basis.
15
will be filed against any customer
16
communicating a written demand.
17
•
~hich
and S&S Credit co., Inc.
No adversary proceedings
~ithout
the trustee first
Because of the circumstances under which Hamilton Taft's
18
bankruptcy was filed, the trustee does not expect any significant
19
preference claims to be asserted on account of payment of vendor
20
debts during the 90 day preference period.
21
generally paying its trade debts as they became due, and the
22
"ordinary course of business" exception will like.ly apply to most
23
payments to vendors.
Hamilton Taft was
24
c.
25
The trustee has settled a dispute with a former Hamilton
Sa."!o.ie Refund
26 . Taft client, Sandia Corporation, also known as Sandia National I
SECOND INTERIM REPORT
_J._ )_
for $3.4
10
:.3
•
•
-47-
•
•
• •
•
•
•
•
ta~es
paid by
1
Laboratories, over a $938,007 IRS refund for payroll
2
Hamilton Taft on Sandials behal.f.
3
trustee received $744,198 from Sandia on February 6, 1992, and is
-4
expected to receive an additional sum of approximately $187,000 on
5
or about March 8, 1992, for a total of approximately $931,200,
6
including interest.
7
reflected in the cash receipts and disbursements schedules shawn
B
in Appendix A, which covers only transactions as of December 31,
9
1991. )
Under the settlement, the
(The $744,198 payment already received is not
The dispute arose out of a $917,876 payment which
10 11
Hamilton Taft paid to the IRS on Sandia's behalf on March 8,
12
On that day, pursuant to its contract with sandia, Hamilton Taft
13
initiated an electronics funds transfer from Sandiats bank account
14
to cover the payment.
15
the same day, and made its
16
resulted
1991.
Sandia, however, reversed the payment on o~n
deposit with the IRS, which
in duplicate payments for Sandia1s account. Sandia applied for and obtained a refund from the IRS of
17
•
•
18
$938,.007, w~ich included $20,131 in interest.
19
not dispute that the refund belonged to Hamilton Taft, Sandia
20
claimed the right to offset against the refund any amounts
21
Hamilton Taft owed to Sandia for unpaid taxes,
22
penalties.
23
completed an internal audit and received confirmation, direct from
24
the taxing agencies. of all payroll taxes which it had remitted to
25
Ha~ilton
26
Taft.
While Sandia did
interest and
Sandia wanted to retain the IRS refund until it had
Taft during the life of Sandia's contract with Hamilton
The trustee was unwilling to wait indefinitely until Sandia
SECOND INTERIM REPORT
-48-
•
•
•
•
1
received confirmation from each taxing agency, which may never
2
occur.
3
taxes for which Hamilton Taft was respons
4
state
unpaid
Hamilton Taftts own records show that the
ta~es
which were not due at the
were
,051 in
Sandia terminated its
I
•
•
5
contract, but for which
6
Taft.
•
to pay to the trustee all of the IRS refund,
8
Sandia
9
including any interest accrued thereon
10
except for $22,051 for the
11
and $160,106,
12
which will be
13
1992.
Sandia's
taxes, which Sandia will retain, the
unconfirmed state tax payments,
an interest bear
account until March 8,
If Sandia is able to find any additional unpaid taxes interest and penalties, it will be allowed to pay such J. ""..1. e.;:,
from the IRS refund.
On March at 1992, all
rema~l}.I.."Y
15
l.J.cu.J.I...l
16
funds from the IRS refund, and accrued interest, which
17
to total approximately $lB7,OOO, will be released to the trustee,
18
regardless of whether
19
Taft's
20
confirmation of Hamilton
D, of December, 1989 to the
in March, 1991,
22 23
has
of its taxes.
21
•
Ha~ilton
The trustee and Sandia reached a settlement, under which
7
14
•
had advanced funds to
Taft:
Ilion in penalties to the IRS on account of late
of the
over $7 of
customers' payroll taxes, which resulted from Armstrong's program
•
25
of diverting tax
/~he
trustee is
/'
26
analyzing whether such SECOND INTERIM REPORT
•
to his Texas entities.
may be recoverable -49-
the trustee
• •
• •
1
or the customers under the Internal Revenue Code, which provides
2
that penalties may be excused if
3
was due to reasonable cause and not willful
4
trustee believes that the unusual circumstances surroundinq
5
late
6
penalties
7
penalties abated.
•
9
The trustee also bel
11
Approximately $1.5
12
the 90 day preference
11
of the tax penalties were paid during
13
E.
14
The trustee and his a
15
claims against persons and entit
are cant
in9 to analyze ch may be 1
ing in, contributing to , or
16
relat
18
Hamilton Taft.
19
such claims.
VIII.
e
to
to the improper transfers of money
The trustee has not reached any conclusions
CREDITORS CLAIMS ANALYSIS Dn
22, 1991, the Bankruptcy Court set a deadl
22
September 3D, 1991 for fil
23
Debtors.
24
of the Debtors and was publ
25
(National Ed
of claim against the f
of the bar date was sent to all known
in the Wall Street Journal
ion), the San
Chronicle and
News.
SECOND INTERIM REPORT
•
Hamilton
Taft may be recoverable by the estate as
26
es paid within
of the filing of the
90
21
•
that any
lO
20
•
should be recoverable, as well as unpaid
pa
17
•
rise to a reasonable argument that
taxes
B
•
to make timely
-50-
Callas
of
•
• •
• • •
~.
2
Proofs o£ claim totalling $205.3 million. unduplicated,
3
were filed against the Debtors constituting the consolidated
4
estate, i.e., Hamilton Taft, Knightsbridge, Remington and
5
Enterprises.
6
the Debtors acknowledge are liquidated, non-contingent and not
7
subject to dispute) are added, the
8
against the consolidated estate total $210.2 million.
9
all claims against the consolidated estate is contained in
10
• •
c~aims
potential
A list of
12
claim, filed by steven Solodoff, Hamilton Taft's former
13
controller, accounts for $110
14
believes that Solodoff's claim is not meritorious.
15
VIII.C below.)
16
potential claims against the consolidated estate total $100.2
17
million. This compares to scheduled claims for the four Debtors of
18
$94.4 million, or a difference of only 6 percent.
~illion
of the total.
The trustee (See Section
If Solodoff's claim is disregarded, the maximum
19
Claims of Hamilton Taft customers for unpaid taxes
20
account for $95.1 million of the $100.2 million total claims
21
(compared to $91.9 million acknowledged in Hamilton Taft's
22
schedules).
2]
and employees total $1.7 million.
Total potential claims of Hamilton Taft trade vendors
For the
Te~as
Debtors, claims against Remington total
including both proofs of
clai~s
and scheduled claims,
25
$970,665,
26
unduplicated, as compared to $505,932 in scheduled debts.
SECOND INTERIM REPORT
•
ma~imum
However, the claims total is distorted, because one
24
•
When non-duplicative scheduled claims (i.e., claims
Appendix C.
11
•
claims
~gainst
Consolidated Estate
1
-51-
Claims
•
• •
• • •
• •
• •
1
against Enterprises total $47,332.
2
Knightsbridge, other than duplicates of claims filed against other
J
Debtors.
4
claims of affiliated entities which are not included in the
5
consolidated estate.
All claims totals e~clude intercompany claims, including
6
B.
7
Proofs of claim filed against Petroleum total $651,060.
Claims Against Dresdner Petroleum
8
Scheduled claims total $371,376.
9
against Petroleum, with duplications deleted, total $731,286.
The maximum potential claims The
10
claims against Petroleum consist almost entirely of vendor claims
11
for goods and services provided to Petroleum's oil and gas
12
operations.
13
in Appendix C.
A list of all claims against Petroleum is contained
steven Solodoff Claim
14
C.
15
steven Solodoff, the Hamilton Taft controller whose
16
public disclosure to customers and the news media of the diversion
17
of Hamilton Taft funds led to the tiling of the bankruptcy, has
IB
filed a $110 million proof of claim against Hamilton Taft and the
19
other Debtors based on the federal False Claims Act.
20
Claims Act allows a private citizen
21
the United States for fraud committed against the government, with
22
the private citizen retaining up to 30% of any recovery.
23
claims that Hamilton Taft violated the False Claims Act by
24
knowingly using false records or statements to conceal or avoid an
25
obligation to transmit money to the United states and fraudulently
26
converting government trust funds.
SECOND INTERIM REPORT
•
No claims were filed against
-52-
The False
to bring actions on behalf of
Solodoff
Solodoff also alleges that he
• • •
•
•
1
~as
2
FBI about Hamilton Taft's diversion of tax deposits.
3
Prior to the commencement of the
wrongfully terminated by Hamilton Taft because he notified the
• • • •
Taft
4
bankruptcy case, Soladaff filed a False Claims Act complaint in
5
the
6
declined to take over the lawsuit, as it is entitled to do, but
7
the
B
complaint be dismissed because any claims stated would be income
9
tax claims, which are expressly excluded from the False Claims
10
u.s. u.s.
District Court.
The United states government not only
Attorney filed a brief recommending that Solodoff's
Act. In November, 1991, Solodoff filed a motion for relief
11
•
Ha~ilton
12
from stay in the Bankruptcy Court seeking a determination that his
13
District Court lawsuit was exempt from the automatic stay as an
l.4
exercise of the "police power".
15
Solodoff's motion, ruling that Salodof! was not a "gove.rnmental
16
llni til enti tied to assert the "police power" exception under
17
Section 362 of the Bankruptcy Code.
The Bankruptcy Court denied
18
The denial of relief from stay to pursue a District
19
Court action does not affect Solodoff's proof of claim in the
20
Bankruptcy Court.
21
Solodoff's claim, purporting to assert relief on behalf of the
22
United states, which has suffered no loss, has any significant
23
likelihood of success.
24
personal claim for wrongful termination is barred by a release he
25
executed at the time of his termination, for which he received
26
four months of severance pay.
SECOND
I~TERIM
However, the trustee does not believe that
REPORT
The trustee believes that Solodoff's
-53-
-
-----~
- --.-.- . - - - - - . - - - - - - - - - - - -
•
•
•
1
IX.
Identification of the main problems, claims, potential
2
• •
J
assets and litigation requirements of the estate is now
4
substantially complete.
5
heavy litigation activity, as the claims brought by the estate are
6
pursued, and presumably also resisted.
7
also be brought by the estate.
S
•
• •
• •
CONCLUSION AND FUTURE ACTIVITIES
9
Additional claims will
The trustee expects that a liquidating Chapter 11 plan will ultimately be filed and confirmed for the consolidated
10
estate, there being no possibility of a rehabilitation of the
11
business.
12
depend upon the prospects of the disposition of its assets.)
13
the point of view of creditors, the questions are, obviously, how
14
much of their claims they will receive, and when they will receive
15
any funds.
16
(Whether a plan will also be filed for Petroleum will From
From this report, creditors and other parties in
17
interest will understand that the trustee cannot now provide very
18
specific answers to these questions.
19
however, on the determinants of the amount of pDtential recovery_
20
Some comments may be made,
Based on the proofs of claim filed against the estate,
21
it does not appear that resolution of claims against the estate
22
will be a major concern.
23
proofs of claim filed and the estate records do not appear to
24
differ sufficiently so as to make any major difference in the
25
potential percentage of payment to creditors on their claims.
26
trustee will in due time review the claims in greater detail, and
SECOND INTERIM REPORT
•
The next six months to a year will see
Except for the Soloaoff claim} the
-54-
The
•
• -.oJ
,~
•
1
file objections as appropriate, but on the basis of a first review
2
and current information, there does not appear to be any
3
likelihood of a major impact on percentage of recovery from any
4
potential correction and disallowance of claims (except for the
5
Solodoff claim). The physical assets of the Hamilton Taft estate together
6
•
•
•
7
with the cash on hand, while substantial, would in them.selves be
a
unlikely under the best of assumptions to yield any more than 10
9
cents on the dollar for prepetition unsecured creditors, perhaps
10
substantially less.
The key to what creditors will receive will
11
be the recovery on the estate's Claims, primarily the claims on
12
the fidelity bonds and for return of preferences, and to a
13
substantially lesser extent, on the success and collectibility of
14
various claims against transferees of Hamilton Taft funds and
is
possibly other third parties.
16
outcome or degree of success on the claims at this time.
What is
17
certain is that litigation and pursuit of claims will be
e~ensive
18
and time consuming.
19
trustee.
The claims will be vigorously pursued by the
This is the major task for the estate in the future.
20
21
•
Da.ted:
It is not possible to predict the
February 20, 1992
22
Freder~e~ee
23 ;!4
•
25 26
SECOND INTERIM REPORT
•
-55-
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