Still, experts recommend that builders secure financing to run their businesses prior to filing (as TOUSA did, with $135 million from Citigroup Global Markets) because “institutions don’t have much appetite” for funding companies in Chapter 11, says David Bruck, an attorney who represented Kara Homes in its bankruptcy case. Kara’s smartest move may have been hiring Perry Mandarino, senior managing director of Traxi, a New York–based bankruptcy consultant, as its chief restructuring officer. Mandarino “put together precisely what Kara had to sell,” says Bruck, and solicited 250 developers and other potential buyers. Mandarino ultimately connected Kara with Plainview Asset Management and Glen Fishman, a local developer, who together formed a joint venture to acquire 12 of Kara’s 29 properties. This joint venture not only agreed to complete construction on more than 600 homes, it also bought $50 million of Kara’s debt and provided Kara with around $20 million to cover Chapter 11 and administrative costs and to pay Kara’s unsecured creditors.
White knights can be a blessing, such as the private equity firm The Najafi Cos. agreeing in late January to acquire Trend Homes in Arizona for $65 million, and then taking that builder into Chapter 11. But such knights are rare. Mandarino couldn’t find a savior for Elliott Building Group, which despite approaching more than 300 prospects, could auction off only two of its 14 properties. What galls Elliott is that his company had two or three profitable communities around which it could have reorganized and was three weeks from negotiating new financing when, he says, it was forced into bankruptcy by a trade creditor that “tried to jump ahead of everyone and foreclose on one of our properties.”
Some builders file bankruptcy to manage the unmanageable. A bankruptcy court recently allowed Levitt and Sons to tap a $3.5 million loan it wouldn’t have had access to otherwise, so the builder could resume construction. Under Chapter 11, Neumann Homes transferred property and mechanic’s lien obligations to five lenders that assumed responsibility for paying trades and completing construction on about 200 homes. Each of Oakwood Homes’ 15 banks, to which the builder owed $30 million, had its own idea about how it should be repaid. Bankruptcy protection offered an orderly path for those lenders to equitably retrieve Oakwood’s assets, which include around 200 lots and 30 unfinished homes in four communities.
However, bankruptcy protection might seem emasculating to builders used to calling their own shots. “You’re in a fishbowl where banks, courts, and creditors are entitled to extensive financial reporting,” says Kenneth Rosen, an attorney with Rosewood, N.J.–based Lowenstein, Sandler PC, which is representing Weyerhaeuser in the Dunmore Homes bankruptcy and a large trade creditor in the Neumann case. Rosen also points to the relatively recent phenomenon of creditors selling their claims to illustrate bankruptcy’s unpredictability. “We’re seeing a lot of vulture investors entering the world of insolvency,” he cautions.
Unpredictability, though, is part of the drill. Neumann must cut a separate deal with Bank of America, which balked at the builder’s property-for-debt proposal. In January, a bankruptcy court judge ordered the trustee in the Levitt case to appoint a committee representing home buyers who could lose more than $15 million in deposits on homes that Levitt hadn’t finished or started. “That’s why you have to get to the banks’ workout departments early,” advises Elliott, “because the people who made the loans are never fully aware of the seriousness of your situation, and banks in general move like glaciers.”
Rosen tells his clients to do whatever they can to get in and out of bankruptcy quickly. “It’s not like wine. It doesn’t get better with age.” Bankruptcies can assume lives of their own and become endless. (The supermarket chain Grand Union has been in and out of bankruptcy since 1995, and its most recent case has dragged on for eight years.) Dunmore Homes’ contentious Chapter 11 already has spilled over into lawsuits filed by its former president against one of its creditors, the developer Reynen & Bardis; and by creditors against a struggling business started by the Dunmore family’s two sons.
Through January, nearly 500 notices, amendments, orders, and other documents had been filed in the Neumann case, including court approval for hiring Hilco Trading Co. as the builder’s real estate advisor. As of early February, Hilco was evaluating Neumann’s land, which could determine the ultimate sale of those assets. “We’re either dead by then, or we’ll have a game plan,” says a source familiar with this case. “We’ve told the banks they aren’t getting Neumann’s property for free, so tell us what you want us to do—like putting it in a trust or selling it—and we’ll do it.”
As banks retrieve distressed land to settle debt, a bankrupt builder such as Perry might get a second life by offering his construction services to build homes on those properties. “Who can do that better?” Perry asks. “The banks, or someone like me, with 30 years in the business?”