Date: Thu, 27 Aug 1998 11:15:19 -0400 From: Darrell Todd Maurina Reply-To: Darrell128@aol.com Organization: Christian Renewal/United Reformed News Service Subject: NR 98083: IRM Declares Bankruptcy; CRC Seeks Removal of IRM Management NR #1998-083: IRM Declares Bankruptcy; CRC Files More Litigation Seeking Removal of IRM Management When three Christian Reformed agencies and over 1500 individual and institutional investors learned last October that they were at risk of losing $228 million of investments in IRM Corporation, a network of 130 California real estate partnerships, virtually everyone wanted a private settlement that would keep the case out of bankruptcy court. Now, three Christian Reformed agencies, the Barnabas Foundation, and a group of twenty individual investors are asking the US Bankruptcy Court to decide on August 31 whether to remove the current IRM management and replace it with a court-appointed trustee. Despite earlier indications that the CRC agencies would withdraw their litigation, an attempt by retired Back to God Hour broadcast minister Dr. Joel Nederhood to mediate between the parties, and a July 23 letter drafted by IRM with Nederhood's help asking the CRC board of trustees to "implore the agencies to dismiss the lawsuit," the litigants have filed a new petition in the Sacramento bankruptcy court not only asking for the replacement of the IRM management with a court-appointed trustee but also asking the court to hear the case on "shortened time." Jay Mol, a retired Grand Rapids businessman who identifies himself as the largest individual investor in IRM, severely criticized the CRC for its actions. "It wouldn't surprise me if before this is over that the Christian Reformed Church loses more membership because of their action here than they did on the creation and women in office issues combined," said Mol, who agreed that IRM management had made bad business decisions but strongly opposed the Christian Reformed claims that IRM had become a fraudulent pyramid scheme. NR #1998-083: For Immediate Release: IRM Declares Bankruptcy; CRC Files More Litigation Seeking Removal of IRM Management * Ken Horjus Affidavit: "IRM has created a completely unsustainable enterprise and defrauded investors of over $100 million, accumulating investment interest and debt in this scheme of nearly $400 million - while the properties as a whole are worth only $270 million or less." * Jay Mol: "Of all the money [the Creditors Committee] spent, not one dime was to seek a solution, it was all crucifixion. They wanted them in jail, they wanted them in bankruptcy, they didn't care." by Darrell Todd Maurina, Press Officer United Reformed News Service GRAND RAPIDS, Mich. (August 27, 1998) URNS - When three Christian Reformed agencies and over 1500 individual and institutional investors learned last October that they were at risk of losing $228 million of investments in IRM Corporation, a network of 130 California real estate partnerships, virtually everyone wanted a private settlement that would keep the case out of bankruptcy court. Now, three Christian Reformed agencies, the Barnabas Foundation, and a group of twenty individual investors are asking the US Bankruptcy Court to decide on August 31 whether to remove the current IRM management and replace it with a court-appointed trustee. The new CRC litigation follows an August 7 decision by IRM to seek Chapter 11 protection from its creditors in the US Bankruptcy Court in Sacramento, California. In an August 7 letter to investors, IRM blamed its decision to declare bankruptcy on four legal actions filed against IRM. On July 16, Christian Reformed Home Missions, the Back to God Hour, Calvin College, the Barnabas Foundation, and twenty individual investors petitioned the Contra Costa County Superior Court to place IRM in receivership and to place the personal assets of the IRM principals and their family members in a "constructive trust" for the benefit of the plaintiffs. On August 4, Mechanic's Bank in California demanded immediate repayment of a $1.5 million line of credit to IRM and asked for the appointment of its own receiver at a hearing scheduled for August 7. A separate lawsuit by a group of Michigan investors was also scheduled to be heard on August 7 but placed on hold because of the bankruptcy petition. In addition, IRM said that several first mortgage holders indicated that if the Contra Costa court placed IRM in receivership, they would foreclose on their matured loans. Despite earlier indications that the CRC agencies would withdraw their litigation, an attempt by retired Back to God Hour broadcast minister Dr. Joel Nederhood to mediate between the parties, and a July 23 letter drafted by IRM with Nederhood's help asking the CRC board of trustees to "implore the agencies to dismiss the lawsuit," the litigants have filed a new petition in the Sacramento bankruptcy court not only asking for the replacement of the IRM management with a court-appointed trustee but also asking the court to hear the case on "shortened time." "They have requested that an order shortening time be entered so that this can be heard Monday afternoon, August 31," said John Barnard, a reorganization consultant nominated by a now-defunct creditors committee to supervise IRM's affairs. "A motion such as this is normally heard on a standard 21 days notice, they're essentially trying to do this on about five day's notice, including the weekend." Representatives of the CRC and Barnabas Foundation could not be reached for comment on their new petition to the bankruptcy court. Christian Reformed office staff said that CRC executive director of ministries Dr. Peter Borgdorff was out of the office until the end of the week. Barnabas Foundation staff said executive director David Vander Ploeg was the only person authorized to comment on IRM matters and was on vacation for the remainder of the week. Barnard was not pleased by either the "shortened time" request or by the idea of a court-appointed trustee. "This is one of the most significant things which will happen in this case the entire time it goes on, and it's just not appropriate to have it considered and decided in such a rushed and summary fashion," said Barnard. "The reason why I think trusteeing this case is inappropriate, inadvisable, and not in the best interests of the creditors is that it will substantially increase the time involved in resolving this, and the expense involved in resolving it," said Barnard. "I don't know what the CRC's and the other plaintiffs' motivation is, but in the past they have been adamant in their desire to remove the existing IRM management and this would accomplish that." What the CRC Says About IRM Management While Christian Reformed officials couldn't be reached for comment, their July 16 court filing cites serious concerns about IRM management. "Given the current impasse between IRM and the Committee of IRM creditors and investors and the fact that the IRM principals have fraudulently managed IRM and IRM-related entities, it is imperative that IRM and all IRM-related entities be restrained from attempting to sell or transfer IRM assets or to dispose of or alter any IRM documents; and that a receiver be immediately appointed to preside over the management of IRM," the CRC alleged in its lawsuit. The lawsuit claims that since 1991, IRM officers "have engaged in a Ponzi-like scheme," legally defined as "a fraudulent arrangement in which an entity makes payments to investors from moneys obtained from later investors rather than from any profits of the underlying business venture." Citing an audit by Pricewaterhouse-Coopers stating that "it appears that IRM management have created and perpetuated a real estate investment pyramid scheme" using "investor money which could only be sustained through continued and ever expanding loans from new and existing investors," the suit argued that "irreparable harm" would occur unless current IRM management is restrained from further management of the IRM assets. An affidavit by Ken Horjus, CRC director of finance and administration and chair of the creditors committee, is even more specific. "Many of the investors in the various IRM-related entities are elderly people who invested their life savings in IRM based on IRM's representations that their money would be secured against real property," wrote Horjus. "In fact many of the investments are completely unsecured or under-secured and in some cases IRM failed to record deeds of trust reflecting the investment or recorded the deeds of trust in an improper order of priority." "IRM has created a completely unsustainable enterprise and defrauded investors of over $100 million, accumulating investment interest and debt in this scheme of nearly $400 million - while the properties as a whole are worth only $270 million or less," continued Horjus. "The control of the properties and funds by a neutral receiver is the only avenue available to ensure the IRM enterprise is handled appropriately. IRM's fiduciary breach and fraud has been so massive that IRM must not continue to have any control over the properties, the partnerships or the investments." The lawsuit also alleged excessive compensation and capital distribution payments to five IRM principals, ranging from $1,066,723 to $1,531,019 during the period of January 1, 1995, to October 15, 1997. The CRC alleged "that under the financially distressed circumstances in which the equity partnerships found themselves at such time, that such compensation was unreasonably excessive and that the distributions of capital were not prudent nor in the best interests of the equity partnerships." According to the lawsuit, IRM broke an agreement with the creditors committee by initiating a sale proposal to Eenhoorn, a Grand Rapids-based management firm that offered to pay five cents on the dollar for the assets of IRM and deferred payments in subsequent years from the profits of the corporation. The Eenhoorn offer includes provisions to pay $2.8 million to the IRM principals and indemnify them against legal claims arising from IRM management issues; both were criticized by the lawsuit as inappropriate. Response to the Christian Reformed Critics Response from the IRM principals and their supporters - who include longtime denominational loyalists with years of service on denominational committees - ranged from a sense of betrayal to outright anger. David Buurma, senior vice president of client services for IRM, took issue with the denomination's decision to enter secular courts. "If you have a problem with a brother, Matthew 18 requires you talk to him about it," said Buurma. "They have never brought accusations to us prior to the lawsuit, they have never brought concerns to us, asked why we did what we did. I just don't know how you dodge Matthew 18, and I Corinthians 6 says pretty clearly you don't sue other Christians. It seems to me they should be talking to our church councils." According to Buurma, IRM management supports a sale to Eenhoorn out of belief that it would be the best option for the IRM investors rather than a belief it would be the best option for the IRM management. "If you look at the Union Realty offer it did the same thing Eenhoorn did; it took care of our lines of credit, I believe it provided indemnification releases like Eenhoorn did, and one of the offers, the Pinnacle proposal, is a little more vague but it sounds like we will get some sort of releases from them, but on top of it we would get half a million dollars for ourselves," said Buurma. "If we were in this for ourselves, we would go with that offer, but it doesn't look as good for the investors." Buurma noted that John Barnard, originally hired by the creditors committee despite IRM management protests to supervise the IRM management, concurred that the Eenhoorn option is best and opposed the lawsuit. "He was hired at their insistence, we did not believe it was necessary, but he has been a blessing from God, there's no question about it," said Buurma. "He has the experience, knowledge in these areas working with lenders. He is an attorney and understands what he can and cannot do. I'm sure he has saved us at least whatever he's cost." Barnard said the CRC petition for appointment of a bankruptcy trustee - which would remove not only the IRM management but also himself from day-to-day control of the organization - was both unwise and unnecessary. Normal Chapter 11 procedures call for the US Bankruptcy Court to appoint two committees of unsecured creditors and investors to represent their interests in the reorganization process. Barnard said the bankruptcy trustee requested by the CRC litigation would have the effect of slowing down a settlement, increasing costs, risking the loss of key management personnel, and reducing the role of the creditors and investors committees. "What they're effectively doing is trying to render largely irrelevant the appointments of the committees the morning before that hearing, because the appointment of a trustee substantially reduces the role and the significance of such committees," said Barnard. "There's nothing that says in the law that the role of the committee is reduced, the practical effect is the role of the committee is reduced in a trustee case." "It will slow things down substantially, it is more expensive because the trustee won't be just one person who comes in here, it'll be one person who will have to come in here with a staff to do all the things the existing IRM management does," said Barnard. "Given the fact that the existing employees here have their loyalty primarily to the existing management and not to the corporation, not to the chairs and the desks and so forth, I think some of those people will be lost. I've been given to understand that attempts have been made to recruit a couple of them away already." Unless the bankruptcy court appoints a trustee, Barnard said its most important decision on August 31 will be to decide which investors get to serve on the investors committee. "This is important because who's on the committee and what interests they represent will have a lot to do with whether the relationships between the debtor in possession and the committee will move forward in a more amicable, more collaborative, or more confrontational way," said Barnard. "If things go reasonably smoothly, which they certainly haven't lately, that might be able to be done by about the end of the year." While Barnard and Buurma muted their public criticism of the Christian Reformed legal action, a group calling itself "Concerned IRM Investors" have engaged in a frontal attack. Sending letters to investors accusing the denomination of "rationalizations, misunderstandings, and/or misrepresentations," the Concerned IRM Investors argue that the Eenhoorn option is the best option available, that immediate action is necessary to avoid extreme financial hardship for some of the IRM investors, and that the denominational accusations against IRM stem more from bitterness than from provable facts. The Concerned IRM Investors, who include some of the largest individual investors in IRM, also note that tax regulations could result in massive losses as well as a tax liability of up to $50 million for some of the larger investors if the sale of IRM's assets isn't handled carefully. Jay Mol, a retired Grand Rapids businessman who identifies himself as the largest individual investor in IRM, severely criticized the CRC for its actions. "It wouldn't surprise me if before this is over that the Christian Reformed Church loses more membership because of their action here than they did on the creation and women in office issues combined," said Mol, who agreed that IRM management had made bad business decisions but strongly opposed the Christian Reformed claims that IRM had become a fraudulent pyramid scheme. "In business we have a term, you have to know when to hold them and when to fold them," said Mol. "I believe that's a good philosophy to be thinking about, but then when I get to another point I think if I had borrowed money from everybody in my church, all of my friends, my family, my children, my grandchildren, and I got into trouble, would I stay with the ship until it went down, and I'm afraid to say I probably would, and I think they did." Mol said the basic root of IRM's financial problems centered on the California real estate market, where property values dropped 30% in six months, and changes in federal tax law which made limited partnerships less attractive as tax shelters for wealthy investors. "You can't have the real estate market drop down that far without finding new money to support it," said Mol. "It seemed like [IRM] was getting away with it. The property values were not coming back as fast as they were in other places in California, but they were coming back." Mol said he didn't understand why the original CRC creditors committee took a strong tack against IRM's principals focusing on attempting to identify their assets and determine if they had siphoned off IRM profits. "All along in the first committee it was all focused on forensic accounting," said Mol. "Of all the money they spent, not one dime was to seek a solution, it was all crucifixion. They wanted them in jail, they wanted them in bankruptcy, they didn't care." According to Mol, who helped facilitate the original Eenhoorn proposal to buy IRM, there is no legitimate reason for CRC officials to oppose the Eenhoorn buyout. Mol said the main reasons CRC officials don't like Eenhoorn is because its president is a member of a church which seceded from the CRC in 1992 and because the Eenhoorn deal "went around the back" of the denomination - accusations previously denied by denominational officials. "Pride, pride, pride," said Mol, when pressed for an explanation of CRC opposition to Eenhoorn. "There are some things that pride is worth more than the results." Nevertheless, Mol cautioned that he wasn't "married" to the Eenhoorn proposal. "I've heard a lot of different comments about the Eenhoorn deal, some extremely favorable, some extremely negative, and I realize that a person who's in business in the Grand Rapids area is going to have more friends and more enemies in Grand Rapids than he has elsewhere," said Mol. "I also know that on someone out in Timbuktu I can't get as good an analysis as I can here because I don't know as many people who will talk to me." "Throughout all the interviews I have had, the good and the bad, the best offer on the table is the Eenhoorn proposal, today," said Mol. "Give me a better offer tomorrow, and I'll change my mind." While hoping for an amicable settlement, Mol said that was less and less likely. "The court could resolve this in six months, the court could take two to four years, and the amount of money involved is going to depend upon how long it takes," said Mol. "I think the church will follow its crucifixion crusade and I think they will force the IRM principals to fight back." Cross-References to Related Articles: #1998-006: Classis Chatham asks Top Christian Reformed Administrative Committee to Appoint Independent Investigators of $11.5 Million in Questionable Investments #1998-028: Classis Lake Erie Overtures Christian Reformed Synod to "Ensure the Editorial Freedom of the Banner" #1998-067: IRM Debate Extends Synodical Session #1998-068: Synod Responds to Possible Multimillion Dollar Fund Loss #1998-080: IRM Investment Debacle Leads to Litigation; Estimate of Funds at Risk Balloons from $11.4 to $228 Million Contact List: Dr. Peter Borgdorff, Executive Director of Ministries, Christian Reformed Church 2850 Kalamazoo Ave. SE, Grand Rapids, MI 49560 O: (616) 246-0832 * H: (616) 957-3288 * E-Mail: borgdorp@crcna.org David Buurma, Senior Vice President for Client Services, IRM Corporation John Barnard, Consultant, IRM Corporation Office: 2151 Salvio St., Suite 325, Concord CA 94520 Mailing: PO Box 3000, Concord, CA 94522-3000 O: (925) 676-1966 * FAX: (925) 676-1744 Dr. David Engelhard, General Secretary, Christian Reformed Church in North America 2850 Kalamazoo Ave. SE, Grand Rapids, MI 49560 O: (616) 246-0744 * H: (616) 243-2418 * FAX: (616) 246-0834 * E-Mail: engelhad@crcna.org Paul Heule, Partner, Eenhorn L.L.C. Office: 2610 Horizon Dr. SE, Suite C1, Grand Rapids, MI 49546 Mailing: PO Box 88335, Kentwood, MI 49512 O: (616) 530-5500 * FAX: (616) 530-0850 Ken Horjus, Director of Finance and Administration, Christian Reformed Church in North America 2850 Kalamazoo Ave. SE, Grand Rapids, MI 49560 O: (616) 224-5889 * FAX: (616) 224-5895 Jay Mol, Concerned IRM Investors c/o 7123 Brooklyn SE, Grand Rapids, MI 49508 O: (616) 669-8960 * FAX: (616) 669-5368 * E-Mail: jcmol@aol.com David Vander Ploeg, Executive Director, The Barnabas Foundation 15127 S. 73rd Ave., Suite G, Orland Park, IL 60462 O: (708) 532-3444 * FAX: (708) 532-1217 ---------------------------------------------------------- file: /pub/resources/text/reformed/archive98: nr98-083.txt .