Property Mortgage Ailing for Years, Examiner Says : Bankruptcy: Investors were shocked when the firm filed for Chapter 11, but the court-appointed official said the collapse was not sudden.
When investors in Property Mortgage Co. were told that the company had run out of cash and entered bankruptcy proceedings, the news was shocking.
After all, most of the about 300 investors jammed in a hotel ballroom in Sherman Oaks that night seven months ago had received regular interest checks from PMC.
But there was nothing sudden about PMC’s collapse, according to Ted R. Roth, an examiner appointed by the bankruptcy judge overseeing the Chapter 11 reorganization of the company. “Unbeknownst to the investors,” PMC actually had struggled for years, Roth says in his first detailed report on the demise of the Sherman Oaks-based concern.
The company posted operating losses totaling $23.2 million from 1986 through 1990, Roth stated. At the end of 1990, PMC had a negative net worth of $24.7 million--its debts outweighed its assets by that amount--and was technically insolvent, according to Roth’s report, which began circulating among representatives of creditors and investors last week.
Actually, PMC, under the direction of its two co-owners and top executives, Elliot Fine and his son-in-law Stanley Glickman, had been insolvent since 1984, Roth said.
Yet, until it landed in bankruptcy, PMC kept sending out monthly interest checks--totaling more than $1.4 million a month--to its investors, as if nothing was wrong.
It was able to do so, Roth stated, mainly by taking in new funds from investors without earmarking that cash for specific real-estate projects. The money was “unsecured funds that were commingled with other funds,” so that much of the incoming money was sent back out to help cover the interest payments due the investors, according to Roth’s report.
That’s not dissimilar from a Ponzi scheme--although Roth did not use that term--in which money is raised from new investors merely to pay off earlier investors. Nonetheless, Roth quoted Glickman in his report as saying that “as long as ‘fresh money’ was coming in, everything was ‘all right.’ ”
In the end, though, there wasn’t enough “fresh money” to keep PMC going, and it “exhausted all available funds,” Roth stated.
David Gubman, a lawyer representing Glickman and Fine in the bankruptcy proceedings, declined comment on Roth’s report. Hydee R. Feldstein, a lawyer for PMC, did not return calls requesting comment.
Roth’s report also said a startling 77% of the company’s loans currently outstanding are non-performing, meaning the borrowers are either behind on their payments or already in default.
PMC arranged mortgage loans for residential and commercial properties using cash provided by the investors. In most cases, the loans were secured by second trust deeds, that is, second mortgages on property that already was secured by a first mortgage.
The risk of a second mortgage is that if the borrower defaults, holders of the first mortgage get first crack at foreclosing on the borrower, leaving in doubt whether there will be anything left for the holders of the seconds.
The holders of the seconds, of course, are compensated for that risk with relatively high interest rates--in PMC’s case they ranged from 12% to 15%--which is why many PMC investors kept putting their money in the company’s loans.
PMC’s investors still haven’t gotten back a penny of the collective $102 million they plowed into the mortgage loans that PMC arranged on their behalf. They won’t see anything until PMC gets a reorganization plan approved by the U.S. Bankruptcy Court. The investors include well-heeled Beverly Hills residents and senior citizens who had their life savings in PMC and its affiliate, SLGH Investments Inc., which also is in Chapter 11.
(SLGH collected the investors’ cash. PMC, as a mortgage broker, would then arrange loans with the investments. Roth’s report assumes PMC and SLGH are one entity.)
Leon L. Vickman, one of the lawyers representing some of PMC’s creditors, said there is no chance PMC will emerge from Chapter 11 before 1992. An “official” creditors committee and PMC are trying to jointly develop a reorganization plan, but it won’t be finished and approved by year’s end, Vickman said.
According to Roth, some of PMC’s biggest losses were from investing heavily in apartment house projects with a Carlsbad developer, JL Construction Co., which is owned and managed by James L. Franklin. His dealings with PMC began in 1986 with an introduction from his father, Stan Franklin, who had previously done business with PMC, the report said.
Over half of PMC’s loan portfolio was tied up in JL projects, many of which ran into serious financial snags.
“JL’s difficulties, combined with the debtors’ liquidity problems, were the primary reasons” that pushed PMC into bankruptcy last Valentine’s Day, Roth stated. Franklin said he had not read the report and would have no comment.
As of July 21, JL owed $64.6 million to PMC, SLGH and various partnerships headed by PMC and JL.
Roth also criticized Glickman and Fine’s management. He asserted that they used investor funds for certain purposes without authorization, that they personally received “advances” totaling $4 million from PMC without pledging any collateral and that “bogus journal entries” were made in PMC’s financial statements to hide its losses from PMC’s employees and investors.
PMC also continued to solicit money from its investors without telling them about the company’s problems, he stated.
Glickman and Fine still have their ownership stakes in PMC and its affiliates, but after PMC filed for Chapter 11, the court turned daily management of the company over to Jeffrey F. Katzer, a Los Angeles commercial-finance specialist.
