Tangled legal fight haunts bankrupt MidPac Lumber

By Andrew Gomes
Advertiser Staff Writer

The trustee in the MidPac Lumber Co. Ltd. bankruptcy may seek to join a criminal lawsuit in which MidPac's largest unsecured creditor alleges that the company and its lender broke federal racketeering laws and defrauded creditors.

MidPac Lumber Co. Ltd. was forced into bankruptcy last year after a failed attempt at retailing. Jeff Widener • The Honolulu Advertiser

The case is further complicated by the related bankruptcy of Maui Home Supply, the personal bankruptcy of former MidPac President Kurt Glassman, a lawsuit by Glassman against a former MidPac director, and what one creditor is calling a plan to plunder what was once one of Hawai'i's largest building-supply companies.

MidPac, a major wholesale supplier to Hawai'i contractors during the construction industry's boom years in the 1960s and '70s, was bought from employees in 1998 by Glassman and Michael Clifford, owners of another building materials supplier, Maui Home Supply.

Almost two years later, in January 2000, creditors forced MidPac into Chapter 7 liquidation after an unsuccessful expansion into retailing mostly lumber, cabinetry and appliances.

The bankruptcy was uncontested. But company records of assets and liabilities were hard to come by, and its bank account — which at one point had annual sales of $30 million — was empty when the bankruptcy petition was filed, according to MidPac Trustee Mark Yee.

A few months ago, Whirlpool Corp., MidPac's largest vendor, went on the legal attack to try to recoup debts. The company filed a lawsuit in U.S. District Court in Hawai'i alleging that MidPac and lender CIT Group/Business Credit Inc. defrauded creditors.

Several motions by defendants to dismiss the Whirlpool suit are scheduled to be heard Friday.

In its filing, Whirlpool claims it was defrauded of $800,000 in merchandise through a "bust-out" scheme that involved acquiring MidPac, inflating its financial status, building up inventory on credit, selling the inventory cheap, and taking proceeds with no intent of paying suppliers.

"The company is then petitioned into bankruptcy with the ... creditors left to pick over the meatless carcass of an assetless enterprise," the suit said.

Glassman, who is not named as a defendant in the suit but is being sued by Whirlpool in a separate case, said MidPac owners never had such a plan. "If that was our intent at the outset why would we give our personal and corporate guarantees?" he said in a recent interview.

Rather, Glassman said MidPac simply expanded too quickly during Hawai'i's bad economy and "overbought merchandise in anticipation of sales that didn't materialize." The company needed additional financing to be sustained, but no investors could be found and CIT quit loaning MidPac money, which led to its bankruptcy.

Ted Pettit, an attorney representing Clifford, Glassman's partner in the company, declined to comment on the suit.

A CIT spokeswoman said it is company policy not to discuss pending litigation.

Whirlpool alleges that CIT, which helped finance the acquisition of MidPac, became aware of the alleged fraud in mid-1999, and conspired to continue the fraud to try to recoup more of its $8 million loan to MidPac.

Shortly before creditors filed the bankruptcy petition, MidPac sold about $8 million in goods for about $5 million under the control of a CIT-appointed "fraud specialist," according to the Whirlpool suit.

Jerrold Guben, an attorney representing MidPac trustee Yee, said the estate may intervene in the Whirlpool action if the suit survives initial challenges for dismissal based on legal standing. If the case is dismissed, the estate may file its own lawsuit against CIT and MidPac, he said.

The move would be one of a number of legal attacks that have been launched to try to recover debts in the troublesome case.

So far, efforts to recover assets have been largely unsuccessful. Last summer, Guben said it appeared that MidPac financial records "virtually disappeared."

A little more than a month ago, creditor representatives calculated MidPac assets at $1.1 million and debts at $8.5 million, though the value of most creditor claims remains unknown.

The largest claim is from CIT for $2.4 million. Whirlpool has a $1.2 million claim. Other creditors with claims of at least $300,000 include the Damon Estate, Kraftmaid Cabinetry Inc., Forest Grove Lumber Co., Klupenger Lumber, Weyerhauser Lumber, Douglas Takata, Enterprise Computer Systems Inc. and the Hawaii Newspaper Agency.

Meanwhile, through the end of March, Yee has recovered just $26,438.

CIT possesses $742,970 in proceeds from an auction of MidPac equipment the day after the bankruptcy filing, but use of that money has been restricted by Bankruptcy Judge Lloyd King for possible distribution among creditors.

CIT is petitioning the court to lift the restriction after a similar request was denied last year. A hearing on that motion is set for Wednesday.

Further complicating the bankruptcy case, Glassman and MidPac's trustee have agreed to jointly sue former MidPac director Ed Bowling.

According to court documents and an attorney preparing the suit, which stems from a previously dismissed case, Bowling received a seven-figure payout from stock he earned managing MidPac and agreed to make the money available in case MidPac needed it.

Because of Bowling's alleged promise, Glassman offered the mortgage on his home as a guarantee to CIT, according to the allegations, and when MidPac got into financial trouble CIT foreclosed on Glassman's home, prompting him to file for personal Chapter 11 bankruptcy.

Bowling, who managed what he said was a profitable MidPac for three years, said he cashed out his MidPac interest "fair and square."

"It's a stick-up is all it is," he said of the joint effort by Glassman and the MidPac estate to reclaim his payout. Bowling attorney David Farmer, who is also defending his client in the Whirlpool suit, added: "We're prepared to vigorously defend all claims."

In the related bankruptcy of Maui Home, which was closed and liquidated about the same time as MidPac, some money has been recovered for creditors. But suspected assets and liabilities related to the MidPac bankruptcy, along with the Whirlpool litigation, likely will delay a resolution of the case.

Representatives of Maui Home creditors have calculated company assets totaling $1.1 million and debts of $6.3 million, though like the MidPac case the value of some claims is unknown.

Trustee Sandra Loomis has recovered $325,000 from a settlement with City Bank involving some liquidated Maui Home real estate.

But trustee counsel Susan Tius said Loomis has yet to determine which claims are entitled to payment, because some are identical to claims filed in the MidPac bankruptcy. In other instances, the parent company of Maui Home guaranteed debts of others, including MidPac, Tius said.

"The claims are very complicated," she said. "I can't even estimate when we will file a final report and account. At this stage, the trustee is reviewing proof of claims to determine whether she'll object to any of them."

Tius said the Maui Home estate is not considering intervening in the Whirlpool lawsuit or filing a separate action seeking money from CIT or MidPac officials.

Call Andrew Gomes at 525-8065, or e-mail agomes@honoluluadvertiser.com.