by Mark Friedman on Monday, Dec. 6, 2010 12:00 am
At stake was $30.6 million worth of unsecured claims that the former northwest Arkansas real estate developer owed and was hoping would be discharged in his Chapter 7 bankruptcy proceedings.
In an enlightening two-day hearing in September, attorney Marshall Ney of Rogers, representing creditor Legacy National Bank of Springdale, grilled Barber on inconsistencies like inflated financial statements, wild variations in Barber's claimed income and transactions by a company Barber created months before he filed for bankruptcy in July 2009.
Ney alleged that Barber, 34, established Nware Investments LLC to funnel money for personal expenses, stays in luxury hotels and even a $2,500 visit to a nightclub while avoiding paying his creditors.
U.S. Bankruptcy Judge Ben Barry agreed.
"The Court is convinced that during the year prior to the date Barber filed his bankruptcy petition, Barber was actively engaged in transferring and concealing his available money with the intent to delay, hinder, and defraud his creditors," Barry wrote in a 28-page order issued Nov. 9. "After reviewing the record thoroughly, and giving Barber the benefit of every doubt, this Court cannot reasonably conclude otherwise."
Barry denied Barber's discharge, which leaves him on the hook for the unsecured portion of his bankruptcy claim.
Bankruptcy attorney James Dowden of Little Rock, who wasn't involved in Barber's case, told Arkansas Business that a debtor whose discharge is denied "doesn't get the benefits of having his unsecured debts wiped out, so it's as if he never filed bankruptcy."
Those creditors are now free to try to collect their debts through lawsuits or liens. Barber listed only $91,000 in assets, according to a Sept. 11, 2009, bankruptcy filing.
"A lot of times it's difficult for a debtor to make ends meet, much less have funds left over for creditors to seek collection of their judgments," Dowden said.
Ney told Arkansas Business last week that he didn't know what assets Barber had. Barber owes Legacy $9.9 million for unsecured debt tied to failed real estate projects.
Ney said the bank would "commence with collection efforts" if Barber doesn't appeal Barry's decision.
Ney declined to comment when asked if he had made a criminal referral against Barber. It is a federal crime for a debtor to hide assets from the bankruptcy trustee.
A phone number for Barber has been disconnected, and he didn't respond to a message left on his Facebook account, where he listed he lived in New York.
Fayetteville attorney K. Vaughn Knight, who represented Barber in the bankruptcy case and in more than 25 lawsuits, declined to comment on Barber's next move. Knight said he no longer represents Barber.
The bankruptcy hearing, though, revealed new facts about Barber, whose real estate empire collapsed almost as quickly as it was built.
A 2005 profile in CitiScapes Metro Monthly of Fayetteville said Barber and his wife, Keri, were "not the stereotypical developers. They are a young, vibrant, forward-thinking couple who have barely reached their thirties. Their amazing story reads like a fairytale come true."
At the bankruptcy hearing, Barber testified about those heady days, saying properties were flipping so fast that he often had buyers lined up for parcels that he hadn't even finished buying.
In one subdivision, Barber said, he bought 39 lots for $60,000 to $65,000 each and had them resold within 90 days for $90,000 to $95,000 each.
"But that was very rare," he said. "The market was going good."
In late 2005, he started developing a seven-floor, 37-unit condo project in downtown Fayetteville called the Legacy Building.
Barber, through one of his several companies, Lynnkohn LLC, applied for a $16.7 million loan from Legacy Bank for the project. Barber personally guaranteed the loans.
As part of the loan application, Barber submitted personal financial statements for 2004 in which he claimed net worth of $17.4 million.
Legacy learned years later, though, that the statement contained inflated values of his companies. For example, Barber reported the value of Barber Properties LLC as $1.36 million, but internal company documents showed the value as negative $364,000 and his federal tax returns showed negative $796,000 in the LLC's capital accounts, Ney said.
Barber said at the hearing that the internal statements were always changing and he didn't know if those reports were final when he prepared his personal financial statement.
Ney said the difference between the values listed in the financial statement and each of his entities' balance sheets was $13.5 million, suggesting Barber's net worth was $3.9 million instead of $17.4 million at the time of the Lynnkohn loan.
In 2007, Barber received another loan from Legacy for $2.7 million, filing 2005 and 2006 personal financial statements with the application. Those statements showed the couple's net worth grew to $31.8 million in 2005 and was $20.6 million as of Sept. 30, 2006.
Those financial statements were also inflated by millions of dollars, Ney said.
Barber said that he was "confident" that he told bank officials that the financial statements were "fair market value" and not book value, which is the cost of the purchase minus depreciation of the assets.
His financial statements, though, don't indicate that the numbers were fair market value.
Barber said he used comparables and appraisals to determine fair market values for his companies, even though he couldn't produce any of the appraisals that he used.
"At that time, we were selling a lot of our property for more than the others were," Barber said in a deposition taken for the case.
But Barber's chief financial officer, Vera Crider, testified in a deposition taken for the case that she had a problem with Barber's personal financial statements. Crider said she told him that she wasn't comfortable with the inflation of values on his statements, according to Ney.
"I don't remember that, no," Barber said when Ney asked if he recalled such a conversation with Crider.
In 2005, the northwest Arkansas real estate market started showing signs of trouble. Too many lots were being developed, outpacing the population growth.
Still, Barber pushed forward.
In 2006, The Barber Group said it had an estimated 2,200 residential lots in various stages of planning or development.
"I think market absorption is all relative to what market you're going after," Barber said in a 2006 e-mail to the Northwest Arkansas Business Journal. "Obviously, there are some positives to supply catching up to demand because it will weed out some of our competitors."
But the market didn't improve. And it didn't help that Barber's debts were mounting. His bankruptcy filing shows a gambling debt of $125,000, owed to the Bellagio in Las Vegas, incurred between 2006 and 2007. Barber's total gambling debts to various casinos total more than $280,000, his bankruptcy filing shows.
Barber's financial situation didn't get better in 2007. The first wave of foreclosures and collection lawsuits hit Barber and his related companies that year.
The Legacy Building, which cost more than $19 million to build, was carrying $18.7 million worth of debt when it was foreclosed upon in July 2008. Legacy National Bank acquired the property in an $11.25 million foreclosure sale in November 2008.
By 2009, Barber or his companies were named in 34 lawsuits; in 13 of those cases, a judgment had been entered against him.
His personal life was crumbling too. After 10 years of marriage and two children, Keri Barber filed for divorce in December 2008. A divorce decree was entered on Dec. 22, 2009, in Washington County Circuit Court.
Briefcase of Cash
On Oct. 6, 2008, Barber formed a new company called Nware Investments just days after he was hit with a judgment of $2.3 million to an entity called CGCMT 2006-C5 Springdale LLC tied to a foreclosure lawsuit.
Ney, Legacy National Bank's attorney, maintained Barber used the Nware bank account to avoid paying creditors and would use complex transactions to put money into the account.
Barber testified that he used the account because he couldn't open a personal checking account at that time. But Ney pointed out in the hearing that Barber had several existing checking accounts that he could have used.
In the fall of 2008, Barber said, he was trying to find buyers for his property, "as opposed to me just filing bankruptcy and saying, 'Guys, deal [with the troubled loans].' I was trying to work with the banks.
"The whole goal of all this, obviously, was I was trying not to file bankruptcy," Barber said.
Barber, though, arranged for friends to put money in his Nware account and the account didn't show up on his bankruptcy filings, which is required since he used it as his personal account, according to Judge Barry's order.
James Van Doren, a friend who lives in New York, was one of the several people who helped Barber keep the money flowing. Instead of using his bank account, Barber gave Van Doren a briefcase containing $30,000 in cash.
"I don't remember how it all transpired," Barber said of the transaction. "I was just living in a real rough place, where whenever I was in New York, and ... it was more just a protective measure that [Van Doren] had [the money.]"
Van Doren said in a deposition taken for the case that he realized that the money was probably in dispute.
"I knew he had creditors after him, so I did know there were probably people that were trying to recover it," he said.
In the fall of 2008, Barber also endorsed a check in the amount of $64,000 to Van Doren, who then gave the money back to Barber. Barber testified that he transferred the money that way because he was "pretty sure" the check was made out to "an entity" and that in New York "they're much more strict on banking as far as what checks you can deposit."
But Barber couldn't recall a time when someone refused to let him deposit the check.
In August 2008, Barber transferred $180,000 to Knight's law firm. Barber testified that he didn't know why he transferred the money to the law firm, but he said he owed Knight a lot of money. In November, the law firm transferred $150,000 to Van Doren's company, Epsilon Investments LLC, money that was then used to pay Barber's living expenses. Those transactions weren't filed in Barber's bankruptcy schedules.
Van Doren said in his deposition that he understood the money was Barber's.
In February 2009, Justin Salter of Fayetteville, Barber's former brother in-law, started providing Barber with money. Between February and June 2009, Salter gave him more than $100,000.
Barber used $15,000 to gamble at a Hard Rock Casino, and spent nearly $30,000 on furniture at IO Metro. On June 30, 2009, Salter wrote Barber a check for $25,000.
And after July 2009, Salter provided Barber another $250,000, according to Judge Barry's order.
Ney argued that the money Salter gave Barber was commission for Barber arranging the $2 million sale of his former home to Salter.
Before the sale closed, both had agreed to a commission, but then Salter changed his mind, Salter testified during the hearing.
But both Salter and Barber maintain that the approximately $350,000 was considered a loan and Salter expected to be repaid.
Barber, though, should have put the alleged claim for commission in his bankruptcy filing and let the bankruptcy trustee decide to pursue it, Barry said in his order.
On the witness stand, Barber said he didn't have any promissory notes for those loans.
Salter said he helped Barber out with loans because he was his former brother-in-law.
"He was in a tough situation at the time," Salter testified during the hearing. "And [I] would have liked to think that if the roles were reversed he would have tried to have helped me."
Ney told the bankruptcy court Barber "was living very high on this money that he was hiding from creditors during these months immediately preceding his bankruptcy."
Separated from Brandon, Keri Barber, who had moved to New York, filed for Chapter 7 bankruptcy protection on May 22, 2009. She listed $47,400 in assets and $16.3 million in debt, all of it unsecured. Her bankruptcy is still pending.
In June 2009, Barber tried to rent an apartment in New York. He claimed on his application that he made $400,000 annually. Less than two months later, though, on July 31, 2009, Barber filed for Chapter 7 bankruptcy protection; he listed income of about $28,000 a year.
At the hearing, Barber defended the $400,000 statement by saying that he was capable of earning that amount. Still, he said what he reported under oath to the bankruptcy court was correct.
"Do you have to be under oath to tell the truth?" Ney asked.
"Not at all," Barber said. "But there was six months [left in the year] and I think my past years had shown I was capable of making that kind of income."
But Ney said all the "loans" Barber received from his friends totaled about $485,000 in 2009.
"So he was in the range of what he claimed to the New York landlord," Ney told Judge Barry.
In the 26 days after Barber filed for bankruptcy, $176,672 was transferred into the Nware account and $178,987 was transferred out, Barry's order said.
"The Court finds that Barber used Nware and the Nware Account to transfer and conceal cash belonging to Barber and in an effort to place the cash beyond the reach of his creditors," Barry said in his order.
"The Court denies Barber his discharge," he said.
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