Arkansas Razorbacks Football Coach John L. Smith's $40 Million Mistake

by Mark Friedman  on Monday, Nov. 5, 2012 12:00 am  

LOUISVILLE, Ky. — In front of the cameras, John L. Smith was being feted as the new head football coach of the Arkansas Razorbacks. Behind the scenes, his financial world was collapsing.

A week after he was hired on April 23, a circuit judge in Jefferson County, Ky., hit the 63-year-old Smith with a judgment for $865,198 in favor of cardiologist Dr. John Rhodes III of Louisville, a former partner in developing upscale single-family homes in Kentucky.

The judgment was slightly more than the $850,000 contract Smith signed to be the head coach of the Razorbacks, who many picked to be in contention for the national championship.

The judgment was a huge blow to Smith. He claimed he hadn’t understood that signing loan documents as a member of several limited liability companies would leave him on the hook for millions of dollars. Smith said he thought he only would be responsible for a prorated share of the losses equal to his share of ownership in the LLCs.

He planned to use that defense in some of the other collection lawsuits that were pending against him in Kentucky. Those lawsuits sought nearly $8 million from Smith in connection with the loans the LLCs took out for real estate developments.

Smith also said in the court documents that he felt targeted by Rhodes because he was the only member of the LLC named as a defendant in the lawsuit. Rhodes in his court filings said he tried to collect the money from the other members.

Unfortunately, the loan documents contained the fateful phrase “joint and several,” meaning the lender could target any one of the partners who signed the promissory notes to collect all of the money. And the first judge to hear his explanation was not persuaded, setting Smith’s ignorance-of-the-law defense up for more failures.

“Smith was not duped into signing the Notes, but instead had sufficient time to read the agreements, ask questions and/or seek legal counsel regarding the documents’ terms,” Jefferson Circuit Judge Audra Eckerle concluded in Rhodes’ case against Smith. “That Smith believed his liability was pro rata is irrelevant to the fact that he freely signed documents that clearly and unequivocally provide for joint and several liability.”

Smith’s mistakes led him to seek Chapter 7 bankruptcy protection in September for $40.7 million in debt, most of which is tied to the real estate investments. His assets were listed at $1.3 million. But Smith might not be responsible for all the debt. He is disputing most of the claims and says the debts are tied to the other investors. And in one lawsuit, Smith has filed a counterclaim against the other members of his investment group.

His story serves as a cautionary tale for those involved in LLCs who sign loan documents without first understanding the terms.

If a member of an LLC signs a loan personally guaranteeing debt, he could be responsible for the entire amount, said Terry Franzen, an Atlanta attorney who handles consumer financial services issues.

“In today’s financial environment, it’s not that unusual for a lender to require the members of an LLC to personally guarantee a loan,” Franzen said.



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