Carinalli to declare bankruptcy

<p>Clem Carinalli has decided to seek bankruptcy protection in federal court, abandoning efforts to reorganize his debt-laden real estate empire in private negotiations with his lenders.</p><p>Carinalli will not challenge a group of lenders trying to push him into bankruptcy and has agreed to restructure about $165 million in debt in open view of all creditors.</p><p>He plans to file papers Monday asking a U.S. Bankruptcy Court judge in Santa Rosa to convert his case from an involuntary bankruptcy and place him in Chapter 11, which would protect him from creditors while he develops a plan to repay them.</p><p>The move, which Carinalli worked hard to avoid, will force the county’s largest individual landowner to disclose intimate details of his finances and remove the veil of secrecy that has shrouded his private talks with individual creditors over the last four months.</p><p>The bankruptcy proceedings also will lay bare the extent to which Carinalli’s financial woes have entangled the local community, especially the social circle of wealthy and well-connected residents that Carinalli turned to for loans.</p><p>“This will probably be one of the most awkward things in Santa Rosa’s history,” said Corrick Brown, a Carinalli creditor and the former Santa Rosa Symphony conductor.</p><p>Brown and four other lenders on Sept. 14 filed an involuntary bankruptcy against Carinalli under Chapter 7 of the bankruptcy code, which would have liquidated Carinalli’s assets and used the money to repay creditors. The filing effectively ended Carinalli’s efforts to restructure his debt outside of court.</p><p>The group, which had loaned $900,000 to Carinalli, filed the petition in part because they learned he had invested some of their money with a convicted white-collar felon, Jay Soderling.</p><p>They also wanted to stop Carinalli from giving what they believed was preferential treatment to some lenders, such as Exchange Bank and Sonoma State University, both which received payments for loans this summer after Carinalli had stopped repaying most creditors in June.</p><p>The court now could void those and other transactions and could require that recent cash payments and land deals be nullified and returned to Carinalli’s bankrupt estate.</p><p>Carinalli is not expected to liquidate his assets, which is the usual outcome of Chapter 7.</p><p>Instead, attorneys for Carinalli and the group have agreed to convert his bankruptcy to Chapter 11. This would allow Carinalli to continue working with creditors to form a debt restructuring plan under the court’s supervision. Creditors then would vote on his plan through a legally monitored process.</p><p>U.S. Bankruptcy Judge Alan Jaroslovsky, who presides over the Santa Rosa court, is expected to approve the agreement to move the case into Chapter 11 next week, attorneys on both sides said.</p><p>If the judge accepts the bankruptcy filing, Carinalli will be given 15 days to submit documents detailing all his assets, his liabilities, a statement of his financial affairs and a list of his 20 largest unsecured creditors.</p><p>Merle Meyers, a San Francisco bankruptcy attorney representing Carinalli, said he plans to request an extension that would give Carinalli 30 days.</p><p>“It’s a pretty complicated set of assets and liabilities,” Meyers said. “We’re going to get it done as soon as we can.”</p><p>Carinalli notified lenders in May that he could not continue making payments because of large losses he suffered in the recession and real estate collapse. He then spent months working long days and late nights to privately restructure debt on his terms.</p><p>He sometimes fielded 40 to 50 calls a day from anxious creditors, asking them to continue to place their trust in the reputation he built over three decades as a shrewd financier and generous community benefactor.</p><p>Carinalli learned of the involuntary bankruptcy the morning it was filed, he said.</p><p>“One of them came and told me in person. I took it in as information,” he said Thursday. “I don’t have any ill will toward them.”</p><p>Still, Carinalli said he’s “disappointed it has to be this way.”</p><p>In an effort to avoid bankruptcy court, Carinalli had laid out a detailed repayment plan to lenders at a June 30 meeting. He spent the following months working closely with banks and then smaller, unsecured lenders to win their support.</p><p>Corrick Brown attended the June presentation.</p><p>“So many of us knew each other at that meeting,” Brown said. “We were sitting behind old friends, in front of old friends, next to our doctors, to our lawyers, to our insurance salesmen.”</p><p>Many of those people, including Carinalli, frequented the same social functions, served on nonprofit boards together and golfed at the same country clubs, Brown said.</p><p>The decision to put Carinalli into bankruptcy already has proved divisive.</p><p>One creditor called Brown to admonish him for pushing Carinalli into bankruptcy court, he said. Others have told him it was the right move.</p><p>“I’ve taken a whole slug of calls from people who say they are all for it,” he said. “There is a reason for bankruptcy laws. We need to protect everyone’s interest.”</p><p>Unsecured creditors, such as Brown, who did not receive a deed of trust for land as collateral on some loans, likely will be represented in court by a creditors’ committee, said Michael Fallon, a Santa Rosa attorney who teaches bankruptcy law at Empire College.</p><p>“These unsecured creditors are going to have a very large voice in this case,” Fallon said.</p><p>The committee will be able to legally monitor his restructuring efforts and demand additional information, such as his ties to assets not listed in his initial filing.</p><p>“He probably has to provide more records now than he would to the IRS in an audit,” said Doug Provencher, a Santa Rosa attorney representing Brown and the others. “He’ll have to lay all his cards on the table.”</p><p>An unsecured creditor might not need to hire their own attorney because the creditors’ committee would select an attorney to represent the whole group, Fallon said. Attorney fees for the committee would be deducted from Carinalli’s bankrupt estate.</p><p>“When the committee is formed, they can then retain counsel,” Fallon said. “That attorney will really be representing all the creditors.”</p><p>Any creditor can request to be on the committee, he said.</p><p>Secured creditors, such as banks, which have deeds of trust to collateralize their loans, likely will have private attorneys, Fallon said.</p><p>“The secured creditors are really off on their own,” he said.</p><p>A key moment for unsecured creditors will come when Carinalli releases the details of his assets and liabilities. It will give them their first legally binding look into Carinalli’s estate and will provide insight into his ability to repay them.</p><p>Carinalli initially will be given 120 days to submit his plan to restructure his debt. His attorney said they intend to submit Carinalli’s proposal in a few months, and it will resemble the offer he already has made to creditors.</p><p>In his previous proposal, Carinalli planned to sell about 200 properties in three to four years to repay some creditors. He estimated he would receive about $123 million by cashing in his real estate holdings, according to documents he provided creditors at the June meeting. This would allow him to pay unsecured creditors 76 cents on the dollar, on average, and repay some secured creditors in full, according to his proposal.</p><p>Under that plan, he would not need to immediately repay all $165 million owed to his creditors. He would retain some properties and continue to make payments on those loans.</p><p>Under Chapter 11, Carinalli will have to propose his plan again. Creditors could approve it within a year. Or the process could take longer if they demand more information from Carinalli or can’t agree on how people should be paid back.</p><p>Either way, most unsecured creditors will not receive repayment soon, attorneys said. And the case is expected to remain in court for several years.</p><p>“Once the plan is approved, the bankruptcy is for the most part over,” Provencher said. “But the reorganization could still take several years.”</p>