Calvin Phelps, the owner of Renegade Holdings Tobacco Co., made a fraudulent transfer of $8.1 million in assets, which he used to help buy Chinqua-Penn Plantation, two corporate jets, cigar-manufacturing equipment and a 2008 Maserati Quattroporte, the examiner for Renegade’s bankruptcy says in a lawsuit.
The future of Chinqua-Penn, a historic 1920s mansion in Reidsville, could be in the hands of a bankruptcy estate if a judge approves the examiner’s request to create a trust for the plantation and its arts and artifacts or to transfer its ownership to the debtors in Renegade’s Chapter 11 bankruptcy.
The suit was filed against Phelps, his wife, Lisa Yamaoka, and 13 limited liability companies, including Chinqua-Penn, that Phelps owns or controls.
Filing the suit was Gene Tarr, the bankruptcy examiner for three companies that Phelps also owns — Renegade Holdings Inc., Alternative Brands Inc. and Renegade Tobacco Co.
Renegade has 140 employees in Davie County.
The claims by the debtors were verified by Peter Tourtellot, the Chapter 11 trustee. A hearing on the claims is set for 9:30 a.m. Nov. 30 in U.S. Bankruptcy Court in Greensboro.
Neither Phelps nor his attorney, Richard Mitchell of Charlotte, could be reached for comment.
Tarr said the objective of the lawsuit is to void and recover “fraudulent transfer of assets” from the three tobacco companies that went to either Phelps, his wife or the LLCs.
That transfer, according to Tarr, damaged the tobacco companies by at least $8.1 million.
“Phelps failed to act in good faith as an officer and director, put his own self-interests above the interests of debtors, squandered and wasted corporate assets and otherwise breached his fiduciary duties of loyalty and care” to the three companies, according to the lawsuit.
The transferring of assets from one company to another by common ownership is not unusual, said Steve Nickles, a law and management professor at Wake Forest University.
What makes for a fraudulent transfer, he said, is when assets shifted from one company to another do not result in a return of equal or better value for the first company.
In Phelps’ case, the lawsuit accuses him of issuing 16 unsecured promissory notes to the companies “at a time when debtors were in dire need of capital.”
In some instances, the assets were used to help pay loans obtained from at least four banks that have struggled with problem loans during the recession — Bank of the Carolinas Corp., Bank of Granite Corp., Carolina Bank and SunTrust Banks Inc.
In those instances, payments on the bank loans stopped.
Besides buying the plantation, jets and sports car, Phelps also is accused of using the assets to help pay Master Settlement Agreement payments for Cutting Edge Enterprises Inc., another company in which he had control as the sole shareholder.
According to audits done by Dixon Hughes on Renegade Holdings and the two subsidiaries, the companies’ liabilities exceeded assets each year from 2005 to 2008, including by $5.3 million in 2008. The companies filed for bankruptcy protection on Jan. 29, 2009.
“The promissory notes were an attempt by Phelps and the Phelps entities to hinder and delay debtors’ creditors,” according to the lawsuit. “Given the promissory notes’ repayment terms, Phelps knew or should have known at the time the promissory notes were made that Phelps and the Phelps entities would not have the ability to repay” the notes.
Chief among the fraudulent-transfer claims is the one involving Chinqua-Penn.
In July 2006, the state’s top elected officials — the Council of State — agreed to sell the mansion — with a failed history as a museum — to Phelps for $4.12 million.
The sale included the 31,100-square-foot mansion, its furnishings and property, including 23 acres of gardens and open land. The plantation was closed in 1991 after failing as a visitor attraction, reopened in 1995 as a place for meetings and weddings, only to close again in 2002 before reopening again nearly four years ago under Phelps’ ownership.
Phelps’ offer was the 15th since the property was listed for sale in February 2005 but the only one accepted by the previous owner, N.C. State University.
According to the lawsuit, Phelps paid the cash portion ($1.83 million) of the plantation deal with money from Alternative. He also borrowed $2 million from SunTrust, then “caused the debtors to guarantee payment” of the loan. The last mortgage payment was made by Alternative on Jan. 15 — two weeks before the bankruptcy filing. The debtors also paid almost all of the plantation’s operating costs.
The lawsuit is the latest, and perhaps costliest, legal development involving Phelps and the three companies. They emerged from bankruptcy protection on June 1, 2010, after Judge William Stocks approved a reorganization plan.
However, on July 19, Stocks vacated the reorganization plan upon hearing a presentation by the attorneys general about a criminal investigation in Mississippi — at least 2 years old — involving Phelps and accusations of “selling cigarettes and other related crimes.”
On Aug. 12, Phelps fired several key management officials and appointed a chief executive, Steve Williams, who had no apparent experience with Renegade or running a tobacco company, according to a motion filed with the court.
Tourtellot was appointed as the trustee on Aug. 17 because Stocks said that there was “a vacuum in management. It is in the best interest of the creditors to appoint a trustee, so that there is no ambiguity of his authority.”
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