Lenders Credit, Arkansas Capital Corp. Lock Horns

F. Max Cloninger III and Arkansas Capital Corporation Group in Little Rock don’t see eye to eye on much these days.

They both agree that Cloninger, the 38-year-old owner of a Fort Smith credit reporting agency, came to Arkansas Capital Corp., a member of ACCG, in February in search of $100,000 in funding. He wanted to launch a service that could help marginal mortgage candidates clear up errors on their credit reports and then match them with willing lenders.

Beyond that, both sides disagree on just about everything. Cloninger claims his faith in ACC — specifically, in former partner Jay Baggett — has likely cost him his business. But ACCG and Baggett say they never promised Cloninger anything, and they say he has tried to turn an attempt to help into a promise to fund.

The disagreement probably will result in a lawsuit against ACCG and may serve as a learning experience for other entrepreneurs dealing with potential investors.

Cloninger projected that his company could generate about $29 million annually by taking a half percent of the eventual loan amount for helping borrowers get their credit in shape for lender approval. He said he could have launched the company on a regional basis weeks ago.

But Cloninger said he burned up nearly $100,000 waiting for Baggett to make good on a promise of funding and connections that would immediately make the service available in 46 states. Cloninger said a national mortgage company is interested in buying firm, Lenders Credit Corp., and he may be forced to sell.

On top of that, Cloninger accuses Baggett of stealing his business plan so he can open his own company.

Baggett specifically denies stealing Cloninger’s idea.

“I have no interest in going into his line of business,” said Baggett, who resigned from ACCG to pursue other options in March, in the middle of Cloninger’s search for money. Cloninger learned of Baggett’s resignation shortly after the fact, but he says Baggett continued to work with him on his project, and Cloninger thought that meant ACCG was still involved. Baggett said he currently is “helping some people out with their business, but it’s a private matter.”

Mess in the Making

Cloninger met Baggett through a contact in the real estate industry and pitched him the idea for his new line of business. Cloninger said Baggett put him in contact with John Oliver, who worked in real estate with First Metropolitan Mortgage in Virginia and had been a friend of Baggett’s for several years.

“I introduced him to John Oliver because John Oliver is in the real estate business, but it was only a sincere effort to help his business. I never committed to help his business,” Baggett said.

Oliver did not return messages left by telephone and e-mail.

Cloninger said he didn’t ask Baggett or Oliver to sign a noncompete agreement because the thought he didn’t need one dealing with ACC.

Now, he said they have no intention of signing one.

In February, though, Cloninger thought he didn’t have to worry. On Feb. 19, he met with Joe Hays, the managing partner of Diamond State Ventures, another member of ACCG, and a Diamond State principal, Larry Carter. They discussed his business plan and his application for $100,000. At the time, Cloninger didn’t realize his deal was a fraction of the size Diamond State generally accepts.

Sam Walls, executive vice president of Arkansas Capital Corporation Group, said Cloninger’s project received appropriate consideration after the Feb. 19 meeting.

“Internally there was a decision made not to be involved in this project,” Walls said. “I have no knowledge of what was done beyond that.”

But Cloninger said he had no idea that he wasn’t an ACC client, and he points to a large number of e-mails and phone conversations he had with Baggett subsequent to the Diamond State meeting.

Cloninger wrote Baggett and asked the status of the project. In a Feb. 21 e-mail, Baggett replied, “We have been dispersed to the wind. I will follow up and get back to you.”

After that, however, Baggett and Oliver sent e-mails back and forth, discussing Cloninger’s plan and how Oliver’s position at First Metropolitan could help take it national.

Sudden Realization

The rest of March was hell for Cloninger.

During the first part of the month, Cloninger was urging Oliver to step on it with some funding.

“I guess the biggest thing I am asking is for us to be mindful that each day needs to be progressive so we can reach a decision that is cost effective,” Cloninger said in his e-mail to Oliver on March 9. “I’ve already invested around $250k to get it this far and my pain threshold should not be the determining factor to launching prematurely — but I may not be able to avoid it.”

As days passed, Cloninger became increasingly anxious.

“What time frame do you perceive before we know ‘this is what we are going to run with’ — not money ready, but final commitment ready?” Cloninger said in an e-mail to Baggett and Oliver on March 12. “What I am trying to look at is if we are looking at another month, or more, to know commitments — if for whatever reason we don’t go forward then I’m going to have a problem switching gears again.”

Walls, executive director of ACC, said the e-mail proves his point that there wasn’t a commitment.

“In his own words, at that point in time there was no commitment of capital from anybody, let alone us,” Walls said. “If you’ve got a commitment to fund, why are you looking for investors?”

Besides, Walls said, two days later, Baggett resigned from the company.

“I don’t have any responsibility for what happened after that,” he said.

But Baggett didn’t tell Cloninger or Oliver that he had left ACC for days.

Cloninger said he found out that Baggett wasn’t with ACC when Baggett said he wanted to open an office to pursue the project in Cloninger’s office. And it was on March 25, during a telephone call with Oliver, that he said he began to suspect that Baggett was trying to steal his business plan.

In the phone conversation, which Cloninger recorded, Cloninger told Oliver that he had always believed that he was working with ACC.

“That’s the same with me,” Oliver replied. “I assumed that this was going to be something where Jay was able to raise money through Arkansas Capital Group. But it was never money that was going to be paid into Lenders Credit Corp.; it was money that going to be paid into a marketing company that Jay and I build.”

Oliver said he and Baggett would pay Cloninger for the leads he developed.

“For me it was an opportunistic thing,” Oliver said. “I’m starting a mortgage brokerage. I have other mortgage brokerages I’m planning to open up.”

Oliver also said that he didn’t think Baggett lied to Cloninger.

“I don’t think he’s a dishonest person,” Oliver said.

Cloninger said hasn’t spoken to Baggett since then.

“No promise was ever made to give Max capital,” Baggett said last week.

“There’s no promise ever made when you’re looking at business opportunities. It’s a process.”

By the time Cloninger realized that no funding was coming from ACCG, Baggett or Oliver, it was too late to launch his business, even locally, because he had burned up most of his startup capital.

He turned to ACCG — either (in Cloninger’s view) to make good on the assurances he thought he received from one of its partners, or (in Walls’ view) to pressure ACCG into funding a project that didn’t fit any of its programs.

Walls provided Cloninger with the names of some people he could call for possible funding, but he didn’t offer any ACCG funds.

“Because I placed my faith in ACCG — I am going to lose my business and everything I own,” Cloninger said in a letter to Walls dated April 8.

“The scam Jay pulled under the guise of ACCG has devastated my company and the hope of recovering is just about gone forever.”

The attorney for ACCG, J.T. Hardin of Little Rock, responded to Cloninger’s letter by saying the company was sorry Cloninger couldn’t find funding for his company and Walls hoped he had better luck with some of the other people he suggested.