John David Lindsey Bankruptcy Takes Center Stage

At 11 a.m. on April 20, John David Lindsey is scheduled to appear at the United States District Court in Fayetteville for his 341 meeting.

It is at this gathering court-appointed trustee John T. Lee and Lindsey’s creditors will question him, under oath, about his financial affairs. Those affairs have sparked considerable conversations, from boardrooms to break rooms, since Lindsey filed for Chapter 7 personal bankruptcy on Feb. 20.

Lindsey is the son of Fayetteville real estate tycoon Jim Lindsey, a member of the University of Arkansas’ 1964 national championship football team who later served as chairman of the school’s board of trustees and who remains an almost-peerless power broker even in this well-heeled corner of the state. The younger Lindsey’s schedule of debt, income and assets, laid bare the third week of March, showed claimed liabilities totaling $169.6 million.

It was a staggering revelation, even in a region where bankruptcies like those involving Ben Israel, Brandon Barber and others have had a numbing effect. The denouement of the Lindsey case could make the others pale in comparison.

“This is a watershed case,” said Ray Green, a partner at Kutak Rock LLP’s Fayetteville office.

Setting the Stage

Lindsey is the principal broker and general manager of Lindsey & Associates, one of three companies owned by his father. Jim Lindsey said in a prepared statement on Feb. 20 none of his companies will be affected by his son’s struggles.

John David Lindsey listed 100 percent ownership of six companies and part ownership or interest in 24 others as part of the 155-page summary of schedules released the following month. Spokesman Scott Rogerson declined on April 6 a request to interview Lindsey for this story.

Lindsey’s only public comment also was released via a prepared statement on Feb. 20.

“Due to the massive slow-down in real estate activity in Northwest Arkansas, a large portion of my personal businesses and real estate investments are no longer viable and I had to file a Chapter 7 Bankruptcy petition,” the statement read. “I sincerely regret any harm that this situation has caused to anyone, including the financial institutions who loaned me money; the vendors who I did business with and especially my former employees and their families. I have been working with my creditors and will continue to work with my creditors throughout this process to try and come to the best possible result.”

Those results are expected to vary. With listed assets of less than $10 million and secured claims of more than $10.1 million, there likely will be relatively little money to be spread among the roughly 300 individuals and entities that have unsecured claims.

(Note: The first money disbursed in cases like Lindsey’s goes to administrator costs and legal fees incurred by the trustee.)

Secured debts include some form of collateral, such as property, shares of stock, interest in an LLC, etc. In these instances, the grantor can claim the collateral if and when the loan agreement is breached. Unsecured debts, conversely, have no such collateral.

It is the latter group of claims that figures to produce the most interest at Lindsey’s 341 meeting. That’s because, according to sources familiar with the case, some of the 13 Arkansas banks with a combined total of more than $120 million in unsecured claims are poised to ask some pointed questions.

Sources said those questions will center around a trust – a one-third interest in a limited partnership – of which Lindsey, 39, receives half distribution at age 40, according to his filing. As a rule, such an inheritance received more than six months after the filing of bankruptcy is not subject to, or included in, the bankruptcy.

If, however, the bankruptcy court were to determine Lindsey made misrepresentations on financial statements that induced a lender to make a loan, then that loan is non-dischargeable.

In other words, if it is determined Lindsey used the aforementioned trust – which sources valued in the tens of millions of dollars – to secure loans, the lenders can go after that money.

Asked whether Lindsey expects to face questions along those lines, Rogerson deferred to Fayetteville attorney Jill Jacoway. Jacoway is representing Lindsey, and has handled other high-profile bankruptcy cases. As of press time, she had not returned a telephone call seeking comment.

It is widely believed most of the banks involved will not pursue a plan of attack that aggressive. Instead, some appear ready to charge off all or part of their respective debts, if they haven’t already taken such action. Still others are expected to, if they haven’t already done so, strike deals to salvage as much money as possible.

It’s also worth noting some of the amounts of unsecured debt that have been published do not accurately reflect what specific banks owe. That’s because each bank, according to Luther Guinn at the Arkansas State Bank Department, has a legal lending limit.

Guinn, a deputy bank commissioner, said banks only can lend 20 percent of their equity capital – determined at the end of each quarter – to any one individual or entity. Most banks also employ their own in-house limits.

“Most banks’ house limit is substantially less than the legal lending
limit,” said Randy Dennis, president of DD&F Consulting Group in Little Rock. “I would say that the house limit has decreased over the last couple of years.”

Thus, some of the banks involved in the Lindsey case have been linked to unsecured claims that are more than their legal lending limit, meaning those loans were participated. Translation: Those banks share responsibility for the loans with one or more other banks.

Blame Game

Regardless of the extent of their individual involvement, the banks as a whole have drawn criticism, too. For starters, there is the perception – as evidenced in a March 31 Arkansas Democrat-Gazette editorial – some banks gave Lindsey favorable treatment due to the “star power” of his family name.

There also is the idea the banks simply failed to contain their competitive zeal during Northwest Arkansas’ real-estate boom.

“They called the terms … so to deny their own exuberance sounds a little self-serving,” said UA assistant professor of law Tim Tarvin, a former bankruptcy trustee and a member of the National Association of Consumer Bankruptcy Attorneys.

Tarvin raised some eyebrows of his own when he was credited in a Democrat-Gazette news article with saying Lindsey’s creditors can expect to collect about a nickel on the dollar for the debt they’re owed. Tarvin recently clarified that amount was based on a “rough equation” using only Lindsey’s stated assets and liabilities.

“What it means is if you take all the creditors as a group, and you assume (Lindsey) listed exact amounts, and the property is valued exactly right,” Tarvin said, “that’s what you get.

“For the creditor who was very careful and cautious … they may well get 100 percent of their money.”

The undersecured and unsecured creditors, however, face a far worse fate.

“They may not even get a nickel on the dollar,” Tarvin said. “They may get nothing.”

The ripple effect on those creditors is immeasurable. Suppliers, subcontractors, et al will absorb financial blows of varying damage.

“There’s a perception among the average citizen that the banks are going to be OK,” Green said, “but these others are local companies that are really going to be hurt. These are real people.”

Even so, some of those affected effectively downplayed their claims. Auto parts dealer Bumper to Bumper has a claim of almost $15,000, but president Fletcher Lord categorized that amount as “not catastrophic.”

Lord also said Lindsey’s case will be handled like any other delinquency.

“What I know about this case is what I’ve read in the newspaper,” Lord said. “From what I’ve read, my expectation is we won’t collect very much, but my credit department probably has a better handle on that than I do.”

Don Anderson of Anderson Gas & Propane in Hindsville said his company’s claim of more than $58,000 is tied to a job on the “Pig Trail” highway. Anderson also said the job was bonded, meaning he expects to eventually collect what is owed.

“The Anderson family will continue to do business with the Lindseys from here on,” he said, “just like we have for the last 40 years.”

It seems safe to say some creditors won’t be as forgiving. Among the unsecured nonpriority claims, no less than 160 are for $2,500 or less, with a total value of more than $115,000. That amounts to a lot of people and/or businesses almost sure to get no more than pennies on the dollar, if that.

Trickle-down Effect

Lindsey’s bankruptcy will prompt other adverse results, too. With more than 400 lots, 200 acres and 200 homes potentially on the block, local market values are sure to take a hit.

And while some institutions have opted to generate cash flow by renting some of their bank-owned property, Guinn said they typically have five years from the time they acquire property to move it. There is a provision that allows banks to request an additional five years to move the property, with those requests handled by the bank commissioner on a case-by-case basis.

Lindsey’s roughly two-dozen co-debtors also are likely to feel a pinch. Depending on the outcome of Lindsey’s bankruptcy, in fact, two sources said some of his co-debtors could be left with potentially unbearable strains on their own financial situations.

The whole ordeal represents a tragic turnaround for Lindsey, who was chosen by the Business Journal in 2006 as one of 12 all-star 40 Under 40 honorees. The idea was to pick those best-suited for a seat at “the closing table.”

“I try to identify the problem right there and instill confidence in the buyer and seller,” Lindsey said when asked how he reacts when things go south at such a table. “Our whole job is getting two people to agree.”

It remains to be seen how much Lindsey and his creditors will agree at his scheduled hearing, particularly if some of them go after the much-ballyhooed trust. One longtime bankruptcy attorney said it could make for compelling theater, but stopped short of speculating on an outcome. 

“Ultimately, a man in a black robe will make that call,” he said.