Creditors Fight for First in Legacy Foreclosure

When is $124,604 greater than $18.1 million?

When a subcontractor is trying to avoid the shaft in a foreclosure sale.

The Barber Group’s 37-condo Legacy Building in downtown Fayetteville has been the highest profile development to go from boom to bust in the last year, and the market is watching to see if the ripple effects will spread beyond a multi-million-dollar write-down for its

financiers and a potential loss of more than $1.8 million for the contractors who built it.

Barber Group president Brandon Barber, who said he’s been spending the majority of his time in New York City with his son and wife lately, preferred not to comment for this story citing the pending litigation.

His on-again, off-again Bellafont mixed-use project on Joyce Boulevard in Fayetteville is on again after a lengthy work stoppage related to a dispute with former general contractor Precept Builders Inc. of Dallas, which is attempting to foreclose on more than $1 million in liens at the site.

He’s left behind a string of unpaid bills, angry tenants, lawsuits, liens and foreclosures. Now, with an ethereal empire built largely on the belief among many he was backed by his father-in-law and Chambers Bank CEO John Ed Chambers, Barber is increasingly isolated and his future as a developer in Northwest Arkansas is on the line.

“I would say that’s a correct assumption,” said developer Hank Broyles, who along with John Nock purchased the 30-unit Metro District condo building from Barber and Mitchell Massey last fall for $13.1 million. “I hate to see anyone have problems. Brandon has been good friend and hope he works his way out of this.

“But the writing on the wall seems to be the writing on the wall.”

Marshall Ney, attorney for LNB, said the bank will pursue all means to satisfy the debt should a foreclosure sale not satisfy the guarantors’ obligations.

“Any non-exempt asset will be fair game,” Ney said.

Broyles said LNB was likely caught up in the moment during the blowin’ and goin’ of 2005 as an upstart startup looking for — literally — a signature project.

“There was a free-wheeling atmosphere in the banking industry in 2005, 2006,” Broyles said. “Even with the family ties, it wasn’t so much the borrowers as it was the euphoria in the marketplace watching success after success.”

That euphoria and a resultant lack of attention to detail might end up costing LNB in its foreclosure fight for first lien rights against the 10 contractors who are asserting top priority versus the two mortgages totaling much more.

Motions are to be heard and ruled on no later than June 4 and the foreclosure trial has been set for July 23.

Believing the Hype

At its core, the argument of the contractors is simple.

Because LNB did not write a construction mortgage before the project started, it is not entitled to first priority to be paid in a foreclosure sale regardless of the disparity between amounts owed to contractors and the bank.

Fayetteville attorney John Scott, who represents EWI Inc. and its Legacy lien-holding subsidiary RGC Glass Inc., wrote in a motion that to award LNB first priority would be “absurd” and “turn the law on its head.”

LNB’s September 2005 loan for $2.8 million to settle Barber’s original $1.45 million loan with The Bank of Fayetteville for the property at 401 W. Watson Ave. was a commercial real estate mortgage, not a construction loan.

It wasn’t until December 2005, when LNB gave Barber, Seth Kaffka and their wives, Keri Barber and Laura Kaffka, a $16.7 million loan (part of the proceeds of which paid off the $2.8 million note), that the bank included the required construction mortgage language and attempted to claim first lien rights.

“The law says priority dates to when the work commenced,” Scott said. “They are superior to every other lien claimant unless there was a construction mortgage before work commenced. The building was demolished and going up when [LNB] gave their loan. The bank can’t argue they didn’t know that.”

So did Legacy National Bank simply screw up?

“They thought there was no way it would fail,” Scott said. “They thought a bunch were pre-sold. They believed the hype.”

At the end of the reservation period in 2005, the Barber Group reported 26 of the 37 condos had been reserved through deposits or down payments.

LNB shared participation in the $16.7 million loan with Metropolitan National Bank, the First National Bank of Fort Smith and the First National Bank in Green Forest.

In April 2007, a month before the Legacy opened, LNB gave Barber a $2.7 million loan to finish the project. Both loans were set to mature on June 15.

Only six condos had sold by that point, as many potential buyers walked away, some because of the market and others who were disappointed in the finished product. Then the liens started piling up, clouding title of the units and preventing any more sales.

That’s bad news for those who bought in, including lawyer Jim Blair and nightclub owner Dave Bass, who purchased condos for $407,000 and $397,000, respectively.

“People who bought at top of market prices and have closed prior to going into foreclosure unfortunately will bear the brunt of the downturn,” said Jack McCabe of McCabe Research & Consulting of Deerfield Beach, Fla. “They will lose equity. They are going to be upside down like on a car.”

Blair said the main thing he’d like to happen at the building, besides getting some neighbors, is a revamped electrical system. The building runs off one meter, which was cheaper to install, but the load was designed for full occupancy and he said his surge protectors routinely trip.

“When you’re trying to watch Tiger Woods and your TV suddenly kicks off, it’s kind of disconcerting,” he said.

Blair said his experience has been “bizarre” and he put Waco Title Co. on notice last summer once the building started being hit with lien filings. He said he’s not considering legal action now because his unit has been exempted from most lien filings. But he said there were at least two problems that happened at closing.

“One is the developer signed affidavits saying it wasn’t subject to liens,” Blair said. “They have to do that. The title insurance company inspects the records for any liens of record, but if there are ones they don’t know about and the developer lies to them, that creates a problem.”

Blair stressed he wasn’t accusing Barber of lying to the title company about the possibility the project could be hit with lien filings.

“I’m saying somebody submitted an affidavit that has what appears to be his signature on it,” he said.

LNB’s Jan. 2 foreclosure filing did not indicate the amounts shared by each bank on the $16.7 million loan, but the bank’s 2007 quarterly reports show its loans 90 days past due went from zero to $7.4 million by Sept. 30. Take away the $2.7 million loan and LNB’s exposure on the largest note may have been just $4.7 million.

LNB could have a problem if the other banks participated in the loan on the belief they held first lien rights. In any case, LNB’s expected loss from the loans sent it from a profitable 2007 to a negative net income of $500,000.

The bank increased its loan-loss provision from $972,000 at the end of the third quarter to $4.05 million at year-end, funds that come directly out of the bank’s bottom line.

LNB president Don Gibson said the bank became profitable in its 13th month of operation and that it is ahead of its projections.

“We’ll be fine,” Gibson said. “We just have to get through this and we’ll be fine.”

Hard to Swallow

RGC’s argument is crucial for all the contractors with unpaid invoices. RGC filed its lien on Aug. 1 and after no response from Barber, it initiated foreclosure proceedings to collect on Sept. 21. Still with no response from Barber, RGC requested and was granted a default judgment for the full amount it demanded, $124,604, on Jan. 9.

Scott has represented contractors who took losses after the bankruptcy of Robert Abercrombie and Betty’s Homes of Bella Vista, but he said that situation was far different than dealing with Barber.

More than the endless stream of broken promises, Barber’s posh lifestyle financed with money he wasn’t perceived to have earned has set him up for the greatest ire.

He and Keri own a 5,700-SF home in east Fayetteville with an appraised value of nearly $1.25 million, financed with a $660,000 construction mortgage from Chambers Bank that matured nearly three years ago but was only recently released despite no recorded modification to the due date since Jan. 8, 2005.

The Barber Group, Barber Development and Barber Construction haven’t exactly been models of responsible spending with lavish party tabs whispered to have exceeded six figures.

According to 2007 property tax records, the companies have a pair of $40,000 Acura MDX SUVs, a 2003 Cadillac Escalade, a 2006 Toyota Tacoma and a fleet of six brand-new 2006 Chevrolet Silverados leased in December 2005 soon after receiving the Legacy loan.

“[Contractors] liked the Abercrombies personally,” Scott said. “They didn’t feel like they’d been unkind. But when you see someone driving the same car, living in the same big house and not making any effort to pay any money, telling you, ‘Sorry, too bad,’ that’s what’s hard for people to see. That’s what’s hard to swallow.”