Lenders Watch Waddle Bankruptcy

Bankruptcy laws may benefit most those who need them the least.

That could be the case for two former partners in Land Ventures LLC, Jonny D. Waddle Jr. and Carol Waddle. The couple, married for only a few months, filed for Chapter 7 bankruptcy on March 26.

They and three others were named in a foreclosure suit filed in Washington County on Jan. 14. In that suit, The Bank of Fayetteville is seeking more than $5 million plus interest on a loan it made to the group in October 2005 to develop the Meadows at River Mist subdivision in east Springdale.

What makes the Waddle bankruptcy stand out from the crowd of more than 644 Chapter 7s filed at Fayetteville’s U.S. Bankruptcy Court last year is threefold: Their fulltime jobs in the financial services industry, their combined incomes and the choice to pursue Chapter 7 liquidation rather than Chapter 13 debt repayment.

Jonny Waddle is a financial adviser at Stephens Inc. in Fayetteville and Carol Waddle is a loan officer for Signature Bank of Arkansas, positions that most reasonably consider as fiscally responsible.

According to their statements of financial affairs, attached to the bankruptcy filing on April 16, the couple has claimed assets of $686,416 and liabilities of more than $5.27 million.

They also claim to spend $1,700 per month — $20,400 per year — on recreation, which includes “clubs and entertainment, newspapers, magazines, etc.”

Last year their combined gross income was $222,384, according to the statement, and at one point in 2007 the couple had gains of nearly $30,000 on the sale of “stocks/investments.” Jonny Waddle’s IRA at Stephens, which is exempt from creditors under bankruptcy law, was valued at $207,501.

The Waddle’s bankruptcy stays the bank’s foreclosure on them as former partners in Land Ventures.

The case has lenders all over the state scratching their heads and wondering if they should begin to second-guess themselves when it comes to assessing risk.

“If you have high income people who can just walk away, that would put a chill on things. That could break things down in a hurry,” said Reynie Rutledge, chairman and CEO of Searcy-chartered First Security Bank.

Rutledge said he might not always like the finer details of a deal, but that if the borrower has a secondary source of repayment and everything else lines up with his bank’s underwriting standards, FSB will typically loan the money.

But if the Waddle’s Chapter 7 goes through?

“I guess that would change my viewpoint of lending and how I would look at a deal,” he said.

“Some people are using bankruptcy as a business strategy. If a project doesn’t work out, they just file,” said another banker, who asked not to be identified.

“It’s just too damn easy,” he said.

Jonny Waddle declined to talk about the foreclosure or the bankruptcy, but did point out that he and Carol Waddle were no longer members of Land Ventures.

Jill Jacoway, lawyer for the Waddles, did not respond to a request for comment.

Lawyers for The Bank of Fayetteville declined to comment, citing pending litigation.

Bob King, executive vice president and chief lending officer at The Bank of Fayetteville, is named in many of the cross- and counter-claims to the foreclosure. He declined to comment but did issue a statement.

Part of it reads: “I will say, generally, that it is a sad and unfortunate commentary of our new bankruptcy laws when sophisticated and high caliber borrowers, and in this case members of the financial community themselves, can elect to file Chapter 7 bankruptcy instead of reorganizing the payment of debt over time.”

Foreclosed Upon Five

The Meadows at River Mist is little more than gravel roads outlined by concrete curbs and waist-high weeds. Piles of rock remain yet to be spread and foot-deep valleys the width of car tires are cut into the half-done streets by excessive spring rains. It’s a treacherous journey from one end to the other for anyone that’s not in a four-wheel drive with plenty of clearance.

It is an all too common sight in Northwest Arkansas these days.

None of the five ex-partners or their lawyers would talk to the Business Journal about the subdivision or about the foreclosure.

The five partners were co-borrowers on the loan, which means they are all equally liable for all or part of the note.

Based on documents related to the case here’s how it went down:

In 2005, Scott Miller, Jack Lovin and Gilford Bryant tried to get a loan from Liberty Bank of Arkansas to develop the subdivision. The bank said the three needed more liquidity, so the partners found Jonny Waddle and Carol Waddle (formerly Carol Green).

At the time, Carol Waddle worked at The Bank of Fayetteville, so the group took the project to King. They were approved for a little more than $3 million on Oct. 14, 2005.

Land was purchased and improvements were made by Fochtman Enterprises Inc.

The project proved to be more expensive than the original $3 million, so there was a modification made to the mortgage on Dec. 22, 2006, which took the available funds to $4.9 million. The note was set to mature on Dec. 22, 2007.

There is some squabbling among the former partners about how the money was spent and fingers are pointed at King and BOF for not lending enough to complete the project and for not participating out part of the loan.

Fochtman Enterprises worked on the site from April 2006 until about May 31, 2007 when a payment didn’t get made. The company ceased working immediately. Fochtman Enterprises was listed as a defendant in the foreclosure filing because it had filed a lien of about $200,000 against Land Ventures prior to BOF’s foreclosure.

Foreclosure law requires that anyone with a lien claim or potential lien claim against a property must also be named in the suit as a defendant. A judge then determines the priority of each claim against the property in the event of a foreclosure sale.

At one point, the group met with BOF and officials from Signature Bank, Carol Waddle’s current employer, but Signature declined to make a loan on the project.

By then, the residential market in Northwest Arkansas had turned sour and no lender was interested in a speculative subdivision.

The group did not meet the maturation payment on Dec. 22 and The Bank of Fayetteville foreclosed on Jan. 14.

“A big piece of this is the fact that the market changed,” said Ross Mallioux, executive vice president and chief lending officer for First Federal Bank’s northwest division. First Federal had its share of bankrupt builders in 2006 and 2007.

“A lot of these deals were put together 3 to 4 years ago when the market was strong. There were a bunch of different deals being made by a bunch of different banks at the same time,” he said.

Life in the Fast Lane

Chip Stacy, a partner in Hood & Stacy PA in Bentonville, represents banks — notably Arvest Bank — in foreclosures and bankruptcies. He said that on a recent docket day in court it took 1.5 hours to read all the cases on the bankruptcy docket. A year ago it would’ve lasted 20 minutes.

Jim Franks, a vice president for the Arkansas Bankers Bank in Little Rock, echoed Rutledge, saying the Waddle bankruptcy could have a “chilling effect” on lending. But he cautioned against a line of thinking that says more bankruptcies will harm lenders across the board.

“There’s all kinds of complicated things involved,” he said.

Bankruptcy filings are climbing again after the statewide surge before the Bankruptcy Abuse Prevention and Consumer Protection Act took effect in 2005.

Judge James Mixon is one of four bankruptcy judges in Arkansas. He said it’s possible the Waddle’s bankruptcy won’t meet the means test, which looks at income, and may be reclassified as a Chapter 13.

His message to lenders: “Diversify your loans, don’t put everything in one basket.

“I don’t think the bankruptcy law is the bad guy here,” Mixon said.

The Waddles, their creditors and the lawyers are scheduled to meet on May 19.