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The John L. Smith bankruptcy story and digging deeper

Discussion in 'Journalism topics only' started by JayFarrar, Oct 7, 2012.

  1. JayFarrar

    JayFarrar Well-Known Member

    I was tempted to put this in Sports & News but it seems more like journalism to me.

    It isn't exactly breaking news that Arkansas coach John L. Smith filed for bankruptcy, but more interesting to me is doing some journalism with the story.

    I deploy the caveat now that I am not a sophisticated real estate developer or savvy investor.

    Here's what the USA Today reported:

    If you want to get up to speed read it all but the condensed version is Smith was one of six investors in a some real estate development projects that went south. The lead investor had a 50 percent stake, while the rest were all at 10 percent.

    The initial investment was $7.5 million in loans. Of the five at 10 percent, two are filing for bankruptcy, the other being a Louisville banker. That pair combine for about $63 million in liabilities and at least $40 million of that is from the real estate deal.

    So here's where journalism should intrude because the story seems to have some unanswered questions.

    Like how did a 10 percent investment in a $7.5 million development become $40 million in losses?

    The developer specifically blames Smith but not the other investor filing bankruptcy, why?

    What is the developer's reputation in Louisville, as in is he seen as a honest broker, or is he questionable?

    Have any of his recent other developments also gone south?

    Were other developments ongoing, while he was working on this deal?

    Was he building spec homes and hoping they'd sell and then when they didn't, did he continue to build new homes?

    I guess my point is, and here's where I'm hoping someone smart steps up, I can't get my head wrapped around the size of the loss, give the initial investment.
  2. dixiehack

    dixiehack Well-Known Member

    Ordinarily the way an investment like that would be set up is for Smith and the other 10% investors to be limited partners, who are not allowed any say so in day-to-day operations of the venture, but also are not personally liable for its losses.

    The partnership can require members to put in extra capital as needed, but if one doesn't they don't get sued. Instead their original investment now represents a smaller percentage of ownership, proportional to everyone's total investment.

    For whatever reason, this was set up as an LLC instead, but ordinarily that still should protect him from liability. The only thing I can figure in this case is that the company couldn't borrow the money on its own strength and had to have the individuals guarantee the note. That should have been a red flag for him and certainly one for his accountant.
  3. dixiehack

    dixiehack Well-Known Member

  4. JayFarrar

    JayFarrar Well-Known Member

    Bad Link

    And I was about to post that myself.

    Also, I chatted it up with a real estate person I know and he told me that they thought something was hinky. Typically, in the case of the contract, individual investors aren't held responsible, but in this case, Smith seems to be on the hook for at least a $15 million loan plus the back interest.

    He said it was beyond bizarre and that Smith might have a case for at a minimum bad lawyering.
  5. LanceyHoward

    LanceyHoward Active Member

    There is no chance of this happening because of the time and financial knowledge it would take but I think someone could write this as a case study for the whole economy.

    I know in Denver a couple of local media guys, including a former high-level editor of the Denver Post, got millions of dollars in debt on real estate. How could people borrow so much?
  6. clutchcargo

    clutchcargo Active Member

    My guess is that Smith lent his name to the investment group to help it get some VC footing and maybe he kicked in something like a few hundred thousand dollars just to show his commitment and get some "skin" into the game.

    How that in any way, shape or form puts him on the hook for $40 million or whatever the figure is, is beyond my comprehension. Someone is using the threat of a bankruptcy-induced lawsuit to try and scare some more dollars out of Smith, and I say good luck with that regardless how inept he, his attorney or his accountant might be when it comes to real-estate investments.

    This would be like the new LA Dodgers ownership group defaulting on their nine-figure purchase in a few years and someone trying to sue Magic Johnson for, say, $1 billion. They can sue, just like any joker can sue anyone for anything. Doesn't mean they'll win.
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