Developer-case trustee selling legal claims

The trustee in the bankruptcy of former high-profile Northwest Arkansas real estate developer Bill Schwyhart is auctioning off some of his legal claims in the case.

On Thursday, trustee Scott M. Seidel offered at auction "all causes of action of the estate" against Schwyhart and his wife, Carolyn. The stalking horse bid of $100,000 for the causes of action was made by Recipio Investments Strategic Fund I, LLC. Recipio has been identified in a request to the court for the auction by the trustee as "a potential target and alleged insider of the Debtors."

The first minimum bid increment was $15,000, with following increments of at least $5,000. According to documents, the trustee has the power to determine the best bid when all considerations are weighed and his selection will be presented to the court for approval at a sale hearing Monday.

As of Thursday afternoon there were no court filings indicating the winner of the auction. A phone call made to Seidel asking for information about the auction's winner was not returned Thursday afternoon.

In July 2018, Schwyhart and his wife filed for Chapter 7 bankruptcy protection in U.S. Bankruptcy Court Northern District of Texas, claiming more than $90 million in debt, mostly related to business.

In documents asking the court to approve the auction, Seidel notes that the estate seems to have claims and causes of action against various third parties, including Pinnacle Villa LLC, as well as Recipio, for potential fraudulent transfers and other causes of action linked to a scheme by the Schwyharts to hide assets, including real property and settlement assets.

Seidel argues that the sale is in the best interest of the estate, since any trial could result in zero recovery for the estate; prosecuting the causes of action could be expensive and time consuming, with possible years of litigation without resolution; and any judgment would be subject to years of appeals. He noted that an auction is the best way to ensure that the final purchase price is fair and reasonable.

The Schwyharts contend in court documents that they have done nothing wrong. Their attorney has asked the court that their bankruptcy be discharged, saying the couple never intended to hinder, delay or defraud, and that all acts or failures to act outlined in court documents were justified under the circumstances of the case.

Joshua Silverstein, a professor at the University of Arkansas at Little Rock W.H. Bowen School of Law who researches and writes about bankruptcy, said in an email that causes of action are subject to the same bankruptcy rules as any other type of property.

"Causes of action -- which is a legal claim against another party -- are a type of property. And thus the right to sue can be sold in bankruptcy just like any other type of property," he said in the email.

Silverstein noted that selling property in a bankruptcy to any type of insider does raise concerns, but sometimes they are the only ones willing to pursue a claim that the trustee wishes to abandon, so Recipio Investments' involvement in the auction does make some sense.

In court documents, CHP LLC, a creditor of the Schwyharts and a potential bidder for the trustee's causes of action, objected to some wording in the auction motion, contending that while the trustee may sell causes of action of the estate, it should be made clear that those rights don't include CHP's fraud and civil conspiracy claims, since they are not the property of the estate. CHP contends in court filings that the Schwyharts have tried to hide their assets, including their interest in Pinnacle Villa LLC, as well as a multimillion-dollar mansion in Northwest Arkansas.

The order giving the go-ahead for the auction notes that the sale does not "prejudice any issue raised by CHP LLC" and that those issues will be considered in the context of the sale motion and sale hearing.

Fayetteville attorney Todd Hertzberg of the Hertzberg Law Firm of Arkansas said in a recent interview that in bankruptcy cases the property of the estate can be defined broadly and can include causes of action.

He noted that in bankruptcy cases the trustee has an important role and as such the trustee is vested with significant powers. He noted that selling causes of action gives the purchaser the ability to step into the role of trustee and wield those powers how the purchaser sees fit.

Hertzberg said causes of action can be purchased for a variety of reasons, for example to allow a creditor to hotly pursue a debtor or those he transfers property to or to stop cold many types of claims against a debtor or those he transfers property to.

During the Northwest Arkansas building boom, Schwyhart worked with trucking magnate J.B. Hunt and Tim Graham on the Pinnacle Hills Promenade mall, which opened in 2006. After Hunt's death later that year, his widow, Johnelle Hunt, and Graham broke ties with Schwyhart.

Schwyhart was also one of the investors, along with J.B. Hunt, in the now-defunct charter-jet company Pinnacle Air LLC, which did business as Aspen JetRide. It filed for Chapter 7 bankruptcy protection in early 2009.

In April, Seidel received approval from the court to employ the law firm Munsch Hardt Kopf and Harr. The trustee noted that the Texas firm, which also has offices in Austin and Houston, has extensive experience representing bankruptcy trustees in multiple fields, including "recovering preference, turnover, lien avoidance, fraudulent transfer, alter ego, breach of duty and other claims of action."

In his request to hire Munsch Hardt, the trustee noted that complex legal issues and potential litigation might come about in the case and that the law firm has "considerable experience and versatility in these matters."

Business on 06/05/2020

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