Bankruptcy Trustee Seeks Papers From Erickson for Possible Lawsuit

Fri, 04/29/2011

A trustee for creditors in the bankruptcy case of Erickson Retirement Communities LLC wants a peek at the documents filling thousands of boxes in a Baltimore-area warehouse as a precursor to a possible lawsuit against the company's directors and officers. But the Erickson family is fighting back.

Lawyers for trustee Dan Lain filed a motion on April 6 in U.S. Bankruptcy Court in Dallas seeking a court order requiring Erickson to preserve the more than 7,700 boxes of files. Lain's lawyers said in the filing that he needs to review the documents to prepare a claim against Erickson's directors and officers, including members of the Erickson family, for allegedly fraudulently transferring company assets, misusing company funds, and illegally paying dividends while the company was bankrupt or on the verge of bankruptcy.

According to court papers, Lain is looking into a $50 million loan in 2005 from Erickson Group LLC to an entity called GST Trusts.

Lain's motion alleged the loan was used to "fraudulently transfer" company assets to members of the Erickson family.

It is not apparent from the filing what the loan was for and who GST is. Lawyers for Lain and the Erickson family, including founder and chairman John Erickson, aren't talking.

In court papers opposing Lain's motion, the family's lawyers said Lain has put them on notice that he intends to sue them.

The alleged claims, totaling $100 million, are "baseless" and an attempt to tap into insurance coverage, the family's lawyers said in their filing. A hearing on the motion to preserve the files is scheduled for April 29 in Dallas.

Erickson Retirement Communities was one of the biggest operators of retirement communities in the country when it filed for Chapter 11 bankruptcy protection in October 2009.

The Catonsville company filed for bankruptcy after it was unable to reach agreement with lenders to restructure its debt and had to stop work on new developments. At the time of its filing, Erickson listed $2.7 billion in assets and $3 billion in liabilities. It employed 12,000 people nationally, including almost 3,000 in the Baltimore area.

Erickson Retirement Communities emerged from bankruptcy in April 2010 as part of a deal to sell its senior living facilities for $365 million to Redwood Capital Investments LLC. Redwood is headed by Jim Davis, a Baltimore businessman, and a cofounder of Hanover staffing firm Allegis Group Inc.

Lain, who is trustee for the liquidating creditor trust in the bankruptcy case, could not be reached for comment. Neither Tricia DeLeon, a lawyer with the firm of Bracewell & Giuliani, who represents Lain, nor a spokeswoman for the law firm could be reached for comment.

Irving Walker, a lawyer with the Baltimore office of Cole, Schotz, Meisel, Forman & Leonard, who represents several Erickson family members, including John Erickson, declined to comment. Jeffrey Scherr, a lawyer with Kramon & Graham, who also represents the Erickson family, could not be reached.

One bankruptcy expert said it is standard practice in a big corporate bankruptcy for trustees like Lain, who are appointed to represent the interests of a bankrupt company's creditors, to sue the company's directors and officers.

That's especially true if the directors and officers are insured by an insurance policy that covers their actions, said Lawrence Yumkas, a bankruptcy lawyer at Yumkas, Vidmar, Sweeney & Mulrenin in Annapolis and a past president of the Bankruptcy Bar Association for the District of Maryland.

Insurance coverage "makes these parties tempting targets", said Yumkas, whose firm is not involved in the Erickson bankruptcy case.

"It is not uncommon in this day and age for someone on behalf of a debtors' creditors to investigate whether officers and directors acted in accordance with their fiduciary duties, to maximize recovery for creditors and to avoid self-dealing", he said.

Trustees may have an incentive to collect as much as they can for creditors because their pay is often based on the amount recovered and distributed to creditors, Yumkas said.

Gary Haber
Baltimore Business Journal