Less than three weeks before an auction of Capital Consultants' $183 million loan portfolio, a federal judge overseeing the landmark fraud case issued an opinion that could lower the bids for the portfolio.
The long-suffering clients of Capital Consultants were counting on the Jan. 24 portfolio sale as one of their last and best opportunities to recover some of the estimated $355 million they've lost in failed and allegedly fraudulent Capital Consultants investments.
The receiver now in charge of Capital Consultants already has a $45.6 million bid in hand from Denver-based Republic Financial Corp. for the portfolio. But clients were hoping that the price would be bid up significantly at the auction.
Many of the loans are considered "troubled" or are in outright default, reflecting Capital Consultants' willingness to make risky loans. Court-appointed receiver Thomas Lennon, now in charge of liquidating the firm, estimated in an earlier report that the firm's loans will generate an average repayment of 29 cents on the dollar -- or about $53 million.
Potential bidders could view the loans as even riskier since U.S. District Court Judge Garr King ruled Thursday that a former borrower of Capital Consultants could proceed with a lawsuit against the Portland investment management firm. Washington Alder, a Mt. Vernon, Wash.-based timber company, has been trying for a year to sue Capital Consultants, claiming the company suffered economic damages when Capital Consultants allegedly reneged on a promise to loan it more money.
Lennon had argued that his status as a federally appointed receiver insulates Capital Consultants and, to some degree, the buyer of the Capital Consultants loan portfolio, from such lawsuits.
But King ruled in Washington Alder's favor, which paves the way for additional claims from other Capital Consultants borrowers.
"The buyer of these notes has bought a series of lawsuits," said Robert Custis, a Portland lawyer representing Washington Alder.
Even if Washington Alder and the other borrowers lose their lawsuits, the specter of protracted litigation could make bidders leery. "The impact could only be to reduce the value of the portfolio," said Mike Esler, attorney for former Capital Consultants clients.
Lennon, who did not return repeated phone calls, replaced Jeffrey Grayson at the helm of Capital Consultants on Sept. 21, 2000. That was the same day that two federal agencies charged Grayson and his company with making imprudent loans and deceiving clients, many of which are union retirement and benefit funds.
A federal grand jury issued an indictment against Grayson in October 2001, charging him with 22 counts of fraud, money laundering, witness tampering, conspiracy and making illegal payoffs to a former union trustee.
Grayson was a genuine mover and shaker in his heyday in the 1990s. His firm loaned money to some of the biggest names in Oregon business circles.
Real estate developer Homer Williams, well known for residential projects in the West Hills and the Pearl District, owed Capital Consultants more than $1.16 million as of Sept. 15, 2001. High-profile Portland travel agency Azumano Travel Service owed more than $2 million. Grayson also helped finance the Governor Hotel in downtown Portland.
James Reinmuth, former dean of the graduate school of business at the University of Oregon and a long-time Grayson supporter, along with a business partner and a company they're involved in, owed Capital Consultants $3.55 million.
Capital Consultants largest single loan -- the $160 million it extended to Andrew Wiederhorn's Wilshire Credit -- is the subject of ongoing civil litigation and is not included in the portfolio. The U.S. Department of Labor claims in a suit against Capital Consultants and Grayson that the loans to Wilshire Credit were imprudent and violated federal pension law.
The four largest single borrowers are:
Miami, Fla.-based auto finance operation Brooks Financial, which along with two related companies owes about $71.5 million.
Bayside Ltd., a subsidiary of Bellingham, Wash.-based timber company Trillium Corp. Bayside and another Trillium subsidiary owe Capital Consultants $35.8 million.
The Governor Hotel Association, which owes $15.6 million.
Washington Alder, which owes more than $19 million.
Together, the four companies owe Capital Consultants about $142.7 million, or 77.98 percent of the portfolio up for bid. The Bayside and Washington Alder loans are in default. Lawyers for all four companies said they intend to go ahead with lawsuits against Capital Consultants.
"There were a lot of borrowers who got lied to," said Al Smith, a Seattle-based attorney for Trillium. "The Capital Consultants mess is truly an ugly one. There are a lot of victims out there. It's not just the union trust funds."
King's ruling may scare off some bidders. But Republic is already on the hook. Republic, which specializes in buying distressed loan portfolios, in November agreed to offer up the minimum bid of $45.7 million.
Susan Maguire, Republic's vice president and chief legal officer, declined to comment on the Washington Alder ruling. She did say that under the terms of the contract signed with Lennon, Republic does not have the option to drop out of the bidding.
Jeff Manning can be reached at 503-294-7606 or by e-mail at