A Few of the Costly Defaults for the USDA

Tuesday, December 4, 2007 9:10 PM

Using the Freedom of Information Act, The Washington Post obtained a list of loans that went bad under the U.S. Department of Agriculture's Business and Industry Guaranteed Loan Program between 2001 and 2006. USDA officials later said the information was confidential and released by "mistake."

A Post analysis shows that the USDA paid out $175 million for 75 guaranteed loans that defaulted during the period. Loans written by Business Loan Express or related entities accounted for $34 million, or nearly one of every five dollars. Here are a few BLX examples:

Three Tees Leasing &t Development: In April 2002, the USDA's Maryland office agreed to back 80 percent of a $3 million loan to the Somerset, Pa.-based company, which operated gas stations in Maryland and several other states.

On Dec. 16, 2003, the Comptroller of Maryland revoked the owner's license to do business in the state, charging that Three Tees owed nearly $4.8 million in unpaid gasoline taxes for 2001 through 2004, records show. The next day, Harry Tunstall, the owner of Three Tees, filed for bankruptcy protection in federal court in western Pennsylvania.

"Unfortunately, we had no knowledge of their problems until they filed bankruptcy," said Jim Waters, the USDA's director of business programs for Maryland.

The USDA bought back the guarantee on the Three Tees loan in August 2004. It paid $2.4 million. Marlene Elliott, the agency's Maryland director for rural development, said the final loss to taxpayers is still being determined. "It's a complicated issue," she said.

Tunstall declined to comment. "I'm under doctor's orders," he said in a brief telephone interview. "I can't talk."

Blue Mountain Mushroom Co.: For years, the 135-acre mushroom farm north of Reading, Pa., was one of the premier mushroom growers in the area, producing about 8 million pounds annually. But in the late 1990s, the company ran into trouble.

It lost an exclusive contract to supply Campbell Soup Co. The roof on one of its facilities collapsed in a snowstorm. In June 1998, the Immigration and Naturalization Service raided the farm, taking away 78 employees.

On April 26, 2000, Blue Mountain's owners filed a voluntary petition for bankruptcy. While the proceeding was ongoing, BLC Commercial Capital Corp., the predecessor of Business Loan Express, lent Blue Mountain $3.4 million, backed by an 80 percent USDA guarantee. Blue Mountain emerged from bankruptcy in April 2003. About a month later, BLX made Blue Mountain a second loan of $1.7 million, also backed by the USDA.

Blue Mountain fell behind, and in January 2006 the USDA had to buy back its guarantees on the two loans for $4.1 million. The company went out of business.

"There was just no room left to maneuver," said Dexter Case, a bankruptcy lawyer hired at the last minute to help the company.

Eisenhart Corp.: In October 2002, BLC Commercial Capital Corp. agreed to lend the longtime Hanover, Pa., wallpaper manufacturer $3 million, backed by a 90 percent guarantee from the USDA's Pennsylvania office.

USDA officials were aware that Eisenhart was in trouble before they agreed to back the loan, letters between the Pennsylvania office and BLC show. The company had lost $169,000 in August and $208,000 in September. As part of its loan application, Eisenhart projected a loss of nearly $1.3 million for the year.

The losses reflected a sharp decline in the wallpaper industry, which had been hit by plummeting sales and eroding markets. Despite their concerns, USDA officials agreed to guarantee the loan.

S. Forry Eisenhart, the company's former owner, said he was desperately searching for a way to save the family-owned business. "We had developed a whole new formulation in which wallpaper would go on easier," he said. "We were still hoping to turn the company around."

But Eisenhart Corp. continued to struggle, and in December 2005 the USDA had to buy back its guarantee of $2.5 million. The wallpaper manufacturer shut its doors for good in April 2006. It had about 20 employees at the time, down from more than 300 at its peak two decades earlier.

The Hanover factory and equipment have been auctioned off. Eisenhart said he thinks the USDA's loss will be about $1.3 million. "In my mind, it was worth the effort," he said.

-- Gilbert M. Gaul

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