Leadership Corp., a Montgomery County development company that stopped working last summer as its debts mounted to more than $16 million, has reached an agreement with its creditors under which more than 200 suppliers and subcontractors will be paid about 30 percent of the money owed to them, attorneys for many of the creditors said.
Among other debts, Leadership owes approximately $7 million to its suppliers and subcontractors and another $7 million to three Washington-area financial institutions holding loans not secured by property, the attorneys said. The $16 million debt does not include construction loans made by several lenders, who already have taken over and sold much of the property in Leadership's nine unfinished developments in Montgomery and Fairfax counties. Lenders' representatives said they could not place a figure on the total construction debt.
The agreement with its creditors enables Leadership, established in 1981 by longtime Maryland developers Peter J. Berman and Robert D. Berger, to avert bankruptcy and means creditors will be paid a larger percentage of what they are owed and will get it sooner than could be expected under a protracted bankruptcy proceeding, according to Roger Frankel, an attorney representing suppliers and subcontractors.
"Normally, the costs of a bankruptcy proceeding are greater than the costs of an out-of-court workout," Frankel said. In addition, property sold as a result of a bankruptcy often brings in less than market value because buyers "think they should be getting a bargain-basement price."
With an out-of-court agreement finally completed, Frankel said initial payments will be made in about 30 days to creditors that "will be in the neighborhood of 15 cents on the dollar." When the sale of all of Leadership's assets is completed and the cost of liquidating the property is paid, a total of about $6 million is expected to be available for creditors and banks owed the $16 million, Frankel said.
Leadership is not expected to remain in business after its assets are sold, Frankel said. The agreement with creditors does not release the corporation from future claims and suits, so that "it would not make sense for the company to try to start up again with all that debt," he said. An attorney representing the developer did not return calls.
Leadership's collapse caught owners of about 300 homes with incompleted work that should have been covered by the company's warranties. Other buyers were left with no finished homes and no indication of when the houses on which they had paid large deposits would be ready. Some eventually got their money back and purchased other homes, several would-be buyers said. Leadership generally built luxury homes costing $300,000 or more.
Home Owners Warranty Corp. received "a substantial amount" of money as part of the creditors' agreement with Leadership to cover the cost of warranty work on the homes it insured. Normally, when builders fail to honor their warranties, HOW does the work and then makes a claim against the builder.
When the agreement becomes effective, about $60,000 will go into an escrow account to complete warranty work in homes not covered by HOW, Frankel said. About $190,000 collected from the liquidation of Leadership assets already has been spent for work on these houses, Frankel said.
Leadership representatives and the creditors have been negotiating since August. A handful of suppliers and subcontractors have not yet signed the agreement, and only "one or two" have indicated they do not intend to sign it, Frankel said.
Attorneys representing Leadership and several affiliated companies, and the suppliers, subcontractors and unsecured banks plan to put the agreement into effect within the next few days even if a few creditors do not sign it, according to Frankel. The only possible hitch would be the filing of an involuntary bankruptcy suit against Leadership, which "could change things." Frankel said he has no indication that anyone is planning such action.
Suppliers and subcontractors with unpaid bills of less than $1,000 will be paid in full before any other unsecured creditors get paid. Those owed between $1,000 and $5,000 can reduce their claims to $1,000 and collect their money within five days after the group of under-$1,000 creditors is paid. About half of the group owed between $1,000 and $5,000 have opted for the lower, quick payment, Markowitz said.
Creditors owed between $5,000 and $25,000 can wait for the same 30 percent of their money that others will receive, or drop their claim to 20 percent and be paid within 15 business days after the effective date of the agreement.
"We were lucky this happened last year," said Raymond Simpson, a member of the creditors' committee and officer of the Paul Friedman Inc. plumbing firm. "We had a good year, and we could take the loss." But, he added, the firm could have been hurt badly had it happened in 1982 during the recession.
Under the agreement, the plumbing company can expect to collect about $24,000 of the more than $81,000 it is owed by Leadership. In negotiating with the developer, "we knew we wouldn't get 100 percent . . . . What we got was all we could squeeze out," he said.
A few of the creditors who did not respond to the committee's correspondence went out of business and left no forwarding addresses, Simpson said. He added that he did not know if the failures were due entirely to Leadership's collapse.
Under the agreement, Berger and Berman will contribute their personal interests in three limited partnership companies. The unsecured banks -- the National Bank of Washington, Suburban Bank and Washington Federal Savings and Loan Association -- will get the first $350,000 received from the sale of one of the companies, which owns a partially completed shopping center near Washington Dulles International Airport. The banks will share with other creditors the sale proceeds of the two other partnership firms, which own unimproved land near Dulles and in Germantown, as well as money gained from liquidation of other Leadership assets, Frankel said.
In return, the banks agreed to reduce their claims by $130,000 and waive claims for interest accrued on the loans after August 1985 and for attorneys' fees incurred in reaching the agreement.