White House Dinner Crashers' Bankruptcy
Some of the news reports on the White House dinner crashers (Tariq and Michaela Salahi) have noted that they own a winery that filed for Chapter 11 (reorganization) bankruptcy and then converted to Chapter 7 (liquidation) bankruptcy. My prurient interest was engaged, so I tracked down the petitions and relevant filings (linked below). What follows is my attempt to sort out the Salahi family's business doings, as well as some musings about where we should really look for bankruptcy abuse--small business filings where the business is the alter ego of the owner, but where corporate law might not allow veil piercing. In these cases the sophisticated creditors get personal guarantees, but the tax authorities, tort creditors, and unsophisticated creditors get screwed by the corporate form.
As far as I can tell, however, from the PACER filings, this part of the story has been misreported. There are two separate, but apparently affiliated entities that filed for bankruptcy separately. First, Oasis Vineyards, Inc., filed for Chapter 11 in December of 2008. Oasis Vineyards has three shareholders: Mr. Salahi (5%), his mother (40%, also president of Oasis Vineyards), and his father (55%). The petition schedules assets of $333K and liabilities of $1.9M. Tariq Salahi, a Salahi Family limited partnership, Oasis Enterprises, Inc., and Salahi's parents are listed as codebtors (cosignors or guarantors) of various obligations.
In April 2009, the US Trustee filed a motion to convert the case to Chapter 7 liquidation or have it dismissed because the debtor failed to file its monthly operating reports and had not filed a plan of reorganization. (This is pretty standard; it appears that several monthly operating reports were subsequently filed simultaneously.) The court has postponed ruling on the motion to convert or dismiss because of the death of the debtor's counsel.
Second, Oasis Enterprises, Inc., a/k/a Oasis Winery, of which Tariq Salahi is the president and sole shareholder, filed for Chapter 7 bankruptcy in February 2009. That case is still pending. The scheduled assets are $339K and liabilities oare $982K. The petition states that Oasis Enterprise's income fell from $1.7M in 2007 to a mere $35,000 in 2008. Ouch. In 2008, a bank repossessed a $150K Aston-Martin car (resulting in a $85K deficiency) and a $90K Carver 350 Mariner Boat from Oasis Enterprises (resulting in a $56K deficiency judgment).
As far as I can tell, Oasis Vineyards does the actual winemaking. It lists various winemaking machinery as well as wine inventory among its assets, so it seems to be the production part of the operation. It also has farming equipment like cultivators, so it must be doing some grape growing, but it does not schedule crops or land.
Oasis Enterprises seems to do, well, I'm not really sure what Oasis Enterprises does other than run an Aston-Martin and boat and go to Redskins games. Maybe it is the sales and marketing side of the operation. Oasis Enterprises lists as an asset a $50K claim against Oasis Vineyards for services provided in support of vineyard operations from 2005-2007, as well as a $224K claim against Oasis Vineyards for rental of the FedEx Redskins Suite (plus catering) for 4 seasons worth of football games.
Bottom line is that nothing looks particularly interesting about these bankruptcies other than some of what passes in bankruptcy land as salacious details (Aston-Martin!).
What is interesting about the Oasis cases is that they indicate that Congress might have been looking for bankruptcy abuse in the wrong place. Cries about bankruptcy abuse are normally aimed at plain vanilla consumer bankruptcies. The Oasis cases show that there is a specter of abuse (and much more galling abuse) in small business bankruptcies, where the small business is the alter ego of the owner. Wealthy debtors are often smart enough to operate behind some sort of corporate form. They might have to give personal guarantees of some of their debts, but the corporate form insulates them from tax authorities, public utilities, tort creditors, and unsophisticated creditors. (Card issuers usually want to see substantial corporate income before forgoing a personal guarantee.) Corporate law is relatively forgiving when it comes to veil-piercing---disregarding the corporate form to hold the business's owners personally liable. If corporate formalities (record keeping, e.g.) are honored, extraordinary facts are generally necessary to pierce the veil. This means that for small businesses, the corporate form offers a way to screw government, involuntary, and unsophisticated creditors. Of course, none of those groups come with the lobbying might of the sophisticated creditors who cried abuse over credit card debt being discharged in consumer 7s.
But what about Salahi? Salahi might have observed all necessary corporate formalities--I don't know--but when one looks at some of Oasis's expenses, they sure look like they were expenses at least in part for him, not for a vinter operation. There's no legitimate business purpose for a vineyard to purchase a $150K sports car or $150K boat (was he growing aquatic grapes?) or $224K in Redskins tickets. I'm sure there's a story that can be spun out about the need to project an image and woo a high-end clientele (client list is valued at $35K), but would the company ever have made such purchases if Salahi didn't like sports cars, powerboats, and football box seats? Of course not. As for evidence of abuse, notice the $80K+ in credit card debt plus a bank overdraft line tapped to the tune of $3,800, as well as stiffing its acquirer some $8K for chargebacks. That overdraft line probably got drawn down just on the eve of bankruptcy, and the chargebacks mean that the acquirer is stuck footing the bill for unhappy customers (bad wine?). These are all unsecured debts that will be discharged. Isn't that abuse?
You might say "cry me a river"--these creditors were sophisticated and priced in the risk. Fine, but if so, they surely do so for consumers too (and probably more so because of the larger risk pool for underwriting). And if you think this sort of debtor behavior is abusive, then isn't this much more upsetting than a consumer who buys a flat screen TV he can't afford, if only because of the scope of the excess?
Limited liability from the corporate form presumably encourages business activity, which is a good thing, but when some parties are able to get personal guarantees (for which there is no notice filing system like security interests), it starts to look pretty unfair for those parties that cannot get such guarantees because they do not contract with the debtor or because they lack the bargaining power or awareness of a personal guarantee's value. Of course, the personal guarantee is only worth as much as Salahi. And that's the real question that is unanswered here.