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).

I haven't been able to figure out what Oasis Vineyards does as opposed to Oasis Enterprises.  I assumed that one would hold the land and the other would be the operating company, but neither seems to own any land, which seems like an essential element of a vineyard, unless they buy grapes from growers and are solely vintners.  Yet Oasis Enterprises lists a lease with Oasis Vineyards on its petition, so someone must have some sort of a real property interest.

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.

Comments

[Steve "PodcastSteve" Lubetkin]

It would be interesting to know how many people they stiffed personally. NY Times and Washington Post already confirm that she hasn't even paid her hairdresser for the hair work done for the "Wedding of the Century" in 2002. And she didn't pay for the hair job she got with Bravo cameras in tow the night she crashed the White House. Post also quotes a former friend who is owed "tens of thousands of dollars." These people appear to be deadbeats and grifters.

[Dennis]

I would venture to say that this Salihi situation mirrors what is taking place throughout our society and world. Increasing so, for the last 30 plus years, we have engorged ourselves on standards that require us to live beyond our means in order to compete in the business world and in life in general. Our children cheat in school and it is dismissed because that is what is required to be competitive in today's world. We do what is necessary (in spite of the traditional mores) in order to get ahead. We desire the ever larger house because that is what is available, in spite of the fact that no thought is given to what is really necessary. Two incomes? No problem, even if our children suffer and are home for many hours without adult supervision and inputs. All in the name of progress. No, this is not an isolated incident from what is playing out in the world today. This is only the latest edition (although on a smaller scale) of last year's financial world crash in which we all want the most with as little personal input and sacrifice as possible. We are reaping as a society as a whole what we have sowed.

[replacement windows Indianapolis]

These people abuse everything. They are total dirtballs. They should lock them up and throw away the key.

[Anon]

WTOP Radio is DC news station; their web site has an extensive 2007 article about a family feud, which "appeared" then to be near resolution. The article was reporting the pending sale of the real estate under the grapes to the same friend of Tariq who introduced him to his wife. A lease back to Tariq was expected. I'm not sure if the sale closed, as there are still competing web sites for the Oasis Winery (which seem to be under auspieces of the feuding mother and son). As for the entity roles questioned in the blog, the article describes a side-business operated by Tariq which operated limos and brought guests to the vinyard for various events. With the WH party crash, the Wash Post is providing extensive coverage of a multitude of financial transactions of the couple (the Post had significant earlier knowledge and reporting of the couple in better "appearing" times). Those interested might want to review the 12/4 article regarding Virginia regulator's look at Tariq's America's Polo Cup and associated charitable activities. The entertainment value of the whole mess is great. For those of us in town, there is educational value in observing the responses by the various government agencies at various levels. Thanks for a start in sorting out the situation, but it's only a start.

[Smart]

Law.com Home

[American finance solution]

WASHINGTON -- The couple who crashed a White House state dinner were being filmed that day by a camera crew connected with a reality television program, although none of the filming took place on White House grounds, a spokeswoman for the program's network said Thursday.

The couple, Michaele and Tareq Salahi, gained access to the dinner President Barack Obama hosted for Indian Prime Minister Manmohan Singh on Tuesday, although they had not been invited, prompting a security review by the Secret Service, which acknowledged that procedures were not followed properly.

Bravo Media confirmed late Thursday that Michaele Salahi is being considered as a participant in the upcoming "The Real Housewives of D.C." program and on the day of the dinner was being filmed around Washington by Half Yard Productions, the producer of the program.

"Half Yard's cameras were not inside the White House. They filmed the couple preparing for the event," Johanna Fuentes, vice president, communications, for Bravo Media, said in an e-mail. She said the Salahis "informed Half Yard that they were invited, the producers had no reason to believe otherwise."

Fuentes referred further questions to the couple's attorney and publicist.