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1 FELDMAN, WALDMAN & KLINE
A Professional Corporation
2 PATRICIA S. MAR
L. J. CHRIS MARTINIAX

• )

4
2700 Russ Building
235 Montgomery street
San Francisco, CA 94104
Telephone: (415) 981-1300
5
Attorneys for Frederick S. Wyle,
Trustee
• 6

s UNITED STATES BANKRUPTCY COURT

9 NORTHERN DISTRICT OF CALIFORNIA


• 10

11
In re ) Chapter 11
12 ) Substantively Consolidated
) or Jointly Administered
13 )
HAMILTON TAFT & COMPANY ) No. 91-3-1077 LK
14 KNIGHTSBRIDGE COMPANIES, INC. ) No . 91- 3 - '2 4 4 8 LK
THE REMINGTON COMPANIES, INC. ) No. 91-3-2449 LK
15 DRESDNER PETROLEUM, INC. ) No. 91-)-2450 LK

• 16

17
DRESDNER ENTERPRISES, INC.

Debtors.
------------------------_______ l
)
)
)
No. 9l-3-2451 LK

IS

• 19

20
SECOND INTERIK REPORT OF
FREOERICR S. WYLE, TRUSTEE

21 February 20, 1992

• 22

23

24

• 25

26


• •
• 1

• 3

4 I. INTRODUCTION AND SCOPE OF THIS REPORT ......•..•.....•. 1

5 II. STATUS OF THE BANKRUPTCY CASES .............•.•........ 2

6 A. Entry of order for Relief . . . . • . . . . . . . . . . . . . . . . . . . 2

• 7 B. of

8 c. The Texas Debtors and Substantive


Consolidation .................................... 3
9
o.
• 10
III.
by Hamilton Taft. as Debtor .............. 6

STATUS OF OPERATIONS .......•...............•....•..... 6


11
A. Ta f t .... if ..... " ............... 4> '" .. " ... .. .. Ii ,. Ii ~ .. '" ... '" .. .. ...... II- 6
1.2
B. Texas Debtors . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . • . . . • . S
IV. FINANCIAL CONDITION OF THE ESTATES . . . . . . . . . . . . . . . '" .10
14
A. Consol Es ta t e & II- .. ~ .. 4 If> '" .. 1> ~ .. ~ '" II- '" ......... ~ II .. II ., ., • , .. 10
15
B. Dresdner Petro leum ...•.......................... 12

• 16

17
V. RECOVERY AND LIQUIDATION OF ASSETS ......••......••... 12
A. PhysicQl Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1S
1. __ Double C Cattle Ranch • • • • . . . . . . • . • . . . • . . . . . 13

• 19

20
2. Seventh Sonterr a ...••.....•••••••.•••••. 16

:3 • Meadows and Glade


21 11 10 .............. '" .. " g " III ..... ~ .. a III> ......... & ...... " '" " I> '" 1B

4. Oil and Gas Leases ......................... 18


• 22

23 s. Luxury Automobiles ....................... , .19

24 B. Promissory Notes and Guarantees ................. 20

25 Mohamed d .••.•..•••••••••••••••••.•••.• 2Q

• 26 2• Stanley Rosenberg ....... , ...... __ .......... 22

-i-





1 J. Parker Automot i ve ................ , ......... 23

2 c. Other Against Thi Parties .....•.....•.. 26

• 3

4 2.
Criminal Defense
McCall Notes .•.....••••..•.•••....••....... 27
1 Fees. _ • It " ,. • 4 • II> ...... , I ,2 6

5 3. Potential To Be
Investigated ..•...•..•.....•...........•... 29

• 6

7
D. Assets ll·in Armstrong's Possession •••....... 31
Interests .....................•...... ) 1
8
2. Texas Stadium Box .................•....•... 32
9
• 10
J. Coffea Internet
Plaza
1 ....................... J 3

Note .......................... 33
11
5. Personal Possessions ...•................... 35
12
VI. LITIGATION AGAINST ARMSTRONG ................••....... 35
13
A. Analysis of Armstrong's Personal
14 ial Transactions .......................... 35

B. status of tion and Settl~ment ............. 40

• 16 c. unctions and Contempt ••••••...••• 4 1

17 1. TROs and •• " ..... 6 ..... 41

18 contempt Proceedings ......•................ 43

• 19

;20 VIr.
D. Cr 1

OTHER CLAIMS AND LITIGATION •.•..••...........•....... 45


'IIJ! A .. ), II' .... Q Q II 10 .... " " ~ .......... ". .. 110 ... 44

21 A. Bonds .. II' .. " .... "" .. "" ... II _ .. "" ), ., " ..... or. " .......... JI< .... '" .. " 45

• 22

23
B.
c.
Preference 44 ....

Sandia Refund .•...........................•..... 47


"" ...... a~·"· . · . ····· ........ ~ ..... 46

24 D. Ta'lt Pena es .. <II .. ............ "" "" .... II. to " ................ "" ......... '" " .. Ii .... 49

• 25

26
E. other Potential CIa .. 1 to ...................... ~ ~ " .... Ii; Ii; .... " .... 50

ii-


• c •
• 1 VIII . CRED ITORS CLAIMS ANALY SIS .•.......•........ . ......... 50

:2 A. Claims Against Consolidated Estate .............. 51

• 3 B.
c.
Claims Against Dresdner Petroleum . . . . . . . . . . . . . . . 52

steven Solodoff Claim ........................... 52


5 IX. CONCLUSION AND FUTURE ACTIVITIES ............•.•... . .. 54

6
• 7 APPENDICES

B APPENDIX A: STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS


FOR THE DEBTORS AS OF DECEMBER 31, 1991
9
• 10
APPENDIX B: ACCOUNTANT'S REPORT ON SOURCE AND APPLICATION
OF FUNDS FOR CONNIE C. ARMSTRONG, JR.
JANUARY 1, 1989 - JULY 15, 1991
11
APPENDIX C: CREDITORS CLAIMS
12

13

14

15

• 16

17

18

• 19

20

21

• 22

23

24

25
• 26

-iii-


• •
• 1

2 1. INTRODUCTION AND SCOPE OF THIS REPORT

s.
• 3

4
On May 28, 1991, Frederick Wyle, trustee of Hamilton

Taft & company ("Hamilton Taft"), filed a First Interim Report.

5 At that time the Hamilton Taft bankruptcy case was two months old.

6 The report focused on the background and business of Hamilton


• 7 Taft, the diversions of Hamilton Taft funds from customers'

8 payroll ta~ deposits to the Texas enterprises of Hamilton Taft's

9 principal, Connie c. Armstrong, Jr., the resulting $90'million in

• 10 unpaid payroll tax liabilities, and the preliminary analysis of

11 the trustee's accountant as to how Armstrong used over $50 million

12 of Hamilton Taft funds for his other business ventures and for

13 personal expenditures.

14 At the time of the filing of the First Interim Report,

15 only Hamilton Taft was under the control of the trustee. This

• 16

17
Second Interim Report .is filed by Frederick S. Wyle as trustee not

only of Hamilton Taft, but also of Knightsbridge Companies, Inc.

1a ( \I Kn ightsbr idge "), The Remington Compani as, Inc. ( tI Remi ngton") ,

• 19

20
Dresdner Petroleum

Inc.
I

(OIEnterprises ll )
Inc.

I
( II Petro leum" ) and Dresdner Enterprises I

whose bankruptcy cases are now either

21 substantively consolidated or jointly administered with the

• 22

23
Ha~ilton Taft case. The Second Interim Report will provide

information on the status of the bankruptcy cases, the trustee's

24 efforts to recover and liquidate assets, the multi-faceted

2S litigation that has been undertaken to pursue claims from various


• 26 parties, and the financial status of the estates.

SECOND INTERIM REPORT -1-




• 1 This Second Interim Report will also contain an analysis

2 by the trustee's accountant of the personal financial transactions

• 3

4
of Connie c. Armstrong, Jr., from January 1, 1989 to June 15,

1991, which includes the period that he was in control of Eamilton

5 Taft. At the time of the First Interim Report, the trustee did
6 not have access to any of the personal financial records of
• 7 Armstrong, which had been withheld on Fifth Amendment grounds.

s certain financial records of Armstrong have now been made

9 available to the trustee, which enables the trustee and his

• 10 accountants to trace the disposition of Hamilton Taft funds

11 through Armstrong perso~ally, as well as through his corporations.

12 During the first few months of the Hamilton Taft

13 bankruptcy case, much of the focus of the trustee's attention was

14 on learning what Armstrong did with Hamilton Taft's money and on

15 recovering assets under Armstrong's control that had been acquired

• 16

17
with Hamilton Taft's money. Although that program has not yet

been completed, by the end of 1991 the focus of the bankruptcy

18 case had expanded to pursuing claims against other parties, and to

• 19

20
realizing on assets that have already been

Armstrong.
~ecovered from

21 II. STATUS OF THE BANKRUPTCY CASES

• 22

23
A. Entry of order for Relief
On May 31, 1991, the Bankruptcy Court issued an order

24 for relief in the Hamilton Taft bankruptcy case, which was

25 commenced through the filing of an involuntary Chapter 11 petition


• 26 on March 20, 1991. In granting a motion for summary judgment

SECOND INTERIM REPORT -2-





1 filed by the petitioning creditors, Federal Express Corporation,

2 Stanford university and stanford University Hospital, the

• J

4
Bankruptcy Court rejected the arguments of Hamilton Taft as Debtor

that a "bona fide" dispute existed as to the petitioning

5 creditors' claims against Hamilton Taft.

• 6

7
B. Appointment of Creditors committee

After the order for relief was entered, the Office of

8 the U.S. Trustee appointed a-Committee of Unsecured Creditors

9 ("Creditors cOI1'l1llittee") consisting of the following 11 creditors:


• 10 Federal Express Corporation (chair), Scott Paper Co.; Signetic5

11 company, R.R. Donnelley & Sons, Castle & Cook (now Dole Foods),

12 Stanford university Hospital, Neiman-Marcus Group, Tandem

13 computers, Advo-System, Inc., Covia Partnership, and Blue Cross

14 and Blue Shield of Texas. The members of the Creditors Committee

15 collectively hold claims of approximately $67 million against

• 16 Hamilton Taft, or about two-thirds of the total claims. The

17 Creditors Committee has employed Murphy. weir and Butler of San

1S Francisco as its counsel.

• 19

20
C. The Texas Debtors and Substantive Consolidation

The bankruptcy cases of Knightsbridge, Remington,

21 Enterprises and Petroleum (sometimes collectively referred to as

• 22

23
the IITe:l{as Oebtorsll), 'were commenced by voluntary Chapter 11

petitions filed in the Bankruptcy Court for the Northern District

24 of Texas, Dallas Division, on April 19 and 29, 1991. On June 7,

• 25

26
1991, on motion of the trustee, the Bankruptcy Court in San

Francisco ordered the bankruptcy cases of the Texas Debtors

SECOND INTERIM REPORT -J-


I
~
I

• 1 transferred to the Northern District of california, pursuant to

2 Bankruptcy Rule l014(b), which provides that bankruptcy cases of

• 3

4
affiliated entities may be transferred to a single court.

Following the change of venue of the Texas cases, the

5 trustee on June 26, 1991 filed a motion for substantive


I .

• 6

7
consolidation of the Knightsbridge and Remington cases with the

Hamilton Taft case. This appeared to be the most expeditious

B means of recovering for the Hamilton Taft estate the assets which

9 had been transferred from, or acquired with funds transferred


• 10 from, Hamilton Taft to the Texas Debtors. The motion was based on

11 a showing that all of the assets of the Texas Debtors were

12 traceable to Hamilton Taft funds, and their liabilities were

13 primarily intercompany payables, which ultimately ended up as

14 payables to Hamilton Taft. Knightsbridge and Remington owned the

15 stock of the other Te~as Debtors, Enterprises and Petroleum, as

• 16 well as other SUbsidiary entities. Therefore, substantive

17 consolidation of Knightsbridge and Remington with Hamilton Taft

18 would enable the trustee of Hamilton Taft to control not only the

• 19

20
entities being consolidated, but all of their subsidiaries as

well. Alternatively, the trustee sought appointment of a Chapter

21 11 trustee for all four Texas Debtors.

• 22

2)
On July 22, 1991, the Court, with the consent of the

Texas Debtors, ordered the intermediate step of appointment of

24 Frederick S. Wyle as interim trustee of Knightsbridge, Remington,


I
• 25

26
Petroleum and Enterprises. The intermediate step was taken at thel

request of the Creditors Committee, so that a claims bar date

SECOND INTERIM REPORT -4- I


• I


• 1 could be established and claims reviewed before a substantive

2 consolidation decision was made. The Court set september 30, 1991

• l

4
as a claims har date for all five Debtors, Hamilton Taft as well

as the Texas Debtors. (See section VIII.)


/

5 The trustee subsequently amended the substantive

6 consolidation motion to include Enterprises in the consolidation.


• 7 Petroleum was not included in the consolidation, because the oil

B and gas operations of Petroleum contain at least some inherent


9 risks of liability such that consolidation of Petroleum's assets
• 10 and liabilities with those-of the other Debtors would not be

11 prudent.
12 On November 4, 1991, the Court ordered substantive

13 consolidation of the Hamilton Taft, Knightsbridge, Remington, and


14 Enterprises estates, effective October 31, 1991. The

15- consolidation was not opposed by any party, including any of the

• 16

17
Debtors. Frederick 5. Wyle was appointed trustee of the

consolidated estate, and his appointment as trustee of Petroleum

18 was made permanent.

• 19

20
As a result of substantive consolidation, all assets and

liabilities of the four consolidated Debtors were combined and are

21 now treated as if the Debtors were a single entity. Petroleum IS

• 22

23
assets and liabilities remain separate, but its bankruptcy case is

jointly administered with that ot the consolidated estate. The

24 ' trustee believes that substantive consolidation has resulted in

25 significant savings to the consolidated estate in administrative


• 26 costs, as well as substantial savings in litigation costs that

SECOND INTERIM REPORT -5-




• 1 otherwise ~ould have been required to obtain the assets of the

2 Te~as entities.

• 3

4
D. Appeals by Hamiltpn Taft. as Debtor

Hamilton Taft, as Debtor, filed appeals to the District

5 Court from the order appointing a trustee entered on March 26,

6 1991, from the order approving the appointment of Frederick S.


• 7 Wyle as trustee entered on March 26, 1991 1 from the order for

8 relief entered on May ll, 1991, and from the order- authorizing the

9 trustee to shut down Hamilton Taft's business entered on June 21,


• 10 1991. The appeals were all assigned to Judge John P. Vukasin of

11 the District Court.

12 On February 13, 1992, the District Court dismissed all


I
13 the appeals as moot, on motion of the appellees (Federal Express,

14 Stanford University and Stanford university Hospital as to three

15 of the appeals and the trustee as to the fourth appeal). The

• 16 District Court ruled that the Debtor's failure to seek a stay of

17 the orders and the sUbstantial changes of circumstances that had

18 I_occurred in the bankruptcy case since the orders were entered made

• 19

20
it inequitable to consider the appeals. The Debtor, which claims

to be acting on authority of Armstrong as "Chairman of the Board"

21 of Hamilton Taft, has indicated that it plans to appeal the

• 22

23
dismissals to the Ninth circuit.

III. STATUS OF OPERATIONS

24 A. Hamilton Taft

May 16,-:.--1991,
Following a hearing on ----
• 25

26
-~ ... ...-'. the Bankruptcy
~

Court authoriz~d the trustee to close Hamilton Taft's business

SECOND INTERIM REPORT -6-




• 1 operations. Hamilton Taft had not conducted any significant

:2 payroll ta)( processing business since the public disclosure of the

• 3

.4
missing funds, the consequent abrupt cessation of funds
transferred to Hal'lilton Taft by its customers, and the filing of
- -,

['.."
5 the Chapter 11 petition on March 2O, 1991. The trustee requested

6 authority to close the business afte~ canvassing the Hamilton Taft


• 7 clients and ascertaining that few clients would continue a

8 business relationship with Hamilton Taft even under the

9 supervision of a court-appointed trustee.

• 10 After the Court approval was obtained, the trustee

11 commenced an orderly shutdown of Hamilton Taft's operations which

12 took place over the next several months. The trustee ceased

1J operations and terminated employees progressively, at a rate that

14 would permit the processing of client records, establish what

15 deposits were made and what taxes were paid and not paid, respond

• 16 to inquiries from ta~ agencies, organize and store records tD

17 enable them to be retrieved as needed, secure-computer records,

IB and dispose of tangible assets of the company.

• 19

20
Hamilton Taft closed its 1 Market Plaza, San Francisco

offices on June 30, 1991. and moved its remaining staff to smaller

21 offices. Most of the office equipment, furniture and other

• 22

23
tangible assets of Hamilton Taft were sold at auction on

August 17, 1991. At present Hamilton Taft maintains a small

24 office staff of three full-time employees in San Francisco, for


25 accounting purposes, to perform data studies, to monitor
• 26 activities in Texas, and to provide support services for the

SECOND INTERIM REPORT -7-





-1 bankruptcy case and litigation. Four additional employees are

2 maintained in Texas j three of them at the Double C Ranch.

• ) 8. Texas Debtors

4 At the time of the trustee's interim appointment on

5 July 22, 1991, Remington maintained a large suite of offices with

• 6

7
some 16 employees at 3Bl1 Turtle Creek Boulevard in Dallas.

Remington provided administrative, accounting and payroll services

8 for all of the Armstrong entities in Texas. Without the continued

• 9

10
infusion of Hamilton Taft money to pay its operating costs,

Remington was running out of money and unable to pay even its

11 Chapter 11 trade debts.

12 Remington had not paid its rent or insurance premiums

13 since the filing of its Chapter 11 petition in April, 1991 , and

14 was under a Bankruptcy Court order, obtained by the landlord, to

15 vacate its offices by July 31, 1991. No plans had been made for

• 16 relocating the offices. Within one week after the trustee's

17 appointment/ new offices had to be found and a move of Remington's

18 offices arranged and completed.

• 19 The trustee within days of his appointment reduced the


20 Remington payroll trom 16 to 10, and further staff reductions took

21 place over the next three months. It was apparent that Remington

• 22

23
and the other Texas Debtors did not have, and had not had,

operations requiring the level of staff and administrative

24 expenses that Remington had maintained. The only ongoing activity

• 25

26
conducted by the Texas Debtors was Enterprises' efforts to sell

SECOND INTERIM REPORT -8-




• •

1 townhouses in San Antonio (see section V.A.2) and Petroleum's

2 unprofitable oil and gas operations {See Section V.A.4).

• 3

4
The trustee determined that Petroleumls operations could
be more economically managed by a~ outside management companYi
s that Enterprises required" only one employee on site in San

• 6
7
Antonioi and that the rest of Remington's administrative and
accounting services could be combined with that of Hamilton Taft

B in San Francisco, thereby eliminating the need for a Dallas office

• 9

10
and achieving substantial savings. On October 31, 1991,
Remington's offices in Dallas were closed.
11 Remington's office equipment, furniture and furnishings
12 have been sold or moved to the Double C Ranch, ~hich was taken
13 over by the trustee on August 1, 1991. Remington's records and
14 files have been, or will be, moved to San Francisco. Sorting out
15 the VOluminous files and records located at Remington's offices

• 16 and at a storage facility has taken and continues to take


17 substantial effort. It also required negotiations with Armstrong

18 over which records belonged to Armstrong personally or Armstrong

• 19 entities not under the control of the trustee.


20 Records retained by Armstrong have been made available

21 to the trustee for copying, except for documents which have been

• 22
23
withheld by Armstrongls criminal defense counsel as subject to a
Fifth Amendment or attorney-client privilege. The trustee is
24 seeking to work out with Armstrong's counsel any remaining

• 25

25
disputes over documents claimed to be privileged. Any unresolved

SECOND INTERIM REPORT -9-






1 \ disputes will be sUbmitted to the Bankruptcy Court for resolution

2 pursuant to an order previously obtained by the truste~.

• 3

4
IV. FINANC!AL CONDITION OF THE ESTATES
A. Consolidated Estate

5 Appendi~ A contains schedules of the postpetition

• 6

7
receipts and disbursements of the Debtors in the consolidated
estate, i.e., Hamilton Taft, Knightsbridge, Remington and

8 Enterprises, as of December 31, 1991. Separate schedules have

9 also been prepared for receipts and disbursements during the


• 10 period of the trustee's administration, which commenced on,

11 July 22, 1991 for the Texas Debtors.

12 The postpetition revenue of the Debtors comprising the

13 consolidated estate totalled S2,193,513, as of December 31, 1991.

14 For the period of the trusteels administration, total revenues

15 were $2,097,101. (The difference is due primarily to the sale of

• 16 a townhouse by Enterprises prior to the trustee's appointment.)

17 The major sources of postpetition receipts have been sales of

18 townhouses ($£51,438), livestock at the Double C Ranch ($331,623),

• 19 and luxury automobiles, office equipment, furniture and

20 furnishings ($342,048); a settle~ent with Armstrongls criminal

21 defense counsel for recovery of legal fees ($400 / 000); and bank

• 22

23
account interest ($lB3,141). Details of these receipts and the

activities prnducing them are provided in other sections of this

24 report.

• 25

26
Postpetition disbursements by the D~btors comprising the

consolidated estate totalled $2,8J7,484, as of December 31, 1991.

SECOND lNTERIM REPORT -10-


• &

• Disbursements during the period of the trustee's administrai
1

2 totalled $2,699,129. (The difference is due primarily to

• J

4
operating e~penses

appointment.)
paid by Remington prior to the trustee's

Of the total postpetition disbursements l $1,357,741

5 were for operating expenses, including sUbstantial employee


6 salaries, primarily for Hamilton Taft operations in the early
• 7 stages of the bankruptcy case before the trustee closed the

B Hamilton Taft business. The operating expenses include the


9 substantial continuing costs of the Double C Ranch since August 1,
• 10 1991, when the trustee took over the ranch.

11 Professional fees of the trustee and his attorneys and


12 accountants account for Sl, oao, 891 of the post-petition 1-\,6
13 disbursements. Additional professional fees were paid to
14 appraisers and consultants employed by the trustee, and attorneys
15' employed by the Creditors committee and the Texas Debtors. The

• 16

17
I
professional fees do not include fees accrued but not paid as of

December 31, 1991.

18 The beginning cash balances for the Debtors in the

• 19

20
consolidated estate, at the commencement of their respective

bankruptcy cases, totalled $5,930,642, of which $5,856,509 was for

21 Hamilton Taft and $74,133 for Knightsbridge, Remington and


I'

• 22

23
Enterprises combined. with total disbursements exceeding receipts
by $643,971, the consolidated estate had a cash balance of

24 $5,288,401 as of December 31, 1991.

25 The trusteels goal is maintain a level of operating


• 26 expenses (i.e., rent, employee salaries and other office expenses)

SECOND INTERIM REPORT -11-


• &


1 for the consolidated estate, if possible, on a level which could
2 be funded from current interest income. Such expenses would not,

• 3

4
however, include the professional fees and expenses, which will be

the primary Chapter ~l costs in the future, and which will in time
5 diminish the existing funds of the estate unless substantial new

• 6

7
rec.overies are had,

B.
and sales are made.

Dresdner Petroleum

8 A summat:y of Petroleum's postpetition cash receipts and


9 disbursements through December 31, 1991, is also contained in
• 10 Appendix A. The postpetition revenue from oil and gas production

11 totalled $667,915 through December 31, 1991. While Petroleum's

12 total cash receipts exceeded total disbursements by $22/136 for


13 the postpetition period, the cash receipts i~clude $60,000

14 advanced from Remington. Without the interc_'?.!lIQ..~~. Y_3~JtY"ance... h'P';' i:J.,v~/f..J/<i.. (

15 Petroleum had a negative cash flow from operations during the

• 16 postpetition pet:iod, through December 31, 1991. (However, see

17 Section V.A.4 belo~ for current situation.) Petroleum's cash

1B balance, as of December 31, 1991, was $47,159.

• 19 v. RECOVERY AND LI~UIDATION OF ASSETS

20 Through substantive consolidation, most of the assets

21 acquired by Armstrong and his companies with Hamilton Taft funds

• 22

23
have been recovered, to the extent that they are available to be

recovered. As discussed in the First Interim Report, a

24 substantial portion of the funds diverted from ~amilton Taft were

spent for investments which became defunct within months of the


• 25

26 investments or for other reason have no realizable value, for

SECOND INTERIM REPORT -12-





1 unrecoverable operating costs of Armstrong's Texas operations, and

2 for personal expenditures of Armstrong. In addition to the assets

• 3

4
held by the Texas Debtors or their subsidiaries, the trustee has

also recovered the najor asset that had been held by Armstrong

5 personally I the Texas ranch. (The assets remaining in Armstrong's

• 6

7
control are discussed in section V.D below.)

The assets that have been recovered are a collection of

8 physical assets which Armstrong bought with Hamilton Taft funds as

9 tlinvestments," and promissory notes and other contract rights


• lO against third parties. All of the assets other than physical

11 assets are expected to require litigation to collect. At this

12 time, the trustee cannot provide any estimate of the amount that
13 will be realized from the assets Which have been turned over by

14 Armstrong or through the takeover of the Texas companies. Much

lS will depend on the outcome of litigation against third parties to

16 whom Armstrong and the Armstrong entities transferred funds

17 through lIinvestments," loans and other advances, and on the

19 financial ability of these third parties to respond to judgments.

• 19 Most of the necessary litigation has been commenced and the

20 remainder will be commenced shortly. Investigation into potential

21 third party liability continues.

• 22

23
A. Physical Assets

1. Double C Cattle Ranch

24 The single most expensive acquisition by Armstrong was a

• 25

26
1,700 acre ranch l which he called the "Double C Ranch."

purchased by Armstrong in February, 1990 as a "hobby ranch," by


It was

SECOND INTERIM REPORT -13-




• 1 Armstrong's own description, meaning a combination cattle and

2 horse operation and personal residence. The residence is over

• 3

4
13,000 square feet in size, with indoor swimming pool, sauna, and

exercise facilities. Armstrong spent over $9.3 million of

5 Hamilton Taft's funds on the ranch, including $6.5 million for the

6 purchase price, $1.1 million for capital improvements, $600,000


• 7 tor livestock and equipment, and $1 million to fund operating

8 deficits of the cattle operation.

9 To acquire the ranch, Armstrong had Hamilton Taft

• 10 advance $9.B million to Winthrop Realty Company ("Winthrop"), one

11 of his Texas companies. Winthrop, in turn, simultaneously loaned

12 the $9.8 million to Armstrong, who acquired the ranch in his own
13 name. Armstrong gave Winthrop a note for $9.9 million, secured by

14 the ranch. Winthrop, in turn, executed a $9.8 million note to

15 Hamilton Taft, secured by a lien on Armstrong's note to Winthrop.

• 16

17
In June, 1991, the trustee declared a default on

Winthrop's note ·to Hamilton Taft and foreclosed on the collateral,

IS namely Armstrong's note to Winthrop. As holder of the Armstrong

• 19

20
note to winthrop, the trustee then commenced foreclosure

proceedings on the ranch, which secured the note. Facing

21 foreclosure, Armstrong offered to transfer the ranch to the

• 22

23
trustee through a deed in lieu of foreclosure.

transferred the livestock on the ranch, consisting of


He also

24 approximately 600 head of cattle and 2S horses collateraliZed to

25 Hamilton Taft, ranch equipment and vehicles and other personal


• 26 property associated with the ranch, and the ranch bank accounts.

SECOND INTERIM REPORT -14-




• took session of the ranch effective August 1, 1991,
1 The

2 although 1e was not recorded until September.

• 3

4
The cattle operations on the ranch

substantial deficit, which was funded by Hamilton Taft money


at a

5 funnelled through the IS-month period that

deficit of the ranch, not


• 6

7
Armstrong owned the ranch, the

the hous expenses for IS residence)

S totalled over $1 million.

9 After acquiring the ranch, the trustee sold the cattle


• 10 and horses over a several month per obtain net proceeds,

11 after direct costs of sale, of $331,623 The trustee also intends

12 to seU ranch and cles not needed for full

U me. and furn ing5 in the main residence and


14 other structures will not be sold until the ranch is sold..

15 In December, 1991, the trustee an exclusive one

• 16 year listing agreement with Town and Estates of Center,

1'7 Texas, to serve as broker for the of the ranch. Because of

18 the nature of the and the economic conditions and

• 19 real estate

for what
in Texas, the trustee cannot predict
, the ranch 11 be sold.
20

21 The carrying costs of the ranch are estimated at

• 22

23
approximately $300,000 per year, of which

and property taxes and half for ma


If is for
costs.

24 maintenance of the ranch and improvements is costly. but

In addition to the main


• 25

26
essent

res
1 for the sale of the ranch.

of more than 13,000 square feet, the ranch

SECOND INTERIM REPORT -15-




• 1 include a guest house with 3,4QO square feet, three foremen's

2 each with three bedrooms, and a large lIstate of the

• J

4
art" show horse arena, which also canta

saloon Approximately 75,000 scruare feet of


off a

5 as well as several les of and other ranching lit

recruire maintenance. While the ranch staff has been reduced


• 6

7 considerably, three rema at the ranch for maintenance

s and security purposes. The trustee to exchange

9 graz for consulting services pa the


• 10 estate.

11 also owned a 121 acre adjoining parcel, known

12 as the stiefer property, which he from Julius D. Stiefer

13 in December, 1989 for $72,429 cash (from Taft funds) and

14 a $181,912 note, secured by the property. The trustee determined

15 that the ble value of the stiefer was less than the

• 16 balance on the note l and ownership of the small WOll

17 not enhance the sale value of the ranch. The trustee

18 therefore declined to take to the Stiefer property and

• 19

20
to Armstrong

property to Stiefer.
a deed in 1 of foreclosure to

21 2. Seventh of SQnterra

• 22

2)
The Seventh of Sonterra project consists of 23 single-

family townhouses and 28 family pad sites near

24 the seventh hole of the Sonterra Club in San Antonio,

25 Texas. The ect was ises from the


• 26 Resolution Trust Corporation for $1.9
.by

~illion J

SECOND INTERIM REPORT -16-


• • •

1 The acquisition was financed with Hamilton Taft funds, funnelled

2 through Knightsbridge. At the time of the Trustee's appointment

• J

4
on July 22, 1991 1 only two townhouses had been sold.

The trustee has continued to sell the single family

5 townhouses individually to retail buyers, having determined that

• 6

7
the net revenue to the estate would probably be greater than from

a bulk sale, although a bulk offer for the entire project would

B also be considered. The townhouses have been individually

9 appraised at $118,000 to $142,00 each, after repair and buildout


• 10 work (at $8,000 to $15 OOO per townhouse)
j are completed. Of the
11 23 townhouses, eight have been sold, seven of them post petition.

12 Several more townhouses are under contracts for sale. In

13 November, 1991, the t~stee obtained a Bankruptcy Court order for

14 general authority to sell the townhouses, without the necessity of

15 a court order for each sale, provided that the gross sales price

• 16 is for an amount not less than 90 percent of the appraised value

17 of the particular townhouse.

18 During the post petition period, net proceeds from

• 19 townhouses sales, after deduction of direct selling costs, total

20 $651,438 through December, 1991, representing proceeds of si~

21 townhouses. Selling costs include the S8,000 to $15,000 of finish

• 22

23
out work and repairs required for each townhouse, which work is

performed by subcontractors of Enterprises at the time of sale.

24 The townhouse sales program and construction work are supervised

• 25

26
by one remaining Enterprises employee on site in San Antonio.

SECOND INTERIM REPORT -17-


• • •
• 1 3. Whispering ~eadows and Glade Meadows

2 Whispering Meadows and Glade Meadows are undeveloped

• 3

4
residential tracts located in Arlington and Grapevine,

respectively, near Dallas. The properties were both purchased by

5 Enterprises from the Resolution Trust Corporation, Whispering


6 Meadows in ~pril, 1990, and Glade Meadows in May, 1990. A total
• 7 of $1.1 million was spent on the projects.

8 Both properties are for sale. There has been

9 considerable interest in the properties, and several offers have


• 10 been made and accepted, subject to court approval after

11 contingencies are removed. However, all the offers have included

12 feasibility or financing contingencies which have not been met.

13 Tnus, the two projects, while again under contract, remain unsold.
~4 4. Oil and Gas Leases

15 Dresdner Petroleum owns oil and gas leasehold interests

• 16

17
on a 560 acre tract in Howard County, and on a 1,000 acre tract in

Fisher County, in Texas. The Fisher county interest is primarily


18 an exploration project, with minor producti~n to date on one

• 19

20
producing well. Continuing the exploration program would require

substantial new investment. The trustee intends to sell the


21 Fisher County property if a reasonable price can be obtained.

• 22

23
The Howard County property is a leasehold which has had

its primary recovery. The profit potential of the field is

24 dependent on the results of an ambitious "secondary recovery"

25 program to be accomplished by water injection into the underlying


• 26 area. Meanwhile, there is some production at this time, which

SECOND INTERIM REPORT -18-



• •
• 1 provides gross revenue of $75,000 to $100,000 per month.

2 Petroleum had operated at a loss since its inception; the

• J

4
continuing operational loss} the trustee believes, was due largely
to excessive overhead and salary costs (including a salary of

5 $200,000 per year for the president of Petroleum).

Effective November 1, 1991, when the Remington offices



6

7 were closed, the trustee turned over management of Petroleum'S oil

B and gas operations to an outside contractor, KCM Management, Inc.,


9 of Dallas. KCM is providing production, accounting, contract

• 10 administration, reporting, tax and other services at a

~1 substantially lesser cost than Petroleum was incurring in

12 performing these services with in-house employees. With the

13 savings in administrative costs, the trustee expects Petroleum to

14 show a small operating profit, except for professional fees. The

15 delinquent post-petition trade debts have now been retired out of

• 16

17
the savings of administrative costs, except for professional fees.

Petroleum also has not yet repaid Re~ington for S60,000 in

18 postpetition advances.

• 19

20 e~pected
The "secondary recovery" water injection program is

to be completed in six months to a year. After the

21 completion of that program, when the flow of oil resulting from it

• 22

23
can be properly evaluated, the trustee intends to sell the Howard
County property.

24 s. Luxury Automobiles

25 At the time Armstrong deeded the ranch to the trustee,


• 26 he also transferred two automobiles, a 1990 Rolls Royce Silver

SECOND I~TERIM REPORT -19-



• •
• 1 Spur II and a 1990 Jaguar ·XJS, both of which were purchased at

2 charity auctions with Hamilton Taft funds and used by Armstrong as

• J

4
personal vehicles.

Lincoln stretch
The trustee also took possession of a 1989

li~ou5ine owned by Remington. The three vehicles

5 were sold by the trustee for a total of $139,000.

6 B. Promissory Notes and GUarantees


• 7 1. Mohamed Hadid

B The trustee has filed an adversary proceeding in the

9 Bankruptcy Court against Mohamed Hadid, a Washington, D.C. real


• 10 estate developer, and other persons and entities, arising out of

11 loans totalling approximately $8.8 million by Hamilton Taft and

12 Remington to Hadid.

13 In March, 1988, when Hamilton Taft was owned by

14 Ma~Pharma, Inc., Hamilton Taft loaned $3 million to Hadid, which

15 ~as to be repaid in )0 days, but was never repaid. Armstrong, in

• 16
17
the same lawsuit against MaxPharma through which he acquired
ownership of Ha~ilton Taft in 1989, also sued Hadid, claiming that

IS Hadid had·conspired with other defendants to convert funds from

• 19

20
Ha~ilton Taft by, among other things, borrowing the $3 million

from Hamilton Taft.


21 In September, 1990 Armstrong settled the litigation

against Hadid for cash of $50,000 and a new $1.75 million note,.
• 22

23 with principal payable in two installments in September, 1991 and

24 september, 1992. Armstrong also agreed in September, 1990 to lend

25 Hadid an additional $6.5 million, notwithstanding his failure to


• 26 repay the earlier $3 million loan.

SECOND INTERIM REPORT -20-

- - - - - - - - - --- - -

• •
• 1 Hadid executed a promissory note dated September 11,

2 1990 to Remington for $6.5 million, which was guaranteed by his

• l

4
wife, Mary Butler Hadid. To secure the $6.5 million note, Hadid

and his wife executed a security agreement pledging all of their

5 interests in numerous corporations and partnerships which

6 purportedly owned, among other real property, four Ritz Carlton


• 7 hotels located or under construction in Washington, D.C., New York

8 City, Houston and Aspen, Colorado. However, Hadid never executed

9 UCC-l financing statements for the security interests, despite his


• 10 representation that he would do so.

11 Despite Hadid's refusal to execute and deliver finan~ing

12 statements, Armstrong authoriZed the funding of the $6.5 million

13 promissory note. In a series of transfers l the last of which

14 occurred on March 13, 1991, Remington advanced a total of

15 $5,796,300 to Hadid. No repayment has been made by Radid of

• 16 either these advances or the $1.75 million note.

11 The trustee has tiled suit against Hadid, Mary Butler

18 Hadid and certain Hadid entities to collect on the $6.5 million

• 19

20
note, the $1.75 million and the original $3 million and to enforce

Remington's lien rights under the security agreement. The trustee

21 has learned that in June. 1991, Radid may have transferred his

• 22

23
interest in the collateral to a business associate, Abdulaziz bin

Ibrahim Al-Ibrahim of Saudi Arabia, commonly referred to as the

24 lithe Sheik". The trustee has joined the Sheik as a defendant and

25 seeks a determination that any rights of the Sheik in the property


• 26 transferred by Hadid are subject to Remington's security interest.

SECOND INTERIM REPORT -21-




1 Media reports as well as reports of the trustee's

2 investigators indicate that Hadid is being pursued by numerous

• 3

-4
creditors, his Washington, D.C. office has been closed, certain of

his real property interests (including his Washington, D.C. home)

5 have been foreclosed, and he may no longer be residing in the

6 United states. Mary Butler Hadid appears to be residing in the


• 7 United states, but the trustee does not have any information as to

B whether she has independent assets to satisfy a judgment.

9 The trustee is seeking to effectuate service on all of


• 10 the defendants through various means. None of tbe defendants have

11 yet responded to the lawsuit. The trustee also intends to seek

12 discovery from third parties to obtain information on the assets

13 in which Hadid purportedly held an ownership interest and granted

14 Remington a security interest. At present, the trustee cannot

15 estimate what recovery, if any, will be obtained on the Hadid

• 16

17
notes.

2. Stanley Rosenberg

18 The trustee has filed an adversary proceeding against

• 19 Stanley Rosenberg, a San Antonio attorney and businessman, on a $1

20 ' million guarantee he executed in favor of Remington on

21 September 19, 1989. Rosenberg was involved in promoting and

• 22

23
developing a combined restaurant and gambling facility known as

River city Fair in San Antonio. Through Remington, Armstrong

24 invested S2 million in the project, of which $1 million was for

2S purchase of a 49% interest in the stock of River City Fair, Inc.


• .26 (IRFer") and $1 million for a loan to RFCI, guaranteed by

SECOND INTERIM REPORT -22-



• •

1 Rosenberg. The restaurant failed and RFCI filed a Chapter 7

2 petition.

• 3

4
In response to the trustee's lawsuit, Rosenberg has

denied liability on his guarantee. Be claims that Armstrong

5 agreed to release him from the guarantee, that Armstrong agreed to

• 6
7
and failed to subsidize all necessary expenses to keep the project
operational, and that Rosenberg advanced additional money to the

B project in reliance on Armstrong's representations, all of which,

9 Rosenberg contends, discharges his obligations under the


• 10 guarantee. Rosenberg has also filed a motion requesting that the

11 Bankruptcy Court abstain from jurisdiction over the claim on the

12 ground that it should be filed as a state court action in Texas.

13 The trustee cannot predict at this time the likely

14 outcome of the Rosenberg adversary proceeding. In addition to the

15 defenses he has asserted, Rosenberg has communicated to the

• 16 trustee that there are other claims and judgments against

17 Rosenberg and that he will not be able to satisfy any judgment

18 obtained by the trustee. However, despite a request by the

• 19 trustee, Rosenberg has not provided any documentation of his

20 financial condition.

21 3. Parke~ Automotive

• 22

23
In February. 1991, Armstrong invested $3 mi~liDn,

through Remington, in Parker Automotive Corporation, a publicly

24 traded company in costa Mesa, California, which manufactured and

• 25

26
distributed a machine and chemical compound designed to clean

automobile engines, and which was in serious financial

SECOND INTERIM REPORT -23-



• •

1 difficulties. Remington received "a convertible note, secured by a
2 lien on all assets of Parker, junior to a lien for approximatelY

• 3

4
$700,000 owed to Home Bank. Remington was also granted certain

stock options and voting rights which gave it immediate control of

5 Parker and the right to acquire up to 66 percent of the stock of

• 6

7
the company.

Ibecame chairman
Upon the closing on February 14, 1991, krmstrong

of the board and chief executive officer of

8 Parker.

Despite Remington's infusion of $J million in cash,


• 9

10 Parker remained in financial difficulty. In June, 1991, Armstrong

11 resigned as CEO, and he and other Remington nominated

12 representatives resigned from the Parker board. On July 26, 1991,

13 facing numerous lawsuits by unpaid vendors, Parker filed a Chapter

14 11 petition in the Bankruptcy Court for the Central District of

15 California. A Chapter 11 trustee was appointed in September, and

• 16 closed Parker's business shortly thereafter.

17 The Parker trustee has contracted for sale of most of

1B Parker's assets, including its manufacturing equipment, domestic

• 19 inventory located in the United states and patent and trademark

20 rights, for $1.5 million, payable $500,000 at closing and the rest

21 over a one-year period, secured by the assets to be sold.

• 22

23
Inventory located in Europe and accounts receivable are not

included in the sale and may bring additional revenue.

24 If the pending sale is completed, and the maximum amount

• 25

26
is collected under the sale, Remington could realize up to

S700,DQO from the sale proceeds, based on its second priority lien

SECOND INTERIM REPORT -24-



• • •
• 1 on Parker assets. Additional amounts may be realized from the

2 sale of the foreign inventory. Furthermore, Remington may be in

first position with respect to the Parker patent, without which


• 3

4 Parker's tangible assets have substantially reduced value, as Horne

5 did not perfect a security interest in the patent.

6 However, Remington's secured position is being


• 7 challenged by the Parker trustee, who seeks equitable

a subordination of Remington's interest on the ground of inequitable

9 conduct by Armstrong in acquiring Remington's interest and/or in

• 10 managing the company. The Parker trustee also claims that

11 Remington may not be secured as to part of its debt (which is of

12 little importance as Remington's debt exceeds the likely value of

13 Parker's assets) r and may not have perfected a security interest

14 in the inventory located in Europe.

15 The parties have agreed to expedited discovery and

• 16

17
resolution of Remington's claim in the Parker bankruptcy case

through relief from stay proceedings that have been filed on

1B behalf of both Remingt-on- and Home--8ank. Remington and Home Bank

• 19

20
have reached a tentative agreement, which has not been finalized

or approved by the Bankruptcy Court, on allocation between them of

21 any proceeds received by either of them from the Parker assets.

22 An agreement between Remington and Home Bank would eliminate any


• 23 disputes between them on lien priorities or the allocation of sale

24 proceeds to the patent, and enable Remington and Home to cooperate

25 in pursuing their mutual interest as secured creditors.


• 26

SECOND INTERIM REPORT -25-



• •
• 1 The trustee cannot estimate at this time what, it
2 anything, the estate will recover from the Parker investment.

• J

4
Protecting the estate's interest in Parker has consumed

substantial time and legal expense, and has been one of the most

5 costly activities of the estate in relation to the potential

6 recovery. Nevertheless, because the Parker asset does have the


• 7 potential for significant recovery for the estate, the trustee
B believes that the time and resources devoted to Parker is

9 necessary and justified.


• 10 C. Other Claims Against Third Parties

11 I. Criminal Defense Legal Pees

12 Dn September 4, 1991, the trustee filed an adversary

13 proceeding against Armstrongts criminal defense attorneys, the

l~ Dallas firm of Meadows, Owens, collier, Reed and Coggins, for

15 recovery of $735,000 in legal fees paid to the firm, of which

• 16

17
~700/000

appointed.
was paid on March 27, 1991, the day after the trustee was

The trus t ee traced the S700, 000 p"aY1llen t to the

18 proceeds of a sale of a helicopter by Winthrop, an Armstrong owned

• 19

20
company, on March 25, 1991. Winthrop had purchased the helicopter

less than a month before, with funds advanced by Knightsbridge,

21 which in turn obtained the funds from Hamilton Taft.

• 22

23 Meadows
The trustee sought recovery of the payments to the

fir~ on the ground that the payments came from fraudulent

24 conveyances from Hamilton Taft and Knightsbridge and were


25 recoverable from the law firm as a subsequent transferee of an
• 26 avoidable transfer under Section 550 of the Bankruptcy Code.

SECOND INTERIM REPORT -26-


------ - -- ----

• • •
• 1 Under section 550, the trustee may recover fraudulently

.2 transferred not only from 1 I but

• 3

4
also from a
without
transferee who received the

and with knowledge of the fraudulent

5 transfer.

6 After the was filed, the trustee


• 7 to a settlement of the claim for 00,000 cash, which was

B paid the Meadows firm in December, 1991.

9 2.

• 10 On 25, 1991, Knightsbridge transferred a total

11 of $600,000 to three members of the McCall family, David McCall,

12 Jr., and his sons, David Mccall, III and Mccall. Each of

13 the McCalls executed a $200,000 note to personally, with

14 a date of January 25, 1992. David MCCall, Jr. also

15 the notes of his sons. All three notes are secured

• 16

17
certain real estate

an insurance agency owned by


sts in Plano, Texas, as well as stock in

McCall, Jr. The McCalls are

18 friends of and

• 19

20 violat
The trustee recently learned that on
of a iminary injunction then in effect (See
27,1991,

21 section VI.C.l), executed an agreement to transfer the


22 $600,000 McCall notes to Dav McCall, III in return for pav~,~nr
• 23 to Armstrong of $275,000, ch rece and retained

24 for his own benefit. The $275/000 was id as follows: S120,000


25 in , 1991 to Chenal Corporation, a new under which
• 26 Armstrong now conducts business, $55,000 in october, ~991 to

SECOND INTERIM REPORT -27-


• • •
• 1 Armstrong, and $100,000 in November, 1991 to Armstrong. (The form

2 of the transaction ~as that Armstrong and Chenal gave David

• 3

4
McCall, III notes for the $175,000 transfers in July and october

1991. In November, 1991, Armstrong obtained another $100,000 from

5 MCCall, and the $175,000 in notes were cancelled.)

6 A letter agreement of November 27, 1991, signed by


• 7 Armstrong and_David MCCall, III me~orializing the transaction,

B conditioned the transfer of the S6DO,OOO notes on Armstrong

9 reaching a settlement with the trustee. That settlement did not

• 10 occur. (See section VI.B.) Armstrong nevertheless received the

11 cash and returned the notes to David MCCall, III at the time the

12 letter agreement was signed, when obviously no settlement with the

13 trustee had been reached. Armstrong also signed documents

14 purporting to extend the maturity date of the McCall notes from

15 January 1992 to January 1994.

• 16 Upon learning of the transactions between Armstrong and

17 David Mccall, III, the trustee commenced contempt proceedings on

18 February 10, 1992 against Armstrong for violation of the

• 19

20
preliminary injunction and obtained a temporary restraining order

prohibiting any further transfers of funds or assets by Armstrong

21 and Chenal, except for certain limited expenditures, pending the

• 22

23
contempt hearing. (See Section VI.C.l.) The trustee has

subpoenaed the financial records of Armstrong and Chenal to

24 determine what ~rrnstrong did with the $275,000 obtained from

25 McCall in return for the McCall notes.


• 26

SECOND INTERIM REPORT -28-



• •
• 1 The trustee also filed an adversary proceeding against

2 the MCCalls an February 7, 1992, seeking recovery of the $600,000

• 3
4
they received from Knightsbridge as fraudulent conveyances from
Knightsbridge, imposition of a constructive trust on the notes,

5 security interests, guarantees and other contract rights Armstrong

6 received from the McCalls, and for declaratory relief that


• 7 Armstrong's November 27, 1991, agreement vith David McCall, III is

8 invalid because "it violates the preliminary injunction and the

9 automatic stay.

• 10 3. Potential Recoveries To Be Investigated

11 The trustee is continuing to investigate other potential

12 claims that the estate may have against third parties for recovery

13 of funds or other assets transferred to them by Armstrong or the

14 Armstrong entities, or for other reasons. The trustee vill pursue

15 SUch recoveries to the extent it would be cost effective to do so.

• 16

17
Among the transfers that will be reviewed are retainers

paid to attorneys by Hamilton Taft and Remington in March and

18 April, 1991, after the Hamilton Taft involuntary petition was

• 19
20
filed. In addition to the ~735,000 paid by Armstrong to his
criminal defense attorneys/ ne caused $480 1 000 in retainers to be

21 paid by Hamilton Taft or Remington to four other law firms, for a

• 22

23
total of $1,215,000 in advance payments to lawyers representing

Armstrong's interests. The $1,215,000 total does not include

24 $145,000 in retainers paid to Creel and Atwood of Dallas,

25 bankruptcy counsel for the Texas Debtors, which retainers were


• 26

SECOND INTERIM REPORT -29-



• •
1 subsequently returned to the Debtors' estates or credited against

2 earned fees approved by the Bankruptcy Court.

• 3

4
The trustee has already settled with Armstrong's

criminal defense attorneys for return of a portion of their fees

5 to the estate. (See Section V.C.1.) The four law firms receiving

6 the remaining $480/000 were Johnson & Gibbs of Dallas, attorneys


• 7 for Hamilton Taft as Debtor ($200~OQO), Long & Levit of San

a Francisco, attorneys for both Hamilton Taft as Debtor and

9 Armstrong personally ($175,000), Eppright and Golembeck of Dallas,


• 10 attorneys for Armstrong, Remington and other Armstrong entities

II ($80,000), and Hance and Gamble of Dallas, who have identified

12 themselves as attorneys for Knightsbridge and Remington ($25,000).

13 None of these attorneys have been approved as counsel for a Debtor

14 in the bankruptcy cases, nor have they filed disclosures of their

15 fee arrangements as required by Section 329 of the Bankruptcy Code

• 16 ana Bankruptcy Rule 2016, nor have their retainers been reviewed

17 or approved by the Court, although all or a portion of their

18 services were performed postpetition.

• 19

20
The trustee has not yet sought return of the retainers,

or any portion of them, to the estate, or made any decision to do

21 so. However, the trustee believes that, at a minimum, the

• 22

23
retainers paid to the attorneys should be reviewed by the Court,

And an accountinq required of the services performed and applied

24 against the retainers. The trustee intends to request such an

25 accounting and review by the Court under Section )29 of the


• 26 Bankruptcy Code and Bankruptcy Rule 2017, regardless of whether

SECOND INTERIM REPORT -30-


• • •
• 1 the trustee decides to seek recovery of the retainers, or any

2 portion thereof. The trustee has been advised that some of the

• 3

4
attorneys involved may seek additional fees from the estate,

beyond their retainers.

5 Hance and Gamble received a $25,000 retainer not only in

6 April, 1991, but also for each of the months of January, February
• 7 ~nd March, 1991, for a total of $100,000. In response to the

B trustee's inquiry, Hance and Gamble has stated that the firm was

9 retained to perform legislative lobbying services tor a flat fee

• 10 of $25,000 per month. One of the principals of the firm is ~ent

11 Hance, a former congressman who received substantial political

12 contributions from Armstrong in his unsuccessful campaign for

13 governor of Te~as. The trustee has asked Hance and Gamble for

14 supporting information to show that it performed services

15 commensurate with the $100,000 fees it received, and has advised

• 16 the firm of his intention to seek recovery of the fees if such

17 backup is not provided.

18 -D. Assets still in Armstrong's Possession

• 19
20
Armstrong still has possession of a number of assets
which were purchased with Hamilton Taft funds and which are held

21 in his name or in the name of Armstrong companies not under the

22 control of the trustee. In addition to the McCall promissory


• 23 notes, such assets include the following:

Rodeo Interests

25 Armstrong owns a 49% stock interest in Pro Rodeo, Inc"


• 26 and either Armstrong or Winthrop owns a 33% limited partnership

SECOND INTERIM REPORT -31-



• •
• 1 interest in Rodeo PartnerS. Both entities are located in

2 Mesquite, Texas} near Dallas.

• 3

4
Pro Rodeo is controlled by a rodeo performer, Don Gay,

and its primary business is supplying livestock for rodeos,


5 principally at the Mesquite Arena, a rodeo arena serving the

• 6

7
Dallas area. Armstrong invested $350,000 of Hamilton Taft's money

to acquire a 49% percent interest in Pro Rodeo in January, 1991.


8 Rodeo Partners is a closely held limited partnership which owns

9 the Mesquite Arena. Armstrong invested $1.5 million, also


• 10 obtained from Hamilton Taft, in Mesquite Partners in September,

11 1990.

12 The trustee has obtained financial and operating

13 information on Pro Rodeo and Rodeo Partners througn the subpoena


14 process available under Bankruptcy Rule 2004. Both entities have

15 operating businesses, but their current profitability and value

• 16 are uncertain.

17 2. Texas Stadium Box

1B In March, 1990, Remington purchased three stadium boxes

• 19 at Texas Stadium, home of the Dallas Cowboys football team, from a

20 bankruptcy estate £or a total of $390,000. Armstrong took title

21 to the stadium boxes personally, and the purchase price was boo~ed

• 22

23
as a loan from Remington to hrrnstrong. After the acquisition,

Remington also paid for improvements for the stadium boxes.

24 In March and April, 1991, Armstrong sold two of the

• 25

26
stadium boxes for a total of $265,000, which was paid to
Remington. Armstrong retained the third box, which, according to

SECOND INTERIM REPORT -32-



• •

1 deposition testimony of his assistant, Teri Robins, ne treated as
2 his "personal" box. Based on information from a broker who sells

• 3 Texas Stadium boxes, the trustee understands that the remaining

4 box has a resale value of at least $~50,OOO.

5 3. Coffe~ International

• 6

7
In 1989 and 1990 Remington loaned a total of $B9,000 to

Armstrong's brother, Robert Chad Armstrong, and to Coffea

8 International, Inc., a distributor of imported coffee beans

• 9

10
controlled by Robert Chad Armstrong. On February, 11, 1991,
Knightsbridge advanced an additional $250,000 to Chad Armstrong or

11 Coffea International. The $250,000 advance, plus the prior

12 advances of $99,000 with interest, were then booked as a $341,225

13 investment by Remington in the stock of Coffea International. The

14 stock appears on the books of Remington as an asset of Remington,

15 but the trustee has been advised that Armstrong also claims the
• 16 stock as his personal asset. The trustee is in the process of

17 obtaining information on the financial status and operations of

lB Coffea International through the subpoena process, and does not at

• 19 this time have information on the value of Remington or

20 Armstrong's interest in Coffea International.

21 4. Plaza Realty Note

• 22 CCAJ corporation, an Armstrong company still under the

23 control of Armstrong, holds a $5 million note of plaza Realty

24 company (IIPlaZa Realty"), an affiliate of Gulftex Financial

• 25

26
Corporation and its principals, Jimmy E. Nix and Richard F.

Watkins. Armstrong (through CCAJ) and MaxPharma, prior owner of

• SECOND INTERIM REPORT -33-


• • •
• 1 Iton Taft. invested a total of $6 mill of Hamilton Taft

2 funds in 1989 in a joint venture Gulftex, called onal

• 3

-4
Investment Fund (IIPlptl) I owned

In February, 1990, CCAJ sold its interest in PIF to


ng center

Realty

5 for $1 mill in cash and a $5 million note executed Plaza

and by certain stock and ip interests



6

7 owned and Watkins. Plaza Rea defaulted on the note

B after one $400,000

9 In 1990, CCAJ filed suit in Texas state


• 10 court against Plaza Real on the note and against Gulftex, N

11 and Watkins and related entities for fraud aris out of the

12 or 1 in PIF. After the su I CCAJ

13 did little to the In December,


14 1991, with a trial date but no capacity or intention in



21 recovering from Plaza Realty or the collateral the Plaza

• 22

23
Realty note are not promising.

the f
However} the trustee has not yet

al cond of za Realty

24 collateral. Nor has trustee yet

25 or merits of the fraud claim against


• 26 Gulftex, Nix and

SECOND INTERIM ~EPORT -)4-


• • •
• 1 5. Personal Possessions

2 Although Armstrong has turned over to the trustee wost

• 3

4
of his luxury automobiles, he still retains two personal

automobiles purchased by Remington and booked to Armstrong as

5 "advances". They are a 1989 Jaguar (not to be confused with a

1990 Jaguar returned to the trustee) and a 1990 Ford Lariat pickup

6

7 truck, which were appraised in ttid-1991 at $37,000.

B Armstrong also has furniture and home furnishings which

9 Knightsbridge purchased for $)5,000 for a four bedroom Aspen,


• 10 Colorado condominium which Armstrong had contracted to purchase

1l jointly with Mohamed Hadid (see section V.B.l.) The condominium

12 purchase was not completed, Armstrong forfeited $300,000 in down

13 payments (paid by Remington), and shipped the furniture and

14 furnishings to Dallas.

VI. LITIGATION AGA1NST ARMSTRONG

• 16 A. Analysis of Armstrong's Personal Financial


Transactions
17
At the time of the First Interim Report, the trustee did
18
not have access to any of Armstrongls personal financial records,

• 19

20
as compared to those of corporate entities controlled by him.

Armstrong had refused to produce any personal records on Fifth


21
Amendment grounds.

• 22

23
In late July and August, 1991, Armstrong produced his

personal bank account records and certain supporting documentation


24
for the period of January 11 1989 through June 15, 1991.

• 25

26
(Armstrong acquired Hamilton Taft in March, 1999.) With the

SECOND INTERIM REPORT -35-


I

I.
• • I
I

• 1 personal financial records, together with the records of the


I

2 Armstrong entities which show transfers of funds to or on beh~lf I


• 3

4
of Armstrong, the trustee's accountants have prepared an analysis

of Armstrong's personal receipts and e~penditures for January 1,

5 1989 through June 15, 1991. The analysis is contained in


6 Appendix B.
7 During the two and a half year period, which covers the

s period of Armstrong's ownership of Hamilton Taft, over $16.5


9 million of Hamilton Taft funds, mostly routed th~ough

• 10 Knightsbridge, Remington or WinthroPJ was paid to Armstrong or by


11 the Armstrong entities to third parties for Armstrong's benefit.
12 of the $16.5 million, about $4.7 million was cash paid to

13 Armstrong. The re~aining $11.9 million was paid by the Armstrong


14 entities for assets, investments and other expenditures which
15 Armstrong held in his own name, including over $9 million related

• 16 to the Double C Ranch.

17 Of the $4.7 million in cash transferred to Armstrong,

IS $1.2 million was booked as compensation or directors' fees

• 19

20
($852,385 net of withholding taxes) or reimbursement of expenses

($396,703). Most of the money, over $3 million, was recorded as

21 cash "advances" from Remington, Knightsbridge or WinthroPI Which

• 22

23
Armstrong has never repaid, or as repayments to Armstrong of a

$1.5 million "loan" he purportedly made to Remington in February,

24 1990. Armstrong made the "loan " to Remington with funds he


25 obtained from Winthrop, which in turn obtained the funds from
• 26 Hamilton Taft. In the first three months of 1991 alone, just

SECOND INTERIM REPORT -36-

I-

• •
• 1 before the public disclosure of Armstrongts diversions of Hamilton

2 Taft money, over $1 million in cash was transferred from

• 3

4
Knightsbridge to Armstrong's personal accounts.
Armstrong's personal financial records verify that he
5 had no significant source of income or receipts, other than
6 Hamilton Taft money, during the two and half year period. Of
• 7 $4.8 million in total cash flow through his personal bank accounts
8 OVer the two and a half year period, all but $127,6Q6 can be

9 definitely traced to Hamilton Taft and the Armstrong entities who,


• 10 in turn, received their funds from Hamilton Taft. Even the money
11 he received in the first quarter of 1989, before he acquired

12 Hamilton Taft, can be traced to Hamilton Taft funds. As discussed


13 in the Accountant's Report, during the first quarter of 1989, as
14 well as earlier, Remington, which was the primary source of

15 Armstrong's funds, obtained its money from loans which were repaid

• 16 with Hamilton Taft money atter Armstrong's acquisition of Hamilton

17 Taft.
18 Likewise, all but an estimated $78 1 °00 of the

• 19

20
approximately S4.7 million that Armstrong received in cash from

Hamilton Taft and the Armstrong entities appears to have been


21 deposited into and can be traced through his personal accounts.

• 22

23
On January 1, 1989, he had $52B in his accounts. On June 15,

1991, the last date for which the trustee has bank account

24 information for Armstrong, he had an estimated $85,000 in his


25 account. Between those dates, nearly $4.7 million of Hamilton
• 26

SECOND INTERIM REPORT -37-


• • •
• 1 Taft funds ~ent into and out of his accounts for personal

2 expenditures.

3 The withdra~als from Armstrong's personal accounts


• 4 include sUbstantial cash ~ithdrawals ($175,138~ and credit card

5 payments ($465,398) for which supporting documentation has not

6 been provided and the trustee's accountants therefore cannot


• 7 provide further analysis. However, most of the transfers and

8 expenditures from Armstrong's personal accounts were by check

9 transactions or wire transfers, for which the payee is identified.

• 10 Among Armstrong's significant personal expenditures,

11 paid from his personal accounts during the January 1, 1989 through

12 June 15, 1991 period out of funds traceable to Hamilton Taft,

13 were:

1. political and charitable contributions totalling

15 $964,701. Of this amount, $603,701 was for charitable

• 16

17
contributions and $361,000 was for political contributions.

Payments characterized as charitable contributions in Arrnstrongls

1S records include $200,000 paid at-a charity auction for a 1990

• 19

20
Rolls Royce and $100,000 paid to the Dallas Opera Ball.

largest political contribution was to Texas gubernatorial


The

21 candidate Clayton Williams, who received $100,000.

22 2. Professional fees of $742,735, of which $735,000


• 23 was paid in March and April, 1991, to Meado~sj Owens, Collier,

24 Reed and Coggins, Armstrong's criminal defense attorneys. (See

25 Section V.C.l.)
• 26

SECOND INTERIM REPORT -38-


• • •
• 3. Investments totalling $494,017, of which $350,000
2 was for purchase of a 49% in Pro-Rodeo~ Inc., a company

• J

4
which
classif
1 for rodeos. (See V.D.l.)

as an "investment expense" was a payment for a $105,000

5 IS check dated November 5, 1990, the rec of which was

not identified in the Armstrong made available to the



6

7 trustee.

S 4. Gifts, loans and other transfers to friends,

9 relatives and totalling $295 / 571, inc ,301 to


• 10 his ex-wife (exclusive of payments identified as child or

11 child care) I $46.575 for an automobile loan and payments to


12 his personal assistant at 2,500 to his fiance, and

13 $J7,lB6 for h motherls med 1 expenses.

14 5, Household expenses totalling $274,089 for

IS 's residence, including 9,352 for and

• 16 ma enance, $56,121 for domestic payroll, $40,734 for ut


11 $15,354 for interior decorating, ,SB3 for es and
18 beverages and $10,329 for flowers.

• 19

20
6. Purchases from jewele~s, clothiers, furriers.
and other retailers totalling over $183,000, not

21 which may have been made cred cards.

• 22

23
Acquisitions, investments or
the $11.9 million which
financed by
Armstrong's
24 benefit with Hamilton Taft addition to the
25 ranch, 47,738 for costs associated with his acquisition of
• 26 Hamilton Taft (consist primarily of $615,000 d to Stanley

SECOND INTERIM REPORT -39-



• •
• 1 Rosenberg, a former Ma~Pharma shareholder, as part of the

2 MaxPharma settlement, and $232,730 for legal fees), $390,000 for

• 3

4
the Texas stadium skyboxes, $600,000 for loans to the McCalls,

$335,000 for the down payment and furniture for a condominium in

5 Aspen, Colorado (which Armstrong did not ultimately purchase),

• 6

7
$295,000 for investments in cotfea International, Armstrong's

brother's company, and $132,767 for automobiles.

8 B. status of Litigation and Settlement

9 commen~ing in June, 1991, the trustee has hed


• LO substantial and ongoing discussions with Armstrong regarding

11 settlement of the Hamilton Taft estate's claims against Armstrong.

12 Such settlement discussions have generally involved a frame~ork

13 under which most assets still remaining in the possession of

14 Armstrong and entities under his control would be returned to the

15 Hamilton Taft estate, and Armstrong would stipulate to a

• 16 nondischargeable judgment for a specified amount, with forbearance

17 on execution if Armstrong paid an agreed upon portion of his

18 futUre income and receipts to the estate for a specified period of

- 19

20

21
years.

While the parties appeared clcse to reaching a

settlement from time to time, the settle~ent discussions were

• 22

23
terminated in late January, 1992. The trustee and Armstrong were

unable to reach agreement on several aspects of the settlement

24 that were of importance to one party or the other.

No further settlement discussions are planned. The


• 2S

26 trustee intends to proceed with the pending adversary proceeding

SECOND INTERIM REPORT -40-

I-
--------

• • •
• 1 against Armstrong to seek recovery of all remaining assets in

2 Armstrong's possession traceable to Hamilton Taft funds, or to

• 3

4
transfers from any of the other Debtors. In addition, the trustee

will seek a money judgment against Armstrong for the full amount

5 of Hamilton Taft's loss, after adjustment for any amounts realized

• 6

7
from recovered assets.

Armstrong sought to re~ove the adversary proceeding from

B the Bankruptcy Court to the District Court on the ground that he

9 had demanded a jury and the Bankruptcy Court could not conduct
• 10 jury trials. The District Court, on Armstrong's motion for

11 withdrawal of reference, ruled that the Bankruptcy Court could

12 conduct jury trials in "core" proceedings, which included the

13 trustee's main claims for fraudulent conveyance, constructive

14 trust, turnover orders and injunctive relief. However, the non-

15- core claims included in the trustee's complaint, namely the breach

• 16 of fiduciary duty, conversion and breach of contract causes of

17 action, were removed to the District Court.

IS c. In-',unctions and Cont.empt Proceedi.ngs

• 19

20
1. TROs and preliminary Injunctions
On April 4/ 1991, after the adversary proceeding against

21 Armstrong and related entities was filed, the Bankruptcy Court

• 22

23
issued a temporary restraining order (·'TRO") prohibiting any

transfers, encumbrances or other dispositions of assets by

24 Armstrong or any Armstrong companies "e:xcept to meet day to day

• 25

26
ordinary operating expenses".

several times.
The TRO was extended by agreement

SECOND INTERIM REPORT -41-



• •
• 1 On July 22, 1991, when the trustee was appointed interim

2 trustee of the Texas Debtors, Armstrong agreed to entry of a

• 3

4
preliminary injunction against him, with the TRO continued as to

the remaining Armstrong entities not under the control of the

5 trustee. The preliminary injunction differentiated between assets

• 7
6 eKisting as of July 22, 1991, and any proceeds and products

thereof (called the "pre-existing assets~), and future earnings or


8 income of Armstrong, and assets acquired from future earnings

9 (called the "new assets"). The preliminary injunction provided an


• 10 absolute prohibition against any transfers, encumbrances and

11 dispositions of pre-existing assets, except that Armstrong was

12 allowed to use his remaining cash, up to S100,ODO, for "ordinary

13 day to day operating expenses and reasonable living expenses tl •

14 Arro~trong's future earnings and income, and assets acquired with

15 future earnings and income, were released from the TRO and not

• 16 subject to the preliminary injunction.

17 On November 4, 1991, the TRO against the remaining

18 Armstrong entities (which for practical purposes consisted of

• 19

20
Winthrop), was converted to a preliminary injunction. The

preliminary injunction against the entities was substantially the

21 same as the TRO, i.e., it prohibited all transfers of assets

• 22

23
except for "ordinary day to day operating expenses." The two

preliminary injunctions, the July 22, 1991 injunction against

24 Armstrong personally and the November 4, 1991 injunction against

the remaining Armstrong entities, are currently in effect.


• 25

26

SECOND INTERIM REPORT -42-


• 1 On February 22, 1992, on application of the trustee, the

2 Court issued a new TRO against Armstrong, which supplements but

• 3

4
does not replace the July 22, 1991 preliminary injunction. The

new TRO prohibits all transfers, encumbrances or other disposition

5 of assets, including any so-called "new assets", by Armstrong, his

6 new company, Chenal Corporation, and any other companies


• 7 controlled by Armstrong, except for a specified list of approved

B expenditures and other expenditures approved in advance of payment

9 by the trustee or the court. The TRO, which is in place until a

• 10 preliminary injunction and contempt hearing scheduled for


11 March 13, 1992, was imposed after the trustee learned that

12 Armstrong and Chenal had received and likely spent $275,000 in

13 promissory note proceeds which were subject to the July 22, 1991

14 preliminary injunction. (See Section V.C.2.)

15 2. contempt Proceedings

• 16

17
The trustee has filed two contempt motions for

Armstrong's violation of the April 4, 1991 TRO and the July 22/

18 1991 preliminary injunction.

• 19

20
In December, 1991, the trustee and the creditors

Committee jointly filed a motion to hold Armstrong in contempt for

21 violation of the TRO. The motion challenged several personal

22 eKpenditures by Armstrong as not for "ordinary day to day


• 23 operating expenses/II including $9,000 to his fiance, $B,OOO to his

24 brother, $5,715 to a womenls dress designer for merchandise

25 ordered by his fiance; and $4,000 for the glasses of a country


• 26 music star purchased at a charity auction. The trustee also

SECOND INTERIM REPORT -43-


• • •
• 1 sought recovery of $11,000 from proceeds of cattle sales which

2 Armstrong transferred from the ranch operating account to his

• J

4
personal account.

After a hearing on January 24, 1992 1 the Bankruptcy

5 Court ruled that Armstrong had violated the TRD and ordered him to

6 pay $37,725 to the trustee over a 90 day period. The order

• 7 provides that if payment is not made, the Bankruptcy Court will

8 recommend that the District court issue an order of contempt.

9 The second contempt proceeding ~as filed by the trustee

• 10 on February 10, 1992 arising out of Armstrong's transactions with

11 respect to the McCall promissory notes. (Section V.C.2.) The

12 trustee contends that Armstrong violated the preliminary

13 injunction by (i) spending or otherwise disposing of $275,000

14 received fron David Mccall, III, (ii} executing an agreement to


15 sell the notes, ~hich total $600,000 , to David Mccall, III in

• 16

17
exchange for the 5275,000 he received from McCall, and (iii)

executing an agreement to extend the maturity date on the notes by

18 two years. On February 11, 1992, the Bankruptcy Court issued an

• 19
20
order requiring Armstrong to show cause on March 13, 1992 why he

should not be held in contempt for violating the preli~inary

21 injunction.

• 22

23
D. Criminal Investigation

The trustee has been advised that the u.s. Department of

24 Justice is conducting an investigation to determine whether

25 criminal charges should be filed against Armstrong or other


• 26 persons on account of the transfers of Hamilton Taft funds. The

SECOND INTERIM REPORT -44-



• •
• 1 trustee has cooperated with law enforcement officials in their

2 investigation, by providing information and documents in his

• 3

4
possession or under his control,

officials.
~hen and as requested by such

The trustee has no control or influence over the

5 results or timing of the criminal investigation.

6 VII. OTHER C~IMS AND LITIGATION


• 7 A. Fidelity Bonds

B The estate's largest potential recovery is on fidelity

9 bonds issued by Underwriters of Lloyd's covering loss to Hamilton

• 10 Taft from theft by employees. The policies contain $20 million

11 primary coverage and $30 million umbrella coverage, for a total of

12 $50 million, subject to certain deductibles. The fidelity bonds

13 were a requirement of most ot Hamilton Taft's contracts with its


14 customers.

15 The trustee gave written notice of a claim to the

• 16

17
underwriters on April 25, 1991. Discussions with the underwriters

commenced, through their San Francisco attorneys, in November,

18 1991. The underwriters have neither admitted nor denied coverage.

• 19

20
They have requested access to voluminous records of Hamilton Taft

and the Texas Debtors to investigate the claim, and the trustee is

21 in the process of responding to these requests. If coverage is

• 22

23
denied or not acknowledged after the underwriters have had a

reasonable opportunity to investigate, the trustee intends to file

24 suit on the bonds.

25 The trustee cannot predict at this time the likely


• 26 outcome of the claim on the fidelity bond. Substantial legal

SECOND INTERIM REPORT -45-


• • •
• 1 issues are likely to be raised relating to coverage or the amount

2 of recovery under the bonds.

• ]

4
Reflecting the importance of the fidelity bond claim to

the estate, both the trustee and the Creditors Committee have

5 retained special insurance counsel. The trustee has retained the

6 law firm of Mound, cotton and Wolan of New York City to assist in
• 7 pursuing the claim. The creditors committee has retained Bronson,

8 Bronson and McKinnon of San Francisco.

9 B. Preference claims

• 10 The trustee has commenced an analysis of potential

11 preference actions against customers of Hamilton Taft for whom

12 payroll tax deposits were made under circumstances that the

13 payments would constitute preferential transfers under Section 547

14 of the Bankruptcy Code. Because of the exclusion for transfers in

l5 the "ordinary course of business", the trustee is analyzing only

• 16

17
celinquent payments made by Hamilton Taft during the 90 days pr_ior

to the filing of the involuntary petition on March 20, 1991. Such

19 delinquent payments were generally made in two time periods, on or

• 19

20
about January 31, 1991, when Hamilton Taft paid over $50 million

in tax liabilities which were due in the first part of October,


21 1990, and on or about March B, 1991, when customers learned that

• 22

23
Hamilton Taft had diverted tax deposits to the Armstrong entities
and made demands on Hamilton Taft for confirmation that their

24 ta~es had been paid. While the trustee's analysis is not

25 complete, the trustee estimates that transfers meeting the


• 26

SECOND INTERIM REPORT -46-



• •
1 preference criteria may exceed $40 million, after deduction of

~ "new value" payments.

• 3

4
The trustee has thus far made demands for return of

payments from, and has filed adversary proceedings against, two

5 parties, Volume Shoe corporation (aka Payless SnoeSource) for $3.4

• 6

7
~illion

million.
and S&S Credit co., Inc. (aka Shop and Save) for $12.5

Delinquent taxes were paid on behalf of these customers

8 in both January and March, 1991. They were among the first

9 customers to confront Hamilton Taft on March 8, 1991, as a result


• 10 of ~hich Hamilton Taft covered the shortfall on their delinquent

11 taxes, and they have relatively small claims against Hamilton Taft

12 for unpaid taxes.

:.3 Additional preference actions are expected to be filed

14 by the trustee on a case by case basis. No adversary proceedings

15 will be filed against any customer ~ithout the trustee first

• 16 communicating a written demand.

17 Because of the circumstances under which Hamilton Taft's

18 bankruptcy was filed, the trustee does not expect any significant

• 19

20
preference claims to be asserted on account of payment of vendor
debts during the 90 day preference period. Hamilton Taft was

21 generally paying its trade debts as they became due, and the

• 22

23
"ordinary course of business" exception will like.ly apply to most

payments to vendors.

24 c. Sa."!o.ie Refund

• 25 The trustee has settled a dispute with a former Hamilton

26 . Taft client, Sandia Corporation, also known as Sandia National


I

SECOND INTERIM REPORT -47-


_J._
)_
• • •
1 Laboratories, over a $938,007 IRS refund for payroll ta~es paid by

2 Hamilton Taft on Sandials behal.f. Under the settlement, the


trustee received $744,198 from Sandia on February 6, 1992, and is
• 3

-4 expected to receive an additional sum of approximately $187,000 on

5 or about March 8, 1992, for a total of approximately $931,200,


6 including interest. (The $744,198 payment already received is not
• 7 reflected in the cash receipts and disbursements schedules shawn

B in Appendix A, which covers only transactions as of December 31,

9 1991. )

• 10 The dispute arose out of a $917,876 payment which

11 Hamilton Taft paid to the IRS on Sandia's behalf on March 8, 1991.

12 On that day, pursuant to its contract with sandia, Hamilton Taft

13 initiated an electronics funds transfer from Sandiats bank account

14 to cover the payment. Sandia, however, reversed the payment on

15 the same day, and made its o~n deposit with the IRS, which

• 16 resulted in duplicate payments for Sandia1s account.


Sandia applied for and obtained a refund from the IRS of
17
18 $938,.007, w~ich included $20,131 in interest. While Sandia did

• 19
20
not dispute that the refund belonged to Hamilton Taft, Sandia

claimed the right to offset against the refund any amounts

21 Hamilton Taft owed to Sandia for unpaid taxes, interest and

22 penalties. Sandia wanted to retain the IRS refund until it had


• 23 completed an internal audit and received confirmation, direct from

24 the taxing agencies. of all payroll taxes which it had remitted to

25 Ha~ilton Taft during the life of Sandia's contract with Hamilton


• 26 Taft. The trustee was unwilling to wait indefinitely until Sandia

SECOND INTERIM REPORT -48-




• 1 received confirmation from each taxing agency, which may never
2 occur. Hamilton Taftts own records show that the unpaid

• 3
4
taxes for which Hamilton Taft was respons
state ta~es which were not due at the
I
were ,051 in

Sandia terminated its


5 contract, but for which had advanced funds to Ha~ilton

6 Taft.
• 7 The trustee and Sandia reached a settlement, under which
8 Sandia to pay to the trustee all of the IRS refund,
9 including any interest accrued thereon Sandia's
• 10 except for $22,051 for the taxes, which Sandia will retain,
11 and $160,106, the unconfirmed state tax payments,
12 which will be an interest bear account until March 8,
13 1992. If Sandia is able to find any additional unpaid taxes

14 interest and penalties, it will be allowed to pay such


15 l.J.cu.J.I...l J. ""..1. e.;:, from the IRS refund. On March at 1992, all rema~l}.I.."Y

• 16

17
funds from the IRS refund, and accrued interest, which
to total approximately $lB7,OOO, will be released to the trustee,
18 regardless of whether has confirmation of Hamilton

• 19

20
Taft's
D,
of its taxes.

21 of December, 1989 to the of the

• 22
23
in March, 1991,
Ilion in penalties to the IRS on account of late
Taft: over $7
of
customers' payroll taxes, which resulted from Armstrong's program
of diverting tax to his Texas entities. /~he
• 25

26 analyzing whether such may be recoverable


/'
trustee is
the trustee

SECOND INTERIM REPORT -49-



• 1 or the customers under the Internal Revenue Code, which provides
2 that penalties may be excused if to make timely

• 3

4
was due to reasonable cause and not willful

trustee believes that the unusual circumstances surroundinq


5 late taxes rise to a reasonable argument that

6 penalties pa should be recoverable, as well as unpaid


• 7 penalties abated.

B The trustee also bel that any es paid within


9 90 of the filing of the Hamilton
• lO Taft may be recoverable by the estate as
11 Approximately $1.5 11 of the tax penalties were paid during
12 the 90 day preference
13 E.

14 The trustee and his a are cant in9 to analyze


15 claims against persons and entit ch may be 1 e

• 16 ing in, contributing to , or to

17 relat to the improper transfers of money

18 Hamilton Taft. The trustee has not reached any conclusions

• 19

20
such claims.
VIII. CREDITORS CLAIMS ANALYSIS

21 Dn 22, 1991, the Bankruptcy Court set a deadl of

• 22

23
September 3D, 1991 for fil

Debtors.
of claim against the f
of the bar date was sent to all known

24 of the Debtors and was publ in the Wall Street Journal


25 (National Ed ion), the San Chronicle and Callas
• 26 News.

SECOND INTERIM REPORT -50-




• 1 ~. claims ~gainst Consolidated Estate

2 Proofs o£ claim totalling $205.3 million. unduplicated,

• 3

4
were filed against the Debtors constituting the consolidated

estate, i.e., Hamilton Taft, Knightsbridge, Remington and

5 Enterprises. When non-duplicative scheduled claims (i.e., claims

6 the Debtors acknowledge are liquidated, non-contingent and not


• 7 subject to dispute) are added, the ma~imum potential c~aims

8 against the consolidated estate total $210.2 million. A list of

9 all claims against the consolidated estate is contained in


• 10 Appendix C.

11 However, the claims total is distorted, because one

12 claim, filed by steven Solodoff, Hamilton Taft's former

13 controller, accounts for $110 ~illion of the total. The trustee


14 believes that Solodoff's claim is not meritorious. (See Section

15 VIII.C below.) If Solodoff's claim is disregarded, the maximum

• 16

17
potential claims against the consolidated estate total $100.2

million. This compares to scheduled claims for the four Debtors of

18 $94.4 million, or a difference of only 6 percent.

• 19

20
Claims of Hamilton Taft customers for unpaid taxes
account for $95.1 million of the $100.2 million total claims

21 (compared to $91.9 million acknowledged in Hamilton Taft's

• 22

2]
schedules). Total potential claims of Hamilton Taft trade vendors

and employees total $1.7 million.


24 For the Te~as Debtors, claims against Remington total

25 $970,665, including both proofs of clai~s and scheduled claims,


• 26 unduplicated, as compared to $505,932 in scheduled debts. Claims

SECOND INTERIM REPORT -51-




• 1 against Enterprises total $47,332. No claims were filed against

2 Knightsbridge, other than duplicates of claims filed against other

• J

4
Debtors. All claims totals e~clude intercompany claims, including

claims of affiliated entities which are not included in the

5 consolidated estate.

• 6

7
B. Claims Against Dresdner Petroleum

Proofs of claim filed against Petroleum total $651,060.

8 Scheduled claims total $371,376. The maximum potential claims

9 against Petroleum, with duplications deleted, total $731,286. The

• 10 claims against Petroleum consist almost entirely of vendor claims

11 for goods and services provided to Petroleum's oil and gas

12 operations. A list of all claims against Petroleum is contained

13 in Appendix C.

14 C. steven Solodoff Claim

15 steven Solodoff, the Hamilton Taft controller whose

• 16

17
public disclosure to customers and the news media of the diversion

of Hamilton Taft funds led to the tiling of the bankruptcy, has

IB filed a $110 million proof of claim against Hamilton Taft and the

• 19

20
other Debtors based on the federal False Claims Act.

Claims Act allows a private citizen


The False

to bring actions on behalf of


21 the United States for fraud committed against the government, with

• 22

23
the private citizen retaining up to 30% of any recovery.

claims that Hamilton Taft violated the False Claims Act by


Solodoff

24 knowingly using false records or statements to conceal or avoid an

25 obligation to transmit money to the United states and fraudulently


• 26 converting government trust funds. Solodoff also alleges that he

SECOND INTERIM REPORT -52-




1 ~as wrongfully terminated by Hamilton Taft because he notified the

2 FBI about Hamilton Taft's diversion of tax deposits.

• 3

4
Prior to the commencement of the Ha~ilton Taft

bankruptcy case, Soladaff filed a False Claims Act complaint in

5 the u.s. District Court. The United states government not only

• 6

7
declined to take over the lawsuit, as it is entitled to do, but

the u.s. Attorney filed a brief recommending that Solodoff's

B complaint be dismissed because any claims stated would be income

9 tax claims, which are expressly excluded from the False Claims
• 10 Act.

11 In November, 1991, Solodoff filed a motion for relief

12 from stay in the Bankruptcy Court seeking a determination that his

13 District Court lawsuit was exempt from the automatic stay as an

l.4 exercise of the "police power". The Bankruptcy Court denied

15 Solodoff's motion, ruling that Salodof! was not a "gove.rnmental

• 16 llni til enti tied to assert the "police power" exception under

17 Section 362 of the Bankruptcy Code.

18 The denial of relief from stay to pursue a District

• 19 Court action does not affect Solodoff's proof of claim in the

20 Bankruptcy Court. However, the trustee does not believe that

21 Solodoff's claim, purporting to assert relief on behalf of the

• 22

23
United states, which has suffered no loss, has any significant

likelihood of success. The trustee believes that Solodoff's

24 personal claim for wrongful termination is barred by a release he

• 25

26
executed at the time of his termination, for which he received

four months of severance pay.

SECOND I~TERIM REPORT -53-


- -----~ - --.-.- . - - - - - . - - - - - - - - - - - -

• •
• 1 IX. CONCLUSION AND FUTURE ACTIVITIES

2 Identification of the main problems, claims, potential

• J

4
assets and litigation requirements of the estate is now

substantially complete. The next six months to a year will see

5 heavy litigation activity, as the claims brought by the estate are

6 pursued, and presumably also resisted. Additional claims will


• 7 also be brought by the estate.

S The trustee expects that a liquidating Chapter 11 plan

9 will ultimately be filed and confirmed for the consolidated

• 10 estate, there being no possibility of a rehabilitation of the

11 business. (Whether a plan will also be filed for Petroleum will

12 depend upon the prospects of the disposition of its assets.) From

13 the point of view of creditors, the questions are, obviously, how

14 much of their claims they will receive, and when they will receive

15 any funds.

• 16

17
From this report, creditors and other parties in

interest will understand that the trustee cannot now provide very

18 specific answers to these questions. Some comments may be made,

• 19

20
however, on the determinants of the amount of pDtential recovery_

Based on the proofs of claim filed against the estate,

21 it does not appear that resolution of claims against the estate

• 22

23
will be a major concern. Except for the Soloaoff claim} the

proofs of claim filed and the estate records do not appear to

24 differ sufficiently so as to make any major difference in the

25 potential percentage of payment to creditors on their claims. The


• 26 trustee will in due time review the claims in greater detail, and

SECOND INTERIM REPORT -54-


• •
-.oJ
,~

1 file objections as appropriate, but on the basis of a first review

2 and current information, there does not appear to be any

• 3

4
likelihood of a major impact on percentage of recovery from any

potential correction and disallowance of claims (except for the

5 Solodoff claim).

6 The physical assets of the Hamilton Taft estate together

7 with the cash on hand, while substantial, would in them.selves be

a unlikely under the best of assumptions to yield any more than 10

9 cents on the dollar for prepetition unsecured creditors, perhaps


• 10 substantially less. The key to what creditors will receive will

11 be the recovery on the estate's Claims, primarily the claims on

12 the fidelity bonds and for return of preferences, and to a

13 substantially lesser extent, on the success and collectibility of

14 various claims against transferees of Hamilton Taft funds and

is possibly other third parties. It is not possible to predict the

• 16 outcome or degree of success on the claims at this time. What is

17 certain is that litigation and pursuit of claims will be e~ensive

18 and time consuming. The claims will be vigorously pursued by the

• 19

20
trustee. This is the major task for the estate in the future.

21 Da.ted: February 20, 1992


Freder~e~ee
• 22

23

;!4

• 25

26

SECOND INTERIM REPORT -55-

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