Homes Remain Rogue Executives' Castles Under Loophole
By Jackie Spinner
Washington Post Staff Writer
Friday, July 12, 2002
Corporate wrongdoers could no longer file for bankruptcy to avoid civil fines and lawsuit claims from bilked shareholders under a provision of the proposed accounting reform bill making its way through the Senate.
But a long-standing legal loophole could make it difficult for regulators and courts to use that provision, assuming it survives in the final legislation, to reach some of the wealthy executives at the center of corporate scandals that inspired the Senate provision.
Known as the unlimited homestead exemption, the loophole allows bankrupt debtors in six states, including Texas and Florida, to shield unlimited amounts of equity in luxurious estates such as the $15 million mansion that Scott D. Sullivan, the ousted chief financial officer of WorldCom Inc. is building in Boca Raton, Fla., and the $7 million penthouse that former Enron Corp. chairman Kenneth L. Lay owns in Houston.
Although neither Lay nor Sullivan have filed for bankruptcy protection from creditors or have been charged with securities violations, the exemptions could help protect them from the new legislation's tougher measures if their fortunes changed.
"The homestead exemption in Florida has been a magnet for affluent deadbeats and bad actors for years," said Travis B. Plunkett, legislative director of the Consumer Federation of America. "The fact that this mansion loophole exists just adds insult to injury to WorldCom investors."
Before disclosures of WorldCom's accounting troubles helped build bipartisan support in Congress for accounting reform, lawmakers in April tentatively agreed to restrict the homestead exemptions as part of a broader overhaul of the nation's bankruptcy law. But the effort stalled last month after House and Senate leaders failed to agree on other parts of the legislation in a private conference.
The compromise would have required an individual to own a home for at least 40 months before filing for bankruptcy protection and trying to use the unlimited exemption. Residents who own homes for less than 40 months would be allowed to shield $125,000 of equity. Individuals convicted of certain felonies or securities fraud in the 10 years before filing for bankruptcy could not claim the unlimited exemption.
"This would say that there's no way these head honchos in these companies under investigation would be able to hide their assets in their homes," said Sen. Herb Kohl (D-Wis.).
The Securities and Exchange Commission has charged WorldCom with fraud for allegedly booking $4 billion in routine expenses as long-term capital investments over five quarters.
Enron is under investigation by the SEC for its accounting treatment of partnerships it used to hide debt and losses. Lay is a defendant in shareholder lawsuits and was accused in an investigation by Enron's board of failing to maintain oversight of the company.
WorldCom fired Sullivan on June 24 and last week sued him to recoup a $10 million retention bonus he was paid. Sullivan is also named in at least one suit brought by shareholders. Earlier this week, he and former WorldCom chief executive Bernard J. Ebbers refused to testify before a House committee, citing their Fifth Amendment right against self-incrimination.
Sullivan, meanwhile, is building his mansion on a four-acre compound in an exclusive area of Boca Raton. The estate features an 18-seat movie theater, a swimming pool and cabana, a two-story boathouse, a guest house and two three-car garages with maid quarters on their second floors.
The architect, Randall Stofft of Delray Beach, Fla., said the project has been in the works for two to three years and is about 85 percent complete. Stofft declined further comment other than to say with a laugh, "It's still a nice house, isn't it?"
Sullivan's attorneys did not return calls seeking comment.
Legal experts said it probably does not matter that Sullivan, who owns a more modest home in a nearby Florida community, is not yet living in the mansion. Florida law does not require a debtor seeking to use the unlimited homestead exemption to live in the residence for a specified period.
"They only have to be a permanent resident of that property, and that's a judgment call," said Jeff Morris, a law professor at the University of Dayton. "Even if the paint isn't done, the courts would likely find that it is a homestead if the person intends to move there."
A Florida Supreme Court decision last year also allows individuals to avoid paying their debts by putting money into their homes even if the purpose is to defraud creditors.
The Florida homestead exemption has a long history of protecting wealthy debtors in bankruptcy.
Former Singer Co. chairman Paul Bilzerian, who was convicted of securities fraud in 1989, kept his Tampa mansion away from creditors and federal regulators trying to collect civil penalties after he filed for bankruptcy. Actor Burt Reynolds, who declared bankruptcy in 1996, got to keep his $2.5 million estate in Hobe Sound.
Kohl said he may try to propose the bankruptcy provision that covers corporate wrongdoers as a separate amendment to other legislation if the bankruptcy bill cannot be reconciled.
"Once we get it passed, Mr. Sullivan, Mr. Ebbers, Mr. Lay, none of these people would be covered," he said.
But some legal experts said the bankruptcy legislation would still contain loopholes for executives convicted of fraud.
Elizabeth Warren, a Harvard University law professor, said married couples could get around the law by transfering the property to a spouse.
And there are other ways to avoid having to pay, she said.
"I suspect a number of lawyers to the rich and infamous are carefully mapping out strategies to exploit the many, many loopholes tucked into the congressional compromise," she said.
© 2002 The Washington Post Company
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