A complete POS ahead of his time:
Farley forking over part of debt to Fruit
Deal ends fight over $65-mil. loan
Ahead of his time: The dispute over William Farley's company-backed loan predated current controversies over loans to top corporate executives.
August 26, 2002
By Alby Gallun
chicagobusiness.com
A three-year battle between Fruit of the Loom Inc. and William Farley over a $65-million company-backed loan to the former CEO has ended with Mr. Farley agreeing to repay part of what he owes.
Amid investor outrage over similar — and now illegal — loans to top executives at companies like Tyco International Ltd., Mr. Farley has agreed to pay the trust that is liquidating Fruit's assets $10 million in cash and a $2-million promissory note, according to a settlement recently approved by a bankruptcy judge. He'll also turn over the cash value of a life insurance policy, some artwork and other assets of undetermined value.
The underwear maker, formerly based in Chicago, filed for Chapter 11 bankruptcy protection on Dec. 29, 1999, about four months after parting ways with Mr. Farley, the flashy dealmaker and onetime presidential aspirant who led a leveraged buyout of Fruit in 1985. The two parties have been battling in court over the loan — made earlier in 1999 — and other matters ever since.
$30 million in charges
Under the settlement, Mr. Farley is likely to repay much less than the $57.1 million in outstanding principal on the loan, which was backed by Fruit's promise to repay the money if Mr. Farley defaulted, which he did. A person involved in the negotiations estimates the agreement is worth roughly $20 million.
Yet it's not entirely clear how much the deal shortchanges Fruit and Bank of America Corp. and Credit Suisse First Boston Corp., which provided the loan. That's because the liquidating trust is still selling off assets to raise money for creditors, and the banks have other, much larger claims arising from direct loans to Fruit.
Fruit, anticipating the potential liability, took $30 million in charges in the third and fourth quarters of 1999 to account for the bad loan. The company had paid $10 million in interest on the loan through the end of February, a Securities and Exchange Commission filing shows.
Mr. Farley's dispute with Fruit prefigured controversies now raging over company loans to Adelphia Communications Corp.'s Rigas family, Tyco CEO Dennis Koslowski and WorldCom Inc. CEO Bernard Ebbers.
"Obviously, he's a piker compared to Dennis Koslowski, but back in his day, Farley was one of the original pigs at the trough," says Patrick McGurn, vice-president of Institutional Shareholder Services, a Maryland-based corporate governance consulting firm.
Mr. Farley and his attorney declined to comment on the settlement. Charlotte, N.C.-based Bank of America and New York-based Credit Suisse First Boston also declined to comment.
During his tenure at Fruit, Mr. Farley, a former Lehman Bros. investment banker, was often criticized for his high pay, his hand-picked board and some $103 million in company-backed loans, including the disputed one for $65 million.
Still, some observers say he would have faced even harsher treatment today, with the stock market in the dumps and livid investors calling for the heads of CEOs at companies where there is the slightest hint of impropriety.
With Fruit's guarantee, the banks agreed to lend Mr. Farley $65 million in March 1999. Part of the money went to refinance two earlier Fruit-backed loans worth $38 million, and part went to cover Mr. Farley's personal expenses and investments.
When Mr. Farley defaulted, Fruit was on the hook for the loan. The company started paying interest to the banks in early 2000, soon after filing for Chapter 11 protection in U.S. Bankruptcy Court in Wilmington, Del. In addition to the principal amount of the loan, Mr. Farley also owed Fruit about $3 million in fees for the guarantee as of this past February, according to the company's most recent annual report.
Since the Chapter 11 filing, the apparel company, which now operates out of Bowling Green, Ky., has been negotiating with creditors and selling off assets, a process that included the April sale of Fruit's core apparel business for $835 million to Warren Buffett's Omaha, Neb.-based Berkshire Hathaway Inc.
The court fight between Fruit and its former CEO has been one of the bigger sideshows in the bankruptcy case, with Mr. Farley claiming at one point that the company owed him more than $100 million in severance and pension benefits. As part of the settlement, Mr. Farley agreed to drop all claims against Fruit.
Early in the case, Judge Peter Walsh approved Fruit's decision to reject Mr. Farley's employment agreement, nullifying a $27.4-million severance package.
A risky — now illegal — practice
Aiming to persuade Judge Walsh to approve the settlement with Mr. Farley , Fruit's attorneys argued in a motion that continued litigation would be "protracted, expensive and uncertain." In addition, Mr. Farley "has demonstrated that his ability to satisfy any judgment obtained against him is limited," the filing said. Fruit's lawyers didn't return several phone calls.
Fruit's dispute with Mr. Farley demonstrates why company loans or company-backed loans to executives are a bad idea, says Charles Elson, director of the Center for Corporate Governance at the University of Delaware.
"One of the downsides of loaning to executives is the executive not being able to pay you back," he says.
Now illegal under the corporate and accounting fraud bill that President George W. Bush signed into law last month, such loans had become commonplace by the late 1990s. And it wasn't uncommon for companies to forgive the loans.
But Fruit's bankruptcy filing deprived Mr. Farley of that option, says Mr. McGurn.
"As long as he had that chummy arrangement going with the board, the chances are (the loan) would have been forgiven," he says. "But the rules change as soon as you go into bankruptcy."
©2002 by Crain Communications Inc. |
