Prium's Pierce County founders borrowed big, lived well and left tenants, contractors in lurch

Staff writerJuly 16, 2011 

Just five years ago, Tom Price and Hyun Um were a Pierce County success story.

They had renovated a historic cannery in Puyallup and planned to dot downtown Tacoma with towers of condos.

They would return the historic Winthrop Hotel to glory and build new apartments for its residents.

They became the state government’s largest landlord, and reached across the Cascades to buy two iconic Spokane office buildings.

Their company – Prium, a name formed by combining the men’s last names – became one of Western Washington’s most notable real estate development companies in 2005.

Riding the wave of real estate, the two men – with little experience in commercial real estate development – took other people’s money and grew their company with little help.

Along the way, Price and Um acquired trophies to signal their success: brand-new Bentleys, private schools for their children, and million-dollar homes they rent from themselves for $100 a month. One son got a Porsche for his 16th birthday.

The men built their empire using hundreds of millions of dollars of borrowed money, and they paid themselves monthly salaries of $20,000 each.

Paying their contractors was much harder.

“I was prepared for slow pay, but not prepared for no pay,” said Greg Bailey, a Thurston County general contractor who is owed about $65,000 for work he did two years ago.

Bailey is in a long line of people waiting for Price and Um to settle up.

The men are in bankruptcy. Together their debts – as much as $350 million – amount to one of the largest bankruptcies in the state.

Their biggest creditors are lenders who are owed tens of millions of dollars. A handful of contractors have legal judgments against Prium, but it’s impossible to know how many others went unpaid.

Price and Um declined to be interviewed. The News Tribune allowed Price and Um to read this story. After they did, they said they had no comment.

Dozens of Prium buildings are run by receivers, and the company’s state tenants complain about janitorial services and water leaks.

Of Prium’s seven planned condominiums, only two were built. Now they’re apartments, and the company no longer owns one of them. The Winthrop is for sale.

In court documents, Price and Um acknowledge the Prium empire grew quickly and broadly but blame their financial trouble on a “historic economic downturn, which threatened the ability to refinance the existing secured debts, renew leases, etc.”

They also say, in at least one lawsuit, that a bank did not distribute the money it promised to lend. That answer doesn’t satisfy the contractors who weren’t paid.

“What did they do with the money?” asked Bailey, the Thurston County contractor. He was referring to his specific job, but his remarks are echoed by almost everyone who has watched Prium over the years.

“Did they just shove it away down some rat hole, or what? That’s what everybody wants to know.”

A FUZZY STRUCTURE

Over 15 years, Price and Um created a web of at least 60 companies and used many of those to borrow from institutional and private lenders. One company does little more than own the developers’ homes, and the men pay $100 a month to rent them. Another company holds only a personal checking account for Um.

Price and Um moved money among their companies and took money out at will, with little to no documentation. Prium has a bookkeeper, but no chief financial officer. It had a chief executive officer for only a few years. And layoffs last year cut the staff in half.

Some creditors, in court filings, accuse them of playing a shell game.

Finding out how much money Prium and its entities have, as well as how all of them are connected, is the task of an independent financial examiner.

Bankruptcy Judge Paul Snyder appointed the examiner in May after a group of creditors said Price and Um weren’t acting in good faith.

The presumption in bankruptcy is that a debtor will do everything he can to pay something to his creditors. After questioning the men and reviewing limited financial reports, some of Price’s and Um’s creditors don’t believe that’s happening.

They asked for a trustee to take over Prium. The judge compromised by appointing the examiner.

His preliminary report, filed June 22, lists 14 projects lost to foreclosure. Nine more are in some stage of bankruptcy reorganization.

The report further notes that just eight projects are making money, most of which goes toward the men’s salaries, payments for their homes and cars, and legal fees associated with their distressed real estate holdings.

To understand Prium, The News Tribune reviewed thousands of pages of court records, depositions, property records and financial statements, and conducted more than two dozen interviews.

The newspaper also asked accounting professors to review the company’s financial records. They said it was impossible to fully understand how Prium works, noting that some documents provided to the court, ostensibly to provide a sense of the company’s health and worth, are confusing and incomplete.

Even Price and Um, during depositions taken a day apart in March as part of their personal bankruptcies, indicate uncertainty about the structure of the company they created.

A lawyer for some of their creditors presented a flow chart related to the primary umbrella company. “Does it accurately reflect the holdings of Prium Companies LLC?” the lawyer asked.

“I don’t know,” Um said, “I don’t know. Let me just go through it, if I may.”

“Sure.”

“Oh, boy,” Um said. “I don’t know.”

LEARNING HOW TO LEVERAGE

Price, 47, and Um, 48, started working in real estate together in the mid-1990s. The first incarnation of Prium was capitalized in 1996 with practically nothing.

“It might be $10 each,” Um said in a March deposition.

As they would dozens of times, Price and Um used a relatively new business entity, the limited liability company. They formed Prium Development Company LLC to raise money for their first project, preparing land for a housing subdivision in Puyallup that later sold for about $1 million.

LLCs are perfect for leveraging – using borrowed money to make a profit greater than the interest on the loan.

An LLC is easy to set up and can be funded with anything: cash, property, services or paper promises of money in the form of a note or an IOU. It can borrow money in amounts sole proprietors generally cannot and creates a liability shield around its members.

In the early 2000s, Prium started buying commercial buildings leased by state agencies. Such buildings are stable and profitable investments: The government signs long-term leases, seldom moves and pays its bills on time. Washington’s real estate chief estimated in June that the state pays Prium $19.6 million in rent each year.

During this time Price also maintained his relationship with Seattle real estate investment mogul Michael Mastro, who had floated loans to Price and Prium-related companies at least a dozen times since 1990.

Mastro’s bankruptcy has been called the state’s biggest, but Price’s and Um’s was larger.

When his creditors pushed Mastro into bankruptcy in 2009, his unsecured debt was about $325 million. Until Price and Um settled with one of their lenders in June, their debt was about $350 million.

Price testified in his March deposition that Mastro opened doors for Prium to other private real estate investors, including David Bingham of Bingo Investments.

Bingo is one of the investment companies of the Bingham family, heirs to the fortune earned from Fisher Communications, Fisher Flour Mills, Safeco Insurance and Seafirst Bank.

The introduction to Bingham would lead to Prium’s head-first dive into Tacoma’s condo market, which turned out to be a pretty shallow pool.

Some of Prium’s creditors say the men hide their assets. The biggest example: an LLC called Queen High Full House, formed after the investment from Bingo.

Money flowed to Queen High from other Prium LLCs, though the business purpose for the transactions is unclear. Money also moved regularly between Queen High and the Prium umbrella company.

Queen High’s purpose is unclear. But it has bought, among other things, two homes of Price’s, one home of Um’s, luxury cars, a boat and a Porsche for Um’s son.

PRIUM TAKES OFF

In his deposition a few months ago, Um recalled the heady days of 2004.

“We were on our way to growth,” he said. “We needed capital, or more capital. We wanted to grow more. “So we brought in at that time, in 2005, Bingo Investments LLC.”

Um and Price had worked with Bingo before, to the tune of about $20 million in loans. In 2005, Bingo found $40 million more for Prium.

A million in cash bought Bingo a 50 percent membership interest in a new venture, Prium Companies LLC. The other $39 million was a loan to launch the company into the condo market.

Price’s and Um’s share of the company was funded on paper. They put no cash into the deal. They used their ownership interests in the real estate LLCs they had created before.

Prium prepared to burst onto the real estate scene.

In the first eight years of their partnership Price and Um formed about a dozen LLCs, state records show. When Bingo came on board, they formed 30 more.

The companies borrowed money to buy land in Cle Elum near Suncadia, Orchard Hills apartments in University Place and commercial property in Kent. Prium also began work on condo projects in Tacoma.

The existence of multiple LLCs isn’t a sign of trouble. In fact, it can be a sign of smart planning, said Dwight Drake, a law professor at the University of Washington.

“You’ve got 12 businesses and one goes bad,” Drake said. “You don’t want it pulling down the other 11.”

“It’s when you start using the structure to commit a fraud,” he said, “to move money that you shouldn’t, to create a false perception of what the entities look like, or you use the entities to abuse the creditors in an unfair way, those are the ways you get into trouble.”

TURNING MONEY INTO MORE MONEY

Queen High was formed within weeks of the Bingo loan coming in. Price and Um each took $5 million from Prium Companies to capitalize the LLC.

Um explained the name in his deposition taken in March, six years after Queen High was formed:

“Between Tom and myself, we have five children; three girls and two boys. So it’s a Queen High Full House,” he said. He knew the basis for the name but not the purpose of the company.

“I don’t know why it was formed. It was just formed,” said Um, who suggested Price would know the details.

The next day, Price said Queen High “really is an investment vehicle to invest in real estate and other assets.” Is there something Queen High can do that Prium Companies cannot? the creditors’ lawyer asked.

“I would say no,” Price said.

Then why form it?

“You know, I – there again,” Price said, “I don’t know the exact reasoning.”

Regardless, he and Um put the LLC to use.

On Nov. 1, 2005, documents show, Price drew $2.1 million out of Queen High to pay off the mortgage on his Lake Tapps home. The next month, county records show, he and Um transferred titles to their homes to Queen High.

The homes then were used as collateral on a $10 million loan from Venture Bank.

Queen High proved useful after Price’s father, Mike, went shopping for a home in Anacortes early the next year. According to documents in his own personal bankruptcy filing, the elder Price bought the home with $2 million from his son, who gave him the money in two checks issued by Prium Companies.

At closing, in April 2006, the title of the home was placed in the name of Queen High. Sometime later, Queen High took out another loan, this one from Centrum, a Bellevue-based private lender.

“(W)e borrowed $550,000 from Centrum, using the Anacortes house as collateral,” Tom Price testified in March. “And what was the purpose of borrowing 550 from Centrum?” the creditor’s lawyer asked.

“Just borrowed the money.”

Drake, the UW law professor, said having an LLC own personal homes seems “stupid.”

“Maybe these guys thought they were protecting their assets,” he said. “(Or) they’re trying to take the position that the homes are a business unto themselves. You can take it too far. It’s like overeating.”

THE MEN WHO WOULD SAVE TACOMA

Price and Um had named their company after themselves; in 2006 they launched plans to broaden their legacies by building structures named after their children.

First came Jay Heights, an 18-story commercial and residential tower at Sixth and St. Helens avenues in Tacoma. Named after Um’s son and oldest child, it would have been Tacoma’s tallest building in two decades.

Plans for other condo projects were simmering.

Hanna Heights, named after Um’s daughter, was planned next to Jay Heights. Chelsea Heights near Wright Park and Courtney Heights on Broadway were named after Price’s oldest children. (A piece of land near Lake Tapps was designated as Carter Estates, Um said, after Price’s youngest child.)

Another Prium condo plan was chosen in May 2006 for a premier spot along the Thea Foss Waterway, a formerly polluted industrial area the city cleaned up and prepared for high-end projects.

The board managing the waterway’s redevelopment picked Prium’s mixed-use office and condo project over two proposals that hewed closer to the board’s original request for only office space. Prium’s local ties gave it an advantage. It also offered the highest price for the site and provided personal guarantees for its financial performance.

“I don’t know technically if (local ownership) can be swayed in the decision, but I personally like the fact you have a local group,” then-Foss board chairman Dick Marzano told The News Tribune that year.

“I’m not opposed to outside developers coming in, but any city where you have a choice between a local and an outsider, wherever you can, you should give it to the local.”

In June 2006, Prium proposed a partnership with the Martin Luther King Housing Development to build a $20 million mixed-use condo/commercial building in Tacoma’s Hilltop neighborhood.

At the end of the year, after reading in The News Tribune about other developers’ plans for the historic Winthrop hotel building, Prium swooped in and bought it. Prium’s plans called for moving the building’s low-income residents to a yet-to-be-built apartment complex.

By December, the company’s yearlong blitz put it on the lips of anyone talking about local development. Prium was “a known, proven quantity,” said Connie Brown, executive director of the Tacoma-Pierce County Affordable Housing Consortium, in a News Tribune article at the time.

The company had begun building Chelsea Heights and Hanna Heights, and was spending money on the Foss Waterway site. With the Winthrop overhaul, Prium was offering to fulfill dreams long held by Tacoma leaders.

“This particular project, The Winthrop, is one that our council has been interested in for many, many years,” said Martha Anderson of the city’s economic development department. “People who have lived in Tacoma for a very long time remember it as a significant part of downtown.”

Prium bought the Winthrop with about $4.5 million from Frontier Bank and $2 million from the city. A credit analysis of Prium at the time showed “they had the means to perform,” Anderson said.

The city wouldn’t have lent Prium the money had Frontier not also been involved, she said, adding that Frontier had four other loans with Prium and thought it was a good client.

Once the hotel was restored, Prium planned part of it as condos. Condos in Tacoma turned out to be a losing idea. “The biggest mistake people made in Pierce County in particular was condo development in downtown Tacoma,” said Bruce Mann, a University of Puget Sound economics professor who tracks local economic indicators.

“There were an awful lot of people looking at Tacoma and Pierce County and seeing pieces in place. The demography was changing. Higher-income young professionals were moving in.”

Nevertheless, a market analysis released in 2006 and the subject of a News Tribune story at the time showed thousands of people would have to move downtown to justify all the condo development.

At the time, reality checks were in short supply.

“All the pieces were in place with a somewhat vacant downtown, and that was driving a lot of the play,” Mann said. But “condos had never been very successful in Pierce County.”

SIGNS OF TROUBLE

By the end of 2007, construction had begun on office buildings in Tumwater and work was under way at Hanna Heights and Chelsea Heights in Tacoma.

But Jay Heights was stalled and Courtney Heights was never built. Hanna Heights and Chelsea Heights were converted from condos to apartments. The market had dried up.

Contractors started suing Prium for unpaid bills.

Several suits were related to work done at Chelsea Heights. Contractors said in interviews that when they approached Prium about being paid, Price blamed the company’s lender for not handing over the money. Nationally, the economy was starting to stumble.

Community and regional banks had followed the lead of the big banks, using risky investments to increase the amount of money they could lend to real estate ventures, where prices had been soaring.

But when property values started to stall, the loans lost their value. Borrowers couldn’t make their payments. Bankers began to realize how many potential problems they had on their balance sheets.

Prium began negotiating for loan extensions.

In early 2008, it let its option to buy the Foss Waterway site expire. In the previous two years, Prium had done expensive environmental work on the site. When Price and Um walked away, they left a million dollars in the ground.

HOW THE MONEY MOVES BETWEEN COMPANIES

Today, Prium’s creditors aren’t concerned about the propriety of the company’s bank loans. They just want to know what happened to the money.

“Through Prium Companies,” some creditors alleged in a court filing, “Mr. Price and Mr. Um have formed other entities, through which they have moved money and repeatedly played shell games with general and secured creditors alike.”

The bankruptcy judge agreed to untangle Prium’s LLC web.

“There’s money coming out of this pot into this pot and no one really knows” what’s going on, Judge Snyder said at a hearing.

State law was of little help straightening things out.

In Washington, an LLC must have an operating agreement, but the statute doesn’t specify what should be in it. Lawyers say a prudent agreement covers such things as how money moves in and out of the business.

Prium had no chief financial officer to scrutinize its operation. Regulations governing LLCs didn’t require it. (Its bookkeeper reports to Price and does what he says, court documents and depositions indicate.)

Price and Um moved money among Prium’s LLCs at will, and most of their companies had no rules about the transfers, according to their depositions.

“It was just Tom’s and my money,” Um said. “We threw it in to Queen High Full House and Prium Companies, which at the time needed it, so we just kept lending it.

“There’s no document. … It was just done.”

Such transactions require care, said Gail Hecmanczuk, a former certified public accountant who teaches business at the University of Puget Sound.

Companies with common owners can do business with each other. But the transaction should be a good deal for both companies, she said.

“You want that sister company, from its standpoint, to earn a decent return and profit,” Hecmanczuk said. “If we set a fair transaction price on something, then we’re managing the company well.”

In his deposition, Price insisted he could make good decisions on both sides of a single transaction.

Troy Greenfield, an attorney representing some of Price’s and Um’s creditors, pressed him on the $10 million the company got from Bingo.

“I made decisions for … both entities based on what I thought was in the best interest of both entities, independently,” Price said.

Greenfield then tried to pin Price down by quizzing him on the $10 million that moved from Queen High to Prium. If it was a loan, Queen High would benefit from charging interest. If it was a payment, Queen High should have received something of value in exchange.

Would charging interest on the $10 million have helped Queen High? Greenfield asked.

Price’s answer: “Could have.”

How would charging interest have hurt it?

Again, Price’s only answer was “could have.”

After several sharp exchanges over whether Price had even answered the question, Price stuck with his contention that the $10 million wasn’t really a loan, though he acknowledged Prium had performed no service to earn it.

Prium’s habit of floating no-interest loans to its companies could mean some of its business partners actually owe money.

In June, bankruptcy examiner Daniel Harper found Prium had “loaned” money to some of its LLCs, including to some co-owned by outside partners. Of the eight projects still making money for Prium, seven have outside partners.

Harper said that in some cases the LLC operating agreements allowed loans from members and permitted interest to be paid on the loans. But Harper said no interest had been paid to Prium, so the money wasn’t a loan as much as an injection of more capital.

“So in theory, if Prium only owns 50 percent of that entity, they’ve been subsidizing their partner a little bit,” Harper said. To equalize the expense and stay faithful to the operating agreement, the non-Prium owner might have to put up more cash.

A NEW BUSINESS PARTNER

Price and Um moved money between their companies with no problem, but by 2009 Prium was starting to face the consequences of not paying some of its bills. By this time, about a dozen contractors had sued.

Of Prium’s seven planned condo projects in Tacoma, only two had broken ground, and they were now apartments. The company had quietly put the Winthrop up for sale.

The national recession was bearing down on Pierce County. The men brought in a third partner.

William Stegeman, 69, had been a commercial broker in Pierce County for decades and had worked with Price and Um before. He once invested $100,000 in a Prium project that didn’t go anywhere, but he had let the money float for awhile.

In 2009, Price and Um approached him for a loan. This time Stegeman wanted a membership interest in exchange for $200,000 more. He became a 15 percent member of Prium and was paid $10,000 a month.

By the time Stegeman came on board, Price and Um had been dealing with economic strains on their real estate portfolio for a year. The longtime partners weren’t getting along, Stegeman said in his deposition.

By spring 2009 the three men began deciding which assets to protect, which to let go and which bills to pay, Stegeman said. He also testified that, as far as he knew, the company was able to pay its debts as they came due. The experience of two businessmen dealing with Prium that spring and summer indicated otherwise.

WANTS VS. NEEDS

In April 2009, Prium hired Bailey General Contractors, a medium-sized company in Lacey with about 20 employees, to build a recruiting office for the Army in a Prium building in Tumwater.

Getting the 1,200-square-foot office ready was a snap. The Bailey crew finished the work in a few weeks. Final bill: about $88,000.

The contract called for the Army to pay Prium for the tenant improvements after it submitted invoices.

In July, the Army paid Prium. But Prium didn’t pay Bailey, and Prium’s project manager stopped returning his calls, owner Greg Bailey said.

“It was just really frustrating,” he said in an interview. “What happens is they stop talking to you. They stop calling you. They don’t have any good news, so they stop answering the phone.”

Bailey went to the top.

“Tom Price would answer the phone and he said, ‘Hey, I’m cutting you a check.’ Then it wouldn’t come,” Bailey said. “Then it was, ‘I can do American Express.’ ”

In August, three months after the job was done, Bailey accepted a $25,000 credit card payment. That was the last money he saw from Prium.

“I get it when people have a problem paying their bills,” Bailey said. “Usually there’s money coming from other projects. They’re very, very large and bring in a lot of money every month. Give me a payment plan. Do something. They didn’t.”

Dan Looker said he had a similar experience.

The owner of Looker Asphalt in Pierce County, he was hired to do a two-day job at Chelsea Heights in July 2009. The $10,000 bill wasn’t paid until nearly two years later.

In an interview, Looker recounted his fight for his money. He said he first went to Price, who blamed the bank and promised to pay. When that didn’t happen, Looker filed a lien, followed by a lawsuit. The judgment led to a partial payment. He was paid in full last month.

“You don’t want people to think you’re not good on your word,” Looker said. “That doesn’t seem to bother Mr. Price.”

At the same time that Looker and Bailey were chasing Prium for the money owed them, Price and Um bought a pair of Bentleys, according to Um’s deposition. The purchase price isn’t clear, but the luxury cars average about $200,000 each.

During Um’s deposition, the creditors’ lawyer asked a question that assumed the men had taken out loans to pay for the cars. Um corrected him.

“There was no monthly payment,” he said. “It was a check. We wrote a check, bought the car.”

STATE TENANTS’ TROUBLED LANDLORD

While Price and Um were breaking in their Bentleys, Prium’s state tenants began having trouble with common maintenance, such as janitorial service and leaking roofs.

In October 2009, the state Department of General Administration called a meeting.

Um was given a to-do list to fix the problems, and Prium agreed to improve communication.

“What we would hope for and have experienced most often is, if a landlord is experiencing difficulty, they’ll talk to us,” Howard Cox, the state’s chief property officer, said in an interview. “We don’t expect a landlord will bare their soul, but I would expect better proactive communications.”

Cox said Price and Um told him they were having cash-flow problems and were trying to work them out. But problems continued. The state tenants started getting shutoff notices from water and electrical utilities – bills Prium was supposed to pay.

Then contractors working on a state-leased space in Wenatchee began calling legislators and the governor’s office because Prium wasn’t paying them. They wanted the state to go around Prium and pay directly.

That wouldn’t work because the contractors worked for Prium. Still, the state tried to intervene.

Then-General Administration director Linda Villegas Bremer wrote to Price and Um on Nov. 20, 2009, expressing “serious concern” about Prium’s failure to pay its contractors.

Bremer demanded Prium get its act together.

“The state cannot continue to absorb costs that result from your inattention to this matter – both in legal fees and resources devoted to responding to complaints,” she wrote.

Bremer also gave Prium a warning: The state would consider past performance when soliciting new leases. Cox said he had several phone conversations with Price about the Wenatchee project. Price again cited cash-flow trouble.

By February 2010, the state had been dragged into four lawsuits by unpaid contractors. Cox wrote Prium and stated that the company’s “financial irresponsibility” had left many state tenants facing unhealthy work environments. He cited multiple problems with janitorial services and building repairs.

“The state is also incurring significant legal fees and additional state management cost simply for being a Prium tenant,” he wrote, adding that the state would start looking for other spaces to lease.

It was an empty threat. In the end, the state agencies couldn’t afford to move.

“We are not only doing extensions but we’re planning to go into new leases with them,” said General Administration spokesman Jim Erskine.

“In most cases, the state is required to go with the lowest bid. That doesn’t mean you aren’t allowed to consider other circumstances, but especially with the budgetary situation that the state is in, you go with the lowest bidder.”

In May 2011, Prium punched back. Instead of negotiating their disputes with the state, they sued.

In one lawsuit, the company said a tenant hadn’t paid some gas bills. The state’s lawyer said a meter was broken, resulting in bills 15 times higher than normal, and the utility has agreed to remove the charges.

In another lawsuit, Prium accused the state of withholding some rent. The state said promised office improvements hadn’t been done.

“It’s highly unusual that someone would sue the people who feed them,” said Brian Faller, an assistant attorney general representing the state. “It’s (a sign of) their economic distress.”

More than half of the state’s 59 Prium leases are tied to buildings that are in bankruptcy or being managed by a receiver, making it a lease portfolio that requires daily attention.

“The circumstances we’re facing with Prium are unique to Prium,” Cox said. “There’s been no one else that we’ve had this level of the need for intensive management of the lease obligation.”

INDIVIDUAL COMPANY BANKRUPTCIES BEGIN

The national recession, already about a year old, slammed into Pierce County at the end of 2009. Prium took several blows the next year.

Intervest, a subsidiary of Sterling Savings Bank, won approval for court-appointed receivers to take over three Prium projects: Chelsea Heights and office buildings in Tumwater and Spokane.

Sterling said Prium had defaulted on three loans for more than $58 million, and the bank wanted to make sure it got all the money coming from the properties.

By summer, Price, Um and Stegeman were putting some of Prium’s LLCs into bankruptcy – Chelsea Heights and Tumwater in June; Kent Retail and Meeker Mall in July.

They also started planning layoffs. The staff shrunk from 29. Excluding Price, Um and Stegeman, 12 employees now work for Prium.

The nonpayment lawsuits moving through the courts were ending in judgments against Prium – $2,000 here, $200,000 there. The contractors won by default because Prium didn’t defend itself.

The judgments were worthless because the contractors likely would have to pay even more to collect.

“You can’t squeeze blood from a turnip,” said Scott Wolfe, whose law practice is dedicated to construction law. “The idea of a judgment is just a principle. … It’s only as good as the amount of assets that the person or company has.”

HOW MONEY MOVES OUT

By spring, Prium owed hundreds of thousands of dollars to at least a dozen contractors.

Nevertheless, Stegeman, the new partner, had his monthly salary doubled to $20,000 as he took the title of managing member of Prium. Um gave his son a ski boat and a Porsche Cayenne for his 16th birthday.

The money for the car came from Queen High Full House, Um said in his deposition in the creditors’ lawsuit. “What funds were used to acquire that vehicle?” the creditors’ attorney, Greenfield, asked Um.

“Money that I had,” he answered. “Draws, or however it came from.”

“It was a check or payment from your personal account?”

“Yeah,” Um said, “I wrote a check.”

“From your personal account?”

“I don’t remember which account.”

“Is it possible the check was drawn on a company account?”

“Well,” Um said, “I mean, a company account? Queen High is not – it’s not personal. The LLC does not write my personal uses. It gets treated as a draw. … I actually get the money, and it’s probably recorded for the amount that I get, a draw from that entity.”

He elaborated: “The routine, the consistent routine, is that if I needed the money, I told Tom (Price) how much I needed. Then he did all the books and financial records to make sure they were in compliance or dividends paid or whatever to the partners.”

In his deposition, Price said withdrawal decisions were shared.

“Mr. Um and I talk about it, whatever available cash flow there is, and make the draws based on that,” he said.

Jeff Dean, a Seattle lawyer who helps set up LLCs, said a company operating agreement usually has rules about withdrawing money, because using an LLC as a personal account weakens the liability protection for its members.

With Queen High, Price and Um testified, there were no rules about draws in the operating agreement. Records show the men withdrew money from Queen High once or twice monthly, beginning in the winter of 2005. That money supplemented their $20,000 monthly member salaries from Prium.

The draws from Queen High stopped in mid-2010 because it was out of money, Um said.

Queen High “lent all the money to Prium Companies,” he said.

‘BEATING OUR HEAD AGAINST A WALL’

Holding members of an LLC personally responsible for business debts is difficult. Even the courts are still figuring out how to proceed, lawyers say.

The point of an LLC is to let entrepreneurs do business, which is inherently risky, without risking everything. To pierce an LLC’s liability shield, judges want proof of fraud, which can be hard to prove.

“You have to show there is an intent to deceive,” said Dean, the Seattle attorney. “Legally there are roughly nine elements that have to be shown in fraud, and they all have to be shown. It’s a very, very difficult hurdle to overcome.”

The case of Greg Bailey, the Tumwater contractor, illustrates Prium’s protective LLC structure and the difficulty of collecting debts.

To get his money for the work on the Army recruiting station, Bailey sought relief in several courts, most recently in the one handling Price’s and Um’s personal bankruptcies.

In March 2011, Judge Snyder threw out Bailey’s case because a Prium-related entity, not Price and Um personally, owed the money for the work of the Tumwater office building.

The two didn’t own Prium Tumwater LLC, their lawyer argued.

The scenario he sketched looked like this: Price and Um owned Prium Companies, which owned P&U Capital Partners I, which owned Prium Tumwater LLC, the company Bailey had a contract with.

The bigger problem for Bailey: Prium Tumwater was bankrupt and in the hands of the bank.

“We disagreed with the decision,” said Jon Cushman, Bailey’s lawyer. “But we were basically beating our head against a wall.”

LLCs are designed to separate the professional from the personal, though Price and Um pushed that envelope. The down side of Prium’s business structure meant that some people wouldn’t be paid.

“It’s frustrating,” said Wolfe, the construction lawyer, “because the only people who can stop or police folks from taking advantage – doing asset transfers or other hiding tricks – are the people who are owed money. There’s no big brother who watches this stuff.”

Creditors must spend a lot of money to sort out how a business is run, Wolfe said.

“Then they have to find proof, and the proof is in these people’s heads,” he said.

To date, only one creditor has popped the LLC bubble around Price and Um. The tool: a typo in a contract.

THE LLC THAT DIDN’T LEGALLY EXIST

In 2003, a Prium LLC and a homebuilder struck a deal. Prium agreed to buy some land, develop residential lots and sell them to the builder at a set price.

A few years later Prium told the builder it wouldn’t sell the lots after all, because the agreed-upon price wouldn’t be profitable. Prium then transferred the lots to Michael Mastro, the Seattle real estate investor, to satisfy a loan.

The builder ended up buying the lots from Mastro for more than it had agreed to pay Prium. The builder, a company eventually bought by Soundbuilt Northwest LLC, sued.

In April 2010, a judge sided with Soundbuilt, ruling that just because a deal might be unprofitable doesn’t mean a company can back out. Moreover, the judge said, transferring the property to Mastro was a breach of contract. Prium was ordered to pay Soundbuilt $5.9 million.

The judge held Price and Um liable because of a missing letter in a contract.

When the lot deal was struck, the Prium-controlled company whose name was on the contract didn’t legally exist. One letter was missing.

The contract was with an LLC called P&U Capital Partners. That company isn’t registered with the state, but P&U Capital Partners I is.

The mistake was repeated dozens of times in the contract. Later, Prium argued that everyone was responsible for the blunder. The builder’s lawyers messed up and we didn’t catch it, Prium argued.

The judge said Prium couldn’t prove that and ruled its lawyer had created all the documents. Because the company in the contract didn’t exist, the people who guaranteed its performance were responsible.

For the first time, Price and Um were on the hook personally, for $5.9 million plus interest and fees.

A state court of appeals is considering the case, but the judge gave Soundbuilt permission to collect on the judgment by seizing Price’s and Um’s assets.

Because of the way the men had structured their business, their biggest assets were their ownership interests in dozens of LLCs. When Soundbuilt tried to take those, Price, Um and Queen High headed for the protection of bankruptcy court.

That is where Prium’s operations would finally be laid bare.

EYEBROW-RAISING BEHAVIOR CONTINUES

Since Price and Um filed for personal bankruptcy in August 2010, the committee representing some of their creditors repeatedly has accused the men of acting in bad faith.

Price and Um haven’t helped themselves in this regard.

Prium is paying for their personal bankruptcies and makes the car payments for the men’s cars. Since last fall the company has been renting the house next door to Um’s, and he recently moved in so his Queen High-owned home could be sold to satisfy another loan.

In December, several months after Price and Um filed for bankruptcy and when the company faced several lawsuits, Prium changed its policy so that emails weren’t saved for longer than six months. The creditors’ committee called this an attempt to hide information. Price and Um said the company’s servers were full and needed the room.

When the new year came, half of the member salaries for Price, Um and Stegeman began to be paid by a new LLC. The new company, PPM Payment Services, was created before Price and Um filed for bankruptcy and started paying them six months after the filings.

Neither man initially listed the company on multiple court documents, though they were required to show what they owned and how they were paid.

Failure to initially disclose PPM is just one example of how the men aren’t forthcoming in telling the court, and thereby their creditors, about their business.

Hecmanczuk, the UPS instructor, was one of two accounting experts who The News Tribune asked to review initial financial reports for Prium filed with the bankruptcy court.

The experts said the company’s financial status couldn’t be determined. The balance sheet was puzzling. It listed several things, such as bank fees and landscaping costs, as assets when they are expenses.

Hecmanczuk said the document seemed rough and internal.

“It lacks a lot of insights,” she said. “I’d have a whole lot of questions if I was auditing this company.” Most notable to Hecmanczuk was what was missing: a statement of cash flow. It’s the key to understanding a company’s health, and Price and Um have not provided it.

The cash flow statement is “the most enlightening piece of information you can have,” Hecmanczuk said. “Missing it here is a real question mark to me.”

Generating income isn’t the same as bringing in cash, and cash is necessary to keep a business going. Take a neighborhood lemonade stand: A neighbor buys a glass but says he’ll pay tomorrow. The lemonade stand owner records that sale as income, but she doesn’t yet have the cash.

Since first filing for bankruptcy almost a year ago, Price and Um have filed at least three sets of financials with the court, most recently last month.

Cash-flow statements are still missing.

GETTING THEIR MONEY

At the heart of some creditors’ situations, particularly Bailey’s, is how Price and Um could receive money for construction but not use it to pay contractors.

Even experts in corporate and construction law disagree.

“What they did was not illegal,” said Dean, the Seattle lawyer and an instructor at the Univesrsity of Washington Tacoma’s business school. “It’s crummy, lousy, horrible, unfair business practices. Did it happen a lot? Yes. And not just with these folks but with a lot of developers.”

Developers must keep multiple projects in the pipeline to ensure that business keeps going and cash keeps flowing. Leveraging to cover the costs of the projects can seem like gambling: A few good turns and you double your money. The trick is figuring out how to keep winning.

“A lot of projects were leveraged too high,” said Wolfe, the lawyer who primarily represents contractors. “No matter how much you protect yourself, when the property’s underwater, you’re not going to get paid. Everyone does everything right, but there’s just not enough money to go around.”

Wolfe disagreed that developers don’t break the law when they rob Peter on the first job to pay Paul on the next one.

“It is very common in the construction industry,” Wolfe said, and “it’s always theft.”

It’s not prosecuted, he said, because criminal prosecutors are busy.

“It’s tough to convince them that it’s not civil,” Wolfe said. “They see it, hear it, and they think it’s a civil matter.”

Washington state statutes require only that contractors on public projects be paid within a specified number of days, said Douglas Oles, a Seattle lawyer with expertise in construction law. It doesn’t spell out how subcontractors on private construction jobs can expect to be paid.

To get their money, subcontractors can use the lien process, which is a claim for the property title.

Another option for subcontractors is a payment bond purchased by the prime contractor. Developers generally require a prime contractor to buy such a bond commensurate with the size of the project.

That way, if the owner pays the prime but the prime doesn’t pay the subcontractors, then the bond will cover the subcontractors’ bills and the owner doesn’t have to pay twice.

There are two potential issues with that arrangement, Oles said.

The first, he said, is it assumes the owner has an arm’s length relationship with the prime contractor, and that isn’t always the case. When the owner and the prime contractor are the same people – the case with many Prium projects – the owner might decide it doesn’t make financial sense to pay premiums on the payment bond, or to take on the larger risk of repaying the company that issues the bond if it has to pay out.

In that case, subcontractors are on their own if the project goes south, or they find themselves dealing with a balky owner.

The second limitation is that state law only requires a payment bond to be up to $12,000. On a bathroom renovation, that’s something. On a multimillion-dollar project with many subcontractors, that’s as good as nothing.

WHAT HAPPENS NEXT

Prium’s future is uncertain.

Some of its creditors want Judge Snyder to combine Queen High and Prium’s web of LLCs so that all the money is in one pool, maximizing the amount available to pay the men’s debts.

Under the law, each LLC is a separate entity. Technically they’re not involved in Price’s and Um’s bankruptcies. In theory, the only source of money to pay Price’s and Um’s creditors is Price and Um, not any of the LLCs.

Snyder might not go along with that.

Simply declaring the LLCs off-limits to creditors may not work because the men control the companies, the judge has said. The LLC web should be a factor, he said, in whatever financial reorganization they propose.

“I am concerned,” he said in June. “The ability of the debtor in this case to compartmentalize, thereby not giving a full measure to what the unsecured creditors are (owed) – that concerns me, the way (the businesses are) being operated.

“If parties can take millions of dollars out, then give pennies on the dollar to unsecured creditors, that does not seem to me to fit the purpose of (a bankruptcy reorganization) plan.”

“If you’re looking at a plan of reorganization,” Snyder said, “you might keep that in mind.”

Um told the creditors’ lawyer how he and Price planned to keep going.

“Weather the storm. Repay all the debt back that we owe,” he said. “That’s the motto.”

Kathleen Cooper: 253-597-8546
kathleen.cooper@thenewstribune.com

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