Curious cash shifting, hefty pay outlined in Prium report for court

Tacoma developers Tom Price and Hyun Um bleed their businesses for all they’re worth.

They pay themselves a salary almost double what others earn in comparable jobs. One company they own charges other companies they own twice the typical rate for property management. And even after a judge ordered them to cooperate with a forensic accountant, it’s still unclear how much money the Prium enterprise brings in.

The accountant’s report, filed Thursday in the men’s personal bankruptcies, makes official the men’s questionable business practices since at least 2009. It bears out The News Tribune’s July report, which detailed troubling behavior even earlier. And it confirmed suspicions of some creditors, who, in court documents, have accused the pair of running a shell game.

Thursday should have been a victory for Soundbuilt Northwest, the most vocal of those creditors. The Puyallup company’s attempt to collect a $6 million judgment sent Price and Um into bankruptcy court, where Soundbuilt has raised alarms about the men’s business practices for more than a year.

But two days before the accountant’s report, a state appeals court threw out that judgment, ruling Soundbuilt’s case never should have proceeded.

These two major events have further muddled a messy legal situation that began in 2003 and now involves two court systems and more than a dozen lawyers.

“It definitely is a watershed moment in a case that has consumed a lot of state court and bankruptcy court time,” said Brian Budsberg, an Olympia-based bankruptcy attorney who is not involved in the case but has been watching it proceed. “Really what you’ve got here is more questions than answers. Everyone is saying, ‘(the appeals court decision) sure changes the ball game,’ but no one knows what’s going to happen.”

Price and Um have said for more than a year that they filed bankruptcy only because Soundbuilt was trying to take over Price and Um’s ownership interests in their companies.

That was a big threat. The men’s real estate empire includes more than 2 million square feet of office space, though the market collapse and ensuing recession put much of it under strain. More than a dozen properties have been lost to foreclosure, and several more are in bankruptcy or being operated by a receiver.

Since the men filed one of the state’s largest bankruptcies in August 2010 with a collective debt of about $350 million, Soundbuilt has been on a committee that started with two other creditors: Sterling Savings Bank and First Independent Bank. Sterling left the committee this summer after settling its $46 million debt with Price and Um. Since then, Soundbuilt has taken charge.

The committee has accused Price and Um of hiding money from its creditors. It has sought company emails, deposed employees and persuaded bankruptcy judge Paul Snyder to have an independent forensic accountant analyze the men’s businesses. The committee now wants to depose Price and Um’s wives.

Interviews with a half-dozen area lawyers said what happens next is anyone’s guess, though they sketched a few possibilities:

• Price and Um could ask for dismissal of their bankruptcy filing so they can settle their debts outside court supervision.

• Creditors who before the bankruptcy might have engaged in such negotiations might reconsider once they’ve digested the accountant’s report.

• The judge could remove Soundbuilt’s claim, but keep moving ahead with reorganization. The day after the appeals court ruling, Price and Um’s lawyer asked Snyder to scrub Soundbuilt from the creditors list. A hearing is set for Nov. 21.

• Snyder also could let Soundbuilt keep its claim alive while it appeals to the state Supreme Court, which Soundbuilt attorney Paul Brain said Thursday is likely. The company has about a month to decide. Then it could take another six months to a year for the Supreme Court, which is selective and backlogged, to determine whether it will hear the case.

In October, Snyder made clear he’s concerned about the men’s bankruptcy cases dragging on and racking up administrative costs when there’s no clear endgame.

Reached by phone Thursday, Um declined to comment on his and Price’s behalf.

‘HOUSES SHOULD BE SOLD’

Spokane-based financial examiner Daniel Harper’s task was to determine whether Price and Um’s five-year debt repayment plan was reasonable, or if they had more money available to pay creditors than they were offering. Harper examined all companies owned or partly owned by Price and Um, including one called Queen High Full House.

Soundbuilt had come after Queen High, too, and it filed for bankruptcy a week before the men did.

Some creditors, in court documents, have called Queen High a slush fund. Harper called it a holding company without any direct business operation. Among other things, Queen High owns Price and Um’s million-dollar homes, which they pay $100 a month to rent; and a commercial leasing company whose “operating goal” is to earn a profit by running down the portfolio until it’s out of money.

Harper wasn’t convinced that having Queen High continue to own the men’s homes served creditors.

“Queen High’s continued investment in the personal residences of Price and Um is without economic merit,” Harper wrote. “These houses should be sold.” Such a sale would give creditors an additional $207,000 for each year of the repayment plan, he said.

Since November 2010, Prium Cos. has been paying $3,750 a month to rent a second home for Um, next door to his Queen High-owned home. The men have said Um’s first home will be sold to pay off a loan. Harper disputes that, saying the home hasn’t been listed for sale and the Um’s proposed reorganization plan reflects no such future sale.

Harper called renting the second home “economically flawed and without merit,” Harper wrote. “Mr. Um should pay for his own housing.”

Finally, Harper said Mike Price, Tom Price’s father, is drawing twice the salary he should for his work on Radiance Capital, the Queen High-owned leasing company. Harper recommended cutting it from $240,000 a year to $120,000.

‘LUCRATIVE AND PROFITABLE CONTRACTS’

Prium Cos. owners Price, Um and William Stegeman pay themselves an annual salary of $240,000 each for property management and leasing agent duties. Harper conducted compensation surveys and found a typical annual salary for those duties for a portfolio the size of Prium’s is about $155,000.

The three men “have drawn compensation amounts far in excess of the fair value of the services provided,” Harper wrote.

Property management duties are conducted through PPM Payment Services, a company separate from Prium Cos. and owned in equal amounts by Price, Um and Stegeman. Harper said Stegeman, who bought into Prium Cos. in 2009, was given his extra ownership percentage in PPM without paying for it. Harper valued that ownership share at $540,000.

Harper said PPM is doing quite well.

PPM works exclusively on real estate owned by Price and Um. Its rates are much higher than average. An independent regional property management firm told Harper that building owners typically pay about 2.75 percent of gross income from tenants to a property management company.

PPM’s clients pay about 6.7 percent.

“These are very lucrative and profitable contracts,” Harper wrote. “These premium contracts result in substantial profits and free cash flow.”

The premium property management rates haven’t resulted in premium service. As The News Tribune reported in July, Prium is state government’s largest landlord. Those state tenants have reported difficulty with routine maintenance since at least 2009. Washington state real estate officials have said Price and Um consistently blamed cash-flow trouble for the inability to fix basic problems, such as janitorial services and leaky roofs.

EXAMPLES OF MONEY MOVEMENT

In May 2010, Pierce County Superior Court judge Katherine Stolz gave Soundbuilt permission to take over Price and Um’s businesses, including Queen High, to satisfy the $6 million judgment. Price and Um tried to stop it, but Stolz shut them down. In July, Soundbuilt asked Stolz to appoint a receiver to take over Queen High.

The accountant found starting that same month, “the month prior to (Queen High’s) bankruptcy and then shortly after the bankruptcy, funds were inexplicably transferred from Queen High to Prium Companies,” Harper wrote. “This was not done in the normal course of business and was contrary to prior practices.”

Harper noted $424,750 in such transfers. The report didn’t say what happened to the money once it left Queen High.

Harper’s report outlined another instance of curious money shifting.

He found funds left a Queen High-controlled LLC despite an explicit agreement against it. When Queen High bought Radiance Capital, Harper reports, it agreed not to make monetary distributions until a loan was paid in full. Money left anyway, Harper found, to the tune of just over $1 million.

During the past six months, Harper found Price and Um to be less than forthcoming.

“Through the exam process,” Harper wrote, the men and their attorney “presented to me a very dire financial picture for the estate.” Harper paints a different picture. Price and Um’s initial plan to pay their debts envisioned a $60,000 annual payment over five years.

Harper said they can afford to pay at least 30 times more: $2 million a year over five years.

He based that estimate on his recommended reductions and just a sliver of information about the men’s web of limited liability companies. Harper said the men have disclosed only 10 percent of the businesses’ cash flows, and called that minimal reporting “completely inadequate.”

THE CASE THAT STARTED IT ALL

If Price and Um manage to avoid paying Soundbuilt, they might have Seattle’s fugitive real estate magnate Michael Mastro to thank.

In 2003, a Prium subsidiary and homebuilder Gary Racca struck a deal. Prium agreed to buy some land in East Pierce County, develop residential lots and sell them back to Racca’s company at a set price. (Racca’s company was an earlier version of Soundbuilt Northwest.)

Two years pass. Price and Um told Racca they wouldn’t sell the lots back to him after all, because the deal was no longer profitable. But it was unprofitable because of Price and Um’s choices. They borrowed $13.8 million against the land after agreeing to sell it for only $11.8 million.

Some of that borrowed money came from Mastro, who’s now being sought by the FBI for dodging his own creditors. Um transferred the land to Mastro to satisfy a $5 million debt. Racca’s company sued the Prium subsidiary for backing out while at the same time negotiating with Mastro to buy the land.

Mastro agreed to sell to Racca for $14.5 million. And he added a condition: Racca’s company had to drop the lawsuit against the Prium subsidiary. The suit was dropped, and the sale went through in late 2005.

In 2008 Racca’s Soundbuilt Northwest LLC started a new fight over the old deal, this time using a missing Roman numeral in a contract to sue Price and Um personally. In April 2010, Judge Stolz 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.

Price and Um were ordered to pay Soundbuilt $5.9 million.

When the appeals court decision overturned that judgment this week, it focused on a narrow matter of law. Back in 2005, when Mastro agreed to sell Racca the lots, Mastro hand-wrote two words into the contract. The sale wouldn’t close until Racca dismissed his lawsuit against the Prium subsidiary “with prejudice.”

That means it can’t be litigated again. On that basis, the appeals court sided with Price and Um, declaring Soundbuilt’s 2008 lawsuit was a second bite at the apple. It gave no opinion on the merits of the dispute. According to court documents, Mastro had explained his desire for such a provision.

“I want a clean deal,” he said.

Kathleen Cooper: 253-597-8546

kathleen.cooper@thenewstribune.com

blog.thenewstribune.com/business

Twitter: @KCooperTNT