Homestead Northwest's investors have been waiting years to find out how much money they might recover from the wreckage of the collapsed Lynden real estate development firm. They can expect to wait a lot longer.

How much longer?

"Nobody's going to like this answer, but I think five to seven years," said Denice Moewes, the attorney representing bankruptcy trustee Virginia Burdette.

Burdette, Moewes and Seattle attorney Alan Wenokur have been working for months trying to unravel a bewildering snarl of interlocked companies, investor dollars and pieces of paper called deeds of trust that were supposed to secure investor dollars with parcels of real estate.

Moewes said there is no shortcut to figuring out how much money can be salvaged for distribution to hundreds of investors who have a total of about $65 million at stake.

"We're never going to get $65 million or anything close," Moewes said.

By April 2009, Homestead Northwest of Lynden stopped making payments to investors, who had been expecting interest of 8 percent and more on their loans to the company. In April 2011, the Washington Department of Financial Institutions accused the company and its founder, James Wynstra, of fraudulent conduct and sale of unregistered securities, proposing to assess a civil fine of $100,000.

Almost a year ago, the first of the Homestead-related companies filed bankruptcy, later followed by all the others.

What's taking so long?

Part of the problem is the nature of the company and its network of small investors. Moewes said some of those investors got their investment back with interest. Some put money in but never took any out, letting their paper profits grow year after year. Still others apparently received deeds giving them title to real estate, instead of getting money back.

Attorneys must scrutinize each case to make sure all creditors get what they are entitled to recover - but no more.

People who got out before the collapse, with interest on their Homestead investments, might be in for an unpleasant surprise.

If there is enough evidence to convince Bankruptcy Judge Karen Overstreet that Homestead operated as a Ponzi scheme, then she could order the repayment of all apparent profits taken out of Homestead companies in the four years before the company's January, 2012 bankruptcy filing.

That money would then be available for redistribution to all investors on an equal basis.

In order to prove a Ponzi scheme, Moewes said accountants would have to offer proof that money from new investors was used to pay off earlier investors.

"There are some investors who got out with $200,000 more than they invested," Moewes said.

Wynstra may have given other investors deeds to property that was worth more than what they had invested. Those transactions, too, could be unwound as part of the bankruptcy proceeding.

"Our focus is always the same," Moewes said. "To the extent you got more than you should have received ... our goal is to try and get that back so we equally distribute the pain."

PAPERWORK A MESS

Another time-consuming headache is the state of the Homestead companies' records. Here's how attorney Wenokur described the company files stored in its former office at 7159-A Guide Meridian:

"The Homestead document retention policy appears to have been: Never throw anything out," Wenokur wrote in a court filing. "There are numerous lateral files, upright files, desk drawers, banker boxes, three-ring binders, etc. - all full of paper. There are piles on floors and on desks. There is also a back building with maybe 300 to 400 bankers' boxes full of documents, some dating back to the 1990s. There are blueprints and other drawings in rolls stacked into boxes ... Unfortunately, with some exceptions, the documents are not subject to any readily observable organizing principle."

After gleaning what she believed were the documents relevant to the bankruptcy case, Burdette asked Judge Overstreet to authorize the shredding of the remaining records so the building could be made ready for sale. Proceeds from that sale could be used to help pay back investors.

But Wynstra's attorney, Lawrence Engel, objected to the shredding, saying Homestead's office might contain documents relevant to the Department of Financial Institutions investigation, other lawsuits, and "potential investigation and/or enforcement and/or police power activities by various government entities and/or agencies."

Some Homestead investors filed objections with the court, too. Some wanted to retrieve construction diagrams from the roads and condos at Homestead's Great Links resort in Douglas County. Others hoped to find documents that would confirm the validity of property transfers that Wynstra made to some investors.

On Dec. 12, Judge Overstreet ordered that the records be preserved until March 31, 2013. She ordered trustee Burdette to notify the Department of Financial Institutions and the U.S. Attorney's Office of the plan to get rid of Homestead's remaining records. Overstreet's ruling gives them and other interested parties a chance to review the records, but they must file a motion with the court describing the records being sought and why they are needed. Overstreet would then hold a hearing on that motion.

PROPERTY GROUPS AN ISSUE

Perhaps the thorniest legal issue is the status of investors who were part of "property investment groups" that Wynstra set up. Although Wynstra was an attorney, Moewes said the investment groups are not legally valid entities.

"It was a made-up entity that Mr. Wynstra made up," Moewes said.

Wynstra provided the investment groups with security in the form of deeds of trust that supposedly entitled them to foreclose on parcels of real estate if he failed to pay investors back. When Homestead did default on repayment of loans made by investment group members, Wynstra then issued the investment group a "deed in lieu of foreclosure" on the real estate parcels.

Then, in some cases, some investment group members formed legally valid "limited liability companies," or LLCs, to take title to those properties and sell them.

Trustee Burdette and her attorneys are trying to reverse those property transactions. Among other things, they contend that Homestead's deeds transferring property to the investment groups were not legally valid, and not all investment group members later became members of the LLCs.

If Judge Overstreet agrees, the unwinding of those deals will be yet another drawn-out legal process.

Lawrence Engel, Wynstra's attorney, said he and his client had no comment.

In a handwritten letter to the bankruptcy trustee, filed with the court, Wynstra said he too lost almost everything when his companies collapsed.

"My spouse and I have put everything we own except assets (very limited) protected against execution of judgments and Social Security income into these companies in an attempt to save the companies," Wynstra wrote. "I failed in the undertaking. ..."

In April 2012, Wynstra was ordered to bring his personal financial records to Whatcom County Superior Court to determine whether he had assets that could be used to satisfy a $250,000 legal malpractice judgment against him in favor of Ron Rietman.

Rietman's attorney, Robert Gould, got that judgment after Rietman testified that Wynstra had been his personal attorney and he relied upon that relationship in making a $250,000 loan to Homestead that was not repaid.

But Gould's search for assets to satisfy the court judgment apparently did not go well. Court records indicate that after examining the records and questioning Wynstra, Gould asked Judge Steve Mura to order Wynstra to turn over the cash in his wallet.

Mura denied the motion.

Reach JOHN STARK at 715-2274 or john.stark@bellinghamherald.com . Read the Politics Blog at blogs.bellinghamherald.com/politics.