Although the final distribution of assets in the Homestead Northwest bankruptcy is still months away, it appears that the company's hundreds of local investors will get a return of about four cents on the dollar.
That was a rough estimate provided Thursday, June 12, by Denice Moewes, one of the attorneys assisting federal bankruptcy trustee Virginia Burdette in picking through the financial wreckage handed to them when Homestead and related companies founded by Lynden developer Jim Wynstra filed bankruptcy in early 2012.
Moewes said 315 Homestead investors and other creditors have filed claims totaling about $49 million. To satisfy those claims, the trustee has been selling the relatively small parcels of real estate that remained from Homestead's once-extensive holdings. Moewes estimated that when the process is complete, there will be about $2 million available for distribution.
Investors have known for years that little, if any, of the money they had entrusted to Wynstra and his company was likely to be repaid.
Many of those investors were elderly people who sunk big portions of their retirement nest eggs into those investments, reassured by Wynstra's reputation and by deeds of trust on real estate parcels that seemed to provide solid security for their money.
But Moewes said that security meant next to nothing, because Wynstra also had turned to Frontier Bank for some conventional financing.
The bank loans, in many cases, were secured by the same real estate that his small lenders had been relying upon to make their own investments safe. And under the terms of the bank loan, Frontier was entitled to have first crack at the properties in the event of a loan default.
"That's kind of when things started going haywire," Moewes said.
When the global real estate financing system ground to a near halt and triggered financial panic, Homestead could no longer sell developed properties or get additional loans to build new ones. That meant there was no source of money to pay back investors, many of whom had hoped to cash out their Homestead investments as other investments dropped in value.
Homestead's financial problems first surfaced in April 2009, after the company stopped making payments to investors who had been getting returns as high at 10 percent on their investments in the company. (About a year later, Frontier Bank failed, but the Homestead affair was just one of many bad loans that led to the Everett-based bank's demise.)
For many years, Wynstra and his company had used loans from small investors to help finance a variety of real estate developments in Whatcom County and elsewhere. He was widely known and respected in the close-knit Lynden community. Among other things, he played a key role in developing Lynden's Dutch-themed commercial architecture. He also built Lynden's Homestead Golf & Country Club.
Moewes said it has taken many months to get the claims of Homestead creditors sorted out. Under bankruptcy law, creditors whose claims were secured by real estate are supposed to get priority over other creditors, and many Homestead investors still have their deeds of trust, signed by Wynstra himself. They have claimed status as secured creditors in filing their claims.
But in nearly all cases, they hold no actual equity in properties. Many or most of those parcels have been foreclosed on by Union Bank - the institution that took over defunct Frontier's loan portfolio.
Moewes contends that investors holding those deeds of trust are, as of now, unsecured creditors. Moewes said she must work her way through those claims, one at a time. In each case, she needs a ruling from the bankruptcy judge declaring that the holder of a deed of trust is an unsecured creditor who won't get first crack at the remnants of Homestead's money.
"It's an incredibly time-consuming process," she said.
Moewes acknowledged that Homestead investors are grumbling because they believe some investors managed to get their money out just before the collapse. To them that does not seem fair. But there is likely no legal recourse.
When a totally fraudulent investment scheme collapses, bankruptcy trustees can go back, in some cases, and order repayment of last-minute withdrawals. That makes the money available for distribution to all creditors. That's what happened in the case of Resource Development International, a Tacoma-based fraud that victimized many in Whatcom County before it collapsed in 2002. Investors were told their money was being used as "collateral" in sophisticated international exchange transactions that earned small profits on multiple trades, piling up big returns in a short period of time.
In reality, RDI was nothing but a Ponzi scheme: The perpetrators relied on attracting new investors to get money to pay earlier investors. There was no other strategy for making money, the "international exchange transactions" did not exist, and some of the people behind the scheme went to prison.
Homestead is not that kind of case, Moewes said. Homestead had a real estate portfolio, and the company built golf courses, resorts and subdivisions before its demise, taking in millions of dollars in revenue from sales of developed properties. That means attorneys would have had a difficult time getting a judge to order repayment of withdrawals made by earlier investors. In any event, the amount of money that could have been recovered in that way would have been small, she added.
In early 2013, Wynstra agreed to pay a $100,000 civil penalty to the Washington Department of Financial Institutions, without admitting wrongdoing. But that fine may be no more than symbolic: Under the terms of the deal Wynstra negotiated with state financial regulators, he is liable to pay that fine only after his investors have been repaid in full.
Lawrence Engel, an attorney who has been representing Wynstra, said Wynstra had no comment.