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Victim of a bad economy or a house of cards?

Finance | Bankruptcy report of real estate firm shows hazard of commuting with commerce

Issue: "New faces of New Orleans," Aug. 15, 2009

At first glance, the bankruptcy of a church-connected real estate firm may appear to be simple backwash from the real estate crash that wrecked Wall Street and the nation's economy. However, the imminent demise of Cornerstone Ministries Investments (CMI) has implications stretching back further, to its formation 23 years ago under the auspices of the Presbyterian Church in America (PCA).

After filing for Chapter 11 reorganization in February of 2008, the publicly held company is in the final stages of a bankruptcy whose effects have rippled through the Christian community nationwide. A few examples:

• Congregations such as Mason Memorial Church of God in Christ, Norfolk, Va. ($1 million), Linden Presbyterian (PCA) of Linden, Ala. ($600,000), and First Presbyterian (PCA) of Gadsden, Ala. ($220,000), have lost funding for emergency medical care, missions, orphanages, scholarships, and many other programs.

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• Retirees say they are living in some cases on one-third less income after seeing CMI-invested bonds turn worthless. CMI dubiously invested in second mortgages 63 percent of its funds.

• Kathy Woody-Deming of Clermont, Ga., retired after a serious auto accident that killed her first husband, now must work as a job coach for a county school board after dividends stopped on the $523,000 she invested from an insurance settlement in 2005. "You put this stuff in the back of your mind and try to live day to day," the Southern Baptist church member said.

• Betty Smartt Carter of Birmingham, Ala., whose father used to work for the PCA, said about $50,000 of her children's college funds are in peril. She advocates more public discussion of CMI so others can avoid bad investments: "I wish they would come out and speak to people and give [investors] a chance to forgive them. And at least admit they made some bad decisions."

Linden Presbyterian's Ray Burge, a member of the creditors committee, has a harsher assessment. Noting the network of interlocking companies outlined in a bankruptcy court examiner's report, he said Cornerstone's demise doesn't surprise him. "Any time a company sets up with companies owning companies and dealing with themselves, it gives me the impression it's a shell game," Burge said. "You move money around and siphon a little off."

Much recent controversy stems from the mid-March report by bankruptcy examiner Pat Huddleston. It points fingers at many CMI principals, particularly former President Cecil Brooks-who died in late June-and one-time Chief Financial Officer John Ottinger Jr. Ottinger rejoined the company as interim CEO in late 2007.

"Through a tangled web of non-profit and for-profit corporations and limited liability companies, Brooks and . . . Ottinger profited from real estate development," Huddleston wrote. "Beginning with churches, they expanded in the late 1990s to senior housing facilities, single family housing and multi-family housing."

Among his charges: "Self-dealing" by the top two officers, both ordained PCA ministers, characterized Cornerstone's shift in making loans from non-profits to for-profit companies. Huddleston accused the pair of creating phony non-profits to hold some of Cornerstone's properties while appointing figurehead officers to oversee them.

Huddleston also says the officers didn't report some of their earnings in filings with the U.S. Securities and Exchange Commission. The largest gains include $6.2 million apiece for Brooks and Ottinger from the sale of a senior housing facility in 2007.

In addition, Huddleston reports that in 2006 Brooks, Ottinger, and two other Cornerstone directors acquired a 75 percent interest in a related company for $1,000 apiece. He alleges that later each received distributions of almost $171,000, although the subsidiary never made any money.

According to court documents, more than 3,500 investors hold $142 million in Cornerstone's bonds, with the bankruptcy settlement expected to yield only between 9 percent and 36 percent on those claims.

The distribution of assets and potential lawsuits likely will stretch beyond 2009, along with investigations by Georgia and Alabama securities officials. So could arguments over whether CMI was the victim of a bad real estate market or was an unethical house of cards. In one court filing, the company attributes its problems to the downturn in real estate and credit markets, starting in 2007. It says the squeeze created a liquidity crisis that left it unable to pay bondholders in the first quarter of 2008.

A CMI director contacted by WORLD said corporate legal counsel had instructed principals to maintain a low profile. In addition to possible legal action, he faced hostility from investors. Speaking on the condition that he not be named, the director said company records estimated that Cornerstone's assets would return at least 96 percent of investors' funds before the sagging real estate market and global recession slashed that number: "There are definitely a lot of broken hearts and people who feel they were taken advantage of, but things were done in good faith," he said, noting that Cornerstone's employees cumulatively invested $2 million in the company. "I mourn the loss of resources that we had counted on for retirement."

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