Professor Steve Nickles Comments on Chinqua Penn Legal Troubles

Judge seals details around seizure of Chinqua Penn
Published Sept. 30 | by Richard Craver
Reposted from Winston-Salem Journal

A federal bankruptcy judge has put under seal the details behind the seizure of the operations of Chinqua Penn Plantation in Reidsville.

Officers with the U.S. Marshal’s Office for the Middle District of N.C. and the Rockingham County Sheriff’s Office conducted the seizure about 3:30 p.m. Tuesday.

Although officials with the historic 1920s museum and plantation said yesterday that it was open for business, they confirmed that it is closed to visitors until Saturday morning. The plantation is owned by Davie County businessman Calvin Phelps.

Judge William Stocks ordered the seizure at the request of Peter Tourtellot, the Chapter 11 bankruptcy trustee for three Davie tobacco companies — Renegade Holdings Inc., Alternative Brands Inc. and Renegade Tobacco Co. — that also are owned by Phelps.

The companies, which have a combined 140 employees, went into bankruptcy in January 2009.

Stocks approved a reorganization plan in April 2010 and allowed the companies to exit bankruptcy on June 1. He vacated the plan six weeks later based primarily on information presented of a federal investigation involving Phelps and the companies that’s focused on accusations of “unlawful trafficking in cigarettes and other related crimes.”

In the lawsuit, Tarr asked Stocks to approve his request to create a trust for the plantation and its arts and artifacts, or transfer ownership to the debtors in the bankruptcy case.

Stocks deferred comment to Tourtellot. Gerald “Jeb” Jeutter Jr., an attorney representing Tourtellot in the case, said that the plantation was seized and an attachment placed on property “as part of a protection and preservation mechanism for the benefit of the bankruptcy estate.”

In July 2006, the Council of State agreed to sell the plantation to Phelps for $4.12 million. The property included the 31,100-square foot house and its furnishings and property. N.C. State University owned the property at that time.

The plantation was closed in 1991 after failing as a visitor attraction, reopened in 1995 as a place for meetings and weddings, only to close again in 2002 before reopening again nearly four years ago under Phelps’ ownership.

On Sept. 23, Gene Tarr, the bankruptcy examiner for the three companies, filed a lawsuit against Phelps, his wife, Lisa Yamaoka, and 13 limited liability companies, including Chinqua Penn, that Phelps owns or controls.

The lawsuit accuses Phelps of making a fraudulent transfer of $8.1 million in assets from three companies to the LLCs, which he used to help buy the plantation, two corporate jets, cigar-manufacturing equipment and a 2008 Maserati Quattroporte. Rick Mitchell, an attorney representing Phelps in the bankruptcy case, could not be reached for comment yesterday.

The transferring of assets from one company to another by common ownership is not unusual, said Steve Nickles, a law and management professor at Wake Forest University. What makes for a fraudulent transfer, he said, is when assets shifted from one company to another do not result in a return of equal or better value for the first company.

Phelps is accused of issuing 16 unsecured promissory notes to the companies “at a time when debtors were in dire need of capital.”

According to the lawsuit, Phelps paid the cash portion ($1.83 million) of the deal with money from Alternative. He also borrowed $2 million from SunTrust, then “caused the debtors to guarantee payment” of the loan. The companies helped pay for the plantation’s operating costs.

Nickles said that it is relatively rare for a judge to seal bankruptcy documents.

“When it happens, it typically involves proprietary issues or confidentiality agreements that could involve a third party wanting to buy assets,” Nickles said.