Homebuilder gets OK to wipe out price promises

A U.S. Bankruptcy Court judge on Tuesday allowed homebuilder American West Development to legally wipe out the price commitments it had issued to try to boost new house sales as the market plunged during the recession.

The price promise and price guarantee were supposed to reimburse homebuyers if the value of their homes fell within three or five years after their purchase. The company estimated in court papers that few or none of the buyers of 187 housed in covered subdivisions would even meet all conditions of the promise and guarantee, but the company wanted to eliminate a potential source of expensive litigation.

The promise offered a rebate of the difference between what the buyer paid and what the same home was selling for three years later. The guarantee offered a credit toward a new home at the end of five years.

The buyers will now fall into the category of unsecured creditors.

Although an emotionally charged issue, with many homebuyers convinced that American West and former president Larry Canarelli never intended to make good on the commitments, Judge Lloyd King said bankruptcy law clearly favors the company. In fact, he did not even require attorneys to lay out their case, a typical first step in a contested hearing.

After going over the pleadings in the case, the visiting judge from Honolulu said, “It would be difficult to conclude that (the buyers) are entitled to much of anything.”

However, he had not reviewed individual claims.

American West continues to construct homes and expects to emerge from Chapter 11 with its debt slimmed.

Homebuyer Larry Stokes was clearly displeased in the ruling.

“To continue doing business and making profits and showing no regard to the homeowners who bought with the assurance of the guarantee” amounted to using bankruptcy law to “pardon the expression, screw the homeowners,” he said.

American West attorney Charles Axelrod said that the terms negotiated with the company’s lenders would provide a substantial and perhaps complete repayment to buyers who met the numerous conditions of both the promise and guarantee. As of late February, 16 buyers had applied for compensation and all were turned down.

Because of the way the company’s finances are being restructured, a large share of the $1.5 million allocated for unsecured creditors could go to homebuyers.

“To say that the primary purpose of the case is to ‘screw the homeowners’ is the furthest thing from the truth,” Axelrod said.

Under the bankruptcy code, companies have wide latitude to sever leases or contracts signed prior to insolvency. For example, other companies have used the law to close poorly performing stores or to end expensive union contracts.

After the hearing, Stokes, who said he is “not versed in the legal mumbo jumbo,” still considered the American West move “an attempt to renege on the promises made to homeowners.”

“The price promise was used as a selling point to homebuyers and basically was a total lie,” added Marcus Conui, another homebuyer who said he applied for a rebate earlier this year but never heard a decision from the company.

Contact reporter Tim O’Reiley at toreiley@reviewjournal.com or 702-387-5290.