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Ch. 7 liquidation clouds Melchiori creditors’ path

By   /   Friday, October 19th, 2012  /   Comments Off on Ch. 7 liquidation clouds Melchiori creditors’ path

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Creditors to Santa Barbara-based Melchiori Construction Co. face a potentially long and complicated path to recovering any of the millions of dollars they loaned the firm.

The general contractor filed for Chapter 7 bankruptcy protection at 9:02 a.m. on Oct. 16  and listed assets of $50,000 or less and debts between $1 million and $10 million. In a Chapter 7 bankruptcy, a debtor seeks to liquidate its assets to repay creditors.

The filing came only minutes before a Santa Barbara County Superior Court hearing in which Santa Barbara Bank & Trust, which alleges it is owed $9 million by Melchiori, was set to ask a judge to appoint a receiver to take control of the general contractor. The bankruptcy filing puts those proceedings on hold, according to a ruling issued from the court and obtained by the Business Times.

A call to Melchiori’s headquarters was not returned. Melchiori’s attorney declined to comment.

But the potential liquidation of Melchiori Construction, in the second generation of ownership, marks a comedown for a company that until 2008 was the second-largest general contractor in the Tri-Counties. According to Business Times records, the family-owned firm had annual sales of about $80 million and more than 115 employees that year; after 2008, the company declined to provide data to the Business Times.

Among its problems, Melchiori Construction has faced dozens of lawsuits in recent years alleging that it did not pay its subcontractors and creditors on time. The pace of those lawsuits accelerated in recent months after Melchiori was terminated as the general contractor on a prominent multimillion-dollar project on the UC Santa Barbara campus.

Mark Melchiori also faces a lawsuit in which his stepmother, Linda Melchiori, alleges that Mark Melchiori’s divorce from his wife was an effort to hide assets from creditors. Linda Melchiori, the widow of company founder Ugo Melchiori, alleged that the Mark and Heather Melchiori were “desperately in need of monies” and asked for a $100,000 loan and then a $1 million line of credit backed by Ugo Melchiori’s estate. The stepmother alleges the couple had “no intention of paying” and “had instead concocted a plan and scheme whereby they would file for divorce to attempt to shield their assets.”

In its lawsuit, Santa Barbara Bank & Trust alleges that Mark Melchiori, who signed personal guarantees on the $9 million in debt with the bank, transferred two Sycamore Canyon Road houses to Heather Melchiori, for no money in return, after he had already defaulted on the loans from the bank. The bank goes on to allege that Melchiori also funneled assets out of the corporate entities and his own name after defaulting “with the actual intent to hinder, delay, and defraud creditors of Melchiori Construction,” according to court documents.

The transfer of assets between the Melchiori corporate entities and Mark and Heather Melchiori could make the bankruptcy complicated for creditors. The listed assets of Melchiori Construction — less than $50,000 — would not satisfy creditors even if auctioned off. A court-appointed trustee can search for more assets, but those powers are limited. A trustee could search for assets transferred away from Melchiori’s corporate entities and potentially unwind those transactions if the court deems them fraudulent.

But transfers of Melchiori’s personal assets — those that should be available to Santa Barbara Bank & Trust because of Mark Melchiori’s personal guarantee of the company’s debts — are generally off-limits to the bankruptcy trustee because it is only the company that is in bankruptcy. In order for Santa Barbara Bank & Trust to attempt to unwind any transfers between Mark Melchiori and his wife, the bank would likely have to pursue Melchiori in civil court, which it is doing, or try to force him into a personal bankruptcy to enforce its his guarantees.

In the past, bankruptcy courts in California were unlikely to set aside divorce proceedings that put assets beyond creditors’ reach as long as those proceedings had the blessing of the state courts. But the bankruptcy rules have changed to make it potentially easier for creditors to go after the assets of a divorcee depending on the timing of the divorce and whether the transfers were disproportionate and flowed heavily to one side of the divorce.

That could become an issue because the Melchioris’ divorce played out this year, after the company’s financial problems had been widely reported.

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