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Former WorldCom Chairman Finds Shelter in Homestead Exemption

Author johnbsims3
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#1 - Posted: 22 Oct 2006 06:38 
Former WorldCom Chairman Finds Shelter in Homestead Exemption

January 4, 2005



John A. Porter's fellow Palm Beach, Fla., socialites know him as the immensely wealthy co-founder and former chairman of WorldCom, the Mississippi-based telecommunications giant that imploded spectacularly in the largest corporate bankruptcy in U.S. history.

Porter, 61, and his fourth wife, Willa, are fixtures at Palm Beach charity balls and other society events. They host lavish dinner parties in their 10,000-square-foot oceanfront mansion, as well as sparkling pool parties in their custom pool with lion head fountains overlooking the sea.

With his collection of Picassos and Matisses, fleet of Mercedes and Lexus autos, thoroughbred racehorses, vintage wine cellar, and domestic servants, Porter seems to fit comfortably into the exclusive world of the Palm Beach superrich.

Except for one thing. What his neighbors don't know -- and what he's tried to keep them from finding out -- is that his current gilded lifestyle is legally tenuous. Last May, Porter filed for Chapter 11 bankruptcy in faraway Atlanta, purportedly to reduce the chances of his peers finding out.

"I'm just trying to put my life back together," Porter said in his first interview since WorldCom went belly up in July 2002. Porter talked only after persistently trying to discourage any article about his bankruptcy. "I've lost everything except my pride and my good name."

Porter estimates he lost a fortune estimated at $700 million. But he's lost something even more precious -- his relationship with one of his two sons, John Lawrence, known as Larry, who ran many of his businesses and whom he blames for their collapse.

Against Porter's will, the bankruptcy was converted into a Chapter 7 in September, and a private trustee was appointed to sell off the assets, including his Palm Beach mansion. U.S. Bankruptcy Judge C. Ray Mullins is presiding.

In his bankruptcy filing, Porter lists debts of $55 million to the Internal Revenue Service, $7 million to lender J.P. Morgan Chase and $7.5 to Citicorp, among others. Since a bankruptcy cannot discharge all types of IRS debt, some lawyers involved in Porter's case say he likely will try to offset the government's demand with proof of massive losses.

He also faces the burden of defending himself against several securities class action lawsuits filed against him and other former WorldCom board members, which allege that he signed off on the 10-K report to investors during the proposed merger with Sprint and therefore should have known what was going on inside the company.

AGGRESSIVE CREDITORS

In addition, Porter faces accusations by creditor J.P. Morgan Chase that he deliberately hid assets, failed to disclose existing liens on his properties when borrowing against them, and improperly transferred wealth to his wife to shield assets. Outside experts say creditors have a reasonable chance of successfully challenging the transfers and reaching these assets.

The bank also contends that Porter's monthly expenses of nearly $50,000, including his three household servants, are wildly excessive. "The debtor's use of estate assets to pay for outlandish personal expenses ... is a gross breach of debtor's fiduciary duty," J.P. Morgan Chase attorneys wrote in a recent court filing.

In court papers, Porter's lawyer, Joseph J. Burton Jr. of Burton & Armstrong in Atlanta, has called J.P. Morgan Chase's collection efforts "arrogant" and a violation of Porter's constitutional rights.

Despite all that, Porter most likely will be able to maintain a lifestyle far beyond the means of most Americans. Thanks to Florida's controversial "millionaire's loophole" offering a virtually unlimited homestead exemption, he will be able to keep 80 percent of the proceeds from the forced sale of his mansion. The mansion currently is listed with Corcoran Realty for $17.5 million.

The fact that he will be able to keep millions from the sale of his house infuriates some WorldCom ex-employees and investors, who lost their incomes and life savings when the company failed due to massive accounting fraud.

Porter's case illustrates what critics say is the injustice of Florida law allowing formerly affluent debtors to shield an unlimited amount of wealth in their homestead from creditors in a bankruptcy. Florida is one of six states that offer a nearly unlimited homestead exemption protecting a person's home from creditors. These state laws, which date back nearly 50 years, originally were passed to protect farmers from losing their farms to creditors.

In contrast, debtors of ordinary means in Florida and around the country generally are left with little or nothing after bankruptcy. Most states have homestead exemptions of $125,000 or less. Georgia, where Porter filed for bankruptcy, has an individual homestead exemption of only $10,000.

Florida's infamous homestead exemption has drawn a roster of big debtors to Florida, including former corporate raider Paul Bilzerian and former U.S. Ambassador to Switzerland Marvin Warner.

Some members of Congress have tried for years to eliminate the millionaire's loophole in the laws of Florida, Texas and four other states. But they've faced stiff opposition from elected officials in those states, which benefit financially from serving as havens for wealthy debtors.

Bankruptcy experts say Congress is poised this year to pass a massive bankruptcy overhaul favored by the credit card industry that would block many Americans of modest incomes from quickly discharging their debts under Chapter 7. But under a compromise agreed to by Democratic and Republican senators, the unlimited homestead exemption in Florida and other states would merely be narrowed, not closed.

Lucky for Porter, even if Congress does tighten the loophole, any congressional action would be too late to affect his case.

Porter's bankruptcy filing also could protect him from several class action lawsuits filed against him and other WorldCom board members. He is being sued by the New York State and Local Retirement Systems, the State of Alaska Department of Revenue, and the National Asbestos Workers Pension Fund.

$700 MILLION

If anyone exemplifies the spectacular highs and lows of the technology stock bubble, it's John Porter. As the chairman and co-founder of WorldCom as well as a leader of a dozen other high-tech companies, Porter on paper was worth $700 million in 1999.

Throughout the 1990s, he flaunted that wealth, buying the Palm Beach mansion in 1998, a 540-acre estate in Maryland called Hidden Bridge Farm valued at $24.5 million, a $1 million Fisher Island condominium, original artwork by Picasso, Matisse and Chagall, a private jet, several yachts including the Bellini, sold for $6 million in 2001, seven Lexus and Mercedes automobiles, and stable of Paso Fino racehorses. Some friends say he became consumed with material wealth.

In 1999, Porter, then 56, married his fourth wife, Willa Swingle, a nearly 6-foot-tall, auburn-haired 38-year-old from the Lake County city of Leesburg who had worked in marketing in California. He boasted to friends about buying her a 38-carat yellow diamond engagement ring.

But the bubble finally burst in 2002, a year and a half after he left the board in August 2000. Porter was the second-largest shareholder in WorldCom after the company's former chief executive, Bernard Ebbers Jr., with more than 6 million shares.

From 1999 to 2001, the company's share price fell from an all-time high of $92 a share in 1999 -- making Porter's holdings worth nearly $562 million -- to 13 cents a share.

After gobbling up regional telecommunications companies all over the country, WorldCom was the fastest-growing telecommunications company in the world by the late 1990s, and was poised to topple AT&T by merging with Sprint in 2001. But the merger fell apart.

In mid-2002, as its stock was nose-diving, the company admitted to an $11 billion accounting fraud. After the company went bankrupt, investors lost more than $180 billion, 20,000 WorldCom employees lost their jobs, and many more lost a big part of their 401(k)s.

FELT BLINDSIDED

Porter insists that the WorldCom collapse was not his fault and that he had no idea when he left the board of the massive financial and fraud problems that existed. As proof, he notes that he didn't cash out his huge stock holding before the collapse. Indeed, two lengthy interim reports to a New York bankruptcy judge about WorldCom's demise by court-appointed examiner Dick Thornburgh, a former U.S. attorney general, make no mention of Porter.

"When I was a member of the board, everything I had seen was good," Porter told the Miami Daily Business Review. "If I had known what was going on, I would have gone to the board. I lost everything just like everyone else."

But lawyers for creditors who are suing Porter -- and investors who lost their life savings when WorldCom collapsed -- don't buy that story. They see him as another corporate villain who is exploiting Florida's homestead exemption to shield his assets from creditors.

Jack Holtsberg is unsympathetic to the plight of Porter and other bankrupt former corporate titans. Holtsberg, a 78-year-old Jupiter resident, said he lost his life savings -- $2 million -- after putting his entire portfolio into WorldCom stock.

Holtsberg is the lead plaintiff in a class action lawsuit against Citigroup Inc. and star former Smith Barney analyst Jack Grubman for allegedly conspiring to continue to advise investors to buy WorldCom stock despite problems at the company. He said he's now trying to find a job, and his wife is working two jobs. Worst of all, he said, he has nothing to leave his children.

"It makes me mad that they get to keep their houses," Holtsberg said. "It's not right."

GEORGIA TO PALM BEACH

Porter is a native of Georgia who graduated from Georgia State University in 1966 with a bachelor's degree in marketing. Friends describe him as extremely bright and driven.

Information about his early career is not publicly available. But in 1985, he founded Telephone Management Corp. in Atlanta. In 1988, Porter's company merged with Long Distance Discount Service, or LDDS, a company Ebbers had founded in 1983.

In 1989, with Ebbers as chief executive and Porter as chairman of the board, the company went public through its merger with Advantage Cos. In May 1995, the company changed its name to WorldCom. In 1997, WorldCom and MCI announced a $37 billion merger

Porter served as WorldCom chairman from 1988 to 1992. By 1992, Porter, then 49, was earning $800,000 a year as chairman. He served as vice chairman from 1992 to 1996, then remained on the company's board of directors and served as chair of the nominating committee until August 2000.

In the 1990s, Porter was busy with other ventures as well. With his son Larry, he set up more than a dozen technology companies and served on various companies' boards, including the Berkeley, Calif.-based Internet company Inktomi, TelTek Inc., Phillips & Brooks/Gladwin, and Sarasota-based Uniroyal Technology Corp.

A sports lover, he and Dallas businessman Jim Mattei teamed up in 1997 to become majority owners in a QVC Ford racing team. He, Ebbers, and a group of investors failed in a $100 million bid to bring a National Hockey League franchise to Charlotte, N.C.

He plunged into high society. His biggest splurge was the Palm Beach mansion he and Willa bought in 1998 for $7.5 million. The home was featured on the cover of the November 2004 issue of Florida Luxury Homes magazine. John and Willa Porter became mainstays in Palm Beach society, appearing at charity events and openings.

Porter told the Daily Business Review that he decided to retire in 2000 in order to relax, spend more time with his wife and do some work on their Palm Beach home. Plus, he said, WorldCom had gotten so big "it just wasn't fun anymore." The New York pension fund that's suing him claims he served on the board until May 2001.

At the time of his retirement, Porter owned 6.2 million shares of WorldCom stock, according to the company's proxy statement to the Securities and Exchange Commission. Only Ebbers owned more -- 27 million shares. By that time, the stock had fallen to about $40 a share, making Porter's holdings worth nearly $240 million. Porter said he also had a substantial 401(k) plan entirely invested in WorldCom stock.

When he stepped down from the board, WorldCom was at its peak, with 80,000 employees and 60,000 miles of telephone lines around the world. Revenues approached $40 billion. WorldCom was in the midst of buying rival Sprint. Porter was slated to serve on the combined companies' board of directors. "I thought everything was in great shape," he said.

When WorldCom filed for Chapter 11 in July 2002, following the disclosure of an $11 billion accounting fraud, he said he received no advance warning and was just as surprised as the rest of the country.

Several executives, including Ebbers and former chief financial officer Scott Sullivan, subsequently were indicted for securities fraud. Sullivan pleaded guilty in March 2004 to three counts in connection with the case and agreed to testify against Ebbers.

That same month, Ebbers pleaded not guilty to conspiracy, securities fraud and filing a false report. He was released on $10 million bond, secured by his $2.5 million Mississippi mansion. On Jan. 18, Ebbers will stand trial in U.S. District Court in New York on charges stemming from the accounting fraud. Several other former WorldCom executives also have pleaded guilty in exchange for lighter sentences.

Porter faces no criminal charges, say lawyers involved with the case.

The former chairman told the Review that he has thought hard about who was at fault in the debacle. He blames both Ebbers and the board of directors he left behind for loaning Ebbers $400 million in 2001. "I can't figure out why they did that," he said. "If I was on the board, I never would have approved that."

Porter said he is a named defendant in several class action suits only because "they're going after anyone who was on the board."

But, according to the suit filed by the New York Local and Retirement Systems, it is more than that. The complaint alleges that Porter signed the company's annual report filed with the SEC for 1999 as well as the Form 10-K, signed the registration statement for WorldCom's acquisition of Skytel Communications in 1999 and the registration statements related to the May 2000 offering.

"WorldCom lacked any board oversight and the board was a rubberstamp, completely beholden to management that failed to perform the most basic functions of a true board," the complaint states.

Lynne W. Jeter, a reporter who wrote the 2003 book "Disconnected: Deceit and Betrayal at WorldCom" (John Wiley & Sons), also questions Porter's pleas of ignorance. "[Porter] was very slick and opportunistic," Jeter said in an interview. "He kept a low profile. He went along with [Ebbers], who was Mr. Slick. He knew what was going on."

Porter said he hasn't talked to Ebbers since he left the board. "If you left, Bernie never spoke to you again," he said. "He saw that as a disloyal act."

After WorldCom crashed, Porter lost the rest of his fortune when his other technology companies failed during the tech stock bust and following the Sept. 11 terrorist attacks. "When the Internet crashed, I lost everything," he said.

Porter blames his son Larry for the failure of his other companies, including Dos Amigos, Porter Investment Co. LLP and Integra Holdings, to name a few. The father claims to know little of their operations, even though he served as chairman while his son served as president.

"I don't talk about that son anymore," he told the Review.

Larry Porter, who lives in Parkersburg, W.Va., declined to comment.

SEEKING PROTECTION

On May 10, 2004, Porter filed for Chapter 11 bankruptcy in Atlanta. The filing came after J.P. Morgan Chase sued him in a bid to seize his farm in Maryland.

Neil Gordon, a partner at Arnell Golden Gregory of Atlanta, was appointed trustee in the bankruptcy case. He speculates that Porter may have waited two years after the value of his stock portfolio plummeted to file for bankruptcy because he wanted time to transfer assets to his wife without running afoul of the one-year reachback period under federal bankruptcy law. Transfers done within one year before filing can be scrutinized for evidence that they were intended to delay, hinder or defraud creditors.

Porter explained that he filed in Atlanta because he conducted a lot of business there through one of his companies, Integra, which separately filed for bankruptcy in Georgia.

Still, outside experts wondered why Porter filed in Georgia -- and why he was allowed to do so -- since he never claimed residence there. "Usually people file here from the outset and make someone challenge venue in Florida," said John Walsh, a partner at Dzikowski & Walsh in Fort Lauderdale who focuses on representing Chapter 7 filers and whose partner works as a bankruptcy trustee.

But sources who did not want to be identified said Porter filed in Atlanta to hide the filing from his Palm Beach neighbors and fellow socialites.

Porter confirmed that. He said if the Review published an article about his bankruptcy, it would be the worst thing that could happen to him because it would affect the market price for his Palm Beach mansion. "I need to get this house sold," he said.

In his filing, Porter listed as his biggest creditor the IRS. Next was J.P. Morgan Chase. Third on the list was a surprise -- his wife, Willa, whom Porter says he owes $3.4 million as part of an unusual prenuptial agreement. Other creditors were listed as well, including the state of California, which claims $723,000 in unpaid sales tax.

Under the agreement, Porter said in the filing, he was supposed to have paid her $10 million if she stayed married to him for three years. At the time of the filing, he claimed he still hadn't paid $3.4 million of that contracted sum.

The IRS filed a proof of claim but has not appeared at any creditor hearings yet. An IRS spokesman said the agency can't comment on individual cases.

J.P. Morgan Chase has by far been the most aggressive creditor. In September, the bank's lawyer petitioned the court to have Porter's Chapter 11 bankruptcy converted to a Chapter 7 so that assets could be inventoried and divvied up under the eye of a trustee. In contrast, under Chapter 11, Porter would be able to oversee his reorganization himself, maintain control of his assets and avoid the embarrassment associated with a Chapter 7.

Porter fought that move to convert the case to Chapter 7. But the U.S. Office of the Trustee agreed with the bank, appointing attorney Gordon as trustee. Meanwhile, lawyers for J.P. Morgan Chase were pushing to liquidate Porter's Maryland farm, valued at $13.4 million, to pay off his debt. In a lawsuit filed in U.S. District Court in Maryland in 2003, the bank sought, and was granted, a temporary restraining order and preliminary injunction requiring Porter to obtain court approval before selling his estate. The bank won a $7 million judgment against Porter in its suit to liquidate the farm and seize the proceeds.

According to a court filing by the bank in the Maryland case, Porter failed by July 2002 to repay the $7 million in loans he borrowed through Integra. Porter told the bank that he had had a dispute with his son Larry, and that his son was no longer involved in the management of Integra or Porter Investment. John Porter assured the bank that the loan would be repaid, according to the court papers. The loan is still outstanding.

J.P. Morgan Chase said in court papers that it later learned that Porter omitted "material representations ... which should have been disclosed to make the representation true and correct."

The bank claimed that Integra did not reveal that a property Porter owned in San Francisco was under contract for more than $3 million and that Citicorp USA also held a lien on the property. J.P. Morgan Chase said it also learned that a loan of up to $10 million was made to Porter and Integra by Bank of America. Similarly, according to the filing, Porter granted Citicorp a second lien on his Maryland farm.

J.P. Morgan Chase also alleged that Porter failed to disclose that he sold Integra's interest in two office buildings in Japan, worth about $2.7 million. According to the filing, it's unclear whether Porter received cash for this transaction or a promissory note.

Finally, J.P. Morgan Chase claimed that Porter failed to disclose the prenuptial agreement with Willa. According to the bank, Porter defaulted on this prenuptial agreement in 2001 and granted his wife liens on his Palm Beach mansion and Maryland farm, which could have been used to satisfy his debt to J.P. Morgan Chase.

Two outside experts said this could be problematic for Porter. John Walsh, a Fort Lauderdale bankruptcy lawyer, said that depending on when the liens were transferred to Willa Porter, creditors may be able to invalidate them and reach those assets. Chief Judge Emeritus A. Jay Cristol of the U.S. Bankruptcy Court for the Southern District of Florida said the rules are clear that if a debtor transfers property without adequate consideration and while insolvent, that property would be reachable by creditors.

Porter "engaged in a pattern of misleading JPMC, fraudulently transferring assets, wrongfully encumbering assets in violation of the negative pledge provisions of the Loan Documents," according to the filing by J.P. Morgan Chase.

Porter's Atlanta lawyer, Joseph Burton, fired back, calling the bank "arrogant" and declaring in court papers that the $7 million judgment in federal court in Maryland was not consistent with bankruptcy law. He accused the bank of trying to illegally seize the Maryland farm in violation of Porter's 14th Amendment due process rights. Porter's lawyers also argued that Porter first must pay off his tax debt to the IRS before the bank can get anything.

Last July, the bank filed a complaint accusing Porter of "consuming, depleting and spending property of his estate, consisting of cash and bank deposits, for his personal benefit and enjoyment and for purposes unrelated to the administration of his bankruptcy case."

"I don't know why J.P. Morgan has been so aggressive," Burton said in an interview. "Mr. Porter had retired years before this bankruptcy occurred. His son has been running all these companies. It's been a mystery to me why they would go after him instead of his son."

But Patricia Redmond, a shareholder in the bankruptcy department of Stearns Weaver Miller Alhadeff & Sitterson in Miami, said if "creditors [are] owed a lot of money, it's very common for them to be aggressive. The wealthier the debtor, the more scrutiny there is." Redmond is not involved in the Porter case.

Gordon, the bankruptcy trustee, said in an interview that he is particularly concerned about Porter's admitted transfer of millions in assets -- cars, paintings and jewelry -- to his wife, purportedly to pay her under terms of the prenuptial agreement.

Under federal bankruptcy law, any assets transferred more than a year before a bankruptcy filing cannot be reached by creditors. But under the law in Florida and other states, the reachback period for improper transfers is four years. If the court finds that an improper transfer was done within the applicable reachback period, creditors can move to void the transfer and claim the assets.

Gordon said he is investigating whether the assets were improperly transferred to Willa Porter within the reachback period. "That may be litigated," he said. "It's part of the whole controversy surrounding this case."

HOUSE A HOT PROPERTY

Gordon said he's recently received a flurry of interest from potential buyers in Porter's Palm Beach house and is confident he will have a contract for sale soon. But he's received just one offer so far, for slightly more than $10 million. He rejected it as too low.

Gordon and his legal team plan to fly to Palm Beach later this month to inspect and inventory Porter's house and possessions as part of the trustee investigation.

Under Florida's homestead law, a primary residence up to 0.5 acre in size that lies within a municipality is entirely protected by homestead right and cannot be touched by creditors. But any acreage in excess of a half-acre can be reached.

Porter's Palm Beach estate lies on about 5/8 of an acre. That means about 20 percent of the total proceeds of the sale will be accessible to creditors, and he gets to keep about 80 percent of the value.

Some members of Congress express anger about the Florida exemption that allows people like John Porter to protect their wealth in bankruptcy.

"I, for one, am outraged every time I see these fantastically beautiful mansions in the state of Florida that [bankrupt corporate executives] ... put their money in," U.S. Rep. Paul E. Kanjorski, D-Pa., said at a House Financial Services Committee hearing last February. "That is wrong. It is something we should clean up and close now."

Congress is expected to take up bankruptcy overhaul legislation again this year and consider the homestead exemption issue. Peter Lawson, director of congressional and public affairs for the U.S. Chamber of Commerce in Washington, D.C., said his group would like to see Congress stop millionaires from "gaming the system."

But he said the latest proposed language would allow states like Florida to keep their unlimited exemptions. On the other hand, the proposal would require debtors to reside in a state for two years -- rather than the current six months -- to claim that state's exemption. That means wealthy people who could see trouble coming still would have two years to move their money into a Palm Beach mansion.

Some of Porter's creditors say that if he wants to show good faith, he should give up the entire proceeds of the sale of his house to pay off his debts. "Are people supposed to shed tears for a guy who lives in a $17 million mansion with servants?" asked one Porter creditor, who did not want to be identified.

Will Porter agree to do that? "I have no comment," his attorney Burton replied with a laugh.

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Former WorldCom Chairman Finds Shelter in Homestead Exemption
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