THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, July 23, 1995 TAG: 9507250453
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY MARC DAVIS, STAFF WRITER
LENGTH: Long : 212 lines
Creditors of once-mighty Computer Dynamics Inc. are starting to ask hard questions about whether company chief Robert L. Starer is personally benefiting from CDI's financial collapse.
In Bankruptcy Court, the creditors ask: How did Starer wind up personally owning several pieces of the Virginia Beach company as it fell apart in recent months?
A lawyer for the creditors, Vincent R. Olivieri, has raised the question in a motion filed recently with the Bankrutpcy Court.
He followed up by questioning Starer for 25 minutes in a bankruptcy hearing Wednesday.
``It has been alleged, and cause exists to believe, that assets of CDI may have been improperly, without consideration, transferred to'' a computer school that was once part of CDI, but now is owned by Starer.
In legal papers and in oral testimony, Starer says that every transaction between him and Computer Dynamics has been proper and above-board, and that the company received ample compensation for every subsidiary sold to him.
``I am absolutely certain we didn't do anything criticizable,'' Starer said after the hearing Wednesday.
But Olivieri, a Virginia Beach lawyer who represents three creditors, said he hopes the Bankruptcy Court will void any transaction in which the company sold or transferred assets for less than fair market value.
``We're looking at a lot of different things,'' Olivieri said. He declined to be more specific.
In court papers, Olivieri also claims that Computer Dynamics made improper payments of $200,000 to its law firm, Hunton & Williams, within a year of the bankruptcy filing. Olivieri did not raise the issue at Wednesday's hearing and would not discuss it afterward.
After the hearing, Starer and company attorney Gregory N. Stillman both denied that Computer Dynamics made any such payment to Stillman's law firm.
Companies in Bankruptcy Court cannot make preferential payments to some creditors at the expense of others. The court can void such payments.
Computer Dynamics is going through a Chapter 11 reorganization in Bankruptcy Court. It now has no paid employees, no contracts and no income.
Hunton & Williams, a Richmond-based law firm with offices in Norfolk, is listed as one of Computer Dynamics' biggest creditors. The computer company owes the law firm $354,661.
In its wake, Computer Dynamics has left many individuals and suppliers who were not paid for work done or products sold.
In court, the company lists 539 creditors owed $13.5 million. They range from $4.50 for a telephone service to $6.8 million for IBM Credit Corp., which kept the company afloat in its final months.
The list includes several large debts to Starer and companies he owns or controls: $22,435 to Starer personally, $167,898 to his Accelerated Computer Education company, $37,979 to his Visual Solutions company and $16,687 to his Tudor Corp.
Court records also show that Starer paid himself handsomely as chief executive officer. His management company, The Tudor Corp., was paid $216,000 in the past year.
Meanwhile, some other employees remain unpaid for work they did.
Starer says 11 former employees, mostly in Hawaii, are owed about $16,000, mainly for sick leave or vacation time.
But Starer's list apparently is not complete. By Friday, three former employees who are not on the list had filed claims for unpaid work. They include Aubrey ``Mike'' Mitchell, the company's former contracts director. He says he is owed $7,492 for severance pay and three weeks of unused vacation. He said at least four other employees will file similar claims.
Ironically, others who are owed money for work include a Norfolk accounting office, Ernst & Young, that started, but did not complete, an independent audit of the company's finances (owed $13,225) and a Chesapeake accountant hired by the company to testify that the company is broke (owed $4,100).
To some creditors, however, the major concern is not Starer's pay, but how he bought several subsidiaries as the company slid into bankruptcy.
Just a few years ago, Computer Dynamics was riding high. It was the biggest minority-owned business in Hampton Roads, with more than 600 employees.
The company, founded by R. Alan Fuentes in 1979, made its money from defense contracts, then spread into private contracts, a computer school and a career school.
Starer was hired in 1991 to run the company, and was rewarded with one-third ownership. Fuentes owned the rest.
In 1992, the company was nearly sunk when Fuentes pleaded guilty to funneling illegal campaign contributions to then-Sen. Paul Trible. To save the company's contracts, Fuentes agreed to stay away from the company and convert his stock to nonvoting status.
Soon after, the company's directors made Starer majority stockholder in exchange for his guarantee on a multimillion-dollar loan. Starer now owns two-thirds of the company. Fuentes owns the rest and is fighting Starer in court, accusing Starer of illegally stealing the company from him.
Those lawsuits are pending.
Meanwhile, with Fuentes out, the company took a disastrous turn. Government contracts began drying up. The company took in $24 million in 1993, but did not turn a profit, Starer said last week.
As the company slid, Starer stopped paying bills, including withholding taxes.
``CDI was not paying its debts as they came due,'' Olivieri wrote recently in a court brief, ``and had not been doing so for some time. The company had otherwise been mismanaged, causing the company to fail.''
Computer Dynamics now owes $1.5 million in back taxes all over the country, including $911,143 to the Internal Revenue Service and $311,217 in state withholding and sales taxes in Virginia.
An assistant U.S. attorney - a bankruptcy specialist in the civil division - questioned Starer hard for five minutes at Wednesday's hearing. He asked about such things as Starer's holding companies and how Starer got cash to keep the company afloat in recent months.
Starer said the federal government owes the company more than $1 million, but did not say for what.
As Computer Dynamics went bust, Starer began breaking up the company. Over time, he acquired most of the best pieces.
In court papers and testimony, Starer described a series of foreclosure sales in which he and his wife bought the company's assets:
In February, Starer bought Computer Dynamics Institute - a career school that was part of Computer Dynamics Inc. - for $1.3 million.
At the hearing Wednesday, Starer said the school had to be broken away from the parent company to meet federal standards for financial viability. Otherwise, Starer said, the school would have lost 90 percent of its federal funding and gone broke.
Starer defended the purchase price, saying Computer Dynamics can buy back the career school anytime in the next two years for the same $1.3 million. For now, the school's net worth is just $500,000, Starer said, and it is not hugely profitable.
``If it makes a couple hundred grand in a year, that's a lot of money,'' Starer said in an interview in May.
Also in February, a company owned by Starer's wife, Merle Starer, paid $200,000 for computer parts and other assets foreclosed upon by ITT. Starer said the assets were first offered to several others, who declined to buy them.
In April, a holding company controlled by Starer paid $1.5 million for two subsidiary companies - a computer school, Accelerated Computer Education, and a video teleconferencing company, Visual Solutions - that were once part of Computer Dynamics.
The two companies were sold in a foreclosure by a Florida finance company, Riverside Capital Advisors, which lent them $1.5 million a year earlier.
Starer defended the purchase price by saying that Visual Solutions and ACE have never been profitable as standalone companies.
Starer said all the sales were approved by the company's independent board of directors, whose chairman is former Congressman G. William Whitehurst.
``You know a Bill Whitehurst . . . isn't going to allow anyone to loot the company,'' Starer said in a May interview.
Next month, at the next bankruptcy hearing, Olivieri will press Starer to explain each sale in greater detail and to provide backup documents.
``The question is: Were these reasonable under the circumstances? Were they sold for fair value?'' Olivieri said. ``If they were sold for less than fair market value, we may be able to have them set aside.'' ILLUSTRATION: Drawing
ALBA BRAGOLI
Robert L. Starer responds to questions during a hearing in
Bankruptcy Court last week.
Graphics
CDI'S CREDITORS
Computer Dynamics Inc. claims 539 creditors. Among them:
Hunton & Williams $354,661
(CDI's law firm)
Accelerated Computer Education $167,898
(formerly a division of CDI, now owned by Robert Starer)
Visual Solutions $37,979
(formerly a division of CDI, now owned by Robert Starer)
Robert and Merle Starer $22,435
(CDI's CEO and majority owner)
Virginian-Pilot and Ledger-Star $17,549
(for advertising)
The Tudor Corp. $16,687
(Robert Starer's management company)
Carlos C. Cambell $14,141
(a CDI director)
Ernst & Young $13,225
(CDI former accounting firm)
Signet Bank Card $11,090
Virginia Power $7,326
USAir $4,899
G. William Whitehurst $500
(CDI's chairman)
Virginia Natural Gas $476
R. Alan Fuentes $53
(CDI founder and minority owner)
Fortune magazine $28.50
Source: U.S. Bankruptcy Court
TAXES OWED
Computer Dynamics Inc. owes taxes to 13 states, three cities, two
counties and the U.S. government:
IRS $911,143
Va. 311,217
Va. Beach 123,228
Hawaii 108,016
Calif. 28,812
Norfolk 16,268
Md. 15,087
Penn. 10,421
U.S. other 4,718
N.C. 3,894
Arlington Co. 3,585
Fla. 2,533
N.Y. state 2,490
Ga. 1,531
Wash. state 894
Henrico Co. 760
Mich. 627
Mass. 166
Wash., D.C. 50
S.C. 25
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TOTAL $1.5 million
Source: U.S. Bankruptcy Court
by CNB