Schools left holding bag in copier firm's bankruptcy.
And they may have been significantly overcharged for the copiers in the first place, an inquiry by the state attorney general's office concluded.
Global closed its doors in the fall of 2004 and owner Larry Clark has filed for Chapter 7 bankruptcy protection, listing $2.1 million in debt and only $528,000 in assets.
Clark, through his bankruptcy attorney James Dowden of Little Rock, declined an interview.
Since the late 1990s, Global sold and leased copiers and other equipment to school districts and then provided service and maintenance for those copiers. Built into many of the contracts were fees for the service and supplies.
Most of the schools' contracts were financed through Summit Bank of Arkadelphia, which has disclaimed any responsibility for providing parts or service.
As of Oct. 12, 2004, 34 school districts owed $2.84 million to Summit for their contracts with Global Business Solutions, according to a document on file with the Arkansas attorney general's office.
When at least three of the school districts realized they still had to pay their lease-purchase agreement to Summit Bank even though they were no longer receiving repair service or supplies such as toner from bankrupt Global, they turned to the AG's office for assistance. But since the school districts are not state agencies, the attorney general cannot represent their interests.
Several districts are now considering suing Global to recoup the losses for unused maintenance and service fees. The Brookland School District in Craighead County has already sued Global for fraud and failing to pay off an existing lease.
"Why are we paying for maintenance we're not getting?" said Superintendent Tom Wilson from the DeWitt School District, which is paying nearly $4,000 a month to Summit even though the district no longer has any of Global's copiers.
He said part of the confusion is that when the school districts signed five-year contracts with Global, the contract wasn't clear what percentage was going to pay off the equipment and what was for the service agreement.
"They lumped it together so really you couldn't figure out exactly what that was," Wilson said. "I will say this: Somebody has those figures, but we couldn't find them."
The General Assembly changed the law in the recent legislative session so that school districts are now required to renew their service agreements annually.
"I would not say that [change in the legislation] was directly related strictly to Global," said Scott Smith, an attorney for the Arkansas Department of Education. "But that was an issue of concern that came out of some of those situations."
Some of the transactions raised more than just legislative questions for the attorney general's office.
"It appears that the school districts may have been way overcharged for the equipment," Assistant Attorney General J. Camille Williams of the consumer protection division wrote to Deputy Attorneys General Teresa Brown and Jim DePriest on Oct. 15 in a confidential memo obtained by Arkansas Business.
Lonoke School District paid $348,000 for copiers that would retail for around $100,000, Williams wrote.
Some of the school districts apparently only considered the affordability of the monthly payments and not the total cost of the purchase.
"While this seems somewhat outrageous, keep in mind that the schools could always trade the copiers in to (Global Business) and get different or better copiers," Williams wrote. "It is unlikely that any school ever expected to 'own' the copiers. So focusing on the monthly business expense was not unreasonable."
Sharron Havens, the Lonoke School District superintendent, didn't return calls for comment.
Williams also questioned Summit's role in the transactions.
"Summit had a duty to conduct due diligence before advancing money on the assignment," she wrote. "If it is true that the copiers are worth only a fraction of the value of the contract, was Summit acting in good faith in agreeing to the terms? Or is that an indication that Summit knew more than just equipment was promised under the leases?"
Summit said it wasn't aware the agreements it financed included service and supplies.
Summit's attorney, John Bryant of Little Rock, said Williams' memo contains inaccuracies.
"There's a lot in here that we assume is not accurate," he said. "Arguing this thing in the newspaper is not something that Summit Bank is interested in doing.
"So just the assertion that Summit Bank committed fraud or that we were in any way involved in fraud is a little bit alarming to us," he said.
Global Business' financial trouble is directly tied to the late Rodney Miller, who owned City First Financial Corp. of Conway. Global Business' Larry Clark first met Miller at a trade show in the late 1990s. During the next few years, Global and City First did millions of dollars' worth of business with "no issues or problems," Clark said in a 2004 interview with Arkansas Business.
City First had financed the contracts with the school districts. Regions Bank financed the equipment order but not the service and maintenance orders, and then City First paid off the Regions equipment loans. City First also resold the agreements to Summit Bank. Clark said he didn't know City First was reselling the contracts to Summit until late 2002.
In November 2002, Global won a $500,000 contract to install copiers and other equipment at the Crossett School District.
Global didn't bother to file a security interest on the equipment with the secretary of state's office because getting paid had never been a problem when dealing with Miller.
But Miller had taken the sales order from Global to Summit Bank for financing. Summit paid Miller the $500,000 and, unlike Global, filed the paperwork to claim a security interest in the equipment. Clark said Miller then should have given Global the $500,000, but he didn't. That sent Global into a financial tailspin.
A month later, Miller, at age 52, had a fatal heart attack, and City First died as well.
Miller's "massive fraud" was then discovered, the AG's Williams said.
"Apparently Miller had engaged in misrepresentations to his investors, to his bankers and to his friends," Williams wrote.
City First's only employee, Carolyn Burnham, told Williams that Miller created reports to investors, creditors and banks.
"It is possible that some of the documents she has would help establish a pattern of fraud and misrepresentation," Williams wrote. "Ms. Burnham also was of the opinion that Summit Bank clearly understood that the financed amount included service and supplies and that the documents she had would show that."
Summit denied the allegation.
In 2003, Global sued Summit Bank in Ashley County to recover the $500,000 but lost. Clark told Arkansas Business in 2004 that the incident cost Global between $1 million and $2 million in lost revenue.
Clark's income started declining. In 2002, his income from Global was $170,000. A year later it was $150,000. And in 2004, it was $110,000.
"I think (Global) was terribly undercapitalized and it required them to keep selling in order to support the contracts that they did have," said Ralph Waddell, an attorney for Brookland School District.
In Brookland's case, Global was supposed to pay off several of Brookland's outstanding equipment leases when the district upgraded its copiers in March 2004. Brookland's lease-purchase agreement was nearly $300,000, and $144,271 was earmarked to pay off Summit. But Global never forwarded the money to the bank, the lawsuit said.
"I don't think the school districts were very knowledgeable about exactly what they were paying for the equipment and the amount of markup," Waddell said. "I think school districts looked at it more of terms of "What's my payment going to be?' and 'Can I afford it?'"
Brookland is also suing Global's office holders, Sue Miller and Dee Human. Human, also known as Paul D. Human, is now superintendent of the Texarkana School District. He started there in 2004.
"Other than him being an officer and shareholder, we don't have any specific evidence of wrongdoing by (Human)," Waddell said.
Human didn't return calls left at the school district. But both Miller and Human denied the allegations in their court documents.
"Brookland is also in the same boat as a lot of these other schools that entered into these finance leases," Waddell said. "And then Global, of course, goes out of business and can't provide the services. And the school districts now are having to go out and pay twice for something they already paid for."
When Global didn't pay off Summit, Brookland defaulted on Summit's lease. Summit could get a court order and ask the Arkansas Department of Education to garnishee the money. But Summit's Bryant said the bank will work with the school district until it settles the case with Global.
"If we can't get Summit paid, then we're in danger of having some state aid withheld," Waddell said. "It's just a bad thing for them."
At the DeWitt School District, the mention of Global Business Solutions is still a sore spot.
In 2001, DeWitt signed a five-year, $177,662 lease-purchase agreement with Global for about 20 copy machines. The monthly payments were $3,222, said DeWitt's Superintendent Wilson.
"The service was good," Wilson said. "I mean, everything was going along pretty good."
But then in 2004, the copiers started breaking down. With Global out of business, DeWitt called Capital Business Machines Inc. of Little Rock for service.
Within four months, DeWitt had paid Capital about $25,000, he said. But DeWitt is still paying $3,200 a month to Summit until May 2006--payments that were supposed to include the cost of repair service from Global. The Gillette School District was paying Summit $600 a month on a Global lease agreement; when it was consolidated into the DeWitt district last year, that bill became Wilson's responsibility too.
DeWitt recently signed a three-year contract with Arkansas Copy Machines for new copiers. The cost is $3,400 a month, and the service contract is separate. "It's going to be a good deal for us," Wilson said.
School Obligations Summit Bank's Lease Purchase Agreements with School Districts for Global Business Solutions' Equipment School Original Balance as of Districts Balance Oct. 12, 2004 Batesville $467,640.69 $286,755.51 Brookland $215,413.30 $134,613.09 Carlisle $157,726.39 $67,130.22 Clarendon $88,284.88 $28,825.99 Cotton Plant $46,172.72 $24,270.67 Cross County $124,825.86 $59,456.85 Crossett $508,325.38 $433,954.19 Dardanelle $41,569.23 $15,223.83 Dardanelle $40,091.00 $14,682.44 Dewitt $177,661.96 $65,064.64 Dollarway $198,579.48 $135,601.81 Earle $422,563.05 $264,208.48 Foreman $35,478.36 $21,604.06 Fountain Hill $56,525.59 $38,599.02 Gillett $32,660.04 $19,887.88 Horatio $74,926.78 $46,848.14 Humphrey $263,582.20 $44,089.47 Lake Hamilton $30,863.81 $12,702.83 Leslie $51,132.81 $31,136.65 Lonoke $376,977.27 $79,561.36 Mayflower $21,546.14 $6,852.83 McGehee $242,536.55 $151,646.53 McGehee $17,163.17 $11,288.33 Nemo Vista $154,252.80 $63,076.29 Ouachita $28,404.45 $17,296.53 Parkin $82,373.34 $50,160.20 Plainview-Rover $70,476.57 $42,837.16 Pottsville $46,389.84 $24,423.82 Russellville $62,452.79 $42,646.43 St. Joe $38,821.61 $18,467.43 Valley View $281,099.88 $176,821.69 Valley View $12,035.08 $5,522.43 Warren $327,804.34 $236,639.18 Westside $164,429.49 $67,809.78 TOTALS $4,960,786.85 $2,839,715.76 Source: Arkansas Attorney General's Office
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|Date:||May 16, 2005|
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