Creditors of bankrupt Care Enterprises of Tustin have accused the company's top management of engaging in insider trading, manipulating earnings reports and generally profiting from corporate transactions at the expense of Care bondholders, shareholders and employees.
Court documents filed by the creditors also allege that executives of the troubled nursing home chain entered into questionable business deals, took corporate jets on fishing trips in violation of company policy and stayed in $1,000 hotel suites at company expense.
The court papers, filed Monday by a committee of Care creditors, ask the U.S. Bankruptcy Court in Los Angeles to oust Care's management and replace it with an independent trustee.
The company is expected to file a formal response to the allegations before a scheduled June 16 hearing on the trustee request. Although the response is not yet ready, Care attorney Arnold Kupetz denied Tuesday that the company's management has acted improperly.
Twin brothers Lee Roy and Dee Roy Bangerter, the company's principal owners and top officers, could not be reached Tuesday for comment.
Care filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code in March, 1987. Care has total debt of about $180 million.
The creditors committee, which represents unsecured bondholders, has been seeking removal of Care's current managers since last year. But the court documents filed Monday represent the first detailed look at allegations of mismanagement raised by creditors of the company.
Many of those allegations involve actions by the Bangerters.
The creditors' court filing states that Lee Roy Bangerter, Care's chairman and chief executive, sold 200,000 shares of Care stock to the company's employee stock ownership plan on April 2, 1986, for that day's market price of $6.75 per share.
One month later, according to court documents, Care reported that its first-quarter earnings had fallen by more than 50% from the previous year's $264,000.
The creditors charge that Bangerter knew about the earnings decline when he sold the stock but failed to inform the head of the ESOP committee. They also allege that he did not tell the committee that his shares were classified as "restricted" under securities laws and could not be resold for a significant length of time.
Care's stock closed at $6.50 per share on Friday, May 9, the day the earnings decline was announced publicly, and $7 on the following Monday. The price of Care stock began falling later in the year and was trading for about 50 cents a share when the company filed for bankruptcy.
Care attorney Arnold Kupetz acknowledged Tuesday that Bangerter sold the shares to the ESOP, but he said the sale was approved by company attorneys. He said the executives administering the ESOP probably had as much information about the company's operations as Bangerter did.
A second allegation contained in the creditors' court papers is that the company manipulated its reported earnings in an effort to improve the appearance of its financial performance in advance of a $51.8-million bond offering.
The creditors said the company prematurely reported the sale of a convalescent care center during the first quarter of 1985. Care recorded a $150,000 profit from the planned sale, which was later scuttled. The recorded gain accounted for about 20% of first-quarter 1985 earnings.
But the company had received only $60,000 of the $500,000 purchase price, the creditors allege, and the sale had not been completed at the end of the quarter. Under accounting rules, the profit should not have been recorded in the first quarter, court documents state.