Pinning his hopes on dubious process; Owner loses business amid apparent conflicts at development agency; Arundel loan turns sour

THE BALTIMORE SUN

As workers installed the shiny wooden lanes and unloaded crates of pins, Robert E. Thompson stared at his financial ledger in growing horror. He realized he would be broke before his new Glen Burnie bowling alley had even opened for business.

Already $600,000 in debt, his applications for further financing rejected by several banks, Thompson turned to Anne Arundel County's Economic Development Corp. But even this county-financed agency -- set up to promote new business in the county -- turned him down, calling his venture too risky.

Yet when Thompson returned to the agency a few months later in 1995, with even more debt and his bowling alley plans unchanged, his application for a $190,000 loan sailed through. The only difference was that this time he had help.

Thompson had turned to M. Willson Offutt IV, a well-connected Annapolis attorney, who also worked for the Anne Arundel economic development agency at the time.

"I was worse off [financially] the second time I went in, but Offutt said don't worry about it, he'd have it taken care of," Thompson recalls. "He knew everyone over there."

Details of the 1995 bowling alley loan, disclosed in interviews and records, demonstrate how people with connections have for years enjoyed unusual access to the agency's multimillion-dollar loan fund.

Of the 57 loans the corporation has issued since separating from county control in 1993 to become a county-funded, nonprofit agency, at least a half-dozen went to companies to which board members had financial ties. And while the apparent conflicts aren't illegal, they rekindle questions about inside dealing that have dogged the county's business development arm for months.

Thompson's story, in particular, offers a look at the high stakes and risks that face outsiders who step into Anne Arundel County's tight-knit community of small business development.

Offutt smoothed the way for Thompson's loan application with letters, phone calls and personal appearances at agency meetings when the bowling alley loan was discussed. But Offutt's interest in helping Thompson secure his loan from the county agency went beyond merely representing him.

Two months earlier, Offutt and a partner had become Thompson's financial backers, having lent him nearly a half-million dollars for the bowling alley venture -- something Offutt didn't reveal to the agency until a curious loan committee member asked. Without the loan, Offutt stood to lose his investment while the bowling alley crumbled under debt.

Instead, the agency's loan helped Thomson make his monthly payments to Offutt. And, when scarcely a year later Thompson finally did go broke, Offutt and a business partner took over the bowling alley -- Glen Burnie Bowl in the 6300 block of Ritchie Highway -- and still run it to this day.

While Offutt denies any impropriety in the deal, he agrees that this was "a tough experience for Mr. Thompson." He says he represented the bowling alley, not Thompson, even though Thompson was the sole owner at the time of the loan.

Offutt says the business' troubles were complicated by a truck accident that left Thompson unable to work for several months.

"I was an invester in a business that borrowed money from the development corporation, that is true," Offutt says. "The goal was to create a business and create jobs, and that's what transpired. It's a success story.

"If I had not stepped forward to rejuvenate this business," by helping to obtain the agency loan, he says, "it would have failed and I would have lost my investment and the development corporation would have lost theirs because Thompson couldn't deliver."

A seeming opportunity

Thompson's foray into the bowling business began almost five years ago, when his favorite Glen Burnie alley, Greenway Bowling Center, burned to the ground in an electrical fire.

He was unemployed and 40 years old. But he was sitting on a $600,000 jury award from a personal injury lawsuit against Baltimore Gas and Electric Co., after a fall on the job years earlier.

Thompson saw opportunity -- 1,500 bowlers with no place to go.

"I had always thought about owning some type of business," he recalls. "I knew a bowling alley could draw the community together, and I thought it might make some money."

Business proposal in hand, he leased space in a low-slung strip mall on Ritchie Highway, and began transforming it into Glen Burnie Bowl, envisioning a premier duckpin bowling center with computerized scoring.

But within months, delays in construction and shipping put the project behind schedule. The bowling alley was three months from opening, the lanes only partially complete, and Thompson was running out of cash.

Spending taxpayer dollars on a bowling alley might seem unusual, but local economic development agencies frequently aid such ventures to create jobs and bolster struggling communities.

Chartered six years ago, the Anne Arundel Economic Development Corp. has taken a mix of public funds and low-interest loans from a pool of 15 local banks, and lent more than $6 million to a variety of businesses. The 57 approved loans backed, among other things, a fitness center, an Annapolis tavern, a plastics company and the inventor of a seat that comes down after a toilet is flushed. The loans ranged from $11,000 to $300,000.

"The whole point is to give a hand to local people who want to build a business and create jobs," says William A. Badger Jr., who took over as agency director in July. "Some people call us the lender of last resort, and in some respects, that's what we are."

On its application to the Internal Revenue Service for tax-exempt status, agency officials stated that loans would only go to companies that could not qualify for bank loans -- primarily minority-owned companies and start-ups in depressed communities. Moreover, Badger said in a recent interview, board members, staff and staff attorneys were trusted to avoid making any loan that would benefit them personally because taxpayer money, and the public's confidence, were at stake.

Thompson first approached the agency in early 1995, but his talks with them were brief. Turned down, Thompson took a friend's advice and went to see Offutt.

"Woody" Offutt, 49, is an attorney, financier and bankruptcy expert who fancies horses and fox hunting. His Mercedes bears the license plate "CHAPT11."

For much of his legal career,

Offutt worked for a small but influential Annapolis law firm. One of his four partners in the firm, Charles F. Delavan, drew up the original charter for the agency and served as its first board chairman.

In 1994, when the law partnership amicably dissolved, Offutt started offering private loans with interest rates hovering around 20 percent to struggling start-up businesses. While those interest rates were legal, commercial rates from banks averaged 9 percent at the time.

Offutt made about a dozen loans and said that several led to successful new companies. But court records show that about half did not. Some who borrowed from him described how the initial euphoria of finding financing quickly faded.

"It's so easy to get into, it's incredible," says Stanley J. Gesek, a former auto body shop owner who defaulted on a loan from Offutt and a partner, losing his house and control of his business. He has a lawsuit pending over terms of the deal. "In the end, they take everything from you and it's still not enough."

Thompson recalls riding that same emotional wave, when Offutt agreed almost immediately to the terms of a $475,000 loan in the spring of 1995. "He gave it to me just like that," Thompson says. "With a handshake. Without any information about the business or anything."

Thompson agreed to repay

Offutt in monthly installments with 19 percent interest, and an additional 5 percent every sixth month. Offutt put up a third of the money and brought in a second investor to fund the rest.

"I know we were charging the guy a stiff rate," Offutt says. "But that was typical. We would demand a rate significantly higher than what you get at your local bank, because we are financing something that is new and uncertain."

Thompson believed he would cash in by launching the new bowling center just as the popular league season began. But until the lanes opened, he knew he wouldn't be able to meet Offutt's payments, which started at about $7,500 a month, and grew to more than $12,000 with renegotiations. Thompson said he was also paying sizable legal fees to Offutt -- something the attorney denies.

"I don't have any recollection of sending him a bill or being paid a dime," Offutt says.

After being shown copies of a monthly bill totaling more than $2,975, Offutt said: "I sent that to Mr. Thompson so he would know all the time and effort I was spending. I never asked him to pay it and he never did pay it. I was never paid a dime."

Still, Thompson was sinking in debt. Desperate, he took Offutt's advice and approached the agency with a second application.

"I needed money to pay his loan back," Thompson says. "All the money I got from the [agency] I used to pay him back. He knew he wasn't going to get his money back otherwise."

Just how much influence Offutt wielded in the summer of 1995 -- and whether his involvement in Thompson's application constitutes a conflict of interest at all -- is a subject of considerable disagreement.

Agency officials won't talk about the loan, citing confidentiality concerns. Offutt acknowledges that he "shopped around" at the agency for Thompson, but says he also approached banks and private financiers.

Offutt contends that it was not his clout, his work for the agency or his friendship with board members that helped get the loan approved. Those connections might have been "5 percent of it," Offutt says, but "95 percent" was because he and his partner had given Thompson fresh backing with the $475,000 loan.

Offutt has said repeatedly in interviews that he did not intervene in the process or lobby for the loan. But letters obtained by The Sun, and accounts by agency officials, tell a different story.

Members of the agency's finance committee said Offutt attended their closed-door meeting the day the bowling alley loan came up for consideration in early August 1995.

Offutt says he was invited to answer questions. But David J. Steinhoff, the agency's loan administrator, says that then or now, it would be highly unusual for attorneys representing loan applicants to attend those meetings.

Badger, the agency's current chief executive, instructed loan committee members two months ago not to speak to reporters. But one committee member who spoke on condition of anonymity found Offutt's presence at the deliberations baffling. "The reason I remember it so well is that it seemed so awkward to me at the time. It seemed weird to me. Why would he have been there?"

The extent of Offutt's involvement is apparent in letters he wrote to Thompson and to the agency. In one, addressed to loan administrator Shelly M. Gross-Wade and dated July 24, 1995, he urged officials to move quickly, and suggested which attorneys the agency should assign to the transaction. In another, he said he had arranged for a second appraisal of Thompson's properties, which he thought the agency had undervalued.

On Aug. 22, 1995, Offutt wrote Thompson to say he would be charging him $175 an hour for his help securing the new loan, negotiating the terms of the deal and briefing agency attorneys.

"I found myself acting as your mortgage broker," he wrote to Thompson. That new role "raises no ethical issues for me."

While Offutt was apparently charging Thompson during this time, he was also being paid by the development agency -- as one of a handful of transaction attorneys. In that role, Offutt was responsible for a significant portion of the legal work related to lending. Agency records show that, between 1995 and 1998, the agency paid him $57,786 for his services, nearly twice what they paid any other lawyer.

Agency officials denied The Sun's request to view legal bills, which would indicate whether Offutt charged them for any work related to the bowling alley loan. Until recently, the agency denied repeated requests from The Sun and from County Executive Janet S. Owens to disclose even such basic information about the loan program as the names of borrowers and the amounts of loans.

Agency officials say it is up to board members to volunteer information if a conflict arises. Neither the state financial regulation division's annual review nor a recent County Council-ordered audit is set up to look for conflicts of interest.

The audit did reveal, however, that board members paid themselves thousands of dollars over six years for supplying the nonprofit with everything from legal advice and accounting work to stationery and computer software.

In fact, less than a year after the agency granted the bowling alley loan, board member Andrew L. Lombardo became the accountant for the partnership Offutt set up to invest in the alley and other businesses, according to Offutt's financial records, obtained from court files.

At first, Lombardo said he could not recall ever doing work for Offutt. In subsequent interviews, though, he acknowledged the relationship.

In September, after Owens' demands and an opinion by the county attorney, the agency released records, financial documents and meeting minutes that revealed that several borrowers had financial ties to board members. Board members interviewed this month defended the loan program but acknowledged for the first time that it has had problems.

Leonard A. Blackshear, a director since 1993, says the program had "some questionable spots."

But he adds: "Overall, it has been a great program that has helped the economic growth of the county and has helped a lot of people. I think some loans are unfortunate, but you can't throw the baby out with the bathwater."

Offutt says his involvement in Thompson's loan was not a conflict of interest but simple networking, a practice that was common -- even encouraged -- at the agency.

"As far as I am aware, board members, friends of board members, acquaintances were all encouraged to refer potentially qualified applicants to the development corporation," Offutt says. "They were looking for customers that met their goals and profiles. I have suggested to probably a dozen local businesses that they contact the development corporation, and that has always been greeted warmly."

Byron L. Warnken, a University of Baltimore School of Law professor who is often retained by law firms to render opinions on ethics issues, says that, in general, entering a deal with that many connections makes the perception of a conflict unavoidable.

"The more hats an attorney wears, the higher the risk is that a potential conflict becomes a real conflict," he says, noting that he was not familiar with specifics of Offutt's arrangement. When that happens, he says, it's unclear whose interests the lawyer represents.

Neither Offutt nor the agency's board in 1995 saw any ethical problem.

Minutes from an Aug. 16, 1995, meeting of the board of directors show that members knew that one of the agency's lawyers had invested in the bowling alley.

"Mr. Offutt is a transaction attorney and knowledgeable of the incentive fund," the minutes state. "However, [our attorneys] do not view this as an ethical problem since he is a vendor."

Asked to elaborate on how

Offutt's status as a "vendor" would eliminate any conflict, Badger and loan administrator Steinhoff say they have no explanation.

"I was on the marketing side of the house at the time," Badger says.

"It's not proper to discuss an individual loan," Steinhoff says.

Agency reforms

Since Owens took office in January, she has called for reforms at the agency, replacing five of nine board members and ordering them to write a conflict of interest clause into their bylaws.

The clause, which took effect in September, requires board members and loan committee members to disclose any business relationship with a company seeking a loan. It does not apply to the agency's staff or lawyers.

Badger now says that the bowling alley loan poses ethical concerns -- a departure from his earlier stance.

"It is an unusual transaction," Badger says. "It is something we need to look at and is one of the things we will be scrutinizing as we move forward and make sure that in the future our attorneys are accountable and ethical in their service to this corporation."

"The board is now made up of people who have the good of the county at heart," says Ermis Sfakiyanudis, one of the new board members. "Janet [Owens] has made it very clear we are to follow the bylaws of the corporation and run the corporation as it was originally intended."

But the reforms can't help Robert Thompson.

Just before Christmas 1996, tow trucks pulled up the dirt road into the woods that surround his Severn house. They had come to repossess his cars. Inside, a call came from a credit collection company that he would lose his house. Offutt was calling in the loan.

"We were worried he was going to take everything, even my Christmas presents," Thompson recalls.

To save his house, cars and other possessions, Thompson agreed to give up all control of the bowling alley to Offutt and his partner. He also turned over a house that he owned and agreed to give them part of any settlement from a pending personal injury lawsuit filed after the 1996 truck accident. In exchange, Offutt repaid the agency in full.

The takeover would not have been possible, though, if the agency had objected on Thompson's behalf. In minutes from a February 1997 board meeting, Steinhoff, noted that "any transfer of ownership requires our express consent," but said the board wished to "handle this matter amicably." A month later, the board allowed the transfer.

Offutt says Thompson's story is a sad one but blames Thompson's loss not on the terms of his loan, but on the truck accident that left Thompson seriously injured and unable to work for several months.

"Mr. Thompson's situation had all the usual problems of a start-up, and he got whacked in the head [in the accident]," Offutt says. "It's not common for me to take over a business and to have to buy out a failing entrepreneur. It's never what I want to do."

Thompson agrees that his accident sealed his fate, but still he wonders: "Sometimes I think

Offutt knew all along he was going to end up with the bowling alley."

And sometimes Thompson feels angry, though he tries not to think about it too much.

Today, Glen Burnie Bowl is turning a profit. This summer, it was named "Best Bowling Center" in Baltimore Magazine. And Thompson's wife, Barbara, says she has even bowled a few frames there.

But Thompson says he won't return. He has given up any thoughts of owning a business.

"These days," he says, "I just want to keep what I have."

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