NEW YORK — William Farley, the charismatic executive at the helm of Fruit of the Loom as it careened towards bankruptcy in 1999, had hoped for a nine-digit severance and pension payout.
Instead, he’s got an eight-digit bill to pay.
A Delaware bankruptcy court in the Fruit of the Loom case has approved a settlement agreement that calls for the former chairman and chief executive officer to repay a portion of the $65 million loan he received from his former employer.
The terms of the settlement agreement between Farley and the FOL Liquidation Trust did not disclose the total amount to be repaid, but sources said Farley agreed to repay 35 percent of the loan, or about $23 million. Delaware Bankruptcy Court Judge Peter Walsh approved the settlement on Aug. 9.
Executives from two other bankrupt companies, Warnaco Group and Kmart Corp., have drawn the attention of Securities and Exchange Commission officials as the space between the growing web of corporate scandal and the apparel retailing industry continues to narrow.
Farley at one point claimed that FTL, in proofs of claims filed with the bankruptcy court, owed him at least $100 million in severance and pension payments. Those Farley claims have been dropped as part of the settlement agreement.
Under the terms of the settlement, Farley agreed to pay $10 million in cash at the outset. The former ceo also agreed to deliver a promissory note to the FOL Liquidation Trust to pay $2 million by June 1, 2004, and a letter-of-credit reimbursement agreement in which Farley agreed to reimburse to Bank of America all draws under outstanding letters of credit in the amount of $2.2 million by Aug. 31, 2002.
As part of the settlement, Farley also agreed to deliver to the trust collateral documents mortgaging certain real property, pledging certain stock and perfecting certain security interests, as well as the surrender of certain life insurance policies and the delivery of the cash surrender value to the trust. Moreover, Farley will hand over certain artwork to the trust.
Court papers showed that one of the pieces of artwork to be given to FTL is “Rougue Island Beach” by John Marin. In the event that Farley fails to deliver it, he is to pay FTL $53,000 and warrant to FTL that he “does not have direct OR indirect title, possession or control over such artwork and also has not conveyed that artwork to any person.”
The collateral documents mortgaging real estate interests to be delivered to the trust include Unit 26 at the Seafields Condominium in Kennebunk, Me.; a second mortgage for property located at 20 Lord’s Point Road, also in Kennebunk, and a mortgage for property at 100 Fore Street, in Portland, Me.
The loan to the former ceo was made in March 1999. Farley resigned six months later and FTL filed for voluntary Chapter 11 bankruptcy court protection in December 1999.
After Farley defaulted on the terms of the loan, FTL on Jan. 28, 2000, began making interest payments to lenders under the loan agreements, but claimed that several defaults existed under its loan arrangement with Farley. FTL in March 2000 posted staggering losses for the fourth quarter and yearend. Included in the fourth quarter expenses was a $20 million charge for a loss contingency on FTL’s guaranty of the $65 million loan.
FTL filed suit in July 2000 in connection with the company-guaranteed loan. A suit seeking to repossess Farley’s artwork was filed the following month.
The operating portions of FTL, its core apparel business, have since been sold to Warren Buffett’s Berkshire Hathaway for $835 million. A spokeswoman for the new FTL declined comment on the settlement. The holding company for FTL Inc. that is still in Chapter 11 has been selling off unsold assets and negotiating payouts to its creditors.
Court papers said the settlement served the “paramount interests of the [FTL] estates and creditors” because Farley has “demonstrated to the trust that his ability to satisfy any judgment ultimately obtained against him is limited.”
Those documents also said that FTL was a party to a guaranty agreement with NationsBank, now known as Bank of America, and Credit Suisse First Boston.
After details of the settlement were hammered out last month, the outstanding principal balance on the Farley loan, excluding interest, fees and amounts owed under letters of credit, was $57.1 million.
Company loans to executives have been a frequent subject of legislative and judicial scrutiny as a number of corporate accounting and governance scandals have come to light this year. As reported, Chuck Conaway, former chairman and chief executive officer of Kmart Corp., and Mark Schwartz, the bankrupt discounter’s former president, are now under investigation for allegedly feathering their nests while the retailer’s financial condition deteriorated up until it filed Chapter 11 last January. The investigation is ongoing and no indictments have been issued.
Former Tyco ceo Dennis Kozlowski was arrested on charges of tax evasion, and his apprehension was followed by the arrests of some members of the Rigas family who ran Adelphia Communications.
With the public clamoring for answers, Congress has been busy leading the charge as well with a flurry of bills detailing new requirements to ensure that corporate executives and board members faithfully execute their responsibilities to the real owners of American companies: their shareholders. The purpose of the new Sarbanes-Oxley Act, signed into law by President Bush on July 30, is two-fold: overhaul corporate governance and increase the accountability of attorneys, accountants and financial analysts.
New corporate loans to executives are now a thing of the past. One of the highlights of Sarbanes-Oxley is that it prohibits public companies and their subsidiaries from extending credit, either directly or indirectly, to their executive officers and directors. Personal loans in existence prior to the bill’s enactment are “grandfathered,” but existing loans may not be renewed or modified.