Saturday, August 9, 2008

We Are Doomed to Repeat What We Do Not Understand

Albert Einstein once said "The definition of insanity is doing the same thing over and over again and expecting different results". He also said, "A man should look for what is, and not for what he thinks should be." Through these long months, I have maintained that the bankruptcy of the organization was built with love and care “is what it is.” In conducting post-mortem analyses and waiting for “the rest of the story” to reveal itself I’ve had to come to terms with laying down the expectation that “what should be” will become the basis for a future solution or resolution. More than anything, hindsight is a great teacher and I accept that train wreck occurred on my watch. I was driving the bus that stalled on the track, and when the train’s headlights appeared in the darkness, I made the decision to rely on the advice of system ‘experts’ to restart the engine rather than acting on my instinct to push it off the track. We all died.

There are of course, no clauses in the FAR playbook that define what contractors are to do when there’s a train on the track speeding unchecked in your direction or when federal procurement officials decide to your detriment, to throw away the rulebook in favor of their own contrivances. There is no guarantee that, had the dispute been properly resolved, we still wouldn’t have been placed into an involuntary bankruptcy imposed by the merger of Regions Bank with Amsouth. Our lending requirements were defined out of the scope of the loan profiles that were carried into the merger on the portfolio ‘keep pile.’

“What should be” is represented by an ideal world in which there’s no such thing as political interference; regulators do the jobs they are compensated for; mistakes are never made or if they are, they are recoverable; and agendas are openly communicated and disclosed for the benefit of all. Unfortunately, that is not the world we live in and while I did not fail to identify that the processes which governed our work were being impeded, I failed to comprehend the degree to which our work was being interfered with - in the media, politically, contractually, and in the financial world. Like my peers in this industry, I believed that the constraints and safeguards imposed by regulations would force “reasoned heads and regulations to prevail.’ I did not understand that if the engineer driving the train that is headed in your direction has no brakes and is traveling unchecked, there’s no need to replace the starter while stalled on the track.

Now I know that it is inevitable that there will always be the likelihood of unpredictable catastrophic events occurring that have the potential to wipe us out. And I also know that catastrophe can be predicted, and (not if but) when these events occur, the work will be impeded or destroyed at great cost and loss. The key to understanding how to avoid catastrophe is analysing, understanding and planning for reducing the deleterious impact of catastrophic risk events through the preventive application of continuous risk management and change control practices. Ultimately, those practices are not necessarily what we learn through executive management schools – unfortunately, they are best identified and learned through ‘trials by fire’ and real life experiences captured, memorized, dissected and distributed.

Somewhere between “what should be” and “what is” lies the definition of that entropic event that we know as “risk.” And that is where we who serve on corporation boards or who hold executive management positions work while we create communities, and manage programs, services, and financial affairs. According to the Project Management Institute, “Risk is a type of event, positive or negative, which has the potential to effect the outcome of an organization’s projects or activities, and may be “known,” that is, identified and planned for, or “unknown or a known unknown” with the potential to occur and overwhelm the organization.” To sum, the following risk events acted like dominoes to swamp the Advocacy and Resources Corporation into becoming fodder for a bankruptcy filing:

  1. The media created a platform of perceived and widespread misconduct as a pattern of behavior in the JWOD program. All six hundred affiliated organizations were painted by the same brush, and the top twenty producers in the program were particularly targeted. Misstatements and political agendas forwarded by the media were widely reprinted and became the ‘sieve’ through which all attempts at correction of the facts were filtered, whether or not veracity could be established.

  2. JWOD leadership failed to comprehend the impact of the media upon local community rehabilitation programs and recoiled from their responsibilities to (1) issue correcting information while managing the media and correcting the record, leaving it to individual agencies to fight each media battle separately and (2) manage the day to day operations associated with contractual obligations, allocate personnel to the conduct of business, and left it to individual agencies to fight for course correction in the impeded environment without coordinated national support from either the central non profit charged by law to broker the programmatic relationships or the Committee for Purchase.

  3. Politcal appointees and staffers in government seized on the media’s activities and the lack of response from JWOD leadership as a basis for furthering their own political agendas,[1] impeding contractual processes and failing to ensure that contract management obligations were met, thus knowingly and purposefully creating extreme financial strain on this organization in the post Katrina economic environment. All they had to do was direct their staff to do nothing to meet their obligations and that is exactly what they did. They waited us out until our resources were exhausted, thus benefiting commercial firms.
  4. The secured creditor and their representatives deftly capitalized on (1) media reports and the capability of the media to control the message, (2) political and economic conditions imposed by the government’s failure to act in accordance with contract terms, and (3) the very integrity of the social enterprise business model as a strategic and acceptable method for economic development, to seize and convert the assets of the not for profit organization for the purpose of meeting pending merger write-downs from their loan portfolios.
  5. Our elected local, state and national political representatives, whom we relied on to represent the community, reframe political processes and demand course correction, looked the other way, failing to appropriately value or appreciate the loss of the federal activity to our local communities, the impact on individuals with severe disabilities, the financial impact to creditors supporting these federal contracts, and the ultimate loss of core services that cannot be replaced without social entrepreneurial practices at work in our communities.
  6. The assigned Bankruptcy Court Judge, whose responsibility is to manage proceedings, has never questioned the appropriateness of the bankruptcy in front of him, the independence or actions of the appointed Trustee to act in the best interest of the community, and has failed to appreciate whether the rehabilitation of the organization is being handled in accordance with the wishes of the community, regulatory requirements, or in the interests of the persons the agency is charged to serve. It’s bankruptcy as usual and the only beneficiaries to the process are the attorneys who have waived the ‘bankruptcy flag’ over their open checkbook, and who will most assuredly have their fees paid when creditors and employees are harmed again, when the organization is reorganized to chapter 7, and persons with severe disabilities and their families are without the community and employment supports they desperately need.
  7. The community has for whatever reason, failed to raise its’ voice, acknowledge the loss, demand an accounting, or register the value it placed on the service system that was forged from the successful application of social enterprise practices at work in the community. The primary stakeholders to this process, persons with severe disabilities, have lost their primary organizational support system, and cannot muster the voice without community assistance. To date this has not happened and the service system that was sponsored by ARC has not been replaced as no other agency or political entity has stepped forward into the advocacy breach.
The danger in any entrepreneurial enterprise is that while it might be important to enterprise leadership, it might not be important to those who manage and set the agendas for the enterprise’ stakeholders-citizens, persons with disabilities, creditors, customers. Whether this event is resolved on behalf of the segment of the community served by the former Advocacy and Resources Corporation depends entirely upon whether the community stakeholders to this process determine that the outcome is important to them and organize toward an effective solution. In this case, it would seem that if decapitating the leadership effectively dissolved the assets of the enterprise for the benefit of the ‘negative stakeholders,’ then one should question whether the enterprise was ever necessary in the first place. While that is for the stakeholders to the process to decide, our communities are still faced with the lack of supports to approximately 1,500 of the most defenseless of our citizenry-mothers, fathers, aunts, uncles, brothers, sisters and neighbors-persons for whom there are no other services or funded supports.

[1] GAO & Washington Post Articles

Know When to Fold 'em

A no-fault settlement agreement[1] has been negotiated between the Trustee and the inside directors, Terri McRae and Tim Durm, which allows the Trustee to proceed to lodge a claim against the D&O carrier for $3,000,000 using the cumulative adjusting transaction error in the sales order clearing account of $4.2 million dollars as a basis for establishing “loss” and a breach of management oversight responsibility. The basis for the D&O claim herein has been shifted from (1) the completely legal and disclosed transactions between the companies, to (2) the soc error with “errors and omissions,” which has been redefined as “the officers should have known this error existed” and because they didn't, they breached their fiduciary duties.

There is a difference between a material mistake and material misconduct. Remember the "Prudent Man Rule"? If the attorneys handling the D&O claim for Philadelphia Life Insurance have any sense at all, they will raise this as an issue to have the claim thrown out. It should be remembered that while the immediate assessment of the problem resulted in making a correction and immediate restatement of the balance sheet portion of the financial statements for the previous three year period, it had no functional bearing on the operation of the agency, its’ receivables, expenses, periodic interim reports to the lenders, or net return and overall financial position. That this error existed at all will be the basis for the claim made.

Collins, as Trustee, is suing simply because under the Act, he can sue the members of a Corporate Board under the presumption that if there is a bankruptcy filing, there is a “fault or breach.” With the complicity of the middle Tennessee Bankruptcy Court, they do not have to be related events and apparently, they don’t even have to have occurred under the control of management. So long as the presiding Judge does not impede the process, corporation directors are fair game for collection processes conducted against D&O policies or failing that, conversion of personal assets to pay down the estate of the bankrupt debtor corporation. The gap between D&O coverage and Board member protection is a canyon of absent protective coverage and creates an opportunity for overreaching Trustees to abscond with the personal assets of well meaning corporation organizational leadership for the purpose of repaying bankruptcy court fees and expenses under the theory that ‘because it happened it must be wrong.’ Any other branch of the legal advocacy system would refer to the conversion of personal assets by this process as ‘racketeering.’’ Indeed in some quarters, litigation against Trustees for conversion of personal assets is now occurring filed under Ricoh statutes.[2]

This suit against the D&O carrier will be filed by the Trustee’s attorney on behalf of the inside directors to reimburse the court for the costs of the legal proceedings. Upon the signing of this settlement agreement, the suit against the inside directors will be set-aside for the period of D&O litigation. Upon collection of the $3,000,000 the suit against the inside directors and the settlement agreement will terminate. Should the D&O claim be unsuccessfully resolved, the Trustee will revive the suit against the inside directors requiring them to sell their personal homes and possessions for reimbursement of a minimum of $50,000 and potentially up to $3,000,000 to the court. Should the worst case scenario occur, the inside directors can declare personal bankruptcy, which will allow them to keep a homestead exemption of up to $25,000, depending on the value of their personal possessions, which by no means approaches a figure even close to the $3,000,000 in question.[3] The Trustee may opt to place a lien on their future earnings. Additionally, the Trustee’s legal firm will file suit against Philadelphia Life, the D&O carrier, for failing to mount a defense of the inside directors as required by Tennessee law. Should the total collected sum exceed $8,000,000 the “inside” directors will become the beneficiaries of the excess proceeds. In the very remote event that this actually happens, it will not of course, even begin to compensate us for the destruction wreaked upon our personal and professional lives and reputations by these processes.

[1] Settlement Proposal
[2] See Case No ---- Florida
[3] See submitted, personal financial statements of Terri McRae and Tim Durm.

Litigating D&O: You Get All the Defense YOU Can Personally Pay For

Since the passage of Sarbanes Oxley (SOX),[1] legislation written for publicly traded for profit entities in the aftermath of Enron and WorldCom, and the passage of BAPCPA, more emphasis has been placed on looking to Directors and Officers insurance policies to replace losses that occur while Corporate Boards are seated or to reimburse bankruptcy courts (which are fee generating entities) for their costs. The hallmark of this legislative reform is the automatic presumption of ‘fraudulent bankruptcy filings,’ wherein business debtors run up large debts and leave creditors and employees ‘holding the bag’ for losses only to reappear at a later date operating as another business. The reform characteristics of the Act now hold management and Boards personally financially responsible for pre-petition debts incurred prior to filings, whether or not there is actual and intended mismanagement at the expense of the creditors.

The passage of this act has made bankruptcy a very lucrative fee-generating business within the Department of Justice’s Trustee program, which operates with little independent oversight or supervision except that which is provided through the U.S. Attorney General’s Office. While federally appointed Bankruptcy Judges manage proceedings, Trustees are charged to manage cases on behalf of the unsecured creditors, and derive their financial support through priority fees charged against collections. There is no timeframe for discharging a case or converting it to another proceeding.

Whether the organization is for profit or not for profit, if the business structure of the bankrupt entity is that of a ‘corporation,’ the D&O policy is fair game for litigation no matter what the cause of the bankruptcy, unless as some courts have ruled, the agency's charter includes references to the "Prudent Man Rule," wherein some courts have found that the right to sue for breach of fiduciary responsibility is a right reserved for creditors, not the debtor in possession (DIP) or the Trustee who serves as the DIP. The only way to reach into or litigate against a D&O policy is through the failed corporation’s Board of Directors, volunteer or compensated, who are now under the Act, personally liable for the financial conditions of the corporation in the same manner as "owners," and who, where the 'prudent man rule' has been incorporated, are shielded from frivolous lawsuits filed during times of financial crisis out of their control.

Frequently, Trustees extract pre-negotiated ‘tolling agreements’ designed to limit the payout liability of claims made against the carrier. This tactic has been rarely used to address losses imposed by bankruptcy imposed by a secured lender upon a not for profit organization or church. However, it is expected that even these organizations will be fair game in the current economic climate, a fact which has very serious implications for the volunteer boards of not for profit corporations typically operated on very small margins, have little or no ability to absorb significant losses, and are subject to significant negative economic impact during times of economic downturns or natural disasters.

In this case, in order to pull cash into the financially strapped debtor reorganization, the Trustee elected to ignore the impact of the "Prudent Man Rule" and pursue a suit against the Philadelphia Life Insurance Company, issuers of the agency’s Directors & Officers policy,[2] negotiating a ‘tolling agreement’ [3] for a payout of $3,000,000 on the last day the policy was in force. He deftly minimized payout risk to the D&O carrier for “errors and omissions” by separating out the ‘inside directors’ or staff from the ‘outside directors’ or volunteers and delimiting his right to make claims against the policy as the debtor in possession.

By creating a community climate of perceived mismanagement through the development of salacious charges[4] (using the estimated $8 million in multi-year dollars transacted between ARC and the afore-mentioned companies as a basis) he knew the D&O carrier, having a ‘duty to defend’ directors under Tennessee law, would not, primarily because the claims made fell outside the scope of their D&O policy coverage. As expected, this resulted in the D&O carrier denying the “inside officers” a defense beyond that limited defense they could pay for thru a sole practitioner. Dispute of the claims made would have required contracting with an independent forensic auditing firm, and paying significant costs for depositions and court reporters, all of which were costs beyond the personal financial capability of the inside officers. When the D&O carrier, again as expected, ignored pleas to mount a defense in accordance with the terms of the Directors and Officers Policy, the Trustee filed a motion for “summary judgment” [5] to speed the route to collection on the tolling agreement.

The summary judgment was denied by the bankruptcy court Judge, Keith Lundin, and at that point, the Trustee and his legal representatives brought the litigants to the table to propose a “settlement” offer to close down the pending suit against the inside directors. During the course of the closed door discussion, they admitted that they ‘knew we were nice people, “hadn’t done anything wrong,” but they could not appear to “collude” with the inside officers to mount a suit against the D&O carrier to collect the pre-negotiated fees against the tolling agreement. By their own statement, they just needed $3 million to reimburse the court for their fees, and ‘we didn’t even need to cooperate,’ but if we interfered we would be held liable for $3 million in repayment of these fees in accordance with the allowability under the Act to hold members of corporate boards responsible for any types of losses that lead to bankruptcy filing[6] (Bankruptcy Reform Act, 2005), even those that occur in cases where the debtor organization is placed into what functionally amounts to an ‘involuntary bankruptcy’ by the secured creditor (Amsouth) and even though we were not in control of the debt incurred during the ninety day pre-petition period.

So, while we weren’t ‘technically responsible’ for the losses, which derived from a contractual dispute with the government, incomplete federal litigation and the spending of the workout group, and were no longer employed at the time of the bankruptcy filing, the 2005 revisions to the Act extended the allowability period to two years prior to the bankruptcy filing, thereby picking up the inside directors as responsible parties to the D&O litigation process. Because losses occurred during the period of allowability, one can make the claim that the Directors and Officers breached their fiduciary responsibilities, again despite the incorporation of the "Prudent Man Rule" into the agency's charter and by-laws. They proposed utilizing the $4.2 million dollar adjusting entry error in the soc account as the basis for establishing “errors and omissions and breaches of officer and management responsibility” even knowing that this error, which required a material restatement of the net inventory assets, made no impact on the financial position of the agency, and fell within the five percent (5%) statistical error of confidence protocol under which GAAP operates.

[1] Cite
[2] Philadelphia Life D&O Policy
[3] Tolling Agreement
[4] Lawsuit
[5] Summary Judgement Petition
[6] D&O Article

The Bankruptcy Filing as Revisionist History

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)[1] makes provision for NFP organizations in financial distress to seek the protection of the State Attorney General and State Courts to reorganize during periods of financial distress.[2] Under the Act, federal rules are suborned to state regulations. At no time prior to my resignation was the organization’s board advised by the workout group of their rights to seek this protection under the State courts. One can reasonably presume and conclude that both Amsouth Bank, as the secured lender, and KRS, as the ‘independent and expert turnaround contractor’ should have been aware of this feature of the Act and its’ availability to the not for profit organization in constructing a critical financial path through government dispute and past the secured lender’s merger. Retrospective review of the events makes it easy to conclude that bankruptcy was planned for by the secured lender and manipulated into the not for profit organization as a method for securing control and sale of assets.

Upon the bankruptcy filing, the KRS began to process the organization for liquidation and sale of the assets. In July of 2006 a contract DOJ Contract Trustee, Michael Collins, was appointed. He elected to keep Kraft Recovery Services LLC, in place along with the attorney group, Baker-Donelson, rather than maintain independence by terminating the relationship and contracting with his own advisors. One can make the reasonable assumption that Michael Collins, as the Trustee, should have been aware of this feature of the Act and its’ availability to the not for profit organization through the State Courts in constructing a financial path through government dispute and past the secured lender’s merger. The records to date do not indicate that any attempt was made to reconcile the features of the Act with the merger agenda of the secured lender or to protect the not for profit or its’ unsecured creditors from predation. Rather, Collins elected to continue to campaign carried out to date by KRS on behalf of the secured lender.

In November 2006, Collins recruited for profit post-petition entities to the table to manage the resurrection of the not for profit organization and its’ JWOD contracts. Rejecting purchase offers from other not for profits, he accepted the offer from LMM&M, LLC formed for the purpose of replacing the management and directors of the organization. LMM&M, LLC was subsequently purchased by Jeffrey Callahan who created AUI Management, LLC[3] to serve as the post-petition lender and operator. At the time of his appointment, Mr. Callahan was the target of a suit filed by the city of Signal Mountain, for noncompletion of a contract awarded to his sewer engineering company, AUI. The allegations in the suit reflect poor overall contract performance, yet Mr. Callahan's participation in the management of ARC is ostensibly for his experience in managing public contracts. Mr. Callahan created multiple companies to shield the fees he has been systemmatically removing from revenues generated by ARC's federal contracts including AUI Management, LLC and CPI which not only charge for administration, but leasing ARC's own equipment back to the organization at a suspect rate, payments to EconoGenesys, and the factoring of supplies at cost plus a percentage. A recent lawsuit filed by Owensboro Grain against Jeffrey Callahan and all of his alias companies indicates that the management entities have failed to properly reimburse Owensboro Grain for the cost of supplies.

Until recently, Dennis Michael Barrett, an attorney debarred by the US Supreme Court, who was twice convicted for violating federal contract procurement protocols and is currently on federal probation through October of 2008, served as the agency’s Chief Operating Officer. Parnering with Kevin Bowling in the creation of a sales and marketing company named ‘EconoGeneysis,’ he unduly benefit from commissions paid to him for work conducted under the set-aside program.

Thousands of dollars in bankruptcy court fees have been paid to Michael Collins, KRS and Baker-Donelson Attorneys with no apparent progress toward resolving the most critical matters that involved the resolution of the price change dispute. As of 02/08, the trustee certified a loss to the not for profit of more than $6 million after 16 months of “intervention.” The government price dispute has not been rectified in accordance with FAR requirements or litigated within the Administrative Procedures Act, and filings indicate that the current organization owes millions of dollars to it’s current creditors. The resurrected agency has been placed on probation by the Committee for Purchase for failure to meet the direct labor hour requirements of the JWOD program.

Collins submitted yet another financial reorganization plan[4] to the court during the week of March 24, 2008. This proposal now intimates that because the organization is in bankruptcy, everybody who ever served as an officer or director or had a role in advising the executive staff must have been bad and he therefore reserves the right to litigate against the former board members Don Calcote, Steve Copeland, Gerry Whitehead, Vikki Thomas, and Ruth Jones in the future for conversion of funds through the D&O or other routes. He also threatens to litigate against Ken Williams, attorney, John Stophel, attorney, and Lloyd Pitts, Certified Public Accountant. He has proceeded to wave the flag of lawsuit against Lloyd Pitts, and is seeking to force twelve creditors who are owned significant amounts of monies to disgorge previous payments made not in preference, but because they were necessary to conduct business activities as directed by Amsouth and KRS.

What he has failed to disclose to potential unsecured creditors in this set of documents is that the settlement constructed between the Trustee and the inside directors through a pre-negotiated tolling agreement with the D&O carrier, settles all claims that may be litigated against the insurance carrier for the actions of the Board of Directors or their subcontractors. While leading potential unsecured creditors, who are asked to vote on this plan, down the garden path of “I will set up a trust to capture future recoveries so you can get paid twenty-five to fifty cents on the dollar over time” he does not disclose that he cannot do so through the route of litigating against “the bad actors,” which is basically (by his description) everybody who ever served in any capacity to the organization. Monies recovered would be placed into a trust account from which priority fees would be paid first to the trust managers (a.k.a Michael Collins, proposed), second to unsecured claimants.

Collins further asserts that he recognizes that this solution hinges on a satisfactory resolution to the vegoil dispute, that he may not achieve a satisfactory outcome against USDA (which should have already long been rectified under the Administrative Procedures Act) but fails to acknowledge that if experience to date is any indicator of his prowess, he and his advisors might not be competent to litigate these matters. The multiyear vegoil revenue numbers proposed in the reorganization documents are illusory and offered without support, and lack compliance with FAR pricing mechanisms. And finally, his proposed reorganization plan allows the operator, AUI Management and the contracted marketing company, EconoGenesys (Bowling and Barrett,[5] et al), the rights to more than a combined ten percent of every dollar earned, a percentage of benefit that is more than has ever been afforded the costing and profitability structures of the JWOD contracts, and which reserves nothing in the way of funding for the recovery of the not for profit or the benefit of the creditors.

As offered, the reorganization plan paves the way for a chapter 7 filing, wherein the new secured creditor, AUI Management, is guaranteed the future opportunity to recover losses and benefit from the sale of the not for profit assets to the detriment of the creditors.

Political Interference in the Contractual Environment

The contract climate in which ARC conducted its’ work was authorized and captured in the United States Code, and implemented through Federal Acquisition Regulations[1] and clauses.[2] Historically, annual fair market prices for government unique supplies[3] had been set by the Committee for Purchase after a review of direct and indirect cost and compliance with requirements imposed by the Office of Management and Budget and captured in OMB Circulars A-122 and A-133. These price schedules, adjusted annually in response to economic conditions, were ‘fixed’ for an annual price period, with certain elements of price adjusting through the use of agreed methodologies long established in government. According to regulation, interim price changes can be negotiated when conditions in the marketplace markedly change and procedures for negotiation were clearly established by regulation and memorized by the Committee in Pricing Memorandum 2 (PR-2, 1998).[4]

After the hurricanes of 2004 (Rita, Ivan) and 2005 (Katrina), ARC-D entered in a protracted price change negotiation with the personnel in Farm Service Agency, a division of the United States Department of Agriculture.[5] An additional dispute was in process with the Department of Defense. The agency’s fixed-price contracts[6] were significantly and negatively affected by rapid increases in commodity and fuel prices after sales to China reduced crop reserves, followed by the destruction in the gulf coast states. The environment was much like we see in the economic conditions of the current US business climate. When the price change negotiation failed to resolve through the use of established procedures and within the necessary timelines, we requested the use of the alternative dispute resolution procedure known as “Impasse.”[7] The authority to use this procedure was delayed by management personnel within Nish’s products division until January of 2006, nearly seven months after the thirty day price change period had elapsed. On January 17, 2006 ARC filed an administrative dispute procedure with the Committee for Purchase. The dispute resolution process became unnecessarily prolonged when management staff at the Committee opted to unilaterally revise the criteria for the management of the dispute process itself during the course of our dispute process, extending the dispute resolution period from thirty days to one-hundred-twenty days without notifying the parties of the change in procedure.

There is evidence that this same management staff at the Committee allowed non-price issues to ‘muddy’ the dispute process and may have also been unduly influenced by the lobbying of commercial firms to reduce the size of the JWOD contracts within the Department of Agriculture. It has since been learned that the Federal Acquisition Regulations which provided a basis for fixed price contracting were suborned to the political machinations of a few highly placed political appointees and management staffers in the Department of Agriculture and the Committee for Purchase who circulated and used the allegations in the Oregonian articles as a basis for impeding the organization’s contractual price change rights under the FAR to pass thru direct costs (up or down) through adjustments to the fixed annual price, and whose misapplications of federal procurement laws have since been chronicled by both the General Accounting Office (GAO), the Office of Management and Budget (OMB)[8] and the Washington Post[9] in at least two other matters related to the events here in Cookeville and elsewhere in the JWOD community of affiliates.[10]

The failure of this dispute to resolve timely appears to have become, at least in part, the basis for our lender’s decision to call our lines of credit and seize agency assets for resale in preparation for their merger with Regions Bank (publicly announced May 26, 2006).[11] That commodity and fuel prices were escalating wildly is well documented by economic indexes. That the prolonged negotiation had caused a compromise of the agency’s compliance to the lender’s profitability covenants as of second quarter ending December 2005 (fiscal year July 1 thru June 30) is without question and was duly disclosed to the lender along with a complete explanation of the status of the dispute. That management had completely informed the lender’s personnel throughout the process is also a matter of record. When disclosed, the lender’s representative, Jim Armistead, made the following statement to executive management in response: “What kind of a bank would we be if we were only here for the good times?” We know the answer to that now.

It is also known that personnel within the lender’s organization had become aware of the controversy raised by the Oregonian’s widely reprinted allegations about the JWOD program which in turn, trickled down by implication to ARC. By January of 2006 the agency was conducting workforce reductions and stripping whole programs out of the organization in response to the protracted dispute. Wages and salaries were rapidly and markedly reduced beginning with executive management. The agency’s executive managers began to negotiate with outside firms for the restructuring and sale of the UGR-A contract to a commercial competitor.

Our operating line of credit was renewed by the lender in February and subsequently ‘called’ in April of 2006. Coupled with the continuing stress of what had become a protracted dispute with the government, our ability to continue to cashflow our significant contractual obligations was immediately impeded, causing our largest vendors to stop delivering supplies when they could not be assured of payment. Amsouth placed us into the ‘Special Assets Group.’ We proposed a workable financial reorganization plan to the lender to work us past the resolution of the dispute. Special Assets personnel declined to release our assets to another bank. We were told to direct our employees to continue to work. I notified our employees in writing that we had been ordered to work and I could not guarantee their wages. I called the City Council members into a meeting at our facility and advised them that we were under financial siege by our lender, had been told to continue to work without the use of our receivables and that I could not guarantee that we could pay our bills for utilities. I asked for their forebearance while we worked through the crisis. Every day became an ordeal.

It should be noted that up to the point that Amsouth called our line of credit, and while we were operating under the stress of months of dispute without resolution, we had not missed a single payment to our lender, and all vendors were receiving payments and employees were receiving wages. Special Assets forced a ‘workout’ group, Kraft Recovery Services, LLC (KRS), into our work advising us that they would determine whether this company was ‘worth saving,’ but the lender failed to disclose that they had already ‘written the organization down’ as part of a multi-million dollar reduction in their lending portfolio in preparation for their pending merger. The Advocacy and Resources Corporation was not the only local entity negatively affected by this merger.

KRS, presenting themselves as experienced in not for profit workout, insisted on the one hand that ‘they were here to help us’ and effectively manipulated our Board of volunteer directors to turn over the reins of the organization. On the other, KRS had failed to disclose their pre-existing arrangement with the secured lender to position (hence the term ‘workout’ in favor of the secured lender) the organization’s $18,000,000 worth of assets for a bankruptcy filing. Little did we know that the ninety day pre-petition period for a bankruptcy filing had been commenced, or that the secured creditor’s total concern was to insure their receipt of as much cash as possible paid down to their organization at the expense of creditors before the petition filing date. KRS immediately began to reduce the ability of agency personnel to conduct the tasks necessary to deliver on orders to the government knowing that it was highly unlikely that a bankruptcy judge would require payments made to the secured creditor during the prepetition period be “disgorged or reversed.”

Our Board, believing they were working in good faith with KRS toward a solution, worked to develop continued financing or move the lending facilities without success, while agency staff struggled to maintain orders and minimize disruption. While executive staff worked to reorganize internal resources and prioritized contractual obligations to reduce risk and maximize revenue, KRS examined revenue streams, costs, wages and salaries, and began the wholesale ‘slaughter’ of vendors and customers, ordering large amounts of supplies to convert inventory into receivables to pay down the secured lender at the expense of the creditors. I protested vigorously.

During the April interval, when cashflows reduced and large numbers of transactions stopped moving through the accounts, the executive management and Board were notified by the department manager for business operations that an account linking the MAS500[12] sales order module to the inventory module was found to have accumulated $4.2 million in unrelieved adjusting transactions from the beginning of the installation in 2003 through the current date. Despite multi-year independently contracted audits, bank audits, internal audits, and audits conducted by BCG,[13] the software reseller under contract to the ARC, this functional error in a dynamic account in which value increased and decreased daily, had not been identified from the installation of the new system. While not affecting receivables or expenditures, these numbers had, unbeknownst to all, affected the linking sales order purchase clearing account on the agency balance sheet from the beginning of the installation of the accounting system at the end of 2003, creating a percentage of error of .02% of approximately $174,000,000 total reported dollars for the three year period from the date of installation. Relieving these numbers to correct the balance sheet required either (1) deleting them through the ‘cost of goods account,’ washing the dollars out through net return, and restating the balance sheets in question or (2) taking the time to rebuild the transactions. Given time constraints, the agency’s auditors, board and the workout group elected to utilize the first option.

Whether this error occurred because staff was improperly trained by the software firm, misunderstood the requirements, or the system linkage was set up improperly, remains to me an unknown as I simply was not afforded the opportunity to determine the root cause. What is known is that this error, under the control of agency business operations staff and under continuous scrutiny by BCG from the installation date, did not result in the improper reporting of receivables, expenditures, payables, fixed assets, or net return, and the correction served to ‘double dip’ the (already) relieved values associated with the sales orders. [14] This error became the fuel for (1) a whisper campaign created by KRS intimating that funds under the control of executive staff were “missing” and conversely (2) the claim by Baker-Donelson Attorneys that we ‘cooked the books to obtain higher salaries and knowingly gave compensation consultants false information.’[15] Every party to the correction of this error knew those claims to be without merit.

On May 19, 2006,[16] bank representatives and KRS insisted to the volunteer Board that executive management no longer be able to make financial decisions on behalf of the agency. Accordingly, my access to financial information, vendor activities, and day to day decision making was removed. KRS extracted control of the agency from the Board of Directors from May 19th, and at that time, insisted on the termination of our legal counsel claiming ‘conflict of interest.’ They were replaced by Baker-Donelson,[17] a firm that later disclosures indicated was also under contract to Amsouth Bank, a clear conflict of interest. The merger of Amsouth and Regions was publicly announced on May 26, 2006.[18] The Department of Agriculture placed the agency contracts into a default status when the lender refused to authorize funds necessary to purchase supplies.[19] The lender refused to allow the agency to respond to DoD orders to ‘launch’ critical supplies in support of critical military programs. Nearly five million dollars worth of pending unfilled orders were in the system for June production. KRS ordered supplies from vendors knowing that orders would not be filled and increasing creditor debt would tip the agency’s internal financial relationships in support of the pending bankruptcy filing. I vigorously protested the harm to suppliers, many of which were very small businesses.
In an attempt to preserve and replace the jobs and revenue associated with the vegoil program, I successfully negotiated the sale of ARC’s UGR-A contract to a large commercial firm, Wornick Company. KRS came to the table as this negotiated sale was completing and took control of the negotiation, pressing unsuccessfully for a $1,000,000 “good faith” signing bonus. The sale of this contract relieved ARC of the cash outgo associated with the purchase of UGR-A supplies, was expected to create as much or more profit for the assembly program than had been previously attached to the vegoil set-aside, was expected to wipe out the year end deficit imposed by the prolonged dispute by the first of October 2006 and would have preserved forty jobs for persons with disabilities while mitigating financial damage to vendors by improving cashflows.[20]
On June 9, 2006 executive management was ordered to resign or be terminated, with the understanding that if we resigned, the organization would be allowed to ‘live’ by the lender for a ninety day period of reorganization and continue to carry on functions. Key executive personnel tendered their resignations, believing that the lender would honor the promise of continued operations and financial reorganization pending resolution of the government impasse. When I requested that vendors be notified that I was no longer responsible for purchase and payment decisions I was assured that KRS would take care of notification and remove my name from vendor accounts. They not only failed to execute notification, they placed my name on purchase orders to vendors who thought they were helping work us through a crisis and placed my name on blank guarantees for payment[21] through the use of my signature stamp and auto check signature well after May 19[22] and beyond my date of constructive termination on June 9. Days later, the entire management team was notified of pending termination. Kraft directed the Board of Directors to vacate activity on the government lawsuit.

During this period, contracts were abandoned, creditors were abused, and customers were harmed by failed deliveries. The agency’s relationship to its’ Board was terminated, and KRS extracted total control. A Chapter 11 liquidation bankruptcy was filed on June 30, 2006[23] by KRS, now openly acting on behalf of the secured creditor. To my knowledge, at no time was the Board of Directors notified of their right to other recourse. Two managers who had NO knowledge of the agency’s financial matters, the government dispute, or the intricacies of contract management were kept to support KRS with liquidation of agency assets.

[1] Almost since government contracting began, there has been a special process followed for disputes arising under a government contract between the Government and the contractor. Until 1978, this process was governed solely by a "Disputes" clause found in almost all government contracts. In 1978, this process was codified by the Contract Disputes Act of 1978 (CDA), 41 U.S.C. §§ 601, et seq . This process applies to all disputes arising under or relating to a government contract. As a waiver of sovereign immunity, courts and administrative boards of contract appeals construe the CDA narrowly. Accordingly, a contractor that has a dispute with the Government must be careful to follow the CDA's mandated procedures, or it risks waiving or otherwise losing its right to proceed against the agency. Administratively, the FAR implements the CDA through the standard "Disputes" clause, which defines the rights and duties of a contractor in dispute with the Government. Notably, a contractor must continue performance pending resolution of a dispute with the Government.
[2] C. " Default" Clause. The standard "Default" clause resembles the "termination for cause" term often used in the commercial marketplace. It permits the Government to terminate a contract for default where the contractor breaches the contract -- i.e., fails to (1) deliver the supplies or perform the services within the time specified in the contract; (2) make progress, thereby endangering performance of the contract; or (3) perform any other material provision in the contract. FAR 52.249-8(a)(1). If the Government intends to exercise its right to terminate under the second or third referenced circumstances, it must first notify the contractor in writing and allow the contractor to "cure" its deficient performance within ten days. FAR 52.249-8(a)(2). The standard "Default" clause, however, excuses the failure to perform where such failure arises from causes beyond the control and without the fault or negligence of the contractor (e.g., acts of God, fires, floods, strikes, and unusually severe weather).
[3] ‘Government unique’ refers to supplies and services for which there is no commercial marketplace and the specifications and requirements are defined by the government for reserved sales and government use only.
[5] For more information see
[6] Fixed price contracts are…
[7]; FAR Section….
[8] GAO Report
[9] Washington Post
[10] Platte River Industries v. Committee for Purchase
[11] See Merger Announcement dated May 26, 2006.
[12] Sage Systems, Sales Order Module
[13] BCG, Ohio
[14] As Directors and Officers, certainly we should have known of this error, but we could not have, as multiple internal and external audits by many parties over a period of three years from 2004 – 2006 had not revealed the error in adjustments. Management reports set up by the software support company, BCG, did not detail the contents of this dynamic account on management reports. Further, in accordance with best practices for ensuring the efficacy of internal controls, the system was set up to deny the executive management, officers and directors physical access to the system. See restated balance sheets 2004, 2005, 2006.
[15] It’s hard to comprehend how ‘missing funds’ could be utilized to ‘inflate assets’ and become the basis for overstating asset figures for years prior to their very existence, all for the benefit of influencing larger salaries that were set up on non-revenue based figures, independently derived by consultants from industry standards as opposed to agency revenue. It’s even more amazing that a supposedly competent seated Bankruptcy Judge can’t recognize the oxymoronic nature of these claims.
[16] See letter from Don Calcote to Terri McRae May 19, 2006
[17] For more information about this law firm see
[18] See merger announcement
[19] See Default letter Robert Buxton KCCO
[20] The first order placed from Wornick to ARC for July, 2006 of 100,000 units would have generated a $1,000,000 net return to ARC-D.

[21] See guarantee for payment issued to IWC, Cookeville, TN.
[22] See IWC lawsuit
[23] Filing document

ARC's Compensation Study

From 1986 through 2002, ARC’s management team periodically addressed and adjusted compensation and benefit strategies for direct labor and salaried employees. At the end of 2002, ARC’s Board determined that the time had come to address key personnel compensation as part of an examination of its’ overall business transition strategy. During this period of change, not only did the revenue basis for the organization experience significant complex growth and change, but the operating framework of the organization was revised from a membership managed entity to a Board managed entity, with changes made in accordance with revisions of the Tennessee Corporations Act and revisions to IRS charitable organization rules.

From 2003 – 2004, and as part of this process, ARC’s Board engaged the legal firm of Chambliss, Banner and Stophel [1] to study compensation and retirement issues for long term key personnel termed by the IRS as ‘highly compensated employees.’[2] This type of employee is ‘disqualified from’ or exempt from the definitions of the Fair Labor Standards Act and therefore it is assumed that their compensation is set by other ‘rebuttable’ methods for determination of compensation parity. Recommended by Wimberly, Lawson and Seale,[3] this Chattanooga based firm had extensive practical experience in studying compensation issues and making recommendations to not for profit organizations to meet the ‘rebuttable presumption’[4] requirements of the IRS. In 2003, prior to the installation of the MAS500 accounting system upgrade, the then Board began a multi-year phase in based on external recommendations generated by John Stophel Esq., of the lawfirm of Chambliss, Bahner and Stophel[5] who reviewed historical agency revenue information from 1986 through 2002, studied comparable not for profits and commercial industrial activities, evaluated essential functions of comparable commercial and ARC’s key management, and subsequently made a set of recommendations for redetermination of wages and benefits based on essential functions, current industry practices, agency requirements and the constraints imposed by regulations. Stophel’s report identifies the lengths that he went to for review of published data, his sources, and his contacts with regulating entities including the IRS. The resultant wage and benefit numbers were subsequently phased in over a three year period, appropriately disclosed on the agency’s annual reports to the Internal Revenue Service on Form 990 and reflected in agency minutes and work documents. In 2003, the ARC’s Board made a decision to establish and ‘salt’ a retirement fund for three long term key personnel in recognition of the short period of time remaining and available to plan for retirement. This fund was fully taxable and reported as required on Form 990 at year end 2004.

While the Oregonian articles made significant note of the changes that were reported for ARC’s ‘highly compensated employees’ from 2003 to 2004, they failed to add definition or detail the numbers in question, properly represent the context of the organizational change and growth in complexity or current work practices that had guided ARC’s Board through the process of developing compensation strategies designed to ensure the ability of the key personnel, all approaching fifty five years of age and employed for nearly twenty years without benefits, to (1) aggressively plan for retirement with their remaining years of employment, (2) recruit and replace key executive management to lead the now complex organization, and (3) properly represent overhead costs for compensation in accordance with both the IRS rebuttable presumption requirements and OMB Circular A-122’s definitions for ‘Fair Market Prices.’. Nor did the authors of the Oregonian articles ask any clarifying questions about these matters until after their articles were framed in the media and reprinted widely. Their reports led to a firestorm of misperception based on incomplete statements and misrepresentations of readily available information and became the fuel for political interference in ARC’s contracting environment.

Further, this process of achieving compensation parity as required by regulation, was knowingly, willfully, and repeatedly, misrepresented by Kraft Recovery Services, LLC as part of their overall manipulation of ARC’s Board of Directors into a ‘voluntary’ bankruptcy Chapter 11 (liquidation) filing. Adopting the allegations circulated in the Oregonian’s media reports, proceedings documents continuously misrepresented the processes used, the intention of the parties and the independent consultants, the data collection period, and the management and Board. They further alleged that key personnel knowingly provided false information to the independent consultant to manipulate the outcome for their personal gain and knowingly and willfully failed to include and submit the readily available materials which counter and refute their claims made to the court.

[1] For more information about this law firm visit
[2] “Highly compensated employees” are defined by the IRS in Publications 560 (Revised 2007) and 7335 (Revised 11-2006).
[3] For more information about this law firm visit
[4] According to the IRS, If an organization meets the following three requirements, payments it makes to a disqualified person under a compensation arrangement are presumed to be reasonable, and a transfer of property or the right to use property is presumed to be at fair market value. The three requirements for establishing the rebuttable presumption are: (1) The compensation arrangement must be approved in advance by an authorized body of the applicable tax-exempt organization, which is composed of individuals who do not have a conflict of interest concerning the transaction, (2) Prior to making its determination, the authorized body obtained and relied upon appropriate data as to comparability, and (3) The authorized body adequately and timely documented the basis for its determination concurrently with making that determination.
[5] See John Stophel’s written recommendations to ARC’s Board of Directors dated December 17, 2003.

Friday, August 8, 2008

Social Enterprise, Job Creation and Community Development

When I signed on to this task with the State of Tennessee, I committed to develop jobs through earned income strategies and practices. I was not asked to, nor did I commit to, limit this economic development effort to those models associated solely with the not for profit world. Throughout the last eighteen years of community economic development, and as a direct result of refining and growing a social purpose strategy that allowed ARC-D to meet the requirements imposed by participation in three federal system change projects, I created, in addition to the not for profit Advocacy and Resources Corporation, a number of additional social purpose businesses.

A social purpose business is a “discrete division, subsidiary or related corporation of a nonprofit or a for-profit company that deliberately pursues financial and social returns within a specific industry segment in the commercial marketplace.”[1] These not for profit and for profit entities that reflected (1) the need to leverage resources to support the development of community services, employment training and/or housing, (2) support to the needs of the not for profit agency and its’ customers and (3) filled a vacuum created by the lack of vendors available to close the supply chain gaps necessary to support the new procurement practices environment that emerged with the ‘reinvention of government.’ These vendors were planned for under Tennessee’s corporation rules,[2] incorporated within the necessary legal and auditing environment, and reflected the agency strategy for insuring that the very best cost structure would be passed on to the government in accordance with constraints imposed by Federal Acquisition Rules (FAR Part 48).[3]

These entities were disclosed, audited, and banked by the same lenders that banked the not for profit organization, with full disclosure and electronic visibility of financial transactions between the entities in place between the companies at the lender level. They included three not for profit and four for profit taxable entities, all designed to serve specific purposes to further the social enterprise community development mission while keeping subcontracting dollars flowing into our local vendor community without compromising the ARC’s not for profit status. The related (shared board members with ARC) business entities were:

  • Development Opportunities Inc. (DOI), a not for profit land bank formed for developing housing for persons with disabilities;
  • Falling Water Construction (FWC), a not for profit trades training program designed to build the houses and maintain agency facilities;
  • Homeowner Dream Management (HDM), a consumer homeownership training program;
  • Tennessee Analytical Services (TAS), a taxable for profit laboratory owned by the agency’s Board of Directors.

The for profit, controlled group business entities were:

  • TCOMUS, a taxable for profit entity set up as a woman-owned microenterprise for the purpose of supported the esoteric requirements of the US Navy and DoD beyond the set-aside purpose of ARC’s set-aside contracts;
  • Lewis-Durm Logistics (LDL), a taxable for profit small business which provided trucking and bulk oil supports when the available vendors to the vegoil program were unable to fulfill requirements;
  • Fruition Foods, a taxable for profit research entity designed to engineer commercial frozen products for eventual commercial sale or set-aside; and
  • McRae Durm Properties, the partner ownership of a hubzone-located building (formerly owned by IWC) procured and improved for the unitized group rations program (UGR-A), which was commercially awarded and slated for a future JWOD set-aside.

Each of these entities properly reflected the IRS requirements for separating the distinct missions, accounting for revenue generated by the activity, and instituted the construction of a ‘firewall’ between the organizations for the payment of taxes on unrelated business income (UBIT),[4] and hiring of nondisabled personnel, while closing the vendor gaps in support of the agency contracts and while offering services to others. Between them, they employed forty five low-income persons whose socioeconomic status did not qualify for employment through ARC.

The IRS audited the for profit entities not owned by ARC in 2005[5] and assisted by a contracted certified public accounting firm, determined that these entities should be handled as a ‘controlled group’ with unrelated business income taxes and outstanding equipment notes paid down, taxed and passed through the tax returns of the owner operators as ‘management fees.’[6] Wages and salaries did not accrue to the registered agent of record, ARC board members, or the registered owners of these entities. In keeping with the model adopted, profitability was retained and reinvested within the social purpose businesses, and supervision was provided by a General Manager.[7]

ARC did not contribute funds to the for profit entities of TCOMUS, LDL, Fruition Foods, or McRae-Durm Property, nor did these entities enjoy less than fair market benefit from their relationship as a supporting vendor to ARC. These facts are a matter of public record and were absolutely handled in accordance with IRS Publication 598-Unrelated Business Income[8] and OMB Circular A-122 – Costing and pricing rules for not for profit organizations[9] and A-133 –Audit rules for not for profit organizations.[10] Over the years of their operations, transactions between these entities and ARC were carefully scrutinized, audited, and disclosed in the agency’s books and minutes and annual financial report. In the aftermath of ARC’s bankruptcy filing, all of these entities were closed and employees released.

Reinvesting its’ earned income, or net return, ARC contributed startup capital to the not for profit entities Development Opportunities Inc, Homeowner Dream Management, Falling Water Construction, and the board owned for profit Tennessee Analytical Services (TAS) as part of a comprehensive agency community development plan. Five banks and nearly forty persons drawn from the community participated in the design of these entities over a multi-year period. Each had separate boards, structures, bylaws, and missions, including land-banking, homeowner counseling, construction trades training and analytical services. At the time of this writing, all of these entities have been terminated, employees and programs terminated, their assets reabsorbed into the bankruptcy estate of ARC, and for the most part, sold at pennies on the dollar. [1]

[1] The Trustee occupied the leased building on Whitney and Willow for nine months post petition, and despite pleas to assume responsibility for maintenance during the period of occupation, failed to allow routine maintenance of the freezer equipment. This led to the spoilage and wasting of nearly $500,000 worth of edible foodstuff under the care and custody of the Trustee, and led to the unnecessary damage of compressors and fixtures. When the building was finally abandoned by the Trustee in February 2008, eighteen dumpster loads of spoiled food and garbage were removed from the property occupied by the Trustee; the widespread and completely unnecessary damage to the building fixtures and equipment were documented by photos and inspection by insurance adjusters.

The Oregonian Newspapers "Investigate" JWOD

In 2004, writers for Newhouse News Group publishing through the Oregonian Newspapers, conducted a review of the JWOD/AbilityOne program after allegations arose in the State of Oregon regarding unfair competition practices between the small business community and the state set-aside program. Their reports led the writers, Les Zaitz, Brian Denson and Jeff Kosseff, to an examination of the federal program’s employment practices, the definitions of severe disability that qualified participants, and eventually, compensation strategies in the JWOD program.

Subsequent reports[1] focused on the executive compensation packages of the top 20 producers under the program utilizing the gross numbers reported on annual not for profit IRS Form 990 filings submitted for the year 2004. For the fiscal year in question, the Advocacy and Resources Corporation was number six in on this list of producing agencies due to increases in partnering programs with the Department of Agriculture. Wi thout the benefit of significant analysis or elaboration, Denson and Kosseff’s reports intimated that the growth in wages during the years 2004 and 2005 of grouped executives at the helms of the organizations under scrutiny was related to opportunistic practices’ amounting to private inurement or ‘self-dealing’[2] and that the nationwide executive group as a whole, was engaged in practices designed to benefit themselves at the expense of both the government and the severely disabled employees served by the JWOD program.

Their body of work cited the disparity between wages paid to persons with very severe disabilities compensated under the Fair Labor Standards Act (FLSA) [3] for ‘Sub minimum Wage’ and hourly wage to wage packages paid to executives, without acknowledging the very different job skills, responsibilities, capabilities and education required or the market conditions under which services and products were contracted for in the JWOD environment. Their ‘analysis’ and exploration of the issues failed to acknowledge the complexity of the organizations, the essential management skills required, or the wide variation in contractor requirements and business models. They also failed to acknowledge the difference in regulatory requirements in reporting ‘not for profit’ wages and benefits as opposed to ‘for profit’ compensation, imposed by the Internal Revenue Service through the use of Generally Accepted Accounting Practices (GAAP).[4]

The circulation of this series of articles raised questions which resulted in increased discourse across the country that helped to clarify that a wide range of compensation practices in the program appropriately existed which were dependant on geographic region, agency size, contract management requirements and populations served, and overall, reflected a complex variety of agency financial strategies and resources. The increase in scrutiny also exposed conditions that, in at least one case, agency management may have financially benefited by their relationship to a not for profit that was being operated without regard to compliance with the direct labor record keeping requirements for participation in the JWOD program. Subsequent investigations of the agency in question yielded information that oversight by the JWOD program had been lax and that violations of direct labor regulatory record keeping requirements had been repeatedly unenforced.

Based on this example, ‘the JWOD baby got thrown out with the bathwater’ and every agency’s collective leadership on this list of twenty found themselves forced to examine and defend agency practices to their various constituencies, whether warranted or not. By implication and through media reports, these allegations in all of their reprinted and variously edited forms, filtered into the community in which ARC operated and ultimately, into ARC’s government contract environment.

[1] Denson, B., Kosseff, J. CEOs benefit as charities boom. The Oregonian Online, Tuesday October 18, 2005.
[2] “Self-Dealing” is defined by the Internal Revenue Services in document no. 200813043, issued 3/28/2008.
[3] United States Department of Labor, Fact Sheet 39 – Fair Labor Standards Act (FLSA) – Sec 14(c) Subminimum Wage Compensation of Disabled Workers.
[4] The standard framework for accounting principles generally referred to as ‘Generally Accepted Accounting Principles (GAAP)’ and found at this url:

History and Background of the Social Enterprise

Conceived at the request of the State of Tennessee and born on a kitchen table in 1986, the Advocacy and Resources Corp (d.b.a. ARC-Diversified, or ARC-D) was established for the purpose of utilizing “social enterprise, and earned income practices[1] to establish an employment and community services system for persons with severe disabilities who reside in the rural Upper Cumberland region of Tennessee. A “social enterprise,” sometimes referred to as operating in the ‘third’ or ‘fourth sectors’[2] of the economy, is defined as ‘an organization or venture that advances its social mission through entrepreneurial, earned income strategies. Payments to the organization are earned and received in direct exchange for a product, service or privilege. Earned income for a nonprofit includes such elements as tuition and fees for service, commercial products or services, government contracts, consulting fees, membership dues (when dues purchase tangible benefits), sale of intellectual property, agreement to use the nonprofit’s identity, property rentals, etc. Earned income does not include such sources as corporate, foundation or government grants or subsidies, contributions from individuals, or in-kind donation of products or services. The intention of this strategy is defined as the extent to which a nonprofit is able to pursue its mission indefinitely through the use of earned income as a method for achieving financial self-sufficiency without relying in whole or in part on charitable contributions or public sector subsidies.’[3] This approach allows organizations much more flexibility in meeting the needs of communities without the constraints imposed by public funders for limiting their services by scope, time, or to specific populations.

Charged by it’s initial grant funding from the State of Tennessee in 1986 to become a financially self-sustaining engine for employment and service system creation in accordance with the definition and practice of social enterprise, the organization affiliated with the Javitts Wagner O’Day (JWOD) (now known as "AbilityOne"[4] program in 1992 after identifying nearly 1500 persons with severe disabilities who lived in the fourteen counties of the Upper Cumberland needing rehabilitation supports provided through a competitive employment model. This piece of legislation, originating in 1938 and periodically revised and amended through the years, was designed to ensure that Americans with severe disabilities who receive rehabilitation services through 501c3 tax exempt providers have the opportunity to participate in federal contract opportunities through the procurement and production of goods and services as part of their employment rehabilitation plan.

Operational oversight of the program is maintained by the Committee for Purchase from Persons who are Blind or Severely Handicapped (the Committee) and two central not for profit organizations, Nish[5] and National Industries for the Blind (NIB).[6] Participating not for profits must maintain strict requirements imposed by the federal government in order to participate, including reserving seventy five percent (75%) of direct labor hours for persons with severe disabilities who qualify for employment and training, maintaining records which prove participant eligibility, and providing evidence that the contract clauses to which federal contracts are subject, are duly implemented . ARC-D was the first affiliate to produce and manufacture government unique food products under the program, growing its set-aside contracts in a light industrial setting in support of both the Department of Defense subsistence feeding programs[7] and the United States Department of Agriculture, Farm Service Agency.[8]

Continuing its’ strategy of earned income through the business practice of social enterprise, ARC-D was a named partner in three government reinvention and modernization programs from 1992 through 2006 including (1) Prime Vendor, (2) the Unitized Group Rations (UGR-A) and (3) the USDA’s reinvention of inspection systems and conversion to Total Quality Systems Audit, modeled after international standards of quality. As a result, and primarily because of the organization’s commitment to and adoption of proactive business practices, quality production and customer service, the revenue basis grew over a seventeen year (17) period to an estimated $68,000,000 in annual revenues and ARC-D gained the technical capacity to produce a number of packaged government unique variants. The employee basis grew from three employees to two hundred fifty (250), and the entity grew from a simple manufacturer to a complex organization generating nearly three million dollars in earned income annually to support the creation of community programs designed to ensure the independence of persons with severe disabilities throughout the rural upper Cumberland region. These programs, funded entirely by net return generated by ARC’s manufacturing contracts, included case management, emergency housing, youth mentoring, drug court support, and an innovative representative payee program supporting approximately 1,800 unserved persons with severe disabilities annually. ARC was not a fundraising charitable organization, did not give away funds to individuals and was not registered with the State of Tennessee as such.

[1] For a complete description of ‘social enterprise’ visit
[2] Social purpose mission driven businesses using for profit or not for profit strategies to accomplish objectives.
[4] For a complete description of the JWOD program, now referred to as “AbilityOne”, visit
[5] For a complete description of the central not for profit known as “Nish” visit
[6] For a complete description of the central not for profit known as “National Industries for the Blind” visit
[7] For a complete description of DoD feeding programs visit
[8] For a complete description of FSA procurement programs visit

About this Blog

Since June of 2006, this private citizen has remained silent on the issue of the Advocacy and Resources Corporation bankruptcy and the subsequent actions of Michael Collins, Trustee. Throughout this period, Cookeville's local newspaper, the Herald Citizen, filed numerous reports as to the events leading to the bankruptcy filing, the status of the organization, its’ reorganization, and the intentions of its’ ‘investor/rescuer’ group, leading the community to speculate as to whether the likelihood exists that the intervention currently underway will be successful and wondering about the causes.

For the record, the not for profit rehabilitation company that I and my coworkers built with love and care over the years became embroiled in the political agenda of Bush appointed politicos who were more concerned about the preservation of their government to business relationships than with the government regulatory processes they were charged to safeguard. After the hurricanes of 2004 and 2005, the organization became the victim of a price dispute over the adjustment of its' federal contract price schedules. Massive interference by key officials along with disregard of procedural and regulatory requirements led the organization into a position of financial distress during a contract negotiation period that lasted months longer than it should have by regulation. In the spring of 2006, our bank, Amsouth prepared to merge with Regions Bank Corporation. The organization, like many others of a significant size and complexity, was placed on the 'outpile.'

Over the months, I have watched the facts of this case become submerged, subordinated to salacious charges lodged as a matter of course by the parties to the bankruptcy proceedings and officers of the court. Interestingly, the handling of these matters have addressed everything except the facts. Under the 'color and protection of bankruptcy law,' officers of the court have made claims that the the inside directors:
· caused corporate opportunities which belonged to ARC to be usurped
· “cooked the books” to manipulate increases in wages
· breached their fiduciary responsibility to govern the business activities of the not for profit organization
· created outside business interests to personally benefit from the activities of the not for profit agency they governed
· shifted revenue to outside business interests when they understood that the financial position of the agency was “headed for the tank.”

These claims, while certainly spectacular, and designed to provoke an extremely emotional response in support of the current operating group’s activities (while creating a ‘smokescreen’ for their outrageous conduct), are not supported by fact or records. Further, regulatory imperatives provide clear guidance and support for the decisions made by agency leadership in a rapidly changing and challenging business environment over the nineteen year period that leadership was at the helm. These requirements have also been conveniently omitted from the overall conversation by the litigants.

As a result of these allegations, omissions and deletions of record and fact, expectations have been raised about the intentions of the parties to the current reorganization effort, great harm has been done to the organization’s ability to financially recover, creditors and vendors who have supported the organization have been harmed, the resources of a remarkable community mental health program have been raided, and the reputations of a skilled management group have been purposefully and needlessly libeled.

While it may be perceived by some as “just business,” it should be noted that, bent on removing the influence of the former management team of fifteen persons, the current operators and legal counsel have impaired the very assets and recovery of corporate knowledge necessary to restore the ailing organization to its’ previous health as a community mental health services provider with important customer and system relationships.

This blog is designed to reinsert the regulatory, decision-making environment back into the discussion and details the facts of these matters. This blog also contains key court filings and submissions which the court refused to consider or allow but which are central to construction of a factual record. Within each posting you will find a summary of events, a glossary of terms, and links to key regulatory references and links.

Breaking the Silence

For months, this private citizen has remained silent on the issue of the Advocacy & Resources Corporation bankruptcy[1] and the subsequent lawsuit filed by Michael Collins, Trustee. During this period, the Herald Citizen Newspaper in Cookeville, Tennessee has filed numerous reports as to the status of the organization, its’ reorganization, the intentions of its’ ‘investor/rescuer’ group, leading the community to speculate as to whether the likelihood exists that the intervention currently underway will be successful and wondering about the causes.

Over the months, I have watched the facts of this case become submerged and subordinated to salacious charges lodged as a matter of course by the parties to the bankruptcy proceedings. Interestingly, these allegations have addressed everything except the facts of these matters. Claims have been made that the inside directors:
· caused corporate opportunities which belonged to ARC to be usurped
· “cooked the books” to manipulate increases in wages
· breached their fiduciary responsibility to govern the business activities of the not for profit organization
· created outside business interests to personally benefit from the activities of the not for profit agency they governed
· shifted revenue to outside business interests when they understood that the financial position of the agency was “headed for the tank”

While certainly spectacular and designed to provoke an extremely emotional response from the community in support of the current operating group’s effort while creating a ‘smokescreen’ for their activities, the records of the organizations in question do not support these allegations when considered in entirety. Further, regulatory imperatives provide clear guidance and support for the decisions made by agency leadership in a rapidly changing and challenging business environment over the nineteen year period that leadership was at the helm. Their requirements have also been conveniently omitted from the overall conversation by the litigants. As a result of these allegations, omissions and deletions of record and fact, expectations have been raised about the intentions of the parties to the current reorganization effort, great harm has been done to the organization’s ability to financially recover, the resources of a remarkable community mental health program have been raided, and the reputations of a skilled management group have been purposefully and needlessly libeled. While it may be perceived by some as “just business,” it should be noted that, bent on removing the influence of the former management team of fifteen persons, the current operators and legal counsel have impaired the very assets and recovery of corporate knowledge necessary to restore the ailing organization to its’ previous health as a community mental health services provider with important customer and system relationships. The following reinserts the regulatory, decision-making environment back into the discussion and details the facts of these matters. Within each topic you will find a summary of events, a glossary of terms, and links to key regulatory references and key
[1] Advocacy & Resources Corporation, Debtor Case N0. 206-03067, United States Bankruptcy Court, Middle District of Tennessee, Cookeville Division. Chapter 11, Judge Lundin Presiding.