When contractors and subcontractors go unpaid, their best tool for recovery is a mechanics lien or a bond claim. But what happens when a huge development project is under a fraud investigation, claiming misuse of $200 million dollars? At least in this instance, the Vermont Economic Development Authority stepped in to ease the blow on the affected businesses.
So what actually happened here?
The owner of Burke Mountain and Jay Peak Ski Resorts, Ariel Quiros, along with Bill Stenger, the President of Jay Peak, are under investigation for fraud. They have been accused by the SEC and the state of Vermont of misusing $200M from foreign investors, which represents more than half of the money raised. These funds were raised through the EB-5 program, which we discussed recently. In a nutshell, the program allows foreign investors the opportunity to obtain a green card in exchange for investments in certain projects. Due to questionable regulation, the program itself has come under fire over the last several years.
The Securities and Exchange Commission alleges Jay Peak misled investors in order to obtain funds and diverted large sums of investor money for personal use in a “Ponzi-like” scheme. It is estimated that as a result of that fraud, between 30 and 40 contractors and subs remain unpaid on the ski resort project and a total of over $4.5M is owed. Contractors and other laborers can follow the fraud lawsuit here. Most of the unpaid parties are owed between $20,000 and $200,000, but one contractor is missing $800,000 in payments. Most of the affected unpaid contractors and subcontractors have filed liens on the project, and over 40 liens have been filed.
Because there are so many creditors on the project, full recovery by all parties involved is unlikely. As much of the missing funds have been allegedly been diverted for personal use, there is a limited amount to go around. While the defrauded investors may have a tougher go of it, the contractors and subcontractors have a secured credit interest in the property which may be eventually sold to fulfill the amounts of the liens. Vermont follows the general “first-in-time, first-in-sight” rule, however, meaning that any encumbrance that was recorded before the mechanics lien is superior to the mechanics lien.
In order to preserve the assets of the company, a receiver has been appointed to run the Jay Peak and Burke Mountain businesses. While this will protect the assets that contractors and subcontractors have liened, a lot can go awry in the process of securing a lien. Even successful claims can take years to recover. For this reason, the Vermont Economic Development Authority (VEDA) and the Northern Community Investment Corp (NCIC) have stepped in to aid those injured.
In order to help those businesses affected by the alleged fraud and nonpayment by Jay Peak, the VEDA and NCIC have created a loan program. While taking out a loan is certainly not an all-curing solution for these contractors and subcontractors, this provides them with some working capital to keep their businesses operating. According to the program, each contractor could be approved for up to $500,000 for a six-year term depending on their specific needs. Loans operate with a variable rate, starting a 4 percent. For the first year of the loan, only interest payments are due. The program is funded by VEDA’s small business loan program and does not utilize any state funding.
Typically, contractors and subcontractors are on their own when attempting to recover unpaid sums. The law can be favorable to lien holders, but procedural tripwires can cause even the most meritorious claims to stumble. In this rare instance, losses were directly tied to a widespread scheme to commit fraud, and the state intervened to help laborers. This sort of further aid is extremely uncommon, but the extensive number of unpaid workers and investors called for greater action.