1031 Tax Group Case Spinning Out of Control: Assets Are Evaporating While Investors Are Searching For Answers

It just continues to slowly erode the confidence and hopes that investors have harbored since the day the 1031 Tax Group owned by Ed Okun first declared the money was “missing.” The “It” I speak of is the proposition that investors were going to get their money back. CoStar Group’s Mark Heschmeyer wrote an eye opening article on the current state of the Ed Okun trial: Investors Still Ensnared In 1031 Exchange Collapses.

In the latter part of August, the 1031 Tax Group presented a plan for reorganization; the plan was to be reviewed in bankruptcy court this month. According to Heschmeyer the plan proposed that “340 unsecured creditors” would receive $142 million; the money was to come from a loan made to Okun by JPS Partners.

Okun’s collateral for these loans, according to Heschmeyer, was the following laundry list:

1. 13 Investment properties estimated worth of $162.5 million and personal residences that total another $19.5 million.

2. 20 cars which included 4 Indy race cars, Rolls Royces, Lamborginis and other exotic rides.

This collateral and JPS plan sounds like it would take care of the investors problems. Unfortunately that has not been the case. In past bankruptcy case history, the US Trustee appoints a small committee of unsecured creditors to represent the other unsecured creditors (victims) in the case.

When the 1031 Tax Group unveiled it’s plans for reorganization, 3 of the 12 appointed unsecured creditors in the committee resigned. Of those 3 who resigned, two have sold their rights to any potential recovery to an investment firm for a substantially reduced settlement. They took whatever money they could and ran.

Heschmeyer asserts that under the first plan of reorganization with JPS, investors would receive “75% to 84% of their investment” back.

1031 Tax Group has a back up plan in place if the JPS plan does not go through. (It is not looking as if JPS will go through with this deal at the time of this article.) This mere fact caused much of the sell off by unsecured creditors of their settlement rights to investment companies. It also had the investment companies, looking at bailing the 1031 Tax Group out, refusing to take on this deal.

Heschmeyer states that “under the backup plan, they (unsecured creditors) would get only 52% to 66%.” This plan would rely upon Okun to fulfill his obligation by selling off his assets. This is not a very likely scenario.

Even worse yet is the last alternative: liquidate all of the 1031 exchanges. Under this scenario unsecured creditors would be left with the crumbs of a 9 or 10 cents per dollar settlement.

The newest development that has come to light could spell the end of JPS’s involvement in the case altogether. Stay tuned for the next article in this long series, as I describe how one of 1031 Tax Group’s most valuable commercial property assets is in jeopardy.