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Attorney general blocks payment to Christian School chief

Henderson County plans to make the former Hendersonville Christian School property an Athletics and Activities Center.

By Bill Moss, Published: February 1, 2013

The state attorney general's office has blocked the former headmaster of Hendersonville Christian School from collecting any of the proceeds from the school's sale to Henderson County and ordered that a court-appointed receiver handle the money.

The attorney general's office conducted a review of the circumstances of the sale of the property from the Christian School, a non-profit organization, to Henderson County. The sale closed Jan. 30 for $910,000. That short sale paid the bulk of two TD Bank mortgages, covered a lien for state unemployment taxes and paid a real estate commission and other closing costs. The attorney general authorized those payments. The appointment of a receiver does not jeopardize the county's ownership of the property, County Attorney Russ Burrell said.
The attorney general's order blocks Skip Goldsmith, an attorney who served on the school's board and was its interim headmaster, from collecting any of the $20,000 that remained.
The attorney general's office has a "common-law right and power to protect the beneficiaries of charitable trusts," Assistant Attorney General Kimberley A. D'Arruda said in the nine-page report. The school was obligated under the law to give the attorney general's office a 30-day notice "before it sells, leases, exchanges or otherwise disposes" of assets, which the school had done.
The attorney general's review focused on whether the community would benefit from the sale, "whether the proceeds of the sale will be distributed fairly among outstanding creditors," and "whether any conflicts of interest exist in the transaction as proposed, including whether any board members or employees of the nonprofit stand to profit personally and unreasonably from the proposed transaction to the exclusion of other creditors," D'Arruda said.
TD Bank agreed to accept $765,000 of the $910,000 purchase price as payment in full for two mortgages. The sale also provided $30,000 to cover the North Carolina Employment Security Commission lien, and $91,000 in real estate commissions, and other closing costs. That left $20,000.
"Mr. Goldsmith, as the only remaining member of the Board of Directors of HCS, informed the North Carolina Attorney General's office that this remainder would be paid to himself to cover legal expenses incurred prior to and during the sale of the school property, for expenses incurred during the winding up of HCS, for expenses incurred to defend any lawsuits by creditors, and for administrative expenses incurred in maintaining educational documents for HCS," D'Arruda said. "He claimed to be due much more based on the contingency fee of 30 percent of 'all proceeds,' but would take the remaining approximately $20,000 as his fee because that was all that was left."
In her review of the transaction, D'Arruda raises questions about how Goldsmith, as a board member and attorney, worked out an agreement with the Christian School board to be paid 30 percent of the sale proceeds for his work liquidating the school's assets and dissolving the corporation.
Goldsmith said in an interview he has no problem with the attorney general's recommendation.
"I knew what I intended to do was for the school and to protect the school," he said. "But it's always better to have somebody else referee the game. I've got about six months in it and another six months getting it dissolved. For instance, we're scrambling around now trying to get W-2s out."
According to board minutes, the school board appointed Goldsmith to a vacant seat last July 30. Then the board voted to give any net proceeds of a property sale to two local charities. Finally the board voted to "reimburse Skip Goldsmith 30 percent of all proceeds for his total and complete dissolution," D'Arruda said in her report. "Before concluding the meeting, the Board then voted to receive the resignations of all of the Board members, except Mr. Goldsmith. It is unclear whether the Board considered hiring other legal counsel or solicited other fee arrangements from lawyers not previously employed by HCS or serving on HCS's Board."
As of last June 30, 25 unsecured creditors remained. The school owed them $82,700.
"Based on the information provided to the North Carolina Attorney General's Office, HCS would not pay any of these debts from any proceeds of the sale," D'Arruda said. "Rather, Mr. Goldsmith would defend any suits brought by these creditors for payment, while at the same time keeping the remaining proceeds of the sale for himself. ... It does not seem reasonable or appropriate that a Board Member of HCS receive proceeds from the proposed transaction, while, at the same time, outstanding creditors remain unpaid."
D'Arruda went on to say that state law governing conflicts of interest on non-profit boards and State Bar rules and ethics opinions regulating contingency fees come into play regarding Goldsmith's arrangements with the school board. The July 30 minutes showed that Goldsmith was appointed to the board during that meeting before the contingency arrangement was made.
"However, there is no indication from the minutes that Mr. Goldsmith removed himself from that discussion or abstained from the vote on that issue," D'Arruda said. The State Bar, she said, requires that "contingency fee agreements to be in writing and to be specific.... and signed by the client."
The assistant attorney general also cited a State Bar opinion rising from a case where a board member had a law partner who was handling "a transactional matter with the organization."
"Specifically, the opinion requires that the attorney on the Board disclose his or her relationship to the matter in writing or at an open meeting of the Board, refrain from expressing any opinion about the matter, excuse himself or herself from any discussion of the matter, and withdraw from voting on the matter," she said. "Here, the situation is even more direct in that the Board Member himself is the party to the transaction (by standing to receive proceeds from the transaction) as opposed to the Board Member's law partner."
While the attorney general's office did not object to the sale, it ordered judicial oversight of the dissolving of the Christian school and the disbursal of its remaining assets, citing its concerns that "a Board Director stands to receive all of the remaining proceeds of this transaction while outstanding creditors are still owed money by HCS and would not receive any of the proceeds of the transaction."
As part of the process, Goldsmith said he is carrying out the attorney general's order to notify all creditors. The state's order said that a judge must allow "all creditors an equal opportunity to be heard by the court regarding any monies available for payment of liabilities."
The amounts owed are relatively small, Goldsmith said, and include things like an electric bill and water bill and payments to a company that produced the school's annual.
He said he did not expect to have been working this long on the liquidation. He said he does not have a problem with a receiver taking over.
"I'm in support of that," he said. "I'll just present the time and hours I've got and let the judge decide."