How Does a Major California RE Brokerage Firm Declare Bankruptcy, and say it was a “Strategic” Move?

Shorewood Realty, one of the largest and most reputable firms in Southern California, has filed for bankruptcy. You may ask yourself, how does one of the largest private brokerage firms in California go bankrupt? Especially in a market now bustling and booming. How can a successful broker end up with debts exceeding income?  Well, like all good stories, this one has a twist.

Roger Herman, CEO of LBH (Shorewood’s parent company) has said that the filing for bankruptcy actually had nothing to do with the current financial situation of the company. He insisted that the company was actually very profitable at the moment, stating, “It was a strategic move; most of our agents understand. Some are concerned, some customers are concerned, but there is no effect on our customers or clients in any way, shape or form.”

Strong words for a brokerage that is facing nearly $6M in debt which is owed to its franchisor ERA, and 3 lawsuits.

Perhaps the statement is a bit rosy, considering that Shorewood’s top three agents have left the company in the wake of the filing. Both Jen and Dave Caskey, along with Ed Kaminsky have all left Shorewood to represent other firms. And while they respectively insist the reasons were not related to the bankruptcy, the timing seems rather ironic. Regardless, the largest question still looms over us. Why would Shorewood file for bankruptcy when they are clearly profitable? And if it was a strategic move, was the strategy ethical?

It would seem that the only real “strategy” here was to deflect the claims of a recent lawsuit filed by ERA Financial Systems. According to an article in BusinessDen, “LBH defaulted on a franchise agreement and a convertible debt note, and owes ERA more than $6 million.”

To add to the conundrum, the co-founders of Shorewood, Arnold Goldstein and Larry Wolf, may lose more than $3.75 million due them because of Herman’s actions to declare bankruptcy.

“ERA has since objected to LBH’s bankruptcy filings, arguing that it should be first in line for payment. LBH claimed in bankruptcy filings last week that it only owes ERA $1.5 million.” Final terms have not yet been reached.

Will Herman get away with avoiding his payment to ERA and the founders of Shorewood? Is declaring bankruptcy a new way to avoid paying what’s owed? And why does this smell so fishy? Could the financial leadership of LBH be that off or is this just a ploy?

What do you think? Better yet, what have you heard? Please share your thoughts with us!