Minnesota real estate mogul Steve Hoyt filed for Chapter 11 bankruptcy in late May. Hoyt is the CEO of Hoyt Properties, which operates out of Minneapolis. Hoyt listed assets of slightly over $30 million and debts of $54 million in his bankruptcy petition. When considering the magnitude of these numbers, the shocker is that the bankruptcy petition was for personal bankruptcy, not a corporate bankruptcy of Hoyt Properties. Thus, those dollar amounts reflect personal assets and liabilities.
Despite the recent downturn in the housing market, real estate is generally a lucrative business. As CEO of a major real estate development firm, Hoyt has been able to rack up quite an impressive amount of assets over the years — so much so that he makes enough in interest and dividends in one month for an average person to live off of for a year. Hoyt was making around $45,000 per month and most of this was passive income (investment income is considered passive, while money made at work is called earned income).
So if Hoyt has so much money, how could he possibly owe almost double that amount to his creditors? Basically, Hoyt used his assets (stock, etc.) as collateral for very large loans, which he did not fully pay back on time. As certain areas of his business investments went south, Hoyt took out more loans to refinance the original loans, just as some consumers attempt to use new lines of credit to manage their existing credit card debt. As is the case with many credit card holders, this tactic did not turn out well for Hoyt. Hoyt’s creditors now have the right to foreclose on his collateral. His main creditors are local banks, followed by private MN investors such as local businesses. Michael Meyer, Hoyt’s attorney, stated that Hoyt’s bankruptcy will allow him to protect some of his assets from these creditors (i.e. delay or prevent foreclosure) and to reorganize his liabilities.
Hoyt’s Chapter 11 petition alleged that the banks are acting in a heavy-handed manner because of all of the negative press and government scrutiny that they have received due to their poor lending policies. Hoyt’s allegation may appear to hold water with regard to some of the banks involved but it does not explain the actions of other banks. For example, American Bank of Saint Paul, MN and First Commercial Bank of Bloomington, MN were found to be in violation of banking regulations in 2009. In contrast, Commerce Bank has not been similarly sanctioned. Thus, it appears that Hoyt’s failure to pay back his loans on time is the root cause of his current situation.