CURTAINS FOR WARNER'S?THERE'S NOTHING CHINTZY ABOUT WHAT'S AT STAKE AS INTERIOR DESIGNERS, BANKERS, LAWYERS SQUARE OFF IN AN UGLY FIGHT OVER A LONGTIME VALLEY DESIGN FIRM
In 1952, Ron and Carolyn Warner pulled together $1,400 and bought a burned-out grocery store at 26th Street and Osborn Road. Together the young 20-somethings shoveled out the soot and the trash, and in its place opened Warner's Furniture and Interiors.
In the early days, they sold just about everything a person needed to get a house together, from sofas to swamp coolers. Ron Warner did the buying and selling and supervised the design. Carolyn Warner ran the books, the money and the warehouse.
Warner's grew over the years until it gained a reputation as one of the best design studios in the West, regularly showing off its work on the back page of Phoenix Magazine.
People used to say that you could always tell Warner's designers at first glance. The men wore starched shirts with coats and ties. Women were in stockings and heels. Everyone's shoes were shined. They always introduced themselves in galleries and stores as representatives of Warner's.
Even today, the showroom is gorgeous, never a chair out of place. The back office has an elaborate library of fabric and more resources than any other studio in the Southwest. And for good reason.
The average Warner's client lives in a $1.2 million home and spends about $200,000 on a job.
Theirs is a world of $30,000 closets, Faberg Easter eggs, expensive antiques, imported needlepoint pillows and fine fabric draperies that puddle perfectly at the floor. It is not uncommon for customers to fly to Los Angeles or San Francisco to look at a piece of furniture that might sit nicely underneath a favorite painting.
Warner's clients often either have not yet moved into their homes or go away for months while they're being "done." They come home to a beautifully decorated, fully furnished, perfectly lighted house. There are fresh linens and towels and, in some cases, the refrigerator is even stocked.
As the business grew over the years, the Warners also made a name for themselves in politics and community service. Ron Warner sat on the boards of Samaritan Health Services and the YMCA. Carolyn Warner ran for governor in 1986. Socially and politically, they were among Phoenix's elite.
So it was a momentous plunge for the most well-established interior design firm bearing one of the biggest names in Phoenix to file for bankruptcy in 1993.
The clue to what brought down Warner's lies somewhere in a convoluted web of lawsuits and financial investigations pitting Warner's against its employees, its customers, the state's largest bank and its law firm for 35 years, one of the most successful in Phoenix.
There are allegations of theft, fraud, mismanagement and enough conspiracy theories to fill an Oliver Stone movie. In a multimillion-dollar lawsuit, Ron Warner contends that his own employees diverted more than $2.5 million in sales out of the company and into their own pockets by running their own business inside Warner's. He also claims they were aided in this by Bank One.
Ron Warner seems to have an eye for talent. Some of the best designers in Arizona have passed through Warner's. Gerald Ebbett is no exception.
In 1966, Warner hired him a couple of years out of the Parsons School of Design to do floor displays. By all accounts, Ebbett is a phenomenally talented interior designer with a particular eye for fabric.
It was no surprise that he would move up in the company.
In 1974, Carolyn Warner was elected state superintendent of public instruction, a post she held for 12 years. She effectively left the business during the first election.
Meanwhile, Ron Warner served on the boards and committees of the YMCA, Salvation Army, United Methodist Church, Arizona Commission on the Arts and a catalogue list of others. He served on the Samaritan Health Services board of directors for 18 years.
He raised money for the Arizona Democratic party, the NAACP, Arizona Boys Ranch and the United Methodist Church School of Theology.
"I've spent about half of each day for the past 25 years working on some community service," Warner reflects. "I enjoy that."
He also ran his wife's campaigns.
In 1986, when Carolyn Warner ran for governor, Ron Warner handed the day-to-day operation of Warner's Furniture and Interiors over to Ebbett. He was more than an employee. He was practically a member of the family. Ebbett, they say, had dinner at the Warner house as often as five nights a week, and is godfather to five Warner grandchildren.
Shortly after Carolyn Warner lost to Evan Mecham in a three-way race, the Warners named Ebbett president of the company. When Ebbett left in 1992, Warner says, he was making $11,000 a month and had drawn about $400,000 in profit-sharing funds.
"Gerry ran the business without any interference from me, which is the way it has to be," Warner says. "You have to give the person that latitude or it doesn't work."
Warner's philosophy may have come back to haunt him.
The late 1980s were not good for either Phoenix or the interior design business. The real estate market was in the dumps. The wealthy weren't spending their money easily and the rest didn't have any.
A proliferation of design centers and wholesale-type markets opened up to freelancers, housewives and just about anyone else with a notion to decorate. Home magazines were telling the masses how to do it themselves.
It was tough for the well-trained, sophisticated designers of the likes of Warner's to hang on to their niche. And to make money.
Warner's had a long-standing policy that aimed for a 100 percent markup, an industry standard. That means a sofa that cost Warner's $3,000 should ideally sell for $6,000. The company required at least a 50 percent markup in order for designers to earn a commission, which was 20 percent of the profit.
Other design houses, however, had met the crunch by going to a commission structure of "cost plus" 30 to 40 percent of sales, and an hourly rate for design services.
But Warner's would not change. It had been successful under the same formula for four decades. It had weathered recessions.
"You have to have a 50 percent markup in order to be profitable and to stay in business," Ron Warner says matter-of-factly. Nevertheless, the company aimed for 100 percent.
In June of 1988, Ron Warner looked at the economic horizon and decided to diversify. Ebbett was running Warner's Furniture and Interiors pretty much without him, anyway. Warner started a subsidiary called Sofas & Chairs, which made just that, and ran it with his daughter Christi.
A customer could select a style and a particular fabric and have the whole thing made to order. And Warner's could keep the profits inside the company. Warner later started Warner Imports, which imported silver products like picture frames from Mexico.
The subsidiaries were designed to boost Warner's profitability, but its employees allege they drained the company.
A September 1994 audit of Warner's Interiors and subsidiaries by Tucker Alan Inc., commissioned by Bank One, shows that the business and its subsidiaries lost a combined total of $85,294 between 1989 and 1992, primarily because of $180,000 used to support Sofas & Chairs and Warner Imports.
Ebbett, who refused to be interviewed for this story, says in an October 1994 deposition that Sofas & Chairs had quality problems, so he quit ordering from the company. Warner's Interiors was generating 60 to 70 percent of the sales of Sofas & Chairs, according to Warner's.
"I would bring in a deposit check from a client who would give us 50 percent down. All the checks were supposed to be utilized to start the work for that client's purchase," says Kirk Guthrie, a former designer at Warner's.
"In fact, in the last year and a half, maybe two [before November 1992], those funds would be utilized to pay overhead and expenses and, I feel, to support Warner's Imports and Sofas & Chairs.
"It is my belief that if the money hadn't been drained from the company for Warner's Imports and for Sofas & Chairs, the company still would be solvent and I would still be employed there," says Guthrie.
Warner argues that the subsidiary business is being made out to be some sort of financial scapegoat for other problems at Warner's.
"Every nickel of Warner Imports was my own money. Not a nickel of corporate funds went into that business," Warner says.
But by early 1992, Warner's Furniture and Interiors was hemorrhaging. Joyce Bezdicek, Warner's former controller, sent memos to Warner saying that cash was tight and that the business could not continue to fund Sofas & Chairs. (Bezdicek did not return phone calls from New Times.) Warner argued that that couldn't be the case.
He rode Ebbett constantly about money. Ebbett, he says, told him that things were even worse at other design houses. And, in fact, Barrows Furniture, one of Warner's biggest competitors, closed its doors in the Valley. A design center in Tempe filed for bankruptcy.
"I'm really stupid. I think business is bad," Warner says. "In my world, things are bad. People lost homes, land and money. The market just went downhill. All the things were there to make it believable."
Warner gave up his salary and the rent that the business paid him on the building he owned. Suppliers went unpaid. Cash was tight. And yet there appeared to be business throughout the store.
"As I had told Carolyn," Warner says, "`We have a lot of business and we have no money. The two don't go together.'"
On a fall morning in 1992, Ron Warner discovered what he now believes is the reason his company was losing money. David Wilcox, a former employee of Warner's Interiors, met Warner for breakfast. It was the beginning of a nearly three-year saga that has not yet completely unfolded.
Wilcox told Warner that his employees had been diverting hundreds of thousands of dollars from his company in a scheme that involved several of the firm's employees, including Ebbett, president of Warner's Interiors and Ron Warner's trusted friend. Wilcox later confirmed that in an affidavit filed in court.
It was unbelievable. Yet, in Warner's mind, it made a jumble of puzzle pieces fit together.
"I had no idea that Gerry was involved," Warner says. "I guess I would have thought maybe someone was embezzling money. But not Gerry."
Warner began investigating. He came into the store at night and went through records trying to verify what Wilcox had described.
By early November, Warner had seen enough. There were keys to storage lockers in state and out under Warner's name. There were invoices for jobs there was no record of. On November 12, 1992, Warner called all of the employees together, told them it didn't look like the business was going to make it and that he would have to let them all go immediately.
Some were stoic. Some cried. Ebbett, he says, ran out of the building.
"The only thing I had left was the element of surprise," Warner says.
"And then I made a terrible decision. An unbelievable decision," he remembers. "[The controller and assistant controller] talked me into letting them stay an extra day."
Warner says he wanted to make sure the clients were taken care of. Now, he thinks the employees destroyed records.
At 68 years old and after 40 years in business, Ron Warner began shoveling the ashes out of the store again and started over.
In 1986, while Ron and Carolyn Warner were running a gubernatorial campaign, Gerry Ebbett hired a designer named Kirk Guthrie, primarily to work on a commercial job.
Guthrie is a thin, pleasing man with a soft voice, the kind of overly unoffending guy you immediately assume makes his living in sales. He is the son of schoolteachers, a husband and a father of four children and the sole support of his family.
After the commercial job was finished, Guthrie stayed on at Warner's full-time.
By then, Ebbett had built a high-end client base that included most of the social register of Phoenix. As president and director of design, he assigned them to the designers at Warner's he felt would likely best suit them.
Between Ebbett's referrals and customers who came into the showroom because of word of mouth, Guthrie built his own client base in short order.
In the design industry, it's not uncommon during the course of a big job to arrange for something to be done at cost or sell a particularly expensive piece at little profit to keep a good client happy. But those sorts of things are generally done cautiously and at the discretion of the business.
Guthrie and his fellow employees maintain that they had to sell things like antiques off the books of Warner's because they couldn't get a 50 percent markup on them. And that it was that practice that kept the business coming in the door for Warner's.
It began, Guthrie says, in 1988, when he approached Ebbett and told him that he had a client who was doing a lot of business with Warner's and, to complete the job, he had to buy some high-end antiques.
"He [Gerry] said, 'You can just handle it yourself.' I interpreted that to mean that there was no way we were going to get close to 50 percent [markup needed to earn a commission]," Guthrie said.
The Warners allege that it was the start of a scheme that would eventually divert more than $2.5 million in business from the store, business for which Warner's continued to pay the overhead. They allege that Ebbett, Guthrie and other employees all either participated in or knew about the deal.
Guthrie and Ebbett both maintain that they had to run jobs on the side because cash was too tight at Warner's to front the jobs, and that Ron Warner knew what was going on. The rest of the accused maintain that they had nothing to do with it.
Warner doesn't buy it. Mostly, he says, because as the side work escalated in 1992, his employees did more business than Warner's did. It was, he says, an elaborate scheme to put Warner's out of business. And it almost worked.
These are not allegations of merely moonlighting--working a second job that competes with Warner's. They are those of business theft--taking payment directly from a customer, paying a supplier and keeping the profit. All directed from the showroom of Warner's Furniture and Interiors.
Starting somewhere around 1990, there was other work done off the books, as well.
In a business like Warner's, designers may place a window at a certain location so that the client has a particular view from the breakfast table, knock out a wall, prescribe new lighting, redo the plumbing, add wall texture or any number of other configurations.
Guthrie says that sometime about 1990, Ebbett handed down a mandate that there was to be no more construction work run through Warner's because it created cash-flow problems and the potential for liens filed against customers, who, in turn, could sue Warner's.
"Gerry said, absolutely, we don't run any of the construction services through the company," Guthrie says. So he decided to handle construction-type work for customers on his own.
Guthrie paid subcontractors for work in his clients' homes in Arizona and California and then was, in turn, paid by the clients.
"I made that part of my services that was not run through Warner's," he says.
He says he charged a fee for this work and, on occasion, received a commission from some of the subcontractors. In one instance in 1991, Wang Electric did more than $1,200 worth of work in Guthrie's home after he hired it to work on a remodeling job for a client.
But there are a few problems with that. To begin with, Guthrie did not have a contractor's license, which, according to the State Registrar of Contractors, is against the law.
And, regardless of what Guthrie was or wasn't told, Warner's did jobs with contractors and subcontractors as late as 1992.
In January, Kirk Guthrie signed a sworn affidavit stating that he had run his own design business inside Warner's while he was an employee, using Warner's employees, reputation and credit, drivers and warehousemen to process, deliver and install the merchandise he sold.
He also states that he split fees, commissions or profits with Ebbett and that Ebbett had started his own business inside Warner's, using Warner's client base. Guthrie says he paid Ebbett $108,000 between October 1991 and October 1992 in connection with his own business.
A review of Warner's records, court documents and an interview with Guthrie indicate that the scenario through which Warner's alleges its business was stolen worked like this:
Guthrie would order merchandise and work to be done on a client's home. Merchandise that was not delivered directly to a client's home was delivered to Warner's. Warner's employees then delivered that merchandise to the client.
Invoices from suppliers were sent to Warner's, which Guthrie paid with a personal check. He then presented either the original invoice to the client or, in some cases, created his own invoice reflecting a markup of anywhere from 5 to 160 percent. Clients paid Guthrie. He kept the profit, and, in some cases, paid a portion to Ebbett.
"I always made Warner's more money than I ever did," Guthrie says. "I really feel that the clientele felt like they were being treated fairly by me because I would let them have some things cheaper and they had to pay the full price on others.
"If I had approached them and said, 'Well, I have to have a 50 percent markup,' they would have never talked to me."
However, in at least one instance, the customer had no idea what he was buying, let alone what the markup was.
In an April 1992 sale to Bruce Halle, owner of Discount Tire Stores and Warner's largest customer, Guthrie falsified an invoice from an antique dealer in Los Angeles, nearly doubling the price of three items for a total of about $24,000.
While the bill went to Halle, the merchandise went to his daughter's home in San Diego.
According to Guthrie, the price of those items was inflated to cover items that Ebbett had included in the delivery from his own home. Ebbett did not want Halle to know that they came from his home, so he didn't itemize them. Guthrie then paid Ebbett with the money he collected from Halle.
"Gerry told me to do it this way," Guthrie says. "It was, 'Kirk, do this'--Done."
In a different transaction, another designer ordered a rug for a client from a dealer in California. It was shipped to Warner's and installed by Warner's employees. The client paid Ebbett $38,200 for the rug. Ebbett then wrote a check for $28,000 to the dealer for the rug. He also wrote a check for $5,000 to another designer, which he says in his deposition was her share of the profits.
"If I hadn't done it direct, I wouldn't have been able to finish the job," Ebbett says in deposition.
Ebbett and Guthrie both justify going off the books of Warner's. They claim that they were ordering items and paying the suppliers for them out of their own pockets because Warner's didn't have the money. But bank records show that Ebbett and Guthrie did not pay the suppliers until they collected from their customers.
In 1989, Guthrie says he went to Ron Warner and told him that he and Ebbett both were doing business on the side. The occasion was that Ebbett had mandated that all the designers at Warner's were to use a drapery maker called Custom Works exclusively.
Guthrie was furious. He had had a falling out with the owner of Custom Works over a bill from a client and did not care to do any further business there.
In describing the scenario to Warner, Guthrie says, he included that he had done side work and so had Ebbett, and offered his resignation. Warner, he says, sent him back to Ebbett to work things out.
"I met with Gerry and offered my resignation," Guthrie says in his deposition. "He explained to me that this was a normal part of this business and this had to happen from time to time to keep a job running and that my resignation was not accepted and that I produced much too much business for something like this to interfere with my employment relationship with Warner's Interiors."
Ebbett says in his deposition that he sent the business to Custom Works because the drapery company was renting a house that he and Warner jointly owned, and because the business would carry Warner's for up to $10,000 on jobs. Warner says he told Ebbett that the fact that they were landlords to the drapery business is exactly why it wasn't a good idea to use Custom Works exclusively.
But Ebbett left out another piece of information, according to his deposition. Ebbett never told Warner that he was a partner in the Custom Works business.
"At a company this small, in which hundreds of thousands of dollars' worth of merchandise is in this warehouse going out and it's not being run through Warner's . . . it's impossible for everybody not to be in on it," observes Warner.
In her deposition, Bezdicek, Warner's former controller, says that she knew nothing of side business going on at Warner's. But Guthrie says she knew all about it, in part, because she would get the invoices.
"It was not a real hush-hush secret," Guthrie says.
And, in fact, several invoices contain what appear to be notes from Bezdicek to Guthrie directing him to take care of payment.
Recounting all this feels like fingernails across a chalkboard to Ron Warner, a gentlemanly man with a general distaste for conflict, especially in his own affairs.
He maintains that he did not have a clue about the business that was kept off Warner's books. The reason, Warner says, is that he was not seeing accurate financial statements for the business. He says that a later audit of the books, which is still under way, indicates that the expenses from the work that were not logged through Warner's books were placed into a "work in progress" account.
That account is an asset account, which would make it appear as though it were incoming business, rather than expenses.
"I look at the financial statement and think things aren't so bad because we've got this business coming in," Warner says.
Ron Warner was literally not minding the store. Warner's books were not audited for 1991 or 1992 because the firm had not paid the CPA. Warner says he didn't know because, frankly, he wasn't there. He was trying to get Warner Imports going, he was traveling, he was involved in community activities and he trusted his employees.
Warner's has banked with Valley National Bank, now Bank One, for more than 35 years. Guthrie and Ebbett banked there, too.
As Kirk Guthrie's personal business began to grow, he spoke with a Valley National Bank operations supervisor named Hazel Bedell and explained to her that he was taking outside jobs, for which he received money from clients and, in turn, paid suppliers.
Guthrie, in a sworn affidavit filed in the Warner's case against him, states that he ran about $1 million through his personal checking account in one year, most of which was related to the design work he was doing apart from Warner's.
Canceled checks and bank records for Guthrie indicate that he routinely deposited large checks--some for more than $100,000--from clients drawn on accounts from other banks and had same-day access to those funds. In some cases, the checks were drawn on out-of-state banks.
He says that he explained to Bedell early on that, because of the nature of his business, he had to have funds cleared immediately to pay suppliers.
And, in fact, Guthrie's bank records show that he was overdrawn several times on his account.
This arrangement is at the crux of the vicious fight Ron Warner began with Bank One shortly after Warner fired his employees in late 1992.
In the suit, Warner alleges that the bank financed his employees' side businesses by allowing them to cash and deposit checks through the bank and get immediate access to funds in a manner outside of normal banking procedure.
Bank One, meanwhile, maintains it was doing nothing more than routine transactions for its customers, and that Warner is trying to dump his business problems at the doorstep of the bank.
Guthrie explains his banking routine this way:
"I always went to the same person, Hazel Bedell," he says. "I would always make my deposits with Hazel. Sometimes I put it in the night deposit slot. Sometimes I would go in the morning and give it to the teller at the drive-in window and ask them to deliver it to Hazel. She would know that these funds were to go into my account. It was a personal banker type of an arrangement."
Bedell's initials appear on many of the checks deposited into Guthrie's account.
"She would call me to tell me that the checks that I had put in there had been cleared," he says. "They didn't clear it immediately. She always would call."
Guthrie says that Bedell also called periodically to notify him that there were not sufficient funds in his account to cover the checks that were coming through.
In bankruptcy proceedings, Bank One and Warner's agreed that there were 30 phone calls per month among Warner's, Guthrie, Ebbett and the bank.
When Bedell was transferred to another branch in December 1991, both Guthrie and Ebbett moved their accounts with her. Ebbett says he followed her because Bedell was always very service-oriented.
Bedell is now a security investigator for Bank One.
In a June 12 affidavit, Bedell characterizes her relationship with Guthrie as less than he remembers it. "Occasionally, I would be called upon to authorize checks presented by Kirk Guthrie for deposit because the amount of such checks exceeded the Customer Service Representative's [teller's] limit."
Warner's disputes other deposits Guthrie made, as well.
In one instance, Guthrie deposited a $12,046.50 check made payable to Warner's into his account, taking $46.50 in cash back. The check had no endorsement on the back, and the teller who took the deposit had a $10,000 limit.
In an April 1993 letter to Warner's attorney, Bank One's attorney stated that "based on the information that we have received, it appears that the $12,000 check deposited by Mr. Guthrie into his account actually was money paid to Mr. Guthrie as reimbursement for advances that he had made on behalf of Warner's."
Guthrie also says that this money was owed to him by the client for a chandelier, nightstands and other things he had purchased on the client's behalf.
But in an October 1994 affidavit, the client stated that not only was the check intended for Warner's, but the bank never asked her if the check was intended for Guthrie.
The bank, in later court filings, states that the teller made a mistake in depositing the check into Guthrie's account.
Bank One contends that it was operating within the bank's policies and its employees did nothing more for Guthrie than for any regular bank customer. The bank also maintains that there was nothing improper about Bedell making funds available immediately on checks to Guthrie if the funds existed.
In yet another issue, Warner's alleges that the bank was negligent in routinely cashing Warner's Interiors business checks made payable to cash and petty cash.
According to Warner's records, between 1989 and 1991, the bank cashed more than $30,000 worth of Warner's company checks made payable to "cash" or "petty cash" with no endorsement. Those checks were signed either by Ron Warner or Gerald Ebbett, but, Warner's contends, cashed by employees without notifying Warner's.
Bank One spokesman Steve Roman declined to discuss customer accounts. However, he did say that bank policy is that any check written to cash does not have to be endorsed.
In court filings, the bank maintains that this procedure had long been followed whenever Warner's needed cash and that a check payable to cash is a bearer instrument that doesn't require endorsement.
However, other banking-industry executives and officials don't entirely agree.
Standard banking procedure, according to the State Banking Department, federal Comptroller of the Currency and several major banks, is that all checks should be endorsed, especially checks made out to cash.
"There is a certain risk that the bank is assuming by not getting endorsements," adds Harold Feeney, deputy superintendent at the State Banking Department.
"Company checks are not supposed to be made out to cash," says Rich Hendry, consumer affairs investigator for the U.S. Comptroller of the Currency. "A cautious institution might refuse to cash checks made out to cash unless there is a petty-cash agreement. If they've entered into that agreement, they should not be allowed to do anything else but what it says."
"Running [$1 million in a year] through an account like that should raise some concern," Hendry adds. "If it's Ross Perot, who cares? But if it's me, yeah, someone should notice."
Warner's belief that everyone had to be in on the deal has led even to a lawsuit against the customers. The business filed suit against Halle, Herman Chanen, who sits on the Bank One board, and George and Carol Beil, principals in the Houston's Restaurant chain. Carolyn Dayani, who had homes in Paradise Valley and La Jolla, California, done by Guthrie, is named in the suit with the bank and the employees. Warner's alleges that they knew about the scheme and dealt directly with employees to get a better deal.
The clients say that they did no such thing and that it's not their responsibility to watch Warner's business. In short, they paid what they were told to pay and to whom, by Warner's employees.
Dayani, one of Guthrie's biggest clients, sometimes paid him with checks made out to cash for as much as $50,000. According to her deposition, that was in order to conceal the purchase of antiques from her estranged husband during their divorce proceedings.
Guthrie cashed or deposited those checks, some of which were drawn on out-of-state banks, and was able to have access to the funds within 24 hours.
In one instance, Guthrie deposited a $50,000 Dayani check made payable to cash from a local bank and a $4,985 out-of-state Dayani check payable to cash. He did not endorse either check and no hold was placed on the funds, even though Guthrie did not have the money to cover those checks in his account.
Warner's may not see the end of its lawsuit with Bank One. The two have engaged in a tournament of hardball that could result in the end of Warner's before the civil suit sees the inside of a courtroom.
Warner's Furniture and Interiors, as well as Ron Warner personally, filed for Chapter 11 bankruptcy in 1993. Under Chapter 11, a company is reorganized. The company still exists and attempts to pay off its debts.
But Bank One, Warner's largest creditor, has opposed this arrangement. Instead, the bank has moved to push Warner's into a Chapter 7 bankruptcy. Under Chapter 7, a company is dissolved and its assets are liquidated.
Should this occur, Warner's Furniture and Interiors will be taken over by a trustee, who could be less likely to pursue lengthy litigation.
In 1989, Ron and Carolyn Warner got an $800,000 mortgage loan from Bank One for their 18,000-square-foot showroom on Osborn. They lease the space to Warner's Furniture, which guaranteed the loan.
Earlier, Warner's Furniture had taken out a loan with the bank for improvements on the showroom. The business had a balance of about $124,000 on this loan from Bank One, and had fallen behind in 1992.
After the business filed for bankruptcy in early 1993 and asked for reorganization under Chapter 11, Warner's paid off that improvement loan, which was the bank's only direct claim against Warner's Furniture and Interiors.
Warner's offered a settlement on the mortgage, but the bank said no dice. Ron Warner had already begun to make allegations that Bank One was involved in the fraud scheme with the interior design firm's employees, and the bank would not accept any agreement that didn't release all of its directors, officers, agents and employees.
Besides, the bank said, Warner's wasn't offering enough to cover the debt.
Instead, the bank moved to take the building on Osborn.
The court allowed Bank One to foreclose earlier this year on the property where the Warner's Interiors showroom sits. Bank One claims there is a deficiency balance on the property, which means it is still a creditor in the bankruptcy and may continue to pursue Chapter 7 proceedings against Warner's.
The bank contends that it is simply trying to collect its money. And it has pursued that aggressively.
Although Carolyn Warner hadn't filed for bankruptcy, Bank One went so far as to seek to force her into Chapter 7. Warner fought back, arguing that she didn't qualify for Chapter 7 because the bank was the only creditor she wasn't paying.
Although Bank One dismissed its action, U.S. Bankruptcy Court Judge Sarah Curley scheduled a July hearing on possible punitive damages against Bank One.
As to the bigger question, the judge is scheduled in July to decide whether Warner's will be liquidated under Chapter 7 or reorganized under Chapter 11.
Much as Warner's has banked at the same branch of Bank One for more than three decades, the store and the Warners had been represented by the Phoenix law firm of Streich Lang and its predecessors since Warner's was incorporated in 1952.
When Ron Warner discovered the alleged fraud, he initially turned to Paul Gilbert, a friend from the firm of Beus, Gilbert & Morrill. Still, Streich Lang acted as agent on the Warner's Interiors profit-sharing plan until 1988 and has billed and corresponded with Warner's as recently as January 1991.
But more important to the Warners is that Streich Lang still had some of the company's corporate records. The firm faxed 36 pages of Warner's bylaws and incorporation documents within hours after Warner's requested them in conjunction with firing its employees in October 1992.
Ron Warner was more than a little upset when he found out that Streich Lang was representing the bank against him--in the bankruptcy and the civil cases.
Not only did Warner never sign a conflict waiver releasing Streich Lang, he wrote to top executives at both the firm and the bank stating that he felt that the firm had a direct conflict in representing Bank One against Warner's Interiors.
Streich Lang points out that it wasn't until a few months into the bankruptcy that Warner sent his letters about the conflict. And Warner didn't file a motion to the court to disqualify Streich Lang until February 1994--one year after Streich Lang began representing the bank in the Warner's Interiors bankruptcy--which Streich Lang attorneys contended was a stalling tactic.
Warner, of course, says that he didn't realize Streich Lang was representing his adversary until then.
The law firm's attorneys further contend that Streich Lang had not done work for Warner's in several years, and, therefore, has no conflict of interest.
In a January 1994 letter, John Clemency of Streich Lang told Pamela Vining, Ron Warner's bankruptcy attorney, "We have not had an open file on the Warners or Warner's Interiors in years."
Open files didn't become an issue. It was the previous work that bothered Warner. Streich Lang, Warner says, drafted the employee handbook that forms the basis for part of Warner's suit against its former employees and the bank.
And then there are the property issues.
In 1983, Warner's had applied to Bank One, then Valley National Bank, for a business loan. The Warner's showroom has been in a primarily residential area near 26th Street and Osborn Road since before city zoning standards came into play. Warner's was, officially, a legal, nonconforming use on residential property.
But in order to get a loan from the bank, Warner says, the property had to be rezoned for commercial use. This caused great concern among the neighbors. Warner's was a fine neighbor, even a good neighbor, they said. But rezoning the property could open the door for a less-desirable neighbor should Warner's ever decide to move.
Warner's and the neighbors compromised, Warner says, agreeing to deed restrictions on the property that would limit what the property could be used for. Streich Lang represented Warner's in that case.
Those deed restrictions became an issue as Warner's fought against foreclosure. The deed restrictions would make the property worth considerably less, Warner maintained, should Warner's Furniture move out.
Clemency, lead attorney for Streich Lang, now representing Bank One, argued that there were no deed restrictions on the property. And, in fact, there is no record of those deed restrictions having been recorded in Maricopa County. Nor could Warner produce a copy of them.
However, Warner said that that was because Streich Lang had the deed restrictions, as well as a letter confirming the agreement.
The court in March 1994 ordered Streich Lang to hand over any records it still had for Warner's. Streich Lang produced microfilm and various documents, including a record of billing for preparation of deed restrictions.
Finally, in a December 1994 hearing, Judge George Nielsen told Clemency, "The firm does not bill people just for asking for representation. I see a bill for $48 from lawyers; I presume that there was some consultation."
Indeed there was. Clemency produced a copy of the letter to Warner prepared in 1983 by a Streich Lang attorney that states, ". . . this firm has been instructed and is commencing preparation of a draft of deed restrictions for the above-referenced property, which restrictions will limit the commercial uses . . ." and ". . . this firm will then proceed to put the deed restrictions in final form."
Clemency did not respond to repeated requests to be interviewed.
According to Warner attorney Vining, this was the first time the Warner side had seen such a letter. Clemency stated in court that he was under the impression that the file had been sent.
On May 1, Judge Nielsen disqualified Streich Lang from representing Bank One in Warner's bankruptcy. The firm remains counsel to Bank One in the civil cases, however, which Warner's plans to contest.
Ron Warner would like to have the money back that he says was stolen out of his business. He's also asked for punitive damages against the bank. He says he plans to create a fund to help other businesses in a similar situation bring legal action against the bank. Warner's recently sent out a copy of Guthrie's January affidavit, along with a cover letter explaining how the company alleges its business was stolen, to about 500 customers and suppliers.
Warner's has hired new designers and is putting the business back together. In August, it plans to move to a new location in Scottsdale, assuming the court doesn't rule in favor of liquidation.
"It's just survival," says Ron Warner. "The first thing I have to do is keep this corporation alive. There are just so many hurdles to jump through."
Ebbett and Guthrie started their own design business with two or three other former Warner's employees about a month after Warner tossed them out.
Guthrie settled with the Warners for about $40,000 in a $2.5 million judgment against him.
Perhaps more important to Ron Warner than the money is his name and reputation. And that's what he seems to be fighting for the most.
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