Phoenix Business Journal – by Jan Buchholz
Date: Friday, April 29, 2011
The flagship franchise of Phoenix-based Realty Executives International likely will file for Chapter 11 bankruptcy reorganization within the next few days.
The franchisor, Realty Executives International, was started in Scottsdale in 1965 by Rector’s father, Dale Rector. That company is not involved in the bankruptcy, nor are other Realty Executives franchises, including 17 others in Arizona and dozens around the world.
Rich Rector, who also is president and CEO of Realty Executives International, said lockouts at three of Realty Executives Phoenix’s offices during the past two weeks were the primary factor in the bankruptcy action.
“That was an absolute shock to us,” he said.
Rector and Morrie Aaron, president of MCA Financial Group, which has been providing financial advice to Realty Executives Phoenix for the past several months, blame a few uncooperative landlords for the lockouts.
“A handful of landlords won’t work it out with us,” Aaron said.
The franchise operates 14 offices in the metro area and Tucson. Three Valley offices were closed during the past several months before the end of their lease terms. According to Rector, two of the landlords involved in those closures settled with the company. The third filed a lawsuit over the amount owed on the lease. That case is pending in Maricopa County Superior Court. Rector said negotiations are continuing with that landlord, however.
Since then, three other landlords have locked out agents and staff for nonpayment. Rector and Aaron said they were surprised by the lockout activity because negotiations had been ongoing with those landlords and everyone had been offered the same settlement. Both said what was offered would amount to more than they would get in a bankruptcy restructuring.
Even so, Rector said he couldn’t risk having agents and staff feel uncertain about the company’s future and decided it was time to file Chapter 11. That action will allow Realty Executives Phoenix to renegotiate its leases under bankruptcy protection, and thus avert any further lockouts, he said.
So far, agents and office personnel have been understanding about the situation, Rector added.
“We’ve had candid discussions with our office liaisons,” he said.
Several factors have exacerbated Realty Executives Phoenix’s financial problems, he said.
The challenging economy played a major role, as did a falling-out with former Realty Executives Phoenix President John Foltz. He left in spring 2010 after more than 20 years with the company.
Foltz’s departure was not amicable. A few months before he left, he was given the title president emeritus and was replaced as president by Dominic Scappaticci, a recruit from competitor Russ Lyon Sotheby’s International Realty. After Foltz left, Rector filed a lawsuit claiming he had misappropriated corporate assets. Foltz countersued, claiming libel. That case continues to wind through the courts.
Foltz told the Phoenix Business Journal Friday that Realty Executives failed to pay him while he was employed and under contract with them.
“I complained about not getting paid and they filed a lawsuit,” Foltz said.
Rector alluded to Foltz as a source of the company’s problems with office leases.
“There were lease renewals done without our knowledge. There was a lack of oversight in operations,” Rector said.
Foltz said he did not write the terms of the leases.
“We hired a professional company to negotiate those,” Foltz said.
Ultimately, Rector said, “It happened under my watch.” His mantra these days, he said, is “failed to verify.”
Rector has let three other executives go since the first of the year: CEO Glenn Melton, CFO Karen Dunham and Supervising Broker Sandy Young. He said he needed to cut back operations expenses and to take a more active role in leading the company.
“You have to remove the excesses and get down to basics,” he told the Phoenix Business Journal shortly after the firings.