JK Harris to file for bankruptcy
The JK Harris company once advertised that it could resolve people's tax debts for "pennies on the dollar," but now it could be the company's creditors and disgruntled former clients who will get less than they are owed.
JK Harris & Co. plans to seek bankruptcy protection in Charleston to head off an attempt by the Texas attorney general's office to force the company into receivership, said company founder John K. Harris. The company, a national tax-debt-resolution service based in Goose Creek, has been dogged by cash-flow problems and the cost of large settlements related to claims that it misled consumers.
The bankruptcy filing is aimed at selling the business quickly while writing off debt. The company would continue operations in the meantime.
Consumers who were to get millions of dollars in compensation from previously agreed-upon settlements, from a class-action suit and from complaints by multiple attorneys general, could receive dimes on the dollar, as could JK Harris' creditors. About 30 employees of the company who were laid off last week also are owed wages.
The Texas attorney general's office is involved because it agreed to accept a $1.2 million settlement from JK Harris to resolve claims that the company misled consumers and took money from customers ineligible for relief from the IRS.
Texas is one of about 20 states -- South Carolina is not among them -- where attorneys general have pursued such claims against JK Harris.
"They picked on us because we were about 15 times the size of our nearest competitor," Harris said. The company has changed the practices that led to the complaints, he said.
In September, the Texas attorney general's office said JK Harris defaulted on its settlement after making a single payment of $100,000. Texas is now suing Harris personally, alleging that he "was fully aware that the company would not perform its obligations" when he signed the agreement.
"The complaint sounds bad, but my lawyer says they really have no recourse," Harris said. "I did not guarantee it."
Harris' company seeks to resolve debt through the bankruptcy filing and a Section 363 sale in which it could be sold with court approval.
"It's an aggressive and, some would say abusive, way of pursuing a sale without evaluation by their creditors," said Jason Kilborn, resident scholar at the American Bankruptcy Institute. "The real question, after a 363 sale, might be how to divide up the money."
The way the process works is that a company files for bankruptcy with a bidder known as a "stalking horse" already lined up with a buyout offer. Rival bidders are then given a chance to offer more. Eventually, a bid is accepted and the company sold. Creditors then divide the money paid for the company, which is typically a fraction of what creditors were owed.
Harris estimates JK Harris is worth around $7.5 million. He said the stalking-horse bidder will likely be rival firm TaxMasters Inc., a publicly traded company based in Houston. TaxMasters did not return several phone calls Thursday.
JK Harris currently owes about $12 million to its primary lender, RAI Credit, according to Harris. The company also owes about $4 million on what originally was a $6 million class-action lawsuit settlement, plus $1.1 million to the Texas attorney general and consumers there, and additional payments to attorneys general in other states. That's in addition to money due to employees, vendors, and other debts.
"I doubt that it's a positive thing for our class members," said Mario Pacella, a Columbia attorney who represents claimants in the class-action lawsuit. "I'm not surprised."
In Goose Creek, where the company once employed 325 people, about 85 remain.
"We plan to bring them back on in about 90 days," said Harris, who expects to continue running the operation under new ownership. "Basically, (the bankruptcy filing) means they get to retain their jobs and we get to maintain our clients."
