Tempe-based Fulton Homes Wednesday assured its customers and others it's business as usual despite its filing a day earlier for Chapter 11 bankruptcy.
Fulton Homes Corp. filed the petition Tuesday in the U.S. Bankruptcy Court of Arizona. In Chapter 11 proceedings, the filer proposes a plan for reorganization to stay in business and pay creditors over time.
Doug Fulton, company CEO, has not been available for comment but did issue a statement Wednesday saying Fulton Homes Corp., which handles land and acquisition duties for the home builder, filed Chapter 11, and not Fulton Home Sales Corp., which sells and provides warranties on all of its homes.
"We filed Chapter 11 reorganization in order to continue operating without tremendous bank interference," he said in the statement. "Financially, we are in better shape now than before the filing."
Sharply falling land prices led to Fulton Homes Corp.'s financial difficulties, Fulton said.
"Of the many lenders we use to finance land acquisition and development, a distinct minority has taken action against Fulton Homes due principally to the current valuation of our land holdings," he said in the statement. "By filing for Chapter 11, Fulton Homes can protect our business, retain our value and continue to properly service our customers."
Founded in 1975, Fulton Homes is the state's largest privately owned homebuilder. It has communities across the East Valley, including Fulton Ranch in Chandler, Freeman Farms in Gilbert and Ironwood Crossing in Queen Creek.
According to the Chapter 11 petition, Fulton Homes Corp. has up to 199 creditors, while its liabilities total up to $500 million, at least as much as its estimated assets.
A creditors meeting has been scheduled for March 3. The company has six months to formulate a reorganization plan that would be acceptable to a creditors committee, Fulton said in the statement.
"During Chapter 11 reorganization, Fulton Homes will continue to build homes, pay subcontractors, service our warranties and keep our communities looking great," he said. "The main impact will be to the length of time it takes us to develop future communities."
U.S. Bankruptcy Court Judge Randolph J. Haines, who is also an adjunct professor in the Sandra Day O'Connor College of Law at Arizona State University, said companies that file for Chapter 11 face two hurdles early on that are critical to survival.
First, a company needs permission, either from a bank or the court, to spend cash on hand to cover current expenses, said Haines, who is not presiding over the Fulton case. Second, the company needs permission to borrow new money to keep the business going through a reorganization plan, he said.
"It's a ... life-or-death hurdle that you've got to get beyond in many business cases, and it comes on very quickly because usually they need (money) very quickly," he said. "If you get past those two things, then things can kind of calm down for a bit."
Eventually the company drafts a plan specifying how much each creditor will get paid, and all creditors get to vote on the plan, Haines said. However, the court can have final say on the plan, he said.
"Everybody's thought is what's going to happen in the future," he said. "How good is this company going to be managed? What's going to happen to the marketplace? It's difficult to project that."
Valley housing analyst RL Brown said homebuilders are being squeezed by both declining sales and banks changing the terms of their loans to builders.
"We've seen other examples of that played out in the market arena in the last several months," he said. "Brown Family Communities would be one that comes immediately to mind where many of the challenges were the result of the bank demanding additional collateral, and I suspect those same kinds of things played into Fulton's dilemma."
Tempe-based Brown Family Communities shut down after 33 years in business. Other builders that have filed for Chapter 11 in the past several months include TOUSA, the parent company of Engle Homes, Woodside Homes Corp., and Trend Homes.
"We can expect to see additional homebuilders be forced to take those kind of actions as the banks change their policies and as the housing market itself suffers from this current malaise," Brown said.
Fulton Homes is well known for its charitable donations and efforts, and that will continue through the bankruptcy process, Doug Fulton said in the statement.
Company founder Ira Fulton and his wife, Mary Lou, have contributed more than $160million to Arizona State University to be distributed between the colleges of education, engineering and other areas of the university. The university includes the Ira A. Fulton School of Engineering and the Mary Lou Fulton College of Education.