Complaints Accompany VEDC Chapter 11 Filing

One day before the Valley Economic Development Center declared Chapter 11 reorganization on July 2, a lawsuit was filed against it by a company claiming that its property was fraudulently conveyed to the VEDC apparently for free. What’s particularly unusual is that both organizations were headed by the same man: Roberto Barragan. The latest lawsuit is one of a handful claiming questionable financial stewardship during the time Barragan led the VEDC. One small-business borrower, for example, said it got $287,000 from VEDC but was expected to repay $1.6 million. For his part, Barragan said in an interview that he acted properly during his tenure and that the VEDC was financially sound until after he left in October 2016. “Whatever happened, happened after I left,” Barragan said. Barragan was with the VEDC for 21 years; he was president for 17 of them. The VEDC, based in Sherman Oaks, is a well-known lender to minority-owned and disadvantaged businesses and provides advice and technical assistance to them. As a Community Development Financial Institution, it is authorized to gather money, mostly from commercial banks, and loan it to the small businesses. It also can funnel federal grant money to businesses and is an authorized Small Business Administration lender. In its Chapter 11 filing early this month, the VEDC said it has $35 million in loans from banks, but it did not say how much may be in default or otherwise specify its financial distress. The board, down to seven members from 18 a couple years ago, declined to be interviewed. But Chairman Scott Aney said in a written response, “Expenses to continue the national lending programs were out-pacing financial returns from providing small business loans. And, long term debt obligations were coming due without adequate capital for full repayment.” He went on to say that while it’s too early to predict VEDC’s future, “Our hope is that the VEDC will continue to provide important business services to small business owners.” Pacoima property The July 1 lawsuit was filed by the parent company of the San Fernando Valley Financial Development Corp., an organization founded by Barragan; he was president of it at least through the middle part of this decade, according to various sources. The FDC, as it is known, is a nonprofit formed to deliver management assistance, loan services and capital to minority and disabled business owners, mostly. The FDC in September 2009 received a $3.75 million Financial Assistance Award from the Commerce Department’s Economic Development Administration to secure real estate and stand up a small business center in Pacoima. However, the lawsuit alleges that in 2009 Barragan transferred the Pacoima property from the FDC to VEDC without the knowledge or consent of other FDC board members. The lawsuit claims that Barragan, who was president of both the FDC and VEDC at the time, doctored minutes of directors’ meetings to grant himself the authority to transfer the property to VEDC “for no consideration.” Since then, VEDC has leased the property to the city of Los Angeles, which operated it as the North Valley BusinessSource Center, one of the city’s three business resource centers in the San Fernando Valley. The center closed this month following VEDC’s Chapter 11 filing. The FDC claims it didn’t discover what it called doctored minutes until August after a change in corporate leadership. As of July 16, Barragan claimed to be unaware of the lawsuit. He said the transfer of the property was, in fact, authorized by the FDC, and the allegation that he doctored official minutes was “patently false,” likening it to “Area 51 kind of stuff.” The FDC’s attorney, Theodore Theodosiadis, countered: “We have evidence that seems to suggest that, on at least one occasion, he did (doctor the minutes). I think discovery will show that there are more occasions out there.” Additional filings Another lawsuit, filed in February 2018 by Rita Walz and Seth Cartwright and their firm, Trace Co., outlines agreements for VEDC to provide $1 million in grant money (which doesn’t require repayment) and $1.2 million in loans at various times between 2011 and 2015 to help them open restaurants throughout Los Angeles. The suit alleges that, of the agreed-upon $2.2 million, only $287,310 ever made it to the plaintiffs. When the parties met to discuss the misunderstanding in the fall of 2016 just before Barragan’s departure from VEDC, a VEDC executive stated that VEDC made 39 payments totaling $650,000 in grants and $1.6 million in payable loans. However, “VEDC could not provide proof of disbursement of the promised funds,” according to the suit. When Walz and Cartwright stopped making payments on the loans, VEDC moved to foreclose on Walz’s personal residence in Glendale in order to recover money the plaintiffs say they never received. Barragan last week claimed that Walz and Cartwright actually did receive the agreed-upon $2.2 million in combined funding, and that Walz filed suit simply to avoid foreclosure. “We heard they had not received funds, and that’s not true,” he said. Another case – a Chapter 11 filing but not a lawsuit – is that of Mr. Tortilla, a family-owned food manufacturer in San Fernando. For Mr. Tortilla, what started as a $50,000 loan from VEDC in 2014 resulted in debt of more than $309,000 to the lender. The company in October filed for Chapter 11 protection. The centerpiece of that filing is a $150,000 grant from the Department of Health and Human Services in 2015. Mr. Tortilla claims VEDC broke the contract by not releasing this grant until over a year after it was delivered by DHHS. Also, the VEDC converted the grant into a loan payable to VEDC, although a clause stipulated that the grant could be converted into a loan if Mr. Tortilla did not create 10 jobs within three years. Because VEDC would not release the DHHS grant to Mr. Tortilla, the company claimed it was unable to produce enough income to make the required payments on a previous Small Business Administration loan, which itself was issued to help Mr. Tortilla pay off an initial VEDC loan of $50,000. As a result, Mr. Tortilla was quickly forced to take out four additional loans with VEDC. Today, the company finds itself with more than $300,000 in debt to the lender. Representatives from Mr. Tortilla declined to comment on the record for this story. Downward spiral Of Mr. Tortilla’s allegations, Barragan deflected blame, saying it was managed by another VEDC employee. “He brought it in our shop. He advocated for the investment. He lobbied for additional debt,” he said. “I assume VEDC went to (Mr. Tortilla) and told them, we turned (the DHHS grant) into a loan and you must pay it. I believe it happened under (a subsequent chief).” Barragan asserted VEDC’s downward spiral began after his departure as chief executive in October 2016 and pointed to the organization’s frequent leadership changes as a likely contributing factor. “Remember there were four presidents after I left. None had nonprofit experience, none had CDFI experience and none understood government grant making,” he said. He also said he was adept at raising charitable contributions to help VEDC operate, a pipeline that largely dried up after he left. “I was raising $3 million to $5 million a year in charitable contributions for the organization. We were doing very well,” he said. “I was sad when I heard the bankruptcy. There were 80 people when I left there. (There are now 13 employees and seven board members.) It takes some real arrogance, incompetence, ego, to destroy an organization in less than three years.”