Acts of faith: $18 million at stake in corporate collapse with church ties

Hanover Corp. used its links with a Nashville church to raise more than $18 million from about 150 small-time investors, promising a 24 percent annual return. Now the company is foundering amid bankruptcy filings and a lawsuit that calls it a Ponzi scheme.

Email | Print By E. Thomas Wood

10-26-2006 11:42 PM —

It seemed like such a blessing. Terry Kretz, whom so many parishioners at Madison's Cornerstone Church knew as a "Godly man" and a pretty astute businessman to boot, was offering a piece of his action to a few fortunate people in and beyond the congregation.

Investments in Kretz's budding conglomerate, Nashville-based Hanover Corp. LLC, would pay a guaranteed 2 percent per month -- a whopping 24 percent annually -- to small-time savers who could never have accessed such high yields on their own. Some of the most respected members of the congregation were involved in Hanover's subsidiary businesses, with a church pastor in charge of one of the enterprises.

"Those guys are all saying 'Terry's a great guy,'" remembered Adam Hutton, a chiropractor who cashed in retirement savings to invest $50,000. "And if you can't trust your pastors, who can you trust?"

Approximately 150 mom-and-pop investors sank more than $18 million into Hanover's promissory notes between 2004 and 2006, according to court documents and financial information distributed by the company. How much money, if any, the investors will ever get back is now an open question.

In the past three weeks, Hanover has suffered potentially fatal legal blows. First came a lawsuit in Nashville's federal court, claiming that its investments were nothing but a "Ponzi scheme" that took in money from new investors in order to pay off earlier investors. Then came the filing by Linear Logic LLC -- a CD pressing company in Madison that Hutton recalls as "the only one that made any kind of money" among Hanover's holdings, according to company officials -- for Chapter 11 reorganization under the bankruptcy code. Finally, last Friday, came a petition to put Hanover itself into involuntary Chapter 7 bankruptcy -- which, if carried through, would result in the liquidation of whatever assets remain in the possession of Hanover.

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In the lawsuit, filed on October 6, Patrick and Lisa Reitmeyer of Mesa, Ariz. call Hanover "a Ponzi scheme whereby the defendants sought to keep the enterprise afloat as long as possible" for their own benefit "by duping others into providing funds to Hanover." The filing names Hanover, Kretz and George 'Bud' Thorpe, described as a key assistant to Kretz, as defendants.

The Reitmeyers, who say in the complaint (copy available at this link) that they are related to Kretz but do not specify how, report that Kretz and Thorpe flew out on a Lear Jet to visit them in May 2005. Soon the couple had agreed to invest $250,000 in Hanover's high-yield promissory notes, a sum that grew to $734,000 as Hanover's principals convinced them to make further investments in 2005 and early 2006.

"Notwithstanding Kretz's assurances that Hanover was a vibrant and stable company worth approximately $100 million, Kretz, in fact, knew Hanover was virtually worthless and on the brink of collapse," the lawsuit charges. It claims Kretz and Thorpe "misappropriated funds" and "paid themselves large sums and made ill-advised investments."

Ken Bryant and David Johnson of Miller & Martin represent the Reitmeyers.

Linear Logic's filing in bankruptcy court (copy available at this link) took place on October 13 and was signed by Tim West, company president, who has been associated with the Cornerstone Church in the past. The CD-making company listed assets of $2.8 million and liabilities of $3 million. In an August 10 presentation to worried investors (copy of presentation materials at this link), Kretz displayed a balance sheet showing Linear Logic as the largest of more than a dozen investments by Hanover in portfolio companies. The balance sheet showed Hanover's 49 percent stake as worth $2.2 million.

Nashville attorney Steve Lefkovitz is handling the case for Linear Logic.

Three holders of Hanover's promissory notes prompted the involuntary bankruptcy filing on October 20. Adam Hutton, together with Jack Wiesner of Nolensville and Hoyt and Jean Sprinkle of Jonesboro, claim that Hanover has defaulted on more than $300,000 in principal and interest it owes them. Steve Hurd of Sherrard & Roe is their attorney.

Where all the money went is unclear from information currently available. But one other court filing provides details on the use of some of the investment proceeds. Kretz told a New Jersey federal court in 2004 that Hanover had lost more than $875,000 trading options in a pharmaceutical firm called Genta. Hanover sought to become lead plaintiff in a shareholder derivative action, but another owner was chosen. A settlement is now pending in which Genta would pay the plaintiffs' lawyers and institute governance reforms, but would pay out no cash to plaintiffs.

The legal triple whammy of two bankruptcies and a lawsuit may well mark the end of strenuous efforts by Kretz in recent months to reassure investors that he would find a way to make them whole. One observer who attended the meeting Kretz called in August described the scene vividly to NashvillePost.com:

"He personally approached each person as they entered the room to speak to them. His approach reminded me of a minister tending to his flock. When the meeting commenced, Terry walked among the audience, looking folks in the eye and nodding with concern and empathy. He made a point of explaining that his family was present, and his parents and his wife's parents were investors. He said he was working without a salary, and that he had mortgaged everything he owned and put the money back into Hanover."

Kretz reviewed the company's stakes in ventures including transaction processor eCharge2, lawn-care device maker Innovative Concepts, gospel record label Five Stones Music (run by former Cornerstone minister Terry Exley), Linear Logic and others, as well as financial stakes such as a "foreign currency investment" in Iraqi Dinars valued at $45,000. He then proposed that all holders of Hanover's debt instruments exchange them for equity in a trust that would assume ownership of all of the company's assets.

"This is going to work out," Kretz assured investors in the presentation. "However, we must stick together as note-holders." He emphasized that all investors must agree to his plan in order for it to work.

The detailed financials stood in contrast to earlier meetings, where Kretz had painted with a broader brush while summoning the Great Financial Advisor as his muse. After relating tale after tale of Hanover's nascent business successes, he had told one group of prospective investors in 2005: "If you were around us a couple of weeks, you would say 'God's hand is on you guys.' It's very, very obvious."

Following up the August 10 meeting, Hanover sent investors a letter dated September 20, 2006, announcing the setup of an "advisory board" as a step toward creating the trust. One of the board's five members was Patrick Reitmeyer, who would file suit against Hanover 16 days later.

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Many in the church family of Cornerstone, an Assemblies of God congregation in Madison that sees attendance of some 2,500 every Sunday in its 90,000-square-foot worship facility, continue to admire Kretz. But Maury Davis, senior pastor of Cornerstone, wants it made clear that Hanover's problems are none of the church's affair.

Although he has found Hanover so distracting to the church lately that he called a meeting of parishioners to discuss the matter, Davis insists that only a few, perhaps four, of his current congregation members are investors. He says neither he personally nor the church as an institution invested in Hanover's securities. "To have my church tied to something that I don't have anything to do with, and have never had anything to do with, is just sickening," Davis said in an interview.

It's not that Davis is at all averse to entrepreneurship. His Maury Davis Ministries website reaches out to audiences well beyond Nashville with a well-marketed message of personal redemption -- Davis was convicted of first-degree murder at age 18 and served eight years in a Texas prison -- and fundamentalist Christianity. Online subscriptions to his sermons are available for $299 a year. Among the past sermons offered at $2.99 per download are several from the series "Islam: An Evil Religion" that brought Davis national attention, and condemnation from various ecumenical corners, in 2002. He described its subject matter in one sermon as "the prophet Muhammad -- his sexual life, his marriage to a six-year-old girl which qualified him for prison in the United States of America, his polygamy, and the Moslem influence of violence led by this man who personally led 65 crusades."

Davis described a congregation full of understanding for the position Kretz is now in. "I think everybody that lost money is upset," he said. "But I don't have one person in my whole church that feels like Terry did something wrong. Most of them just think he made a bad business decision."

He has spoken recently with Kretz. "He's broken, he's embarrassed, he's humiliated," the pastor said. "But I've told him: I don't do financial counseling. I do ministry." Later in the interview, Davis volunteered this statement: "I think Terry probably is a good, Christian man. And you know what? Who knows? How do you know all those people that are in your church?"

But when the subject turns to Adam Hutton, the former Cornerstone member turned legal adversary of Kretz, the minister takes a hard line. Noting that Kretz, in years past, "helped other people with investments that have come out very well," Davis noted that "Adam didn't talk to me about Terry, and Adam has a long history of unwise decisions." Davis then paused to chuckle.

Hutton, for his part, places some responsibility for his apparent financial losses at the door of Cornerstone. "If it hadn't been based around the church, and the people in the church, there is no way I would have gotten involved," said Hutton, who moved to the Phoenix area last year. "I was just assured, assured that this was a great thing, these people were Godly men, and so on."

On Wednesday night, after NashvillePost.com had conducted interviews with Davis and Hutton, Hutton got a phone call from an associate pastor at Cornerstone. Davis was in the room with the caller, who said the pastor was about to walk to the pulpit for a mid-week service. In the background, Hutton said, he heard Davis's voice:

"Tell him he's a freakin' weasel, and tell him if he keeps talking about me, I'm gonna come after him for slander."

Hutton says he asked what the church's position was on Hanover. "There is no position," he quoted Davis as saying. "It's just a bunch of stupid people making stupid decisions." He then heard the sound of a slamming door.

Davis said in a later conversation with NashvillePost.com that he was not referring to Hutton's interview with this news service when he got angry with the former congregation member. As to the "stupid people" remark, Davis commented: "I think I said something, but I didn't say that." The pastor reported that Hutton has phoned several members recently, saying things that Davis did not appreciate.

"When you call a number of people in a church and infer that the pastor has not been walking in integrity, when you go down that road, I think you're on dangerous ground," Davis said. "I do not appreciate being harassed." He later added: "I'm not talking to him without an attorney present, because I don't trust him. He's a slanderous person."

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Reached at Hanover's offices this week and asked about the federal lawsuit and the involuntary bankruptcy, Kretz initially replied: "I haven't seen anything of the kind." But when confronted with evidence that he had been served with the lawsuit, he responded: "Yeah, my attorneys are involved in that."

This reporter asked several times about Kretz's side of the story, and his reply in each instance was "No comment." When asked whether he wished to have a telephone or e-mail contact for any future statement he or his attorney might wish to provide, Kretz replied: "No, thank you."