Crisis at Rocky Mountain Mutual Housing Association




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Introduction

In January 2004, Rocky Mountain Mutual Housing Association (hereafter, “the Mutual”) was in disarray. The Mutual owned and managed about a dozen multi-family housing properties in Arizona, Colorado, and Utah that were hemorrhaging cash on a monthly basis. The operating cash flows coming from most of these properties were insufficient to cover the operating expenses that were being incurred each month. Some properties produced profits, but they were inadequate to absorb the collective losses that the Mutual sustained.

At board meetings, there was a strong feeling that they were approaching a crisis point. Board members felt that they no longer had control of the organization. Dan Willis, the Mutual’s controller, reported that the financial reporting system with all the complexities of the various properties could not give him adequate information to determine the cash flow situation. But one thing was certain – the various accounts were being drained faster than they could be replenished. If that continued, the Mutual would soon not be able to meet its obligations – to the employees, vendors, lenders, and other businesses that supplied services and goods.

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Board members, including Chairman Victor Gordman, were frustrated. They did not know exactly where the Mutual stood financially. In January 2003, independent auditors had remarked that based on the financials for 2002, the Mutual had no material weakness. But a year later, the verdict was different. The 2003 financials established an uncertainty about the Mutual’s ability to continue as a going concern. The Executive Committee faced the crucial decision of whether to file for bankruptcy and liquidate the Mutual or try to revive it.

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