[Note: This article first appeared on September 16, 2005. It is good example of how big piles of money belonging to a public institution, like a hospital, that no one actually owns can attract "volunteers" who have their own ideas about how to put that cash to work.]
Our series on local attorney Charles McCallum, the Fixer, has been very popular. It’s prompted some questions from our readers. One that surprised me was why it’s a bad thing to have a bigwig lawyer like McCallum putting time into a non-profit organization like the old Butterworth Hospital? Somebody has to step up to the plate, right? So why not prominent citizens as a way to pay back some of the success they have achieved in our community?
The short answer is that it’s not a problem. It’s great that people want to use the talents that have made them successful to help run our schools, hospitals, and churches. But here’s the rub, that only works if they aren’t helping themselves in the process. Volunteering for the board of a local charity means you do NOT use that position of trust to direct the charity to become a client of your business. That’s self-dealing. At worst it can be a crime, like embezzlement. At best, the IRS can step in to strip the charity of its non-profit status. Always it’s morally repugnant, no matter what the excuses you will hear to justify it.
That’s why McCallum’s tenure as Butterworth Hospital’s chairman, secretary, and chief legal counsel was a bad thing. McCallum ruled the roost at Butterworth in the late ‘80s and early ‘90s before he helped Amway founder Rich DeVos devour the hospital in the Spectrum Health merger. He used his positions of trust at the hospital to secure for his law firm, Warner Norcross & Judd, the hospital’s legal business. And guess who at Warner Norcross had the Butterworth account? That’s right, McCallum. That’s self-dealing. But that’s not all.
While chairman he had the hospital set up through Butterworth Ventures, its for-profit arm, a company called Butterworth Occupational Health Corporation. He then funneled from the hospital’s reserves a million dollars a year into BOHC. Guess who was running BOHC? You got it, McCallum’s wife Lois Temple. And what happened to that million dollars a year? Who knows? Temple certainly got paid a hefty salary. Although McCallum booked that annual subsidy as an investment of the hospital’s reserves, when BOHC was converted into a non-profit organization in 1994 to bury its financial irregularities, its balance sheet had no assets to show for the millions of hospital dollars dumped into it.
However, upon becoming a non-profit corporation, BOHC did receive one big infusion of capital from the hospital. It was $2.4 million. What happened to that money prompts the title for this tale. You will recall from “The Fixer” series that McCallum had a client named Joe Spruit who was in deep financial waters in 1992 and 1993. Spruit ran his company Autodie into bankruptcy, and he personally owed Michigan National Bank a lot of money. He hired McCallum to bail him out. McCallum could get from Butterworth Hospital the money Spruit needed to settle with Michigan National by having the hospital buy something from him. Well, there was the Autodie Fitness Center on Ottawa Avenue that Spruit controlled. So here’s how the deal went down …
McCallum had his wife Lois announce in late ’92 that BOHC was fishing around for a fitness center to operate. That provided an explanation to Butterworth insiders why BOHC would soon need funds from the hospital’s reserves. Then there was the matter of the fitness center’s title. Spruit didn’t have it. His company Autodie did, and Autodie was about to file Chapter 7 (complete liquidation) bankruptcy. As it happened Autodie was buying through a land contract part of the lot underlying the fitness center from Spruit’s friend and business associate Joe Rathbun. To wrest the fitness center’s title from Autodie ahead of its declaration of Chapter 7 bankruptcy, in February 1993 Rathbun filed in Kent County district court a foreclosure action against Autodie because it had defaulted on the land contract. This gave Rathbun’s claim against the fitness center precedence when Autodie went into bankruptcy a few weeks later. Eventually this would put the title into hands friendly to Spruit, and so that problem was squared away for the moment.
There still remained the problem of who would actually buy the fitness center. If BOHC did so directly, Autodie’s creditors, knowing that Butterworth can afford it, would demand that its subsidiary pay the market price for the fitness center and then divvy up the proceeds among themselves. This would not have been a problem except that McCallum’s objective was not to use this deal to pay off Autodie’s creditors, but to settle up with Spruit’s biggest creditor, Michigan National Bank. That meant setting up a shill with all appearances of being penniless to front for BOHC’s purchase of the fitness center. This way Autodie’s creditors would not suspect there was a lot of cash to be had from the sale of the fitness center. To this end, long-time Butterworth benefactor and dealmaker Peter Cook gave two of his associates about $100,000 in cash to set up the shill. This resulted in the creation of the Charlevoix Club III Inc. in May 1993.
CCIII, secretly backed by BOHC, then entered into an agreement to purchase the fitness center from Rathbun, secretly obligated to Spruit, for $3.6 million. The terms of the deal were a $1.2 million land contract and $2.4 million in cash. Autodie’s creditors knew only about the land contract and not the cash. To persuade them to release their claims on the fitness center so that Rathbun could sell it to CCIII, Rathbun agreed to throw $300,000 cash into the kitty for the creditors. To bolster the impression that this was the best deal the creditors were going to get, Michigan National’s attorney Robert Hendricks (now corporate counsel for Peter Secchia’s company, Universal Forest Products) wrote to the bankruptcy court a letter implying that $300,000 was the only cash available from this transaction. Consequently, the Autodie creditors took the $300,000 from Rathbun, gave up their claims on the fitness center, and then in August 1993 Rathbun closed the sale to CCIII.
To conceal the receipt of $2.4 million in cash from the sale, Rathbun had his company Rathbun Engineering Inc. set up as the seller of the fitness center. To prepare REI for this transaction, a month before it Rathbun transferred all of REI’s assets to Metro Engineering Inc., a company controlled by his children. Once emptied out of any value, REI received the cash from the fitness center sale and then Rathbun disbanded the company before it would have to report its new-found wealth in its annual corporate report to the State of Michigan. So, Butterworth’s $2.4 million, funneled through BOHC and then CCIII, disappeared down a corporate rathole and soon afterwards Michigan National Bank settled with Spruit and newly retired Rathbun moved out of Grand Rapids to a big new house in a luxury subdivision.
After the sale, McCallum and BOHC were also busy. They had to paper the file to account for the transfer of $2.4 million of the hospital’s reserves from BOHC to CCIII. Because BOHC had to maintain the pretense that it had not purchased the fitness center, McCallum’s boys at Warner Norcross drew up one of the most bizarre leases in real estate history. On the face of it, the lease stated that BOHC was renting the fitness center from CCIII. However, a careful examination of the terms reveals that BOHC had complete control of the property and CCIII was nothing more than the manager of the fitness center operation. On top of this, BOHC held the mortgage to the property that gave it all the remaining aspects of ownership except for formal title. For this reason, BOHC booked its “lease” as a $2.4 million asset.
So that’s how you steal $2.4 million from your local hospital. You need to have McCallum the Fixer as your friend at the hospital who will help set up a sham transaction, take the cash from the hospital reserves to fund that transaction, and then funnel that cash through a shill into the hands of a friend of yours. Easy as pie – if you have no conscience and so no apologies.
Note: What is told here is not guesswork. The money trail from the hospital to REI is documented. We do know that the $2.4 million disappears with REI. It's possible that Spruit and Michigan National Bank never received a dime of that cash, although it boggles the mind why the Fixer and BOHC would go through such machinations to give a multi-million-dollar gift to Rathbun, a man whom they owed nothing. If you have any doubts about how much this deal stinks, consider that this transaction is the one that prompted local Asst. U.S. Attorney Tom Gezon to report self-dealing at Butterworth Hospital to Federal Trade Commission investigator Joe Lipinski. It wouldn't be self-dealing if McCallum's client Spruit did not benefit from McCallum's influence at Butterworth. If you want to know why the feds dropped the ball on this, click on the link above and learn what it takes to buy a favor from a U.S. Senator.