Golf-Course Developer's Game Is Over -- Hiroshi Tanaka Used Other People's Money For His Ventures And Lands In Bankruptcy; Grand Jury Investigations

Hiroshi Tanaka, failed developer of golf courses, ducker of process servers and taker of other people's money, loved one thing more than any other: the game of golf.

He loved talking about golf courses. He loved planning them. He loved playing on them. He even loved his golf clubs. In his 9,000-square-foot, $3 million Windermere home, Tanaka used one room to display his six sets of golf clubs.

He loved the high life - luxury automobiles, 70-foot yachts, million-dollar condos, ski getaways, fabulous banquets at his Windermere home.

But Tanaka fueled his exploits with other people's investments, made on promises of fabulous returns or unparalleled golfing experiences, or both.

If it were simply bad business judgment, Tanaka's story, which played out in the Seattle area starting in the late 1980s, might be noteworthy only for the scale of his business reverses. But there's a darker side to the tale.

Tanaka defrauded his business partners in Indian Summer, a golf-course development near Lacey, of millions. He took hundreds of thousands of dollars from prospective members of Remington, a golf course near Kent that hasn't been finished.

To shield his personal holdings, he declared bankruptcy, and tried to evade creditors by failing to disclose assets, turn over documents and vacate his residences, even under court order.

After learning that Tanaka brought a large emerald ring into the country without declaring it in 1994, as well as $190,000 in checks, the U.S. Bankruptcy Court began to strip him of his assets to settle more than $23 million in claims. As of Sept. 1, Tanaka will be evicted from the last of his properties, a First Avenue condominium.

James Rigby, the attorney appointed to represent creditors, says Tanaka's behavior has been shot through with "a whole undercurrent of deceit and dishonesty. It's ethically acceptable to file for bankruptcy. It's completely illegal to refuse to cooperate with a (bankruptcy) trustee."

Tanaka, 59, refused to be interviewed for this story. But as recently as this spring, he was being investigated by a federal grand jury for "criminal fraud, bankruptcy crimes, money laundering and tax evasion," according to documents filed with the bankruptcy court by lawyers for one of Tanaka's creditors. The status of that investigation is not known.

In court documents, Tanaka has said his financial misadventures stem from his unfamiliarity with the American business system, bad business decisions and failing health. He contends that aggressive lawyers after his assets have devastated his ability to ever pay his creditors.

And he has his supporters. Ken Horne, who worked as Tanaka's butler and business assistant for five years, says Tanaka went down with the economies of the U.S. and Japan as they began their slide into recession.

"He's very engaging. He loves to talk to people," says Horne. "His sincerest self really had a very good concept that he wanted to fulfill.

"But unfortunately, a lot of his investments were based on the American economy and the Japanese economy. The debt service became impossible."

Wherever the blame lies, his story raises a larger question: Why would so many people give Tanaka so much money, based on little more than personal charisma and business vision?

Tanaka had all the trappings of a wealthy, charming man, and he made an irresistible pitch: I'll double your money. "The people down in bankruptcy court who have taken other people for a ride are charming," says Rigby. "There are people who will wire millions, based on a dinner and a handshake. It's hard for people who don't do business on that scale to understand how much business turns on personality."

One creditor says her only solace is this: "We were not the only ones," she says. "As sick as that is, that's comforting."

Trusting Tanaka

Tanaka was born in Japan in 1935. He attended the University of Washington, graduated in the early 1960s and returned to Japan. On his return to this country in the late 1980s, he told his American business contacts that he had extensive experience owning and operating Japanese golf courses.

Tanaka set up at least two different offices in prestigious locations in Seattle and Bellevue and proceeded to plot a bewildering succession of business ventures - a social club in the Skyline Tower in Bellevue, with attached golfing privileges at several local courses. Another social club in the Columbia Center Tower. A $40 million hotel in the International District where visitors to the city would get playing privileges at three different golf courses in the region.

Bob Curran, a Seattle attorney who won almost $8 million in judgments against Tanaka for two Japanese investors, recalls the mood of the late 1980s, and why Tanaka could engage people's interest and trust:

The Japanese were "golf crazy," willing to travel hours by train or plane to play golf in a splendid natural setting. Meanwhile, "the Japanese economy was red hot," Curran recalls. "Japanese banks were encouraging people to borrow against their assets and `go forth and invest.' "

That's exactly what Curran's clients did.

Curran's first client was a Japanese family corporation called Yugen Gaisha Koho. The family representative, Mitsuhiko Yoshikawa, was looking for entree into the world of American real estate investment. He found one in a golf course site named Indian Summer.

The Indian Summer project began in late 1989 when John Morrison, a golf course developer and general manager of Canterwood Golf and Country Club in Gig Harbor, bought an option on 450 acres of Thurston County property.

Morrison needed partners who could provide financing. He contacted both Yoshikawa, an engineer who had sold some Canterwood properties in Japan, and Tanaka.

To Yoshikawa, Tanaka seemed the perfect partner for such a venture - an experienced Japanese businessman knowledgeable in the ways of Americans.

In March 1990, Morrison and Tanaka negotiated an agreement to purchase and develop Indian Summer. Koho was to own 5 percent of the company, and paid about $70,000 for it. Tanaka put up about $470,000.

Morrison was to develop the course and eventually sell the land for a $2,500-per-acre profit to GPI Inc., a corporation created by himself, Tanaka and Koho.

Tanaka, according to the court filings, was to handle all financial matters.

In late July, Tanaka disclosed for the first time that he didn't have the money to close the sale. He began leaning on Yoshikawa to help him out.

By this time, Tanaka also was asking for backing from a representative of another Japanese family corporation, Yugen Gaisha Ogawa.

Koho invested a total of about $1.3 million in loans and share purchases. Ogawa pitched in $2.4 million, gotten, Curran says, through a Japanese bank loan secured by the family's paper-bag factory.

"The idea that this man would defraud other Japanese citizens was unimaginable," says Curran.

By August 1990, the property that Morrison had paid $3.4 million for was appraised at $11.5 million, after getting the grading and conditional use permits for the golf course. Tanaka bought Morrison's option on the property for about $1.1 million, with part of the money he got from the other investors.

With the other part, he made a $1 million balloon payment on a luxury condominium in the Denny Regrade.

In January 1991, Tanaka assigned all the property rights to the Indian Summer development to his own name, instead of the corporation he had formed with the Japanese investors. He then formed a partnership with Aoki Realty Corp., a Japanese firm, to develop Indian Summer, again cutting the other investors out of the transaction.

In December of 1992, Tanaka sold his portion of the partnership to Aoki for a profit of about $8 million.

Koho ultimately won a $2.2 million judgment against Tanaka, after a judge found that Tanaka engaged in "fraud, misrepresentation, bad faith and overreaching" in his business dealings with Koho. But Koho has thus far received only about $774,000, denominated in dollars, which have sunk steadily in value against the yen in the two years since the judgment was entered.

As for Ogawa: "He lost the paper-bag company," says Curran. "The company went bankrupt because they couldn't repay the loan." Ogawa's case against Tanaka was folded into his subsequent bankruptcy filings - Ogawa has a $5 million judgment against Tanaka, says Curran, but subsequent developments make it unlikely that Ogawa will ever see the money.

Living the high life

Meanwhile, Tanaka was acquiring a dazzling array of residences, automobiles and other properties.

The Windermere house, at the end of a secluded street overlooking Lake Washington, was purchased in March 1991 by Tanaka and his wife, Sumie, for about $3.5 million. With 10 fireplaces and an indoor pool, it featured 82 feet of level waterfront, a 74-foot dock and two master suites, each with "his-and-her" baths and closets.

They bought two luxury condominiums in the Denny Regrade for a total of about $3.6 million, as well as at least three other condos in the downtown area, plus a ski condo in Whistler.

Tanaka bought a 70-foot yacht and named it the Maki III after his daughter.

He bought a Cadillac, three Mercedes Benz, a Jaguar, a Rolls Royce, a Porsche 911, a BMW and numerous other vehicles.

Tanaka also invested in other golf courses: $800,000 in Harbour Pointe in Mukilteo and a $50,000 golf membership in the Canterwood Country Club.

He formed business relationships with a number of well-known people in the Seattle community.

One was Shiro Kashiba, the star chef of the Nikko Restaurant in the Westin. Kashiba loaned Tanaka $100,000, secured by the Porsche and the BMW.

Tanaka defaulted on the loan: Kashiba got the BMW but had to sue for the Porsche.

Another was Jack Sikma, the former Sonics star, who borrowed $1 million from Tanaka in 1993 to finance the development of the Holmes Harbor golf course on Whidbey Island. The money went to Golf Northwest Inc., the company developing the course. Sikma was the president.

Unknown to Sikma, Tanaka had been forced to sign the note over to Koho as part of the judgment. When Sikma decided to take over development of Holmes Harbor under a new company, Sikma Enterprises Inc., he told Tanaka he wanted to replace the first note with one under the new name.

Tanaka said he had "lost" the old note. Sikma Enterprises gave Tanaka a new note.

Once he learned that the note had been pledged to Koho, Sikma went to Tanaka. "I asked for the SEI note back," Sikma declared in an affidavit submitted in the Koho trial.

"Mr. Tanaka said that they had the note, but were unwilling to give it to us because his attorney believed that it would weaken Mr. Tanaka's position.

"Without alleging any fraud or wrongdoing, I am concerned and frightened about the possibility that Mr. Tanaka or others acting for him could attempt to negotiate this note, which would expose me to double liability on a single obligation. Given the dollars at stake, I have to be concerned."

All parties finally agreed on which note to honor, Curran says. Sikma paid it off early to Koho at a discount - the only money Koho has received from the settlement, Curran says.

Remington venture

In the summer of 1992, Tanaka started assembling property for another golf course - Remington, near Kent. His partners were Family Golf Inc., a golf-course development company owned by the Soushek family. The Sousheks would eventually lose a total of $4.5 million in investments and work performed on the Remington course, and on another course they tried to develop in Richland with Tanaka.

As plans for the course proceeded, it began to attract the attention of avid golfers. Rich Hendrickson, who paid $11,000 for a membership, recalls that Remington had "an absolutely phenomenal layout."

"It is a difficult course," says Hendrickson. "It has tremendous length." In golf, he joked, "some people are looking to get their heads beat in."

Indeed, that would happen, but not in quite the way Hendrickson anticipated.

About 45 members joined the group. They paid about $11,000 apiece for a total of about a half million dollars. "We were told specifically that the money would be used to go into an account to build a clubhouse," says Hendrickson. "We put money in the account. He raided it."

Keith Fugate, a businessman who, with his brother, paid $40,000 for two corporate memberships, said Tanaka projected an aura of wealth, and had an apparently successful development - Indian Summer - under his belt.

"He told us point-blank that this was just a sideline for him. He had lots of cash, lots of money," Fugate recalls.

Tanaka was eventually foreclosed for failure to make payments on land and loans by his two bigger investors in the development, the Quadrant Corp., the Weyerhaeuser real estate subsidiary, and Eastside paving magnate Rhoady Lee Jr. They have sold their interest in the course to another businessman, who would like to finish developing the course with the Sousheks.

Unfortunately, Tanaka neglected to secure the water rights for the course, and it's hard to have a golf course without water. Members have been told by the bankruptcy court that if the course isn't developed, they can expect to get back about 30 cents on the dollar from their investment.

Estate-planning process

In August 1993, as work on Remington proceeded, negotiations between Koho and Tanaka to resolve the Indian Summer mess out of court had broken down, and a September trial was scheduled. Tanaka entered into what was ostensibly an estate-planning process with attorneys from the Seattle firm Foster, Pepper and Shefelman.

In a deposition, Tanaka said he began the process much earlier, during a 1991 stay at Swedish Hospital. He told his attorney, Doug Palmer, to proceed with a plan for taking care of his wife and daughter after his death.

"I'm not the type of person to tell lawyer what to do," Tanaka said. "Once I ask them, I just ask them and just ask them to proceed whenever they have the time."

But the so-called estate planning, Curran contends, was really an attempt to put Tanaka's assets beyond the reach of his creditors, especially since asset transfers occurred after the judge ruled for Koho. "It's very sophisticated," Curran says. "They transferred all his assets into a family-owned limited partnership and a trust."

The Koho case went to trial in King County Superior Court in September 1993. In October, November and December, Tanaka transferred many of his corporate assets into the partnership and trust. Several of the transfers were dated by Foster-Pepper as of August, the date the trust was created, according to a chronology of the case filed in bankruptcy court.

Palmer contends that dating documents such as stock transfers months earlier than they occurred is nothing unusual, especially when they relate to the creation of a new business enterprise.

He later said the documents were not backdated. "The shares were transferred on or about Aug. 27," he says. He says his firm never had a chance to review or respond to the court order that says the transfers occurred later.

On Oct. 28, the judge ordered Tanaka to pay damages to Koho. But until Tanaka declared bankruptcy in April 1994, he continued to transfer other assets - mostly cars and homes - to relatives, friends, employees and related corporations.

Tanaka also granted Foster-Pepper a deed of trust on his Windermere home, securing attorney's fees through the year 2000, his interest in the Richland golf course, a security interest in his partnership units in the Harbour Pointe golf course, worth $800,000, and a mortgage on two condos at Whistler worth about $300,000.

"In total," said the court order, "Foster-Pepper was granted liens encumbering property with a net value in excess of $3 million. As of Oct. 14, 1993, however, Foster-Pepper was owed just over $200,000 in attorney's fees."

Meanwhile, because of the way Foster-Pepper's claims are structured, the law firm will be among the first to be paid off, Rigby says.

The firm has since severed its relations with Tanaka, but Palmer says there was nothing improper about the estate-planning process.

It was "sophisticated, but not unusual for someone who holds the amount, range and complexity of the assets Mr. Tanaka had," Palmer says. Foster-Pepper may get paid before other creditors, Palmer notes, but the firm will never get more than it was owed, about $280,000.

As for Rigby's contention that the transfers placed Tanaka's assets out of reach of his creditors: "I can't comment on that," he says.

Legal experts say backdating documents, if it did occur, is fraudulent and transferring assets after a judgment is questionable.

"It's a fraud and a misrepresentation" to backdate a document, says Ronald Routunda, a nationally recognized ethics expert at the University of Illinois law school.

The transfers, Routunda says, were an attempt "to prevent the assets from being seized." In December 1993, the judge granted Koho a final judgment of $2.4 million.

That same month, Tanaka, the golf addict, tried to negotiate the sale of $3.3 million worth of farmland in Pierce County to build yet another golf course.

The deal fell through; the course was never built.

Jewels affair

By the spring of 1994, Tanaka had filed for bankruptcy protection. According to a document filed by a U.S. Customs special agent, in July 1994, a man named Sterling Hunsaker arrived at Seattle-Tacoma International Airport on a flight from London. He was carrying a 40-carat diamond and a man's emerald ring.

Hunsaker failed to declare the jewels. Customs agents discovered them on a routine search of Hunsaker's belongings, and valued them at about $800,000.

Hunsaker told the agents he had taken them to Antwerp to be appraised for Bill Moore, a business associate of Tanaka's. Moore says he is an international trader by profession. He is currently being held in the Pierce County jail on a federal drug charge and is facing a 20-year sentence.

Moore also is locally notable for having logged land on a hill he didn't own in Federal Way without state permission.

Moore told customs agents that Tanaka gave him the jewels in return for a $350,000 loan. Meanwhile, Tanaka told special agents from the Customs service that a Japanese friend owned the diamond, but that he owned the ring, valued at about $200,000.

Tanaka had declared the diamond when he brought it into the country. But he did not declare the ring, and Customs took possession of it.

In September, based in part on the jewels affair, the bankruptcy court appointed a trustee to oversee the dispersal of Tanaka's crumbling empire, based on allegations that Tanaka had failed to disclose assets, had concealed assets and had smuggled assets in and out of the country.

"I think Tanaka was in desperate straits when he came to talk to me," says Moore. "He was losing face. He was trying to do what he could to survive. He's a lot smarter than he lets on to be."

Tough to track down

These days, Tanaka is a tough man to track down. Even the phones of his attorney, who requested this spring that he be withdrawn from the case, are disconnected.

His most recent address on the registration for his Rolls Royce is a private mailbox on Capitol Hill that Tanaka quit renting in April.

Even Melinda Stephens, a business associate who answers his phone calls and responds to his faxes, calls him a "phantom." Process servers and reporters can't find him. He doesn't show up for court hearings, even on the threat of arrest.

He still keeps a fax machine in an apartment at 98 Union St., but the operation will be shut down as of Sept. 1, when the bankruptcy court puts the apartment up for sale.

The apartment is mostly empty; however, pairs of polished black shoes and athletic shoes are lined up, Japanese-style, at the door. A rack of men's suits and ties stands in the middle of the living room.

Stephens says that Tanaka is "meeting with his attorney" on new projects and the advisability of talking with the press. She won't give the name of the attorney.

Rigby suggests that Tanaka may not realize how far he has fallen.

"Just because your property is in bankruptcy doesn't mean you make that transition that you're no longer the king of the pile," he says. "It's like stages of dying - it's true in bankruptcy also. He may be denying these problems."

In court papers, Tanaka has said that the proceedings against him have destroyed his business and damaged his family relationships. In a deposition, Tanaka told Rigby: "This lawsuit and everything is collapse my family relationships and everything. . . . I have no way to control because I cannot pay anything. Got the restraining order from the courts and take all - restrain everything. How can I do? How can I live?"

On that note, even Tanaka's most indefatigable adversaries agree. "You won't find anyone coming out of this," says Curran, "with less than Hiroshi Tanaka."