Saturday, October 1, 2011

After Filing for Bankruptcy, One of the Few Things She Still Owns is Her Tibetan Terrier

CHARLOTTESVILLE, Va. — Patricia Kluge appeared for years to be one of the nation’s wealthiest divorcees, with a breathtaking Virginia mansion known as Albemarle, an ample jewel collection and a river of cash from her ex-husband, the late media magnate John Kluge.

After filing for bankruptcy in June, she has a day job.

Not an ordinary job though. She is working for Donald Trump, who scooped up the winery and vineyard that she had built on the Virginia estate — a high-risk venture that drained all her money until she had to seek protection from her creditors in court.

And she is living no ordinary life. Instead, she rents a 6,000-square-foot home with a swimming pool and five bedrooms decorated by a celebrity designer, David Easton, in what was intended to be the first house in an exclusive gated community down the road from her old mansion.

Her vision for an estate and business and gated community was certainly outsize. But the undoing of Ms. Kluge (pronounced KLOO-gy, with a hard “g”) was not so different from that of many Americans who maxed out their credit cards and their home loans during boom times. She borrowed heavily. It’s just that she had so much more to leverage.

While her financial straits have been documented as banks closed in on her, she is speaking publicly at last about her bankruptcy, sounding resolute, reassuring herself about the future — without the liveried servants that once attended to guests at her hunting parties.

“I loved the life I lived at Albemarle. Are you kidding? But it does not define who I am,” she says, dressed in cotton slacks and a T-shirt from the Mount Kenya Safari Club. “If you can get a job, you can build another fortune,” she adds. “That is what I focus on.”

For now, Ms. Kluge, 62, and her husband, William Moses, 64, will make about $250,000 under a one-year contract to work for Mr. Trump at the winery. She handles winemaking, bottling and marketing, and Mr. Moses oversees legal and other matters part time. Roughly a third of their money goes to rent.

Lest anyone think that Ms. Kluge’s worries are entirely over, her lawyer points out that the future is unclear. “They are walking out of bankruptcy with nothing,” said the couple’s lawyer, Kermit A. Rosenberg, a partner at Butzell Long Tighe Patton. When they filed for bankruptcy, the couple listed $2.6 million in assets and $47.5 million in liabilities.

From her living room, she points to the few items that are hers: the photographs — her son in St.-Tropez two decades ago and her 2000 wedding to Mr. Moses — and her dogs, a Labrador retriever and a Tibetan terrier.

“No one should feel sorry for us,” Ms. Kluge added later. “I have a great family, a wonderful marriage and loving children and friends. We are not looking at this bankruptcy as if our life has ended. We see this as an opportunity to recreate ourselves.”

In business, she says, she went down a familiar path learned from Mr. Kluge. During the 1980s, he sold his highly leveraged media properties to a variety of buyers, most notably Rupert Murdoch, for more than $3 billion. “John was a huge borrower,” Ms. Kluge recalled. Her strategy was similar, attract equity investors to pay off the debt, make the business cash-flow positive and then sell.

Over a decade, she bet more than $65 million, using her own money at first and then borrowing more, on the winery, a notoriously risky and capital-intensive business. When the economy turned down, she could not make her payments, and the banks forced her to sell her estate, her winery, her jewels and the land she had acquired for the gated community. The jewelry and home furnishings raised nearly $20 million in a pair of auctions.

“It is Shakespearean in that Patricia aimed so high and did not make use of the kind of financial advice that would have increased the chances of making the vineyard work and minimized her financial exposure from the outset,” said Les Goldman, a business adviser and former partner at the law firm of Skadden, Arps, Slate, Meagher & Flom.

She shows signs of strain from years of battling creditors and countering barbs about what could she possibly have done with so much money. Many reports in the press overstated the windfall from her 1990 divorce. A year ago, when she called Mr. Trump for a meeting, he told his staff that they would be seeing a woman who made out very well in her divorce settlement. “I had always heard she got the income on $1 billion,” Mr. Trump recalled telling them.

But after a three-minute meeting, he said that he knew Ms. Kluge was in “huge financial trouble.”

Outright, she received about $25 million in cash in her divorce settlement from Mr. Kluge, according to several people with knowledge of the terms, as well as Albemarle, an opulent mansion of eight bedrooms and 13 bathrooms over 23,000 square feet she had built during their marriage. (Earlier this year Bank of America bought it out of foreclosure for $15 million.)

Mr. Kluge also agreed to pay her close to $1 million a year for life, those people said. But as the banks closed in, she sold off the rights to future payments for just $5 million, money that went to Farm Credit of Virginia, which was owed about $35 million, according to Bill Shmidheiser, a lawyer for the bank. Ms. Kluge declined to comment on the divorce settlement and the sale of those rights.

Plenty of widows and divorcees have suffered greatly from poor investment decisions. Ms. Kluge stands out because she lost so much in a business venture that she began herself and that carried enormous risks, said William D. Zabel, a lawyer who has handled numerous prominent divorces.

Back in 2008, Rothschild, the investment bank, valued the Kluge wine business at $75 million, as her husband is quick to point out. Mr. Trump paid $6.5 million for it earlier this year.

“I buy a lot of very high-end distressed properties, and over the years, I have worked with many people who have lost their fortunes,” Mr. Trump said. “They have almost never wanted to see again what they lost or where they came from. Patricia is unique because she is still so deeply involved with the vineyard.”

As general manager, Ms. Kluge now works closely with Mr. Trump’s son Eric. “She has created some of the best wines in the country,” Eric Trump said, noting they have been served in elite restaurants and at Chelsea Clinton’s rehearsal dinner. Ms. Kluge is experimenting with new wines and eagerly presses a visitor to taste an aperitif she is developing. Some wines will continue to carry the Kluge label, while some others will bear the Trump name.

The daughter of a Scottish-Iraqi mother and a British translator, she grew up Patricia Rose in Baghdad. When she was 27, she met Mr. Kluge, then 62, at a Manhattan dinner party.

The hostess, Gigi Fisdell, still recalls the 1976 dinner. “I had some records with Arab music,” she said. “Patricia came with a friend. She was half Iraqi and very exotic with a cascade of long dark hair. John was there. I put the music on and she started belly dancing.”

They were married in 1981, and he supported her social life in Charlottesville, New York and even Scotland, where they had a hunting lodge near Queen Elizabeth’s estate. Weekend guests at Albemarle were instructed about wardrobes for weekends that included hunting and fishing and elaborate dinner service with liveried servants followed by dancing and entertainment.

Her social ambitions were short-circuited in 1985 when she was preparing to entertain Prince Charles and Princess Diana in Palm Beach, Fla. Reports surfaced of her earlier marriage to the publisher of Knave, a British girlie magazine, as well as her appearance as a belly dancer in a pornographic film, “The Nine Ages of Nakedness.”

After her divorce from Mr. Kluge, her first business venture grew out of her son’s passion for collecting baseball cards. Recognizing the popularity of soccer in Europe, she began buying rights for trading cards on soccer teams there. In 1991 she traded those rights to Merlin Publishing for a stake in the company. When Merlin was sold to the Topps Company in 1995, her 40 percent stake was worth $20 million, she recalled. Then came the infatuation with a vineyard. “I did a lot of research and found there was an opening in the sparkling wine market, and we expanded from there,” she recalled.

By 2008, the couple had increased production to 30,000 cases of wine. Then the economy spiraled downward. Sales plummeted to just 13,561 cases. “We grew too fast,” Mr. Moses conceded.

Ms. Kluge and Mr. Moses say they believe that the vineyard could have weathered the storm if the Farm Bank of Virginia had been more cooperative. For the loans, Ms. Kluge had given personal guarantees.

A prospective investor emerged in late 2008, according to Mr. Moses and Mr. Goldman, the couple’s business adviser. But after the bank sent out a letter saying the wine business was in violation of loan covenants for failing to meet sales projections, hope was lost. “We had to say that we are in default,” Mr. Moses said, “and then why would anyone invest in the company?”

Michael McCarty, who runs Michael’s Restaurants in Manhattan and Los Angeles, has carried the Kluge wines and speaks highly of them, as well as Ms. Kluge.

“Trying to sell a Virginia wine is tough,” he acknowledged. “If you make it a cult wine, it can work if you make a very small quantity, but when you make a quality wine in the quantity that she was making from a new contemporary wine-growing region like Charlottesville, as she did, it becomes more difficult to sell.”