LOUISVILLE - McStain Enterprises Inc.'s Chapter 11 bankruptcy filing likely will leave its employee shareholders empty-handed, according to legal experts.

The 43-year-old, Louisville-based home builder filed for bankruptcy May 28. It fell victim to the housing bust and then struggled to stay afloat in a tough credit market.

Founders Tom and Caroline Hoyt operate McStain, and they co-own the company with their employees through an employee stock option plan, or ESOP. The ESOP was set up in 2001 as a retirement benefit to employees, and as a way to transfer the company ownership. McStain's ESOP was gaining 4 percent ownership of the company per year, which would have made it fully owned by the plan in 2026.

According to public tax documents, McStain's ESOP was worth about $2.34 million at the end of 2007 with 136 participants. It had been worth as much as $3.5 million at the start of 2006. Now, the stock option plan likely is worth nothing, legal experts said.

The attorneys could not speak specifically to McStain's situation, but said in many cases ESOP shareholders lose out in bankruptcies. It's similar to holding common stock in a public company that goes bankrupt - the shares become worthless, and shareholders are at the end of line in bankruptcy claims.  Even if the company successfully reorganizes under Chapter 11 bankruptcy, the existing shares are wiped out and any new company shares are given to the creditors and bondholders, before the shareholders.

A failed ESOP can be "fertile ground for lawsuits," one attorney said. Shareholders could try and claim that the ESOP was mismanaged, he said. "The independent trustee has a fiduciary liability to the shareholders. Their duty is to make sure the stock is a reasonably prudent investment, and if not, pressure management to boost the value or sell. But that's hard to do with a private company, especially since this was a home builder in this economy."

Public tax documents list First National Bank of Colorado as McStain's ESOP trustee as of the end of 2007. Bank officials could not be reached for comment.

The Hoyts could not be reached for comment on the company's ESOP plan, but they spoke earlier about general details of the bankruptcy.

Tom Hoyt said McStain will work through bankruptcy to complete and sell 35 homes across the Front Range that are either under construction or for sale. The closest of these homes to the Boulder Valley are in Westminster at McStain's Hyland Village project.

"We're working diligently with vendors, creditors and lenders to complete what we started and get a maximum return, instead of just liquidating everything," Hoyt said.

McStain's bankruptcy filing showed the company had assets between $10 million and $50 million and owed creditors about the same.

The filing listed insurance brokerage firm Hub International-Scheer's Inc. as the top unsecured creditor with a claim of $10.85 million. It was followed by Key Bank with a $3 million claim, Boulder-based Crestone Capital with a $2 million claim and Boulder-based William and Associates with a $1.54 million claim.

Thirteen other unsecured creditors were listed claiming less than a $1 million each, including Eric Wittenberg, former McStain chief executive officer, First National Bank in Boulder and Boulder-based Namaste Solar Electric Inc.

McStain's Indian Peaks South neighborhood in Lafayette is not part of the bankruptcy filing, Hoyt said. It is owned by a separate partnership. Also protected from the bankruptcy, legal experts said, is the company's employee 401 (k) plan, which had about $4 million in it at the end of 2007, according to tax documents.

The Hoyts founded McStain in 1966 after acquiring Horizon Building Company, a small custom homebuilder in Boulder. The business was expanded to include the design and development of master-planned communities featuring integrated neighborhoods of condominiums, townhouses and a variety of single-family homes.

The company surpassed the $100 million annual revenue mark in 2002 and reached $118 million in revenue at the height of the housing boom in 2005, employing nearly 400 people. It received numerous awards and accolades for its commitment to green building in recent years.

The national housing bust then took its toll on McStain. In 2007, revenue was cut by more than half to $50 million, and it 2008 the company cut back its staff and Wittenberg resigned as CEO.

In an attempt to starve off bankruptcy in November 2008, McStain closed its physical headquarters in Louisville, reduced its staff to about 20 people and operated the company virtually from several locations. It sold off several future residential neighborhood projects such as West Grange in Longmont.

Hoyt said the final straw was a difficult financial credit environment. In a letter to friends and employees, he said the company was unable to find further equity investments and getting any kind of new bank funding for construction loans was virtually impossible.

"That economic reality, coupled with a backlog of unfunded liabilities makes it abundantly clear that, at least until this great recession is over; there is no viable way for McStain to operate," Hoyt said.