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The Spruce Goose, with the largest wingspan of any aircraft in history, is the centerpiece of the Evergreen Aviation & Space Museum.

(Richard Read/The Oregonian)

McMINNVILLE – The Spruce Goose, a gigantic wooden plane built in 1947 by eccentric billionaire Howard Hughes, looms above other aircraft as the crown jewel of the Evergreen Aviation & Space Museum.

News that creditors are trying to force Evergreen International Airlines Inc., the company across the highway, into Chapter 7 bankruptcy raises new concerns about the fate of the plane and the museum, which has long relied on support from founder Delford Smith and his privately held businesses.

Museum director Larry Wood says the nonprofit and the company are entirely separate, assuring anyone who asks that the museum owns the Spruce Goose free and clear.

But Robert E. Lyon, a Palos Verdes, Calif., lawyer, begs to differ. "There's still money owed" on the flying boat, Lyon said.

At 77, Lyon is one of the few people alive who recalls meeting Hughes, the engineer, investor and aviator who backed the

-- and who narrowly missed Lyon's Beverly Hills house when

that exploded in a ball of fire in 1946. "There's one scenario where we would end up having to repossess the thing and find another buyer," Lyon says now of the

.

The flying boat isn’t the only plane in question.

Close encounters with Howard Hughes

Robert Lyon was 9 on July 7, 1946, when he and his family spotted a black plume of smoke near their Beverly Hills, Calif., house while driving home from Escondido.

Lyon, now a 77-year-old patent attorney who represents the Aero Club of Southern California, recalls his father driving to the source of the smoke a block from the house. A small plane had crashed into their dentist’s house, damaging three other homes on the block.

In a strange twist of fate, the pilot turned out to be Howard Hughes, the eccentric billionaire aviator who helped build the Spruce Goose, the giant wooden plane that now dominates the Evergreen Air & Space Museum in McMinnville. Hauled from the flaming wreckage, Hughes survived, and during his recovery invented the adjustable electronic hospital bed.

On that Sunday afternoon in Beverly Hills, Hughes was flying a twin-engine XF-11 reconnaissance plane with a faulty gearbox. The Lyon boys and other neighborhood kids grabbed parts of the crashed plane as souvenirs.

“Underneath my brother’s bed was a big hunk of the wing,” Lyon said. “My mother went to answer the front door and there were two Beverly Hills policemen there. She called upstairs, ‘Do you boys have parts of that airplane?’ And we said, ‘no.’ She said, ‘You have ‘em, I saw ‘em, bring them down here, the police want them.’”

Lyon’s father, Lewis Lyon, a patent attorney who represented Hughes’ company, the Hughes Tool Co., had previously introduced him to the aviator and business magnate. Robert Lyon recalls a tall, lanky man with a Texas accent.

Lewis Lyon never liked Hughes, who quibbled over minutia in legal invoices. “My father fired him,” as a client, Robert Lyon said, after Hughes disobeyed instructions on a witness stand.

Hughes recovered from burns sustained in the 1946 crash to continue building the Spruce Goose, a heavy transport plane known by its critics as the Flying Lumberyard. The Hughes H-4 Hercules, made of birch and spruce, was then the largest plane ever built, with a wingspan longer than a football field.

On Nov. 2, 1947, Hughes flew the H-4 on its only flight, for one mile. Lyon’s future mother-in-law and father-in-law happened to be in Long Beach that day, and saw the behemoth fly. By getting the plane airborne, Hughes demonstrated that government money had not been wasted on the project.

Hughes died in 1976. The Spruce Goose arrived in McMinnville in 1993 after a 1,055-mile trip by truck and barge. Lyon says Evergreen still owes the Aero Club of Southern California almost $50,000, which must be paid before the museum gains title to the mammoth plane.

-- Richard Read

A 1945 Grumman Avenger and a 1928 Ford Tri-Motor glitter like gems in the aircraft collection. Evergreen bought the torpedo bomber and the cross-country passenger carrier, restored for millions of dollars, in 1989 and '90.

But now the two planes are for sale, unbeknownst to thousands of visitors who view them each month. A broker, Courtesy Aircraft Sales, has listed the Avenger for $250,000 and the Tri-Motor for $1.75 million.

The 1945 Grumman Avenger.

Smith lost ownership of the planes after using both in May as collateral to lease a Gulfstream corporate jet for his holding company, according to an attorney representing lessors who sued Smith and five of his businesses. The Gulfstream was recently repossessed after Evergreen International Aviation Inc. and affiliated companies fell more than $17 million behind in payments, Portland lawyer Joseph VanLeuven said.

For the museum, the question now is how many other planes could be withdrawn from display and whether it and an adjacent water park can survive on their own, absent millions of dollars in bailouts Smith and his companies have made over the years.

Together with the water park, a theater and a chapel, the museum constitutes a Yamhill County landmark whose fate probably interests the public more than the collapse of Smith’s aviation empire. Visitors to the museum in wine country southwest of Portland are struck by the breadth of the collection, the lessons in innovation and history and human nature that the planes provide and the immense knowledge and dedication of the docents.

The 1928 Ford Tri-Motor.

But the Oregon Department of Justice is investigating alleged commingling of funds between Evergreen's commercial and tax-exempt entities -- which occurred frequently, according to Lyon, who has examined the nonprofits' annual financial statements since 1992 in his attempt to calculate how much the museum owes.

Wood insists all is well in the nonprofit's climate-controlled buildings. He maintains the organization can survive on its own even as the airline implodes across the highway.

Wood guesses that about half the museum’s planes are in the collection on loan. He points out that the planes for sale are only two of about 167 major aviation and space artifacts on display.

Wood supposes Lyon's client, the Aero Club of Southern California, could repossess the Spruce Goose. "I wonder if they have enough money to take it apart and get it out of the building," he said, however. "When I took this job in 2010, I didn't know anybody owed any money on it. I found out when I met Mr. Lyon in California at a meeting. I said, 'What?'"

Lyon said Smith personally guaranteed a promissory note in 1992 backing purchase of the Spruce Goose. He said Evergreen recently made the last of 240 monthly payments – over 20 years – that totaled $500,000 for the plane.

That account contradicts a fable repeated by docents that the museum bought the plane for $1. It lends credence to suspicions of former Evergreen pilots who believe Smith, 83, plowed company profits into the museum and water park, hastening the airline’s demise.

But Lyon said the Aero Club is still due at least $50,000 – a percentage of the museum’s earnings, per the sales agreement – before ownership can be transferred to Evergreen through a complex stock-swap scheme.

Who wrote the checks for the $500,000?

"Interesting you should ask," Lyon said. "They came from Evergreen Aviation,” rather than the museum.

The source of the money, not to mention museum planes posted as collateral for corporate assets, might concern the Department of Justice. A museum controller asked Lyon about it, he said, inquiring why the museum wasn't making the payments on the Spruce Goose.

“I said, uh, ‘I was going to ask you that question,’” Lyon said. “I said, ‘Well, we’re thankful for getting the money but it doesn’t look kosher to me.’”

Wood says the museum loaned about $700,000 in 2012 to Evergreen Aviation, which paid it off within a month, adding 9 percent interest. That loan triggered the Justice Department probe, he said.

“When the guy that owns your building asks you to loan some money, you do,” said Wood, referring to Smith.

Justice Department lawyers who have combed through the museum's files for more than a year say they hope to complete their investigation soon.

That's not soon enough for Lyon. He says he can't calculate the exact amount owed on the Spruce Goose until the Justice Department releases its grip on the museum's financial statements. "I was feeling pretty confident that we were getting to the end of the road until the Department of Justice stepped in," Lyon said.

"I've had numerous conversations with Larry Wood about this," Lyon said. "We agreed that when the final payment is made, members of our board of directors will come up and have a ceremony where we actually grant them title to the Spruce Goose."

Asked about Lyon's assertions, Wood acknowledged talking with him.

"I've been trying to call him," said Wood, sounding frazzled. "We paid what is essentially the -- oh, dear, um -- the price of the thing. But one of the stipulations is they want part of the profits of the museum. Our lawyers are looking at it to see what we owe whom and why. It's a portion of the profits since 1990-whatever-the-devil-it-is, I don't know."

Lyon views repossession of the plane as unlikely. "To call it a white elephant would be an understatement," he said. "But concern has arisen of what are we going to do if they default on the note and we have to take the boat back."

The colossal gray flying boat, five stories tall, dwarfs planes including the Avenger and the Tri-Motor, which remain on display. Fifteen other planes in the museum are owned by Evergreen Vintage Aircraft Inc., another of Smith’s companies, making them vulnerable as creditors look for any valuable assets to cover debts.

Included among them are mainstays such as a MesserSchmitt fighter plane, a Supermarine Spitfire Mark XVI, a Curtiss P-40 Kittyhawk and a Curtiss Wright Sedan.

“Del has put some of them up as collateral,” said Wood, referring to Smith and the Vintage planes, “but I don’t know how many or which ones. You’d have to ask the holding company or Mr. Smith.”

Smith, chairman of the board of the museum and founder-owner of the companies, said in a phone interview Thursday that the museum was doing very well. He said he would deal with the Aero Club’s claim immediately.

“I had no idea that they felt we still owed them money,” Smith said. “I thought we were free and clear on that one.”

For now, the Avenger and the Tri-Motor will remain in the museum, where they are well cared for and accessible to potential buyers, said VanLeuven, the Portland lawyer who represents the Gulfstream lessors that acquired the two planes as collateral.

“It’s in everybody’s interest to leave them there for the time being,” VanLeuven said. “I don’t know that we’ll leave them there indefinitely.”

Wood said most of the museum's planes are on loan from other institutions, such as the National Naval Aviation Museum and the National Museum of the Marine Corps. Some are loaned by individuals, he said.

“If you loan us something and you want it back, we have to give it back,” Wood said. But he said he’s confident that the “biggest chunk” of the collection will remain intact.

Wood said the museum, which has no debt, usually breaks even. “Or we lose money,” he said, “but right now we’re breaking even.”

The museum gets about 150,000 visitors a year, about the same as the water park, Wood said. The museum and water park employ between 150 and 175 at peak times, including part-time workers, he said. Museum admission costs $25 for an adult.

A review of Evergreen's nonprofit tax returns shows a $1.7 million contribution by Smith in 2009 to The Michael King Smith Foundation, which owns the space museum, water park, chapel and some planes.

In 2010, Smith gave $1.2 million to the foundation, which is named for Smith’s son, who died in a 1995 auto accident. Smith gave $23.1 million to the foundation in 2011, the same year his Evergreen Vintage Aircraft company, which owns the aviation-museum and theater buildings, donated $23.7 million.

Lyon, the Aero Club lawyer, said there were times when the museum required contributions in the millions of dollars from Smith and the companies to stay solvent. But he believes the organization could survive.

“I’m no financial expert but I would think so,” Lyon said.

Lyon said the Aero Club received title to the Spruce Goose in the early 1980s. The previous owners – Summa Corp., the Smithsonian Museum and the U.S. government – transferred the plane to the club so it wouldn’t have to be cut into pieces for display in Washington, D.C.

The Aero Club leased the plane to the Rather Corp., which did little to merchandise it, meaning the club received scant revenues, Lyon said. Club members decided to sell the plane to Evergreen, which promised to display and market it and pay a fixed amount plus a percentage of income. The club held title to the plane as a security interest through a for-profit company and its stock.

Evergreen moved the plane in 1993 to McMinnville in pieces on barges and trucks, installing it in the museum. Evergreen Aviation began making the monthly payments but never sent income statements, which Lyon kept requesting.

Finally an Evergreen controller sent Lyon the statements, which he said showed only about four or five years when the museum had positive income flow.

The Aero Club has used its income from the Spruce Goose to give scholarships to students interested in aviation. The club puts on an annual Howard Hughes memorial dinner, giving awards to the likes of aviation pioneer James Doolittle and astronaut Neil Armstrong.

Lyon has alerted the Aero Club’s board to the possibility of Evergreen defaulting on payments for the Spruce Goose.

“There are some new young members who probably would have an interest in trying to find another home for it,” Lyon said. “But we would prefer to collect the last few thousand dollars owed to us and hope that someone takes care of the aircraft.”

-- Richard Read