Two mortgage-related firms have plans to emerge from bankruptcy, while former executives of one lender were sued by its bankruptcy trustee and former executives of another bankrupt lender scored a victory.
A bankruptcy judge dismissed many of the counts against most defendants outlined in a $1 billion lawsuit against former First Magnus Financial Corp. executives. The lawsuit was filed in February 2009 against 44 defendants by the litigation trustee in the bankruptcy of the Tucson, Ariz.-based company. Just 27 defendants remain.
First Magnus failed in August 2007, laying off 5,500 employees and subsequently seeking bankruptcy protection.
"This case has now been pending for just over one year, and the litigation trustee/plaintiff has been given three opportunities to plead his case according to the law," the bankruptcy judge wrote in his decision. "Although the trustee/plaintiff has, in his numerous responses to the motions, included a prayer for another amendment, this court believes that the Rubicon, on further complaint amendments, has been crossed.
"The trustee/plaintiff must now ride this horse, and does not get to saddle up a fourth time."
Larry Goldstone, the former president and chief executive officer of Thornburg Mortgage Inc., along with former chief financial officer Clarence G. Simmons III were among seven defendants named in a lawsuit filed on March 2 by Chapter 11 Trustee Joel I. Sher in U.S. Bankruptcy Court for the District of Maryland.
The defendants, which also include former Thornburg structured finance executive Deborah J. Burns, are accused of starting up a secret company using the assets and resources of the jumbo lender, which stopped originating business in August 2007 and filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in May 2009.
Thornburg's board was allegedly deceived about a management agreement between Thornburg, which is now known as TMST Inc., and Thornburg Mortgage Advisory Corp., a management company. As bankruptcy loomed, $4 million was transferred to the advisory firm while expenses -- including $500 a night for Simmons' wife's New York City apartment -- was quickly reimbursed. In addition, the defendants attempted to collect April management fees two months early.
In addition, the lawsuit claims vendors were paid hundreds of thousands of dollars so that the new venture -- Santa Fe, N.M.-based SAF Financial Inc. -- would have products, while the defendants paid themselves $338,092 in unauthorized bonuses on the eve of Thornburg's bankruptcy.
The lawsuit goes on to allege the secret transfer of proprietary information to the new venture, millions of dollars in uncompensated work performed for the benefit of the venture and the execution of a "grand scheme to hide and cover up their actions."
On March 2, Thornburg subsidiary ADFITECH Inc. said its Second Amended Chapter 11 Plan of Reorganization was confirmed by the U.S. Bankruptcy Court for the District of Maryland. The Edmond, Okla.-based firm -- which services over 400 mortgage lenders, banks and other companies -- said it expected to emerge from its Chapter 11 case as a new Delaware corporation around March 15, though no available court filings through Saturday confirmed this.
ADFITECH, which employees 400 people, said it will become an independently owned company managed by a new board of directors who will be led by Chairman Jay H. Lustig.
Extended Stay Inc. this month submitted a plan in the U.S. Bankruptcy Court for the Southern District of New York that discussed how 21 of its 75 entities are saddled with a $4.1 billion mortgage. The debt is secured by cross-collateralized and cross-defaulted first priority liens on the mortgaged properties and other collateral as well as all of the cash proceeds generated from the properties.
But current estimates have the value of the business at only between $2.3 billion and $3.6 billion.
So the hotel operator is proposing a standby purchase agreement with Centerbridge Partners L.P. and Paulson and Co. Inc. The plan calls for the two firms to create a limited liability company that will acquire a 22.5 percent interest in, and provide $450 million to, a newly created parent company of the reorganized debtors. The financing will be obtained through a $225 million cash contribution and a backstopped rights offering for the other half.
Extended's mortgage facility claim holders would get $2.5 billion in new mortgage notes plus 55 percent of the common shares. An additional $0.2 billion will be set aside for holder who don't want equity interest.
In re. ADFITECH Inc.
Case No. 09-17788, May 1, 2009 (U.S. Bankruptcy Court for the District of Maryland).
In re. Extended Stay Inc.
Case No. 09-13764-jmp, June 15, 2009 (U.S. Bankruptcy Court for the Southern District of New York).
In re. First Magnus Financial Corp.
Case No. 4:07-bk-01578-JMM, Aug. 21, 2007 (U.S. Bankruptcy Court for the District of Arizona.
Larry Lattig, Litigation Trustee for the First Magnus Litigation Trust, Plaintiffs, vs. Stonewater Mortgage Corp., et al. Defendants.
Case No. 4:09-ap-00211-JMM, Feb. 26, 2009 (U.S. Bankruptcy Court for the District of Arizona.
Joel I. Sher, Chapter 11 Trustee, Plaintiff, v. Larry A. Goldstone, et al.
Case No. 10-00137, March 2, 2010 (U.S. Bankruptcty Court for the District of Maryland).