In what may be one of the unlikeliest business survival stories in Arizona history, real estate lender Mortgages Ltd. has emerged from U.S. Bankruptcy Court with an approved plan to continue operations — and a $20 million loan to execute it.
In the past two months, a final reorganization plan was approved, financing was secured in the most arid of economic climates, and Winkleman signed on to move the company forward after interrupting a summer escape to Costa Rica.
“This is quite a story of how you get to the end,” said Cathy Reece, an attorney with
Numerous attorneys represented a host of stakeholders in the contentious proceedings that began in June 2008. But it was the plan submitted by the Offfical Investor Committee, on behalf of about 1,400 individual investors, that prevailed.
Working with Ed McDonough, a certified public accountant with the
A few lenders expressed interest, and the court approved a $20 million loan from
Part of the loan paid off two loans Mortgages Ltd. obtained last summer to stave off a Chapter 7 liquidation process. That “debtor-in-possession” financing, obtained from private local lender Stratera Portfolio Advisors, had to be paid off for the company to move out of bankruptcy.
The remainder of the $20 million loan will be used to pay fees submitted by a long list of attorneys involved in the bankruptcy and operating expenses for the small Mortgages Ltd. staff, now headed by Winkleman. Already, the fees submitted by some law firms have generated formal objections from some parties for being too steep. Those issues will be argued in court, most likely in September and October, and will not prevent the firm from moving ahead with its new mission, Reece said.
A new purpose
Once the largest private commercial real estate lender in
According to Reece, by the time the reorganization plan was approved, less than 2 percent of the loans in the firm’s portfolio were current. That meant the vast majority of borrowers — mostly developers and real estate investors — either were unwilling or unable to pay after Mortgages Ltd. founder and CEO Scott Coles committed suicide in June 2008 and the company was thrown into a tailspin.
Mortgages Ltd. funded the construction of numerous high-profile projects in metro
“I have no illusions that this will be simple, but I think I have the experience and skill set to help these people,” he said.
Winkleman officially works for ML Manager LLC, one of two entities that now govern the workings of Mortgages Ltd. The other entity, ML Liquidating Trust, is headed by trustee Kevin O’Halloran. He will assess legal remedies that may be associated with the various loans, including pursuing borrowers who signed personal guarantees to obtain Mortgages Ltd. loans.
The goal, Reece said, is to get borrowers to repay their loans or for Mortgages Ltd. to initiate foreclosure proceedings against the properties that secured the loans. Even though property values are depressed now, she said the environment will improve, and so will the outcome for investors.
“This is not like the (Bernie) Madoff case, where investors had nothing,” Reece said. “There will be the ability to recover.”
McDonough, like Reece, has worked on some of the largest and most convoluted bankruptcy cases in the state. He said the key to finding a workable solution was to stay focused on protecting the investors and not to get distracted by a multitude of extraneous issues. Maintaining the integrity of the notes and deeds of trust and avoiding liquidation was of paramount importance, he said.
That required obtaining the $20 million, three-year loan at 17.5 percent interest. About $1.6 million in up-front fees would have to be subtracted from the loan. The high cost of the loan, McDonough said, reflects the “realities” of today’s credit market, which is limited largely to private money.
Moreover, operating within Chapter 11, Mortgages Ltd. was rapidly running out of money to continue.
“The debtor had about $75,000 left. They would lose (employees) who knew the loans. That was a real deadline,” McDonough said.
In the end, Universal Equity Group, a normally quiet private equity firm in
“They were the only firm willing to do it without having foreclosure rights, and they closed without having full title,” McDonough said.
Even with those risks, Brian Evans, a principal at Universal Equity, said his firm spent weeks performing due diligence on behalf of its own investors and visiting every property in the Mortgages Ltd. portfolio. Even without the foreclosure rights, the loan is collateralized by the Mortgages Ltd. portfolio.
Evans said other potential lenders perceived the situation as “too messy” or wanted to take a more active role in the management of the new company. But he and his partners feel better about taking a hands-off approach and letting the new management take control without any additional stress.
“We envision that it will take some time,” he said.
The three-year loan may be extended to five years. Evans said his Tempe-based firm is delighted to be a part of a plan to help individuals recover their investments in Mortgages Ltd.
Mortgages Ltd.: www.mtgltd.com
Mortgages Ltd. Notable People
Brian Evans: Co-principal of Universal Equity Group, the Tempe-based private equity firm that provided a $20 million loan enabling Mortgages Ltd. to move out of bankruptcy.
Cathy Reece: The attorney with Fennemore Craig PC who represented the Official Investor Committee, which was created by the Bankruptcy Court to represent about 1,400 individual investors with Mortgages Ltd. Ultimately, the plan submitted by that committee was the one approved by Judge Randolph Haines.
Ed McDonough: A certified public accountant with Alvarez & Marsal in
Mark Winkleman: The former
Kevin O’Halloran: An Atlanta-based turnaround expert who’s been named trustee for ML Liquidating Trust. It’s one of two entities that now govern the workings of Mortgages Ltd.
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Two and a half years ago,
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Michael Manning, managing partner of the Phoenix law office of
“That will start the more serious inquiries by the FDIC,” he said.
Manning said the FDIC will have more ammunition to sue bank directors and others involved in commercial deals, because those deals are larger than residential mortgages, and any negligence or fraud will be magnified. While bank executives are the most likely targets, Manning said prosecutors could go after real estate developers, brokers, appraisers and accountants, as well as their corporate attorneys, if they intentionally misled or misrepresented projects to lenders.
“Typically, the insider can’t do this alone,” Manning said.
Jack Hebert, a < ?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />
“All of their superpowers are still in existence,” he said.
Hebert said the FDIC could sue bank directors for significant damages for negligence and defaulting on their fiduciary duties. He said more extreme cases could prompt civil and criminal fraud charges. He predicts most of the civil cases will be settled out of court.
FDIC spokesman David Barr said the federal banking regulatory agency has not filed any director suits and does not comment on future actions.
Suits likely will be filed, said Dale Walters, CEO of
“I expect (the FDIC) to make a statement,” he said. “The government wants to show the public they mean business, and that what they are doing to fix the banks is working.”
The faltering commercial real estate market is prompting foreclosures as well as scuttled commercial and mixed-use projects. A tanked real estate market in
“The FDIC generally engages in a broad-based investigation any time there is a failure of a financial institution,” said Allen Kimbrough, executive director of the
Kimbrough did legal work for the FDIC and for some defendants in
Several banking officials in the
It is likely the FDIC and other prosecutors will go after failed banks, in part because regulators can access all of a bank’s records after it falls into receivership. But legal experts said there also could be civil or criminal actions against executives, directors and other deal makers at banks that are still operating if they made deals negligently or fraudulently.
Milton Schroeder, a law professor and banking law expert at
Stinson Morrison Hecker LLP: www.stinson.com
Keats Connelly & Associates LLC: www.keatsconnelly.com
Polsinelli Shughart PC: www.polsinelli.com
Maricopa County Bar Association: www.maricopabar.org
Notable U.S. bank failures since January 2008:
First National Bank of Arizona
Silver State Bank
First Bank of Beverly Hills
Bank of Wyoming
Colorado National Bank
Source: Federal Deposit Insurance Corp.
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