Mortgages Ltd. Files Competing Ch. 11 Plan

3.4.09

by Jocelyn Allison
Law 360

New York -- Mortgages Ltd. has filed a reorganization plan in its Chapter 11 case that calls for continuing loan operations through a reorganized company and establishing a trust to liquidate some of its assets and handle litigation.

The new company would be called Phoenix Loan Services LLC, and it would continue to manage and administer the debtor's loans under existing agreements, according to the plan and disclosure statement filed Wednesday in the U.S. Bankruptcy Court for the District of Arizona.

"The plan is a simple one which maintains the integrity of the investors' original interests in their loans and provides for continuing servicing of those interests, all to maintain an ease of continuity," the debtor said in court documents.

"The important new factor however is that the servicer of the loans (the new ML) will actually be owned by investors and creditors and will be managed by a board of directors comprised of independent directors as well as investor and/or creditor representatives," the debtor continued.

Creditors and investors would own both the reorganized company and the trust, which would be responsible for litigating against parties that have caused significant losses for the company, the debtor said.

If the plan is confirmed, investors and allowed unsecured creditors will receive most of the interest spread and other fees due when borrowers pay their loans or the property securing the loans is foreclosed, court documents said.

Under the plan, Radical Bunny LLC will have an allowed secured claim of $75 million in addition to a $125 million allowed claim as an unsecured creditor.

The debtor's plan will compete with one submitted Jan. 21 by the official committee of investors, which recently drew harsh criticism from both the debtor and the official committee of unsecured creditors.

ML claimed the investors' plan did not sufficiently discuss potential causes of action, the treatment of investors in reorganization, compensation to the toppled company's officers and is murky on the debtor's default interest and fees associated with the debtor's loans.

The creditors' committee claimed the investors' plan fails to offer "adequate information" necessary for an informed judgment about the plan, and neglects in particular to explain the factors - namely shadowy investor dealings - that contributed to ML's demise.

Certain ML investors were receiving payments that did not originate from the underlying loans they invested in and shuffled the finances to the point that the "operation mutated into a Ponzi scheme," the creditors claimed in the objection.

The creditors also claimed that the disclosure statement failed to clarify liabilities in connection with potential litigation against the debtor and its affiliates, including Greenberg Traurig LLP, over the company's collapse.

The disclosure statement also incorrectly treats Radical Bunny as a secured creditor and neglects to address the business' liability arising from roughly $22 million in cash dispersements it received from the debtor in the year prior to the June 2008 bankruptcy filing, the creditors committee claimed.

Stratera Portfolio Advisors LLC and Secured Capital Management Co. LLC lodged similar objections, claiming the disclosure statement, among other shortfalls, glosses over the circumstances that gave rise to ML's bankruptcy filing and offers meager details of the debtor's future.

The investors committee is composed of 44 investors in ML's Value-To-Loan Opportunity Fund I LLC, which is believed to have extended about $7.7 million worth of loans to the mortgage lender's investor opportunity funds or pools.

The official committee of unsecured creditors is represented by Nussbaum & Gillis PC; Stratera Portfolio Advisors LLC and Secured Capital Management are represented by Greenberg Traurig LLP.

The official committee of investors is represented by Fennemore Craig PC.

Mortgages Ltd. is represented by Jennings Strouss & Salmon PLC, Greenberg Traurig LLP and Deconcini McDonald Yetwin & Lacy PC.

The case is In re: Mortgages Ltd., case number 08-bk-07465, in the U.S. Bankruptcy Court for the District of Arizona.

--Additional reporting by Pete Brush and Samuel Howard