'Turnaround Queen' Tilton's Fight With MBIA Goes On

  • Judge in Zohar bankruptcy case wants full hearing of evidence
  • A bankruptcy could roil global market in structured finance

An investment vehicle created by self-styled turnaround queen Lynn Tilton will get a full federal court hearing on a bankruptcy petition that could affect $800 million in debt insured by MBIA Inc. and disrupt the market in structured investment products.

U.S. Bankruptcy Judge Robert Drain in White Plains, New York, said he wants to hold an evidentiary hearing in about two weeks over the petition, filed by Tilton’s Patriarch Partners LLC. The petition would force the vehicle, Zohar I, into bankruptcy. Drain said he wants to determine if a reorganization plan for Zohar, made up of loans to distressed companies, would serve a valid legal purpose or become “a pig in a poke.”

“Trillions are at stake,” with “industrywide implications,” Rick Antonoff, a lawyer for Zohar, told the judge in arguing against the petition.

Whether or not the case is quite that momentous, it could upset the market in collateralized loan obligations, or CLOs, securities backed by underlying corporate loans. A forced bankruptcy of Zohar, a CLO, could change the way investors think about the safety of such investments, said Steven Kolyer, a partner in the New York office of Clifford Chance US LLP who specializes in structured finance. Formal bankruptcy proceedings for such investments are rare, so investors are watching this one closely, he said.

Tilton, founder and chief executive of Patriarch, launched Zohar in 2003. Patriarch, which filed the petition on Nov. 22, says it needs bankruptcy court protection from creditors to stop MBIA from foreclosing on the loans and to execute a restructuring of debt that includes over $800 million in notes backed by the bond insurer.

If Drain allows a full Chapter 11 bankruptcy, “we think we could file a plan to pay in full” over time, said Jay Goffman, a lawyer for Patriarch.

MBIA opposes Patriarch’s petition, Greg Diamond, a spokesman, said in a December statement.

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