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Lynn Tilton's Zohar Funds File Bankruptcy to Stop MBIA Suits

Updated on
  • Tilton was cleared of SEC and racketeering allegations in 2017
  • Filing blames MBIA Insurance lawsuits for failed sale efforts

Lynn Tilton

Photographer: Adam Jeffery/CNBC/NBCU Photo Bank via Getty Images

New York financier Lynn Tilton, at the center of legal battles over three structured debt vehicles she used to finance distressed companies, put the funds into bankruptcy to block lawsuits from a bond insurer she says has “cast a cloud” over sale efforts.

Zohar III Corp., which bundled the debt of distressed companies into securities that were sold to investors through so-called collateralized debt obligations, filed for bankruptcy Sunday. Tilton said in court filings that as value in the companies is unlocked through sales and debt refinancings, it will bring in “billions” to repay Zohar investors. The portfolio includes what she calls “iconic” American brands such as MD Helicopters, Stila Cosmetics and Rand McNally.

The bankruptcy also seeks to stem a long-running dispute with MBIA Insurance Corp. The unit of bond insurer MBIA Inc. and Tilton’s Patriarch Partners have fought since at least 2009 over the three Zohar funds they created together starting in 2003. A prior bankruptcy in New York sought the same effect, with limited success after MBIA fought back.

60 Companies

The funds “have been tied up in litigation for years -- with no effect other than to prevent me from refinancing the portfolio company loans and selling those same companies in order to maximize value for all of the funds’ stakeholders,” Tilton said in a statement. Court filings cited six lawsuits MBIA brought through collateral manager Alvarez & Marsal since 2016. MBIA didn’t immediately respond to a request for comment.

Tilton, who calls her empire of 60 portfolio companies with 50,000 employees one of the largest woman-owned businesses in the U.S., has drawn controversy for her dual role in the funds that securitized the companies’ debts and as a manager at the corporations themselves. Her Patriarch Partners once served as a collateral manager, and she acts as a manager or director at many of the firms in the portfolio whose debt the Zohar funds securitized.

Zohar’s court filing won’t disrupt the underlying businesses, and Tilton’s Octaluna entities, which own preference shares in the Zohar funds, aren’t part of the bankruptcy, according to the filing. She expects all Zohar claims will be repaid in full, and that no defaults will be triggered for the portfolio companies.

‘Sophisticated Investors’

While cleared of two major cases against her late last year, she said she has been unable to refinance or sell companies in the portfolios because of ongoing suits involving MBIA.

Potential buyers and lenders are “more than willing to engage in sale and refinancing transactions” involving the portfolio companies but will do so only once the legal risk has gone away, she said.

The filing revealed a loose plan to repay stakeholders including herself, by using the bankruptcy court’s ability to pause lawsuits. The billions of dollars resulting from sales will repay interest and principal on the Zohar notes, which are held by 15 “highly sophisticated, institutional investors” with her personally coming last, according to her court statements.

Tilton said the MBIA suits aimed to seize control and ownership of the portfolio companies.

SEC Suit

A recent lawsuit shows the depth of the dispute; it seeks, on behalf of the Zohar funds, a declaration that shares in MD Helicopters Inc. and Vulcan Engineering Co. in fact belong to Zohar. It alleges that Tilton engaged in “self-dealing” by giving entities she controlled “20-year irrevocable proxies” to vote shares in the companies to Patriarch, which has since stepped down as a collateral manager, but which she still controls. The lawsuit says the proxy rights are “invalid.”

Tilton had been sued by the Securities and Exchange Commission, which alleged she had bilked investors of $200 million. Tilton was cleared in September, and absolved of separate civil racketeering allegations in a lawsuit brought by the Zohar funds.

When Tilton’s Patriarch previously petitioned to force the Zohar funds into bankruptcy in New York, MBIA ended up taking possession of Zohar I at an auction after facing off with Patriarch.

Zohar I and Zohar II have already defaulted, and Zohar III will likely default in March 2019, Tilton said. Zohar III Corp. and affiliates’ Chapter 11 filing in Delaware listed up to $10 billion in assets. Zohar I has $286.5 million in outstanding Class A debt, Zohar II has $760 million, and Zohar III has $791 million, according to the filing. Class B debt is also listed in the filings.

Mark Kirschner of Goldin Associates was named as chief restructuring officer for the funds. Bankruptcy counsel is Young Conaway Stargatt & Taylor.

The case is Zohar III Corp., 18-10512, U.S. Bankruptcy Court, District of Delaware (Delaware.)

(Updates with details from filing starting in headline.)
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