Bankruptcy judge delays trustee decision on Mortgages Ltd

Existing management at bankrupt real-estate lender Mortgages Ltd will continue running the company for now.

U.S. Bankruptcy Judge Randolph Haines granted the Phoenix-based company's petition to reorganize under Chapter 11, which allows the managers of a business to continue making decisions about a firm's direction.

But at an emergency hearing Tuesday, Haines postponed making a decision about whether to appoint an independent trustee to run Mortgages Ltd., a move some of its creditors are aggressively pushing.

The judge's decision was made partly to allow the new trustee of a trust that serves as Mortgages Ltd.'s sole stockholder to have more time to review the company's situation.

The lender, which finances the purchase, development and construction of commercial real estate using money it raises through accredited investors, has come under scrutiny since its Chairman and Chief Executive Officer Scott Coles died June 2.

Two developers that borrowed money from the firm are suing Mortgages Ltd., claiming it has defaulted on its loan obligations. Husband-and-wife investors are also suing to get information about Mortgages Ltd. funds in which they invested.

The company has since halted making new loans to borrowers or accepting money from investors, who help fund its loans.

Mortgages Ltd. filed for Chapter 11 on Monday night, aiming to trump a petition by borrower Grace Communities to involuntarily force it into Chapter 7.

Scottsdale-based Grace, which has borrowed money for development projects from Mortgages Ltd. and claims the lender has stopped funding the loans, filed its petition Friday, along with an emergency motion to have an independent trustee take over the business.

Under Chapter 7, Mortgages Ltd. would have to sell its assets. An outside trustee typically is appointed to oversee a bankrupt company's operations in Chapter 7.

In Chapter 11, a debtor establishes a plan to reorganize and pay back its creditors. It usually is not required to work with an outside trustee.

Grace and other borrowers argue an independent trustee is necessary because of conflicts of interest Mortgages Ltd.'s current managers have.

John Clemency, an attorney for the lender, said during the hearing that current management, with assistance from outside consultants the company has brought on, is capable of steering the company out of debt.

He noted that the company is lining up financing from Southwest Value Partners, which would allow Mortgages Ltd. to continue servicing existing borrowers.

If approved by the court, the Southwest's loan would be secured by all of Mortgages Ltd.'s assets ahead of the lender's other creditors.

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Bankruptcy judge delays trustee decision on Mortgages Ltd