First NLC unsecured creditors committee asks court to reclassify secured debt

By Caroline Salls

Pittsburgh, May 9 - First NLC Financial Services, LLC's committee of unsecured creditors asked the U.S. Bankruptcy Court for the Southern District of Florida to recharacterize secured debt related to an acquisition as equity, according to a lawsuit filed Friday with the court.

The lawsuit was filed against Sun Capital Partners, Inc. affiliate NLC Holding Corp., former First NLC parent FNLC Financial Services, Inc., Blue Boy LP, NSH Ventures II, LP and Friedman Billings Ramsey Group, Inc.

The committee said the lawsuit results from a July 25, 2007 acquisition of First NLC "that was purposefully characterized as a loan transaction due to the perceived need to obtain regulatory approval for what in fact constituted a change of control of the debtors."

Through a series of transactions, the committee said the defendants tried to effectuate the acquisition of First NLC by NLC Holding by contributing $60 million to First NLC in exchange for an 80% ownership interest.

By characterizing their equity purchase as a loan, the committee said the defendants "received the benefits of all attributes of ownership, and planned to disguise their equity holdings as loans only until securing regulatory approval for the change of control."

According to the lawsuit, because First NLC was a regulated mortgage broker and originator, any change of control of First NLC required regulatory approval.

The committee said the regulatory approval process is time-consuming, and First NLC could not survive it without an infusion of additional cash.

As a result, instead of seeking the approval, the committee alleged that the parties characterized the transaction as a loan.

The committee said the recharacterization "will have a profound impact on the contours of a plan and recoveries in these proceedings."

First NLC, Friedman, Billings, Ramsey Group, Inc.'s mortgage origination subsidiary, filed for bankruptcy on Jan. 18. Its Chapter 11 case number is 08-10632.

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