First NLC Chapter 7 trustee seeks approval of indemnification claims, lawsuit settlement

By Caroline Salls

Pittsburgh, March 12 - First NLC Financial Services, LLC's Chapter 7 trustee requested court approval of a settlement with Friedman Billings Ramsey Group, Inc., FNLC Financial, Inc. and other Friedman Billings Ramsey officers who served as First NLC's managers, according to a Wednesday filing with the U.S. Bankruptcy Court for the Southern District of Florida.

According to the motion, Friedman Billings Ramsey subsidiary FBR TRS Holdings filed a $9.61 million unsecured claim against First NLC on April 25, 2008 based on an asserted right of subrogation/indemnification arising from FBR Holdings' payment of a guaranty obligation to one of First NLC's landlords.

On May 9, 2008, First NLC's official committee of unsecured creditors filed a lawsuit seeking to recharacterize an alleged $54 million loan made to First NLC by NLC Holding Corp. as an equity contribution, as well as roughly $6 million in alleged loans made to the company by Blue Boy LP and NSH Ventures II, LP.

Based on her findings made in connection with the lawsuit, Chapter 7 trustee Deborah C. Menotte alleged that the Friedman Billings Ramsey managers' mismanagement led to First NLC's insolvency, and that the managers failed to prevent the company's assets from being wrongfully diverted for improper purposes.

The trustee said she believes she would be able to show that the managers improperly allowed a delay of the company's bankruptcy filing in order to facilitate the sale of a $96 million loan portfolio at a price that was below actual market value.

Menotte said the loan portfolio was First NLC's last substantial asset.

In addition, the trustee said she believes she would be able to show that the managers allowed the company to make a $4.5 million payment of alleged intercompany debt to Friedman Billings Ramsey at a time when First NLC was insolvent, and in preference to other creditors.

Menotte said she would also be able to prove that the managers breached their fiduciary duties after First NLC was in bankruptcy "by permitting wide-ranging misconduct to continue to the debtors' detriment."

The trustee has further alleged that she may have avoidance claims against Friedman Billings Ramsey based on payments made before the bankruptcy filing date.

Settlement terms

Under the settlement, the released parties, including the Friedman Billings Ramsey entities and FNLC Financial, have agreed to pay $4 million to the trustee and forgo their right to assert unsecured claims or any other interest or claim they may have in estate cash.

In exchange, the parties will be released from any claims or causes of action First NLC may have against them.

Menotte said the settlement was negotiated to avoid significant cost, delay and risk of litigation and appeals.

First NLC, Friedman, Billings, Ramsey Group, Inc.'s mortgage origination subsidiary, filed for bankruptcy on Jan. 18, 2008. Its Chapter 7 case number is 08-10632.

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