Request to Halt Donovan’s Bankruptcy Case Rejected

The controversial saga of Financial Dynamics founder Richard E. Donovan continued Thursday, as a bankruptcy trustee prepared to take control of millions of dollars in assets once held by the investment entrepreneur who ran afoul of state officials.

The move follows a decision by U.S. Bankruptcy Court Judge Barry Russell to turn down the request of Nancy R. Schauer, an attorney who previously had been sorting out Donovan’s dealings, to terminate the bankruptcy proceeding. Schauer had contended that the thousands of investors would stand a better chance of recovering their money if Donovan stayed out of bankruptcy.

Schauer had been appointed “receiver” in charge of Donovan’s various investment enterprises last July after state Department of Corporations officials shut down his Covina-based firm, claiming that it violated securities laws.

Thursday’s ruling affects some $60 million in assets controlled by Donavan’s companies, said Diane Coleman, an attorney with the Department of Corporations, which also had sought to keep Donovan out of bankruptcy.

Under Thursday’s court decision, the future role of the receivership, which had tried to salvage some of Donovan’s businesses, is highly uncertain. “We’re deeply concerned about whether investors will be properly protected in the bankruptcy system,” Coleman said. Steven E. Smith, the bankruptcy trustee, said Thursday that the court will have to weigh the priority of various claims. Donovan’s finances were placed in bankruptcy court in December, at the request of Wells Fargo Bank, a major creditor. Smith said that he would meet with Schauer shortly in order to assess Donovan’s remaining wealth.

He said that his major concern is to move ahead with liquidating the assets at the best return possible, and denied that the investors’ chances of recovering money were reduced by the bankruptcy process.