Way Clear for FundAmerica to File Chapter 11 : Courts: A judge denies a request that the company be placed in receivership. The firm said it has laid off 114 Orange County employees.
A federal judge in San Francisco declined Wednesday to place Irvine-based FundAmerica Inc. in receivership, clearing the way for the beleaguered company to file a petition for Chapter 11 bankruptcy.
The court action came just hours after FundAmerica, which is under investigation by regulators in four states for operating a possible pyramid scheme, said it has laid off 114 of its 172 employees in Orange County.
The company said the layoffs are the result of “significant legal, regulatory and business problems.” The layoffs will leave the company with only its executive and administrative staffs, Sandi Sternberg, a company spokeswoman, said.
In San Francisco, U.S. District Judge Marilyn Patel denied a request by plaintiffs in a $150-million, class-action lawsuit against FundAmerica to have the company be placed under court-appointed receivership.
FundAmerica gave notice on Tuesday that it intended to seek protection from creditors in Chapter 11. The firm also said that it would ask the bankruptcy judge “to appoint an independent examiner to investigate the various allegations made against the company.”
Patel said Wednesday that a declaration of receivership, which would have immediately removed financial control of the company from its owners, would usurp the authority of the bankruptcy court.
Sternberg said the company did not file a bankruptcy petition Wednesday because attorneys were awaiting the outcome of the receivership request.
Under a Chapter 11 bankruptcy filing, FundAmerica could potentially continue to operate under its current owners. Daniel Girard, an attorney for the plaintiffs, acknowledged that there is no assurance that the bankruptcy court would approve a trusteeship, but he noted that Patel had recommended that a trustee be appointed.
Patel granted the plaintiffs’ request for a preliminary injunction that freezes FundAmerica’s assets and marketing efforts until a trustee is appointed to supervise the company in bankruptcy proceedings. She also approved the status of the suit--filed by former FundAmerica members--as a class action, Girard said.
Patel ruled that it was up to the bankruptcy court to decide if FundAmerica was inherently fraudulent. However, she denied the company’s request for minimal funds to “keep the lights on” while it attempts to reorganize, citing the weight of evidence against it.
“I do not see how this particular kind of what can be referred to charitably as a ‘multilevel marketing scheme’ can, in fact, pass muster under federal security or state laws,” Patel said. “It appears, based on what I see . . . that it is an illegal pyramid scheme found to be in violation of security and state laws.”
Under receivership, the company’s financial operations and assets are strictly monitored by a court-appointed trustee not associated with the company.
Sternberg said the layoffs will affect nearly all non-managerial employees. She declined to comment on the judge’s action.
“It’s a ship sinking fast,” said Susan Henrichsen, deputy state attorney general in San Diego.
Sternberg said the company won’t be able to pay employees’ salaries or benefits without court approval.
The company disclosed two weeks ago that its former President, Robert T. Edwards, was paid a salary of $1 million a month this year and recently wired $11.3 million to two entities overseas. Edwards has declined to comment.
Attorneys for the California, Florida and Washington state attorneys general have testified in Patel’s court that FundAmerica is operating an illegal pyramid scheme and asked the judge to appoint a receiver to protect the public and FundAmerica’s assets.
On Tuesday, Florida fined Fund-America $8 million on fraud allegations and ordered the company to cease doing business in the state.
Florida authorities filed criminal fraud charges last week against FundAmerica and Edwards, alleging that they bilked state residents out of $8.2 million. If convicted of the charges, Edwards could be sentenced to more than 65 years in prison and fined up to $35,000.
The company has denied the allegations and says it is a legitimate, multilevel marketing firm. It has accused the Florida officials of malicious prosecution.
United Press International contributed to this story.
