Pioneer Mortgage, Deep in Debt, Opts for Bankruptcy

Gary Naiman, president and principal owner of Pioneer Mortgage, on Wednesday sought protection in U.S. Bankruptcy Court in San Diego for six corporations affiliated with his financially troubled company.

The closely held companies that operate as Pioneer Mortgage owe at least $35 million to creditors, according to the filings, which list total assets of about $7 million. Attorneys representing various Pioneer Mortgage investors on Wednesday predicted that the list of creditors would swell as more details about Pioneer Mortgage’s financial condition surface.

Naiman, in a related development, said he will soon turn control of the troubled business over to an outside manager. “He’s going to remain at the helm until the selection of someone else, which is expected by the end of the week,” said Brent Whittlesey, Naiman’s Los Angeles-based attorney.

Naiman sought Chapter 11 bankruptcy court protection amid growing pressure from an estimated 2,000 Pioneer Mortgage investors who had invested about $250 million through the company, but who haven’t received monthly checks since November. Pioneer Mortgage had arranged about $200 million in loans secured by trust deeds and $34 million in collateralized mortgage obligations.

Pioneer Mortgage’s financial problems surfaced late last year when the 46-year-old company, based in La Mesa, surprised investors by suspending monthly interest payments on loans it had arranged.

Last Thursday, more than 600 investors met at a San Diego hotel to plot legal strategy aimed at protecting their investments. A steering group elected at that meeting agreed to push Pioneer Mortgage into involuntary bankruptcy if Naiman didn’t enter voluntary proceedings on Wednesday.

Lawyers who represent various groups of Pioneer Mortgage investors described the upcoming bankruptcy proceeding as extremely complex, but most applauded Naiman’s decision to seek protection in bankruptcy court.

“The only way this can be resolved is through a court-ordered operation,” said lawyer Robert J. Berton, who represents about 100 investors who invested about $50 million with Pioneer Mortgage.

“With regard to the creditor body as a whole, this filing is a generally healthy action,” said W. Lee McElravy, an attorney who represents the investor committee that had threatened to push Pioneer Mortgage into involuntary bankruptcy. “My concern at this stage, though, is that so little is known about what has been going on (at Pioneer Mortgage) over the last 60 days.”

“They saw the handwriting on the wall,” said Michael Aguirre, a San Diego attorney who has filed a class-action lawsuit against Pioneer Mortgage on behalf of several investors who allege fraudulent activities.

Wednesday’s filing will not affect an audit in progress by the state Department of Real Estate, according to department spokesman George Hartwell. “The DRE is charged with investigating to determine whether or not violations of real estate law have occurred, and the filing of bankruptcy would not change that responsibility.”

Whittlesey said that Naiman opted for bankruptcy court “to help stabilize operations so we can move forward from here. Pioneer’s assets are now in the jurisdiction of the courts.”

Whittlesey said investors’ funds would remain in trust accounts “in accordance with all state regulations. . . . We are attempting to ensure that investors’ funds are properly handled, just as we believe they have (in the past) been properly handled.”

Pioneer Mortgage had “for many years made advances to investors to cover defaults by its borrowers,” according to a statement that Naiman released Wednesday.

“However, in December, 1990, Pioneer Mortgage exhausted its ability to advance funds to investors,” Naiman wrote.

The company’s financial problems snowballed in recent months, according to Naiman, because “many of Pioneer’s borrowers have been unable to obtain other financing to pay off loans due to Pioneer . . . (because of) the withdrawal of major commercial lenders from the California real estate market.”

“There are a lot of borrowers who just aren’t paying us,” Whittlesey said. “When the money doesn’t come in to Pioneer, money can’t go out, at least for very long . . . that’s the cash crunch.”