Bankruptcy Judge Denies Pioneer’s Bid to Raise Cash

U.S. Bankruptcy Court Judge James W. Meyers on Thursday denied cash-strapped Pioneer Mortgage’s bid to use extraordinary means to generate additional funds for the ailing company that lurched into bankruptcy proceedings Jan. 9.

Meyers’ decision came just minutes after Dennis Schmucker, Pioneer’s chief executive, acknowledged that about half of the 450 loans that Pioneer has arranged for 2,500 investors are in default.

Schmucker also told Meyers that Pioneer will run out of operating funds in less than a month unless the company finds additional revenue to augment loan-processing fees that Pioneer collects from investors.

Schmucker, who took over from former Pioneer Chief Executive Gary Naiman on Jan. 10, said the company would be hard-pressed to deal with its troubled loan portfolio if new revenue sources of revenue are not found.

Pioneer, a La Mesa-based investment firm, filed for protection under Chapter 11 of the U.S. Bankruptcy Code after failing to make payments to investors in recent months. Pioneer’s investors made high-interest loans to borrowers who put up California real estate as collateral for the loans.

The company ran into problems when real estate prices dipped, and a group of investors has alleged fraudulent activity by Naiman, the company’s principal owner.

During Thursday’s hearing, which drew an overflow crowd of nearly 200 Pioneer investors and more than 30 attorneys, Meyers directed Pioneer to collect payments from borrowers who are scheduled to repay $7 million in loans that the company brokered for Pioneer investors.

But Meyers refused to let Schmucker distribute the $7 million to investors. He instead ordered the company to place the funds in an interest-bearing account for distribution later.

Meyers also rejected Schmucker’s bid to raise needed cash by holding back 10% of the $7 million and using it to pay salaries of experts who are needed to manage Pioneer’s remaining loan portfolio.

Meyers said it was “premature” for Pioneer to distribute the $7 million in funds to a handful of investors because a soon-to-be-appointed examiner has yet to review the financially troubled company’s books.

Meyers’ ruling probably will result in layoffs at Pioneer, which now has about 20 employees on its “skeleton” staff, Schmucker said following Thursday’s court hearing.

The judge’s ruling pleased attorneys for Pioneer investors who allege that Naiman engaged in fraudulent activities at the company.

“We still feel, though, that we need a trustee,” said Tim Cohelan, an attorney who represents some Pioneer investors who have lodged a class-action suit against Pioneer in U.S. District Court in San Diego. “We just don’t know what the company’s books look like. And we’re worried.”