Judge Stalls Suits Against Founder of First Alliance

Borrowers and shareholders of defunct mortgage lender First Alliance Corp. lost a legal bid Tuesday to press their fraud cases directly against the company’s founder and majority shareholder, Brian Chisick.

Fearing that such lawsuits would deplete the company’s assets and result in inequitable treatment for borrowers, U.S. Bankruptcy Judge Lynne Riddle issued a temporary order preventing 15 lawsuits in six states from proceeding against Chisick, his wife and other officers of the company for three months.

The Irvine lender filed for Chapter 11 bankruptcy in March amid a wave of borrower lawsuits and state investigations into allegations of price-gouging and predatory lending.

Chisick, who owns about 70% of the company, denied that he or the company acted improperly.

“The company is not guilty of any wrongdoing and I personally am not guilty of any wrongdoing,” Chisick said Tuesday. “The allegations have no merit.”

Though the bankruptcy filing automatically prevented the suits from proceeding against the corporation itself, First Alliance attorneys sought to extend the protection to include Chisick and other executives, who were personally named in many of the lawsuits.

William N. Lobel, attorney for First Alliance, argued that the company would be forced to use its remaining assets to pay the costs of defending Chisick in the numerous state court actions because Chisick was acting as an officer of the company.

“Suing him is the same as suing the company,” said Lobel of Irell & Manella. He noted that First Alliance spent $6 million last year defending itself.

Lobel urged the judge to grant the injunction to give him time to seek a “global settlement” that would resolve all the borrower claims in a single forum, rather than fighting numerous battles in different state courts.

Attorneys for borrowers and shareholders insisted they should be allowed to press their claims against Chisick as an individual.

They noted the Chisick family pocketed about $140 million over the past four years through well-timed sales of company stock, potentially making the Chisicks richer than the company itself.

“This is no small source of revenue,” said Larry Gabriel, an attorney for some borrowers and for the American Assn. of Retired Persons, which has accused First Alliance of preying on seniors.

Arthur Leahy, a securities attorney representing First Alliance shareholders, said the company has no obligation to pay for Chisick’s legal defense if he is found to have acted fraudulently, as many of the suits allege.

But in issuing a preliminary injunction, Riddle ruled that the individual lawsuits threatened to “dissipate” the assets of First Alliance and that the company would face “irreparable harm” if they were permitted to proceed at this time.

She also voiced concerns that First Alliance borrowers who pressed their claims against Chisick personally might receive more favorable treatment than others, even though the claims were similar.

But noting that many First Alliance borrowers were elderly, Riddle vowed to move quickly to resolve the case. She said she would consider extending the injunction, which expires Sept. 22, if progress toward a settlement is being made.

Though the ruling means that lawsuits against Chisick are temporarily blocked, the 60-year-old company chairman is not off the hook.

Gabriel said he plans to seek a court order preventing Chisick and his family from transferring their personal assets until the case is resolved.

In addition, Lobel indicated in court that the company may seek payments from Chisick and others to contribute to a settlement fund that would be used to pay claims.