U.S. seeks trustee to run New Century
The Justice Department has taken the unusual step of asking a bankruptcy judge to oust New Century Financial Corp.’s top managers and board members, and replace them with an appointed trustee.
Directors and executives of the collapsed Irvine-based lender “failed to fulfill their fiduciary roles” by not ensuring that adequate accounting and financial controls were in place last year, according to a motion filed Tuesday in U.S. Bankruptcy Court in Delaware by Joseph J. McMahon Jr., a lawyer with the Justice Department’s Office of the Trustee.
The resulting “material weaknesses” -- which New Century disclosed Feb. 7 -- prompted a restatement of its 2006 earnings, sparked a meltdown of the sub-prime lending industry and led to the company’s filing for bankruptcy protection April 2.
“These misstatements concealed weaknesses in New Century’s financial performance from New Century’s creditors, its equity security holders and the financial markets for many months,” McMahon wrote. “When these weaknesses finally came to light, New Century’s ensuing collapse threatened to cause major losses to New Century’s creditors and investors.”
New Century is under investigation by a federal grand jury and the Securities and Exchange Commission, and more than two dozen civil lawsuits have been filed against the company. Last week, McMahon filed papers to block the company’s request to pay $6.3 million in bonuses to about 130 employees. New Century said the money was needed to “motivate leadership” and boost morale.
Existing management typically is allowed to steer a company through bankruptcy, making Tuesday’s filing highly unusual, bankruptcy experts said.
“It is extremely rare for any party to move for appointment of a trustee in a case,” said Los Angeles bankruptcy attorney J. Scott Bovitz. “It is particularly rare for the United States Trustee to be the moving party for appointment of a trustee.”
New Century disputed the need to replace the current management. “The company strongly disagrees with the motion because it is unnecessary and potentially disruptive to its efforts to maximize the value of its assets for the benefit of creditors and shareholders,” the company said in a statement. “The Trustee’s actions directly contravene the express wishes of the Creditors Committee, which represents the very interests that the Trustee is obligated to protect.”
Before its collapse, New Century had become the nation’s largest independent company specializing in sub-prime mortgages to people with sketchy credit or irregular income.
Founded in 1995 by Robert K. Cole, Brad A. Morrice and Edward F. Gotschall, the company grew to 216 sales offices in 35 states. It fired 3,200 employees when it filed for bankruptcy protection, saying it would seek to sell its remaining operations.
The company seeks to pay Chief Executive Morrice and seven other officials $3.5 million if they find buyers for its main assets. Some 120 other employees would get just less than $3 million whether or not the assets sold. A hearing on the bonuses is slated for April 24.
Cole, Morrice and Gotschall grew wealthy during their time with New Century. In 2003 through 2005, each took home nearly $8.4 million in salary and bonuses -- and earned even more from stock sales.
If McMahon’s motion is approved, an outside trustee would be named to run the firm.
Such motions were all but unheard of before 2005, when changes in bankruptcy law required the Office of the Trustee to seek trustees in Chapter 11 cases where factors including fraud are suspected, said Kenneth Klee, a UCLA law professor.
But actual appointments still occur in only a fraction of business bankruptcies, he said.
“I can safely say it’s under 5%,” Klee said.
