Metropolitan Mortgage & Securities Inc. wants to freeze all lawsuits against former executives and board members, claiming that the money spent on defense lawyers could run into the millions of dollars.
If approved by the bankruptcy court, about a half-dozen lawsuits targeting former executives, including former CEO C. Paul Sandifur Jr., would be placed on hold. Investors have filed several class-action lawsuits against the company and its former bosses alleging securities fraud and other violations. Also, several former employees have filed individual lawsuits against Metropolitan.
Ford Elsaesser, an attorney representing Metropolitan sister company Summit Securities Inc., said he filed the action to preserve a $17 million pool of insurance money he fears would be depleted defending former executives rather than included as part of the company’s assets.
Now operating with a new management team and under the watch of a federal bankruptcy judge, Metropolitan is not interested in defending Sandifur and the other executives who drove the company into bankruptcy court and wiped out investments totaling more than $500 million.
“If there was an action pursued against Mr. Sandifur,” Elsaesser said, the insurance proceeds “would or could be spent to defend him.
“We’re trying to prevent that from happening.”
Metropolitan and Summit jointly filed for Chapter 11 bankruptcy protection last month. Most executives and employees have resigned or been laid off, leaving 116 employees left at the two companies. That’s down from more than 600 several years ago.
The bankruptcy filing has afforded some relief to Metropolitan. Lawsuits against the company have been stayed. Such protections have not been extended to individuals, however.
Brad Jones, an attorney with Gordon Thomas Honeywell who is pursuing a class-action claim against Metropolitan and its former company officials, agrees the insurance proceeds should be off limits to defend former executives. Yet he disagreed that his clients should not be able to pursue their claims that company officers and directors committed securities fraud.
He said the difference between the sides comes down to who should get the money.
“We do not believe the proceeds of those polices should become the property of Metropolitan and Summit,” Jones said. “Our view is that the proceeds of any policy that insured the liability of officers and directors rightly belong to the people who were defrauded, namely the investors in those companies.”
Elsaesser said the various lawsuits should be consolidated to cut duplication costs.
He said such a strategy has worked well in other big cases where insurance money was maintained as a company asset and ultimately distributed equitably to creditors.
Doug Siddoway, an attorney with Randall & Danskin representing creditors in the bankruptcy case, supports the company’s attempt to freeze the lawsuits.
“We just think that $17 million should be protected and put into the company,” he said. “By doing so, I am in no way intimating that claims shouldn’t be pursued against these directors and officers.”
In fact, as creditors’ attorney, Siddoway said he may seek claims against anyone responsible for cheating investors.