Proposal to settle USA Capital case rejected by judge

A federal judge Tuesday rejected a proposed settlement involving investors in USA Capital, a hard-money lender that controlled $962 million in assets when it failed in 2006.

U.S. District Judge Robert Jones said he rejected the $19 million proposal because it contained provisions that were too generous to New York investment company Silar Advisors at the expense of 3,000 investors in USA Capital.

Jones also was concerned that so many investors voted against the settlement and because it appeared that some investors opposed any settlement. Some 1,400 voted, with 70 percent opposed to the deal.

The proposed settlement involved receiver Tom Grimmett and Silar. Under terms of the settlement, the receiver would become the loan servicer and would appoint Silar to manage loans and foreclose on properties.

Jones set the case for trial on Oct. 6, estimating it would take two or three months. But he warned that continued court battles would continue to run up legal expenses that could wipe out any value that is left in the company's assets: foreclosed real estate and loans secured by real estate.

"This is America," Jones said. "(Investors) should have the right to have at it."

Attorney Terry Coffing, who represents Grimmett, agreed with the judge's analysis.

"The alternatives (to settlement) are increasingly grim, and the alternatives do not resolve the issue at hand but rather prolong the agony and expense," Coffing said.

Many USA Capital loans are worth 10 cents to 15 cents on the dollar, said attorney Janet Chubb, who represents several wealthy investors.

The legal wrangling in the case stems from the collapse of USA Capital, which solicited investor money and used the money to make loans to developers who provided real estate as collateral. Investors were attracted by double-digit yields on the loans and the relative safety of having real estate as collateral.

In the past few years, however, real estate values have been falling while legal fees over bankruptcy proceedings and an appeal to district court continue to build up.

Investors are bitter, believing USA Capital cheated them and also complaining that they haven't received fair treatment in court.

Bankruptcy Judge Linda Riegle approved the sale of some loan assets and loan servicing rights to Compass Partners of New York for $65 million. This gave Compass authority to earn fees by collecting interest and principal payments for loan investors and by resolving loans that went bad.

But investors complained of unfair treatment by Compass. So Grimmett negotiated a settlement with Compass.

Silar Advisors lent $50 million to Compass and foreclosed on the loan in September.

Silar claimed it has the right to replace Compass as the company servicing USA Capital loans.

Still, Jones criticized the settlement for authorizing Silar to collect 15 percent, compounded monthly on amounts advanced for the benefit of investors.

The judge questioned why investors who want to replace Silar as loan servicer should first have to pay Silar for its portion of potential recoveries under the $19 million settlement agreement.

Jones said investors were not blameless. He said "no one put a gun to anyone's head" to force them to invest with USA Capital.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.