DENVER - A federal bankruptcy judge is expected later this month to approve the reorganization of failed subprime auto lender Centrix Financial, but the plan leaves little, if anything, for unsecured creditors, including more than 140 credit unions.
The plan basically confirms what has been in effect since February 2007, which is the acquisition of Centrix by its main creditors, Falcon Investments and Everest National Insurance, for $30 million. But administrative costs, including legal fees to the dozens of lawyers, are expected to eat up virtually all of those proceeds, leaving nothing for the unsecured creditors, according to Curt Todd, a Denver lawyer representing Tech CU in the case.
The bankruptcy court has scheduled a hearing on the reorganization plan for April 21, where the judge is expected to rule on the plan. The best chance for any payment to CUs lies with the bankruptcy trustee, which has pledged to seek recovery from Centrix founder Robert Sutton and affiliates of his, if the plan is confirmed, according to Randall Feuerstein, a lawyer representing four CUs. “It will be years down the road before we know if there’s going to be a recovery for unsecured creditors,” said Feuerstein.
The law firm of Foley & Lardner, which is representing numerous CUs in the case, has agreed to pursue claims against Sutton and his affiliates on a contingency basis. Meantime, more than a third of the 88 CUs being sued by Lyndon Property Insurance Co., the provider of Default Protection Insurance on the Centrix loans, have been dismissed from the case in exchange for cash payments to them and an agreement not to pursue further DPI claims.
Lyndon has paid out more than $130 million to CUs in DPI coverage, which is based in the difference between the resale value of the vehicle and the outstanding balance on the loan. Lyndon claims that the credit unions colluded with Centrix in order to fraudulently continue to collect insurance payments.
The CUs remaining on the suit have additional insurance coverage from either CUNA Mutual Group or Chubb Insurance, according to Feuerstein, whose four credit union clients, Arizona Central CU, San Antonio FCU, First CU and Mojave Community FCU, have all struck deals to be removed from the case.
Lyndon’s suit against some of the biggest originators of Centrix loans, including CU of Texas and Velocity CU, was sent back to the bankruptcy court last month by U.S. District Court Judge Edward Nottingham, who the credit unions were asking for a jury trial on the Lyndon charges. Judge Nottingham ruled that the bankruptcy case should run its course before separate charges, like the Lyndon allegations, are removed to District court.
Dozens of credit unions are involved in arbitration with CU of Texas, Velocity CU and other originators over the Centrix loans and are asking that the originators buy back the outstanding loans, which continued to default at a rate over 30%.
Centrix, which engineered more than $4.3 billion worth of subprime auto loans through credit unions, filed for bankruptcy in September 2006, a year after NCUA issued a letter to credit unions warning them that the program may not be viable. After the loss of the credit union market, Centrix sold tens of millions of dollars of the subprime auto loans in pools to investors through Centrix Funds. Attorneys representing those investors are also seeking recourse through litigation.
Even after payment of insurance claims, most credit unions that participated in the Centrix programs have racked up significant losses. CU of Texas, for example, one of the largest originators of Centrix loans, reported a loss of $13 million for 2007.
Centrix has since changed its name twice, first to Flatiron Financial, then to Peak 5, and continues to service more than $1 billion worth of the subprime loans for credit unions.
