DENVER – A federal bankruptcy judge last week approved a plan by failed subprime auto lender Centrix Financial to reorganize under Chapter 11 and scheduled a vote on the plan by creditors.
The plan would pay secured creditors from the proceeds of any successful litigation, including any suits against founder and former owner Robert Sutton, as well as the sale of the company’s remaining assets to Kendrick Acquisition, now known as Peak 5, which closed last February for $30 million.
Kendrick Acquisition is owned by Falcon Investments, which funded Centrix Financial.
Payment of claims by unsecured creditors which includes hundreds of credit unions, depends on whether the creditors want to pursue Sutton. Centrix said it and the creditors committee have identified potential claims of more than $100 million against Sutton for fraud and breach of fiduciary duty.
The plan also calls for Peak 5 to continue servicing about $1.9 billion in subprime auto loans from a portfolio that once exceeded $4.3 billion. About $1.3 billion of the remaining loans are owned by 230 credit unions, with the rest owned by investors in Centrix Funds, a mutual fund organized by Sutton to buy the loans not purchased by credit unions.
Centrix was forced into bankruptcy in September 2006 by several creditors, including Wells Fargo Equipment Finance, IFC Credit Corp. and Suntrust Leasing, who were owed more than $4.6 million in lease payments. The company and its affiliates filed for Chapter 11 several days later.
At its peak, Centrix provided subprime auto lending for more than 400 credit unions. The business took a severe jolt in June of 2005 when NCUA issued a risk alert about the subprime auto program, effectively shutting down its core credit union business and causing a liquidity crisis.
Eventually, losses on the program, originally portrayed as under 20%, soared, with the average credit union portfolio showing as much as 35% to 38% losses and causing millions of dollars in losses to credit union participants.
The creditors vote on the bankruptcy plan is scheduled for March 4.
