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Brasota Investors Await Money

Posted on: Friday, 7 April 2006, 09:00 CDT

By Tilde Herrera, The Bradenton Herald, Fla.

Apr. 7--MANATEE -- Brasota Mortgage Co. investors later this year could get back a 25 percent chunk of the money they put into the fallen mortgage lender.

That's on top of the first distribution of 10 percent approved by a federal judge last month. But the final percentage of money investors receive from Brasota's liquidation could depend on how long they were investors.

In his monthly newsletter released this week, Trustee Gerard McHale warned that although he wants to send checks for the initial 10 percent distribution this month, he may not hammer out the logistical and legal details in time.

It's taking time to reconcile the records and a payment schedule, McHale said.

McHale, a Fort Myers accountant, was appointed a year ago to oversee Brasota's liquidation. Brasota entered receivership in February 2005 after a multimillion dollar shortfall in assets versus liabilities was discovered. Brasota sought Chapter 11 bankruptcy a few months later.

Brasota made loans to sub-prime borrowers and developers using money from noninstitutional investors. Many of these noninstitutional investors were Manatee and Sarasota residents who used the monthly interest checks from Brasota to supplement their incomes. Nearly 1,800 investors are owed approximately $138.5 million.

Since the distribution approved last month only pertains to those holding an undisputed unsecured claim, the action nudged 307 holders of secured-unsecured split claims to convert their status to only unsecured.

McHale must set aside funds to cover potential secured claims but as more claims get converted to unsecured status, McHale said that frees up money to make a bigger distribution later this year.

McHale said he may try to equalize the burden of losses for Brasota's investors as part of the company's Chapter 11 bankruptcy plan.

"Those who didn't get any (monthly interest payments) back, they could end up getting a sizable increase at a small cost to the others," McHale said.

It's a tool sometimes used in cases involving fraud, founded on the rationale that the monthly interest payments by Brasota came from new investors, not from its business operations.

Gilbert Smith, a Bradenton attorney representing several investors, hasn't seen any cases with this sort of distribution formula. "I don't think it's common but this is an unusual case because it's been characterized as a Ponzi scheme from the beginning," he said.

The equalization formula would operate on a sliding scale. McHale has yet to discuss the plan with the Unsecured Creditors Committee.

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Copyright (c) 2006, The Bradenton Herald, Fla.

Distributed by Knight Ridder/Tribune Business News.

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Source: The Bradenton Herald (Bradenton, Fla.)

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