March 12, 2018 / 4:02 PM / a year ago

New York financier Lynn Tilton puts her Zohar funds into bankruptcy

WILMINGTON, Del./NEW YORK, March 12 (Reuters) - The colorful New York financier Lynn Tilton has put her Zohar investment funds, a key element of her distressed debt empire and the subject of several legal battles, into Chapter 11 bankruptcy, with a goal of selling assets or refinancing debt.

Tilton said in papers filed on Sunday night with the U.S. Bankruptcy Court in Wilmington, Delaware that the filing was prompted by litigation with the funds’ current manager, restructuring firm Alvarez & Marsal, and the insurer MBIA Inc, a major creditor.

The Zohar funds were designed as collateralized loan obligations that bundled loans to troubled companies into securities, and had raised about $2.5 billion from investors.

Tilton, who was briefly the subject of a reality TV show called “The Diva of Distressed,” had once run the funds through her investment firm Patriarch Partners, but gave up control in 2016 to Alvarez & Marsal.

Tilton was cleared of wrongdoing over the Zohar funds twice last year, winning dismissals in September of U.S. Securities & Exchange Commission claims that she bilked investors of $200 million, and in December of a racketeering lawsuit brought by the funds themselves.

In an affidavit, Tilton said the bankruptcy will not affect operations at her 25 operating businesses, including Dura Automotive, MD Helicopters, Rand McNally and Stila Cosmetics, and will put off pending lawsuits.

She said litigation has blocked her from selling one company and financing several others, but the funds retain “tremendous value” and are worth “billions of dollars,” and a bankruptcy would let creditors with valid claims be paid in full.

According to the bankruptcy petition, the Zohar funds have up to $10 billion of assets and up to $1 billion of debt.

“Value cannot be maximized in the litigious and charged atmosphere that currently exists,” Tilton said in a statement. “Chapter 11 is the only path forward.”

MBIA had no immediate comment. A lawyer for Alvarez and Marsal did not immediately respond to requests for comment.

According to court records, MBIA has insured about $1.04 billion of $1.84 billion of notes issued by the Zohar funds.

Mark Kirschner, of Goldin Associates, who once led the bankruptcy practice of law firm Jones Day in New York, was named chief restructuring officer for the funds.

The case is In re: Zohar III Corp, U.S. Bankruptcy Court, District of Delaware, No. 18-10512. (Reporting by Tom Hals in Wilmington, Delaware and Jonathan Stempel in New York Editing by Paul Simao)

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