Fall-out from the subprime and Alt-A mortgage crisis continued recently with court approval of a multi-million dollar settlement of a lawsuit filed against former top officers of what had been one of the country’s leading subprime lenders before its bankruptcy in January 2008.

A court in West Palm Beach, Florida approved a $2.825 million settlement of claims brought by a bankruptcy trustee in Florida state court against the former CEO, COO and Chief Restructuring Officer of First NLC Financial Services, LLC and affiliated companies. I, along with my partners Scott Baena and Jay Sakalo, represented the trustee, Deborah Menotte, in this lawsuit.

Former First NLC top officers sued for breaches of fiduciary duties and gross negligence

Ms. Menotte sued those former top officers for breaches of fiduciary duties and gross negligence. The case focused on what the trustee contended was a below-market value sale — finalized just two days before First NLC filed for bankruptcy relief — of the company’s largest remaining asset at the time, a loan portfolio with a face value of approximately $93 million.

That sale was completed after a bizarre process in which the purchaser (a company affiliated with a business that we contended had taken a majority ownership position in First NLC months earlier) selected certain other companies to act as “bidders” for the loan portfolio, and used their “bids” to establish a supposed “market value” for the portfolio. The Chief Restructuring Officer, on the very day that he was appointed to serve in that capacity, signed off on this extremely disturbing transaction on behalf of the company.

The settlement price paid to the trustee (and thus to the bankruptcy estates of First NLC and its affiliates) consisted of $2.675 in cash payments and another $150,000 in forgone professional fees that would have otherwise been charged by the Chief Restructuring Officer’s management company, Mesirow Financial Interim Management. This settlement followed prior settlements valued at over $60 million obtained for the trustee by our law firm years earlier, on related claims against insiders at First NLC.

Holding Executives Responsible

While this more recent settlement has substantial implications in the bankruptcy context — given its important focus on the proper role of a Chief Restructuring Officer of an insolvent company, for example — it also reinforces the notion that mortgage company executives bear risk of liability for facilitating “sweetheart deals” that do not serve their companies’ best interests.

As longtime defenders of mortgage companies against loan buyback and indemnification demands, among other types of claims, we are generally more focused on the culpability of the large national and international banks that structured high-risk loan products, eviscerated underwriting requirements, then piously sought to change the rules and hold correspondent lenders to standards that never existed at the times at which the loans were sold.

But we are also focused on protecting our clients against rogue employees within their own ranks when such employees place their personal interests above those of their company in connection with a sale of company assets. The First NLC case stands as a vindication of the rights of the company and its creditors following top executives’ misguided and detrimental actions.