Commercial Money Center---Up-date
a past edition of the Miami Herald sent in by a reader.
CMC bankruptcy case becomes a liquidation
BY PATRICK DANNER
Some creditors in one of the largest bankruptcy cases ever filed in South Florida claim they are the victims of a massive Ponzi scheme.
With claims of more than $400 million, though, creditors in the case aren't unsophisticated investors or retirees who gambled their life savings. Rather, they're insurance and surety companies.
They all bet on Commercial Money Center (CMC), a company founded in 1997 in Las Vegas to originate commercial equipment leases and consumer auto leases. The leases went to companies or individuals with poor credit who were willing to pay high interest rates, according Bradley S. Shraiberg, the company's Boca Raton lawyer.
The company generated hundreds of millions of dollars by pooling the leases and selling the income stream to investors, typically banks and other financial institutions. To lure those investors, CMC purchased insurance policies or surety bonds so that in the event lessees didn't make payments, the investors would still be paid.
For reasons that are in dispute, CMC's business has unraveled. The company, which once employed more than 100 people, now says it has only four or five working out of a suite in a Tampa office building. Whether the company is still in business is questioned by some.
CMC filed for reorganization on May 30 in U.S Bankruptcy Court in Fort Lauderdale. But with no prospects for CMC emerging from bankruptcy, Judge Raymond Ray on Thursday converted the case to a liquidation.
The investors and insurance companies, meanwhile, are battling over who should be on the hook for the unpaid leases.
The insurers allege that many of the leases were bogus -- set up with shell companies or with individuals whose signatures were forged.
''This case is a massive fraud, a Ponzi scheme of epic proportions,'' said Miami bankruptcy lawyer Howard Berlin, who represents Illinois Union, an insurer that issued bonds that total upward of a $100 million. Other insurers and the amount of the bonds they issued are: Royal Indemnity, $106 million; Safeco, $100 million; RLI Insurance, $54 million; and American Motorists, $44 million.
Some of the investors counter that the insurance companies are just trying to wiggle out of paying claims to the investors.
''From our point of view, the sureties are using the excuse that some of the underlying leases are fraudulent in order to avoid their clear contractual obligation to pay up if the leases go into default, which they have,'' said Louis Mrachek, a West Palm Beach lawyer who represents Cleveland-based Guardian Capital LLC, an investor that claims it's owed $75 million.
Altogether, about 15 financial institutions invested in the CMC lease portfolios. Other large investors include Atlanta-based NetBank, which calls itself the world's largest Internet bank and says it's owed $84 million, and General Electric Capital Corp. Just how much GE Capital is owed couldn't be determined.
CMC denies charges that it was a sham company set up to defraud.
''It's absolutely not true,'' Shraiberg said after Thursday's bankruptcy hearing. ``It's Commercial Money Center's contention that it has performed pursuant to the sales and servicing agreement with each surety and each investor.''
In court, Shraiberg said CMC operated successfully until August 2000 when a South Florida company defaulted on a $30 million lease.
That had a downward ''spiraling effect,'' he said. The company couldn't be located for comment.
CMC absorbed a monthly shortfall of $1.4 million through its cash resources until January of this year. Unable to continue paying the deficit out of its own coffers, CMC filed claims with its insurance companies, Shraiberg added. However, they have refused to pay, he added, even though over $25 million in premiums have been paid to the insurers.
CMC has filed lawsuits against each of the five insurers.
RLI Insurance, which issued surety bonds totaling $54 million, counters that through its own investigation it discovered many of the leases were fraudulent or fictitious. CMC leased everything from medical equipment to dairy cows, according to one person.
RLI sued CMC in federal court in Southern California, where CMC had operations. The investor banks were later added to the suit in an attempt to have the bonds declared void, which would get the insurer off the hook.
In court Thursday, Russell S. Bogue III, the Atlanta lawyer representing RLI, claimed CMC filed bankruptcy in Fort Lauderdale to avoid the rulings of the federal court in California. Shraiberg said CMC filed in South Florida because to be close to the party that had defaulted on the $30 million lease.
Robert A. Angueira, assistant U.S. Trustee, urged the bankruptcy judge to send the case back to California. ``They're using the system . . . to avoid what is going on in California.''
Angueira didn't think too highly of CMC, saying its principals ''appear to be thieves'' who ``probably have stolen hundreds of millions of dollars in a scam.''
Ray, the bankruptcy judge, has set a hearing for July 8 to determine where CMC's liquidation should be overseen.