Former branch managers of bankrupt First Magnus Financial Corp. may be fighting a losing battle to recover funds they thought they had been accumulating as part of their branch agreements over the years — with one manager’s lawsuit seeking more than $300,000. And other former employees may be in the same boat in their efforts to recover salaries, commissions, fees and other income due from their final weeks at the company.
On Jan. 7, the Tucson, Arizona-based company said, in response to a lawsuit, that a Phoenix branch manager is not entitled to any of more than $358,000 due her because no money was ever placed in an escrow or trust account as required under a settlement agreement it signed on Feb. 28, 2007, following arbitration with the American Arbitration Association. The company’s attorneys state that “all funds attributable to the retail location always were held by defendant in a general operating account, were commingled with other funds and are not traceable or identifiable.”
Under the settlement agreement, former branch manager Anna Tran was to receive 8 percent of the balance in the account on every Jan. 16 beginning in 2009 and ending in 2015, when she was due to be paid the entire remaining balance.
First Magnus further maintains that Tran “has, at most, an alleged contingent, unliquidated unsecured claim against the defendant’s bankruptcy estate to the extent that plaintiff’s indemnity obligations to defendant under the settlement agreement do not exceed $358,108.59 through January 1, 2015.”
However, Tran’s branch agreement identifies First Magnus, doing business as Great Southwest, as her employer, clearly making her an employee. And employees’ claims, under bankruptcy laws, take priority over all other claims, except for federal government claims, Oak Park, Ill.-based CPA Dennis Kenny, who specializes in business accounting, told MortgageDaily.com.
Tran’s suit is scheduled to go to trial the week of May 5.
The former manager of the Beaumont, California branch of First Magnus subsidiary Charter Funding, who did not wish to be identified, told MortgageDaily.com that he had a branch manager agreement similar to Anna Tran’s and had been owed some $100,000.
“I only got five percent upfront,” he said, explaining that he had no plans to take legal action in an attempt to recover what he was still owed. “First Magnus was a big company,” he said. “And, besides, I’ve never won a suit in my life.”
Meanwhile, eight former First Magnus employees had filed claims for the money they were owed with the Arizona Department of Labor, which would have entitled them up to $2,500 under a program for the resolution of wage disputes, a department official told MortgageDaily.com.
“But after First Magnus filed for bankruptcy we had to close the claims,” the official explained. “They [the eight former employees] will now have to file for the wages with the bankruptcy court. That’s the only way for them to collect their wages.”
A bankruptcy court judge on Jan. 10 denied class action status to a suit filed by eight former employees under the Worker Adjustment and Retraining Notification Act, stating that each of some 1,000 former employees in the eight First Magnus offices that meet WARN Act requirements must file their own claims, “each of which will be addressed on its merits,” because to certify a class “would unnecessarily increase the costs and reduce the distribution to the proposed class members.”
About 62 former employees have transferred their claims to Debt Acquisition Company of America V, LLC for 35 cents on the dollar. Those claims ranged from $319 to more than $17,000, according to court filings and Debt Acquisition partner Tom Scheidt.
“I’d rather get 35 cents on the dollar now than wait a year or two,” Jacqueline Alvarez, a former loan processor in the West Covina, Calif., office told MortgageDaily.com. The other five employees in her office chose to wait, she said and pointed out, “A lot of loan officers are owed expenses and commissions.”
Her $1,500 claim is listed as number 1509 in the bankruptcy claims register. After three months of unemployment she said she found a job as a loan officer with JP Morgan Chase.
Debt Acquisition expects to get its money “hopefully later this year,” Scheidt told MortgageDaily.com. “But it wouldn’t surprise me if it’s the middle of next year. This was a messy case.”
Adam Brooks Buxton, who worked in the closing department in First Magnus’ Austin, Texas, regional office, told MortgageDaily.com that when the company shut down last August, “We were told the checks would be coming and they just never came.”
So he transferred his $1,538 claim to Debt Acquisition.
But Buxton, who said that he has only been able to pick up odd jobs in the slow Austin market, would have qualified to be part of the WARN act class action because the Austin office had nearly 200 employees, one of eight offices where more than 50 full-time employees were terminated, the minimum required to be covered by the WARN Act, which requires that employees be given at least 60 days advance written notice of their terminations. Under WARN, these terminated employees are entitled to receive wages, salaries, commissions, bonuses and accrued holiday and vacation pay and pension and other employee benefits for 60 days, according to the suit.
“Many of the employees were very hard hit by the company shutdown,” attorney Rene S. Roupinian, of the New York law firm Outten & Golden LLP, which filed the suit, told MortgageDaily.com. “Without the 60 day notice, they were put in a particularly troubling position.”
Bankruptcy Judge James M. Marlar’s decision has been appealed.
In the Anna Tran suit, although the settlement agreement states that Tran’s funds “will be placed in an escrow or trust account with National Bank of Arizona,” First Magnus, in its answer, refers to such an account as an account “contemplated by the settlement agreement.” And because no account was funded, “there were no funds for defendant [First Magnus] or any other person or entity to administer; and no fiduciary relationship was created between plaintiff [Tran] and defendant or any other person or entity.”
Under Tran’s April 9, 2003, branch agreement with First Magnus, according to the copy attached to the complaint, Tran, as branch manager, was to receive all “points and origination fees collected on all of the branch’s loans, any premiums, plus overages/yield spread premiums paid to branch manager by employer, minus all expenses of the branch,.” Those expenses included payroll, payroll taxes, rent, utilities, telephone, advertising and other costs and were not to exceed $2,500 monthly.
First Magnus, in its reply, denies that the copy attached to the complaint is “a true and correct copy of the agreement.” However, it does not state in what ways it is not true and correct.
Whether Tran’s branch agreement is similar to or the same as other branch agreements could not be determined. Tran’s attorney could not be reached by MortgageDaily.com, nor could Tran and several other former branch managers.
First Magnus and its retail subsidiaries, Great Southwest Mortgage, Charter Funding and Frost Mortgage, informed employees on Aug. 16, 2007, that it was no longer funding loans and was laying off most of its more than 5,500 employees in approximately 300 offices immediately. The companies’ licenses were then suspended that day in Arizona and in New Jersey the next day. Then on Aug. 21, 2007, First Magnus filed for voluntary bankruptcy under Chapter 11. Before shutting down, First Magnus and its subsidiaries had more than $17 billion in loan fundings in 2007.
Its Hawaii, offices were subsequently acquired by IndyMac Bank and some of its Arizona offices were acquired by Flagstar Bank.
First Magnus has been seeking bankruptcy court approval of the sale of the Charter Funding trade and domain name for $2,500 to a Randal S. Hutchison or his assignee.
On Aug. 20, 2007, First Magnus officials announced that they and shareholders were funding a $1 million pool to help former employees who had not received their final paychecks. But no further announcements concerning the funds were made, and calls from MortgageDaily.com to officials and company attorneys seeking an update were not returned. And former employees interviewed by MortgageDaily.com said they were not aware of any such fund.
First Magnus was founded in 1996 by Chairman of the Board Tom Sullivan Sr., Vice Chairman Tom Sullivan Jr. and President and Chief Executive Officer G. S. Jaggi, at which time it had 12 employees.
