James Gregg / arizona daily star

A bankruptcy court judge will decide when thousands of employees terminated suddenly by First Magnus Financial Corp. last week will receive their final paychecks.

After filing for Chapter 11 bankruptcy protection in Tucson Tuesday, the company asked the court for immediate permission to pay its remaining 159 employees, including payments of $8,333 to its five corporate officers.

First Magnus also requested that the more than 5,000 employees laid off by the company nationwide be paid when "adequate funds become available" through financing or the sale of assets. That process could take months, one expert said.

The company owes about $13 million in payroll and related expenses, according to court filings.

But in the meantime, the approximately 650 employees laid off in Southern Arizona will be getting some help in the form of $2,000 gift checks from First Magnus shareholders and executives, including CEO G.S. Jaggi, said First Magnus spokesman Gary Baraff. The checks are expected to be cut and mailed today, he said.

After losing their jobs with little notice, a number of former employees expressed outrage at being left without final checks to pay upcoming expenses, such as mortgage payments or rent.

"The writing's on the wall. There are no paychecks coming," said Bryant Keefe, a former manager at First Magnus' Williams Centre branch. Although Keefe has found another job as a loan officer for another lender, he said he may have to turn to family and friends for financial help.

Former employees outside of Southern Arizona will not receive assistance, Baraff said. Former employees in Tucson are expected to have a more difficult time finding new jobs than those elsewhere in the country because their jobs were often more specific to headquarters operations.

"This is a personal gift from our CEO (and shareholders). He can't do that for 6,000 people," Baraff said. "But I really don't want to minimize the importance of the people out there."

Former employees in other parts of the country said they feel the company is being unfair.

"They have offered nothing for their employees outside of Tucson," said Amy Schumann, 32, a former regional operations manager for Texas and Southeastern states. "I would say it's going to be hard to find a job at this point."

A former underwriter at a Houston branch, Sid Yelle, 34, said he was bitter about the layoffs because First Magnus representatives had reassured employees of the company's stability days before it stopped funding loans.

"They told us, 'We're fine. We're privately held, and we don't have any problems. We have deep pockets,' " Yelle recalled. "A week later, they decided to lay everyone off."

The company, which was the second-largest private mortgage lender in the country in 2006, effectively halted business last week when it encountered problems selling mortgages on the secondary market — a key component in its business model.

First Magnus typically made loans using funds from large banks and other outside investors, and then sold the loans at a higher price to repay investors and make a profit, according to documents provided to the bankruptcy court.

In a statement filed with the bankruptcy court, Jaggi said he and other First Magnus officers had been meeting with outside investors and loan-buyers around the clock in the weeks leading up to the company's collapse.

The shareholders of First Magnus' parent organization, First Magnus Capital Inc. — which include Jaggi, First Magnus Chairman Tom Sullivan Sr. and Vice Chairman Tom Sullivan Jr.— injected $13 million into First Magnus's operations to help keep the company afloat, but it wasn't enough to hold off problems in the market.

"On Aug. 16, unable to secure financing for continued operations, First Magnus Financial laid off most of its employees and ceased operations," Jaggi said in the statement.

Unlike many Chapter 11 cases, in which companies are hoping to reorganize and continue operating, First Magnus is seeking to liquidate, according to court documents.

By filing for Chapter 11 rather than a more typical Chapter 7 liquidation filing, the company will be able to maintain control of its business while assets are sold off and creditors are repaid, said certified bankruptcy attorney Randy Nussbaum, of Scottsdale.

In Chapter 7, the company is placed in the control of a trustee, who is responsible for selling assets as quickly as possible to repay creditors, he said. That means creditors often get paid less under Chapter 7 filings than Chapter 11 filings, he said.

"A company that's winding down in Chapter 11 can benefit creditors by not having all of its assets dumped on the market at the same time in a depressed situation," he said.

Employee wages are a high priority among creditor claims in Chapter 11 filings, he said, but it might take months before those details are sorted out.

"If there is money to pay general creditors, there is money to pay employees," he said. "It's inherently unfair for people to work and toil for a company and not get paid if general creditors get paid."

Find all the published stories about First Magnus since the story broke by clicking on "First Magnus: the story so far" at www.AzStarBiz.com.

more online

• Read the stories on First Magnus since the story broke at AzStarBiz.com.

• Christopher Lamoureux, head of the UA's finance department, answered questions Monday about First Magnus in an online chat. Read the transcript at go.azstarnet.com/ bizchat online.

● Contact reporter Christie Smythe at 434-4083 or csmythe@azstarnet.com Star reporter Becky Pallack contributed to this report.