First Magnus Financial Corp. President and CEO G.S. Jaggi faced questions in court on Thursday for the company's failure to pay its employees before filing for bankruptcy in August.
Referencing more than $100 million in payments made to shareholders in the year before the bankruptcy filing, Judge James Marlar asked Jaggi why the company owners couldn't have set aside enough to cover the payroll.
Jaggi answered that the payouts to shareholders were substantially lower than documents filed with the court showed. A portion of payouts went to taxes, and the company's chairman, Thomas Sullivan Sr., reinvested $30 million of his share in the company, he said.
In the midst of a national credit crunch, First Magnus simply found itself unable to pay, Jaggi said.
"It was a very heart-wrenching experience," he said about the mortgage lender's sudden layoff of nearly all of its roughly 5,500 employees on Aug. 16. He added that his first objective in filing for bankruptcy on Aug. 21 was "to get them paid."
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Jaggi testified during a hearing on the confirmation of a plan to liquidate the company and distribute assets to creditors, including former employees. No decision on the plan was reached on Thursday. The hearing is scheduled to continue Monday.
Morris Aaron, a financial adviser and proposed liquidation trustee for the company's estate, testified that the company would have enough under its plan to cover all of its unpaid wages up to a $10,000-per-person limit specified in U.S. bankruptcy law. Other creditors could get 10 cents on the dollar, or possibly even less, for their claims, Jaggi and Aaron said.
John Clemency, a bankruptcy attorney for First Magnus, said that the company has resolved most objections to its liquidation plan.
One exception is outsourcing firm WNS North America, which says it is owed tens of millions of dollars for a contract that was not fulfilled by First Magnus. Another is a group of former employees who filed suit against the lender for failing to provide advance notice of a mass layoff, which is required under the federal Worker Adjustment and Retraining Notification, or WARN, Act.
Marlar denied the suit class-action status and filed an order to dismiss it on Wednesday. The attorneys representing the employees have since filed claims for WARN Act damages from the bankruptcy estate.
Find an archive of stories since First Magnus' collapse at AzStarBiz.com