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Lynn Tilton Loses Another Round in Bondholder Bankruptcy Brawl

Lynn Tilton Loses Another Round in Bondholder Bankruptcy Brawl

(Bloomberg) -- Bondholders crossed another hurdle in their years-long battle with distressed-debt investor Lynn Tilton, after a federal judge ruled that the financier can be forced to sell her portfolio companies to repay about $1.8 billion in bonds.

U.S. Bankruptcy Court Judge Karen B. Owens rejected Tilton’s claim that a 2018 deal with bondholders only required Tilton to “monetize” the portfolio companies, not actually complete a sale. Tilton also claimed that under the deal, Owens did not have the power to force a sale without her consent.

Lynn Tilton Loses Another Round in Bondholder Bankruptcy Brawl

That interpretation “would lead to an absurd result,” Owens said in Wilmington, Delaware federal court on Thursday. “We have now crossed another speed bump on the road to monetize the portfolio,” Owens added. “I anticipate there will be more.”

Starting in 2003 Tilton put together three collateralized loan funds called Zohar I, II & III that borrowed $2.5 billion in order to buy distressed companies and distressed loans. About $1.8 billion of that debt matured without being repaid, according to court documents. The bondholders, including Bardin Hill Investment Partners and bond insurer MBIA Inc., have been fighting Tilton in bankruptcy court, arguing that she is dragging her feet on the sale of the portfolio companies, which she controls.

Tilton says she has hired investment bankers to start the sale process, and won’t be rushed into a bad deal.

MBIA and bondholders fought Tilton for control of the portfolio companies in state court in Delaware. Before the state’s highest court could take up the dispute, Tilton put the Zohar III CLO into bankruptcy in 2018. Within months, a bankruptcy judge stripped her of control of Zohar and appointed a retired federal judge to oversee the CLO. Tilton subsequently signed a deal with bondholders in which she agreed to work with the judge to sell the portfolio or find some other means of “monetizing” the companies.

Owens ruled that “monetizing” the companies meant more than just marketing them. Under the 2018 bondholder deal, if Tilton and the independent director of Zohar can’t agree on whether to close a sale or other transaction, Owens has the power to decide the dispute, the judge ruled.

The case is Zohar III Corp., 18-10512, U.S. Bankruptcy Court, District of Delaware (Delaware.)

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Boris Korby, Christopher DeReza

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