Judge dismisses Chapter 11 filing for mortgage brokers

A U.S. bankruptcy judge Tuesday dismissed the Chapter 11 bankruptcy reorganization petition by a husband and wife team that may owe up to $10 million to creditors mainly through their one-time prominent Maui mortgage brokerage firm.

Judge Robert J. Faris ruled Tuesday in Honolulu in the case involving Kathleen Patricia Morris, also known as Tricia Morris, and David Duffy Herman of the Kihei-based Hawaii’s Premiere Mortgage Co.

As a result of the ruling, creditors may soon be able to take legal action to obtain their money, said longtime Maui bankruptcy and immigration attorney Richard Berman, who was speaking generally on bankruptcy cases. When the case is in bankruptcy court, a stay is imposed on creditors filing actions to get what they are owed, he said.

There still is one more key matter to be addressed by the judge. There will be a March 11 hearing on whether to dismiss the case with prejudice, court records show. If the motion is granted, Morris and Herman cannot return and file for Chapter 11 bankruptcy protection.

Tricia Morris and Duffy Herman responded to the judge’s ruling in an email statement to The Maui News on Tuesday afternoon.

“We filed for reorganization under the Chapter 11 of the U.S. Bankruptcy Code one year ago to protect junior lien holders on our properties,” the email said. “We then filed a plan of reorganization to preserve the rights of all creditors, including the most vulnerable of them.

“We intend to follow through and repay as many people as we can although now we do not have the protection of the court. We will be using revenue from our various businesses to do this, including our mortgage business, which is fully licensed. We appreciate the overwhelming support from the community.”

Court records show that the couple had sought Chapter 11 bankruptcy protection and submitted a reorganization plan that proposed paying first the mortgagees or most senior secured creditors on 26 different properties – including 19 on Maui – monthly payments at 3.5 percent interest over 20 years.

Multiple creditors objected to the proposed plan, court documents show.

Tuesday’s actions were part of a continued court hearing on whether to confirm the couple’s disclosure statement, the first step in finalizing a reorganization plan. The couple disclosed that between 100 and 199 creditors are owed between $1 million and $10 million in estimated liabilities.

In the joint bankruptcy filing, the couple described their debts as “primarily business debts” tied to their Kihei company, which included unpaid mortgages and loans against more than two dozen properties in Hawaii and Idaho.

The couple’s voluntary petition requires only an estimated range of creditors, assets and liabilities.

The Office of the U.S. Trustee, a watchdog for the bankruptcy process, had asked the court to either convert the case to Chapter 7 bankruptcy, which would trigger a liquidation of assets to pay off creditors, or to dismiss the Chapter 11 filing.

A phone call and an email to an official at the Office of the U.S. Trustee in Honolulu was not immediately returned Tuesday.

Court and other legal documents show that Morris would broker short-term loans to borrowers using money from private individuals. The loans would be secured by real estate, often with multiple mortgages stacked against a single property.

A listing of Morris’ and Herman’s creditors holding the 20 largest unsecured claims show bank loans, credit card balances, deficiency judgments and money owed on multiple residences on Maui and the Big Island totaling more than $5.9 million, according to bankruptcy court documents.

Morris and Herman listed assets estimated at between $1 million and $10 million in their bankruptcy filing. However, they are both listed as the “fee owners” of at least 15 Maui properties with a combined assessed tax value of more than $14.5 million, according to Maui County property tax records.

An acting U.S. Trustee said in court documents that the debtors “have demonstrated gross mismanagement of their estates and have not provided information reasonably requested by the U.S. Trustee.”

It accused the couple of having concealed assets, failing to disclose bank accounts, diverted “substantial amounts” of rental income into a business account that they claimed was inactive, and improperly solicited votes on their reorganization plan prior to court approval.

The couple said in court statements that their “finances suffered” after Herman suffered a heart attack in Idaho in 2009. They initially filed for bankruptcy protection in Idaho, but the case has since been transferred to Hawaii.

The statements said Morris tried to reorganize their debt and obtain hardship loan modifications.

The couple also are named in more than a dozen state civil lawsuits and have pending nonjudicial foreclosure cases against four of their Maui properties, court records show.

“These legal and health issues along with the declining economy and home values caused a dramatic decline in the net worth and income,” the disclosure statement said.

“Debtors’ income declined approximately 80 percent during this period. Property values declined 50 percent, wiping out about $12 million of net worth.”

* Melissa Tanji can be reached at mtanji@mauinews.com.