On May 14, a San Francisco court authorized Warren Capital receiver Michael Kasolas to employ McNutt Law Group of San Francisco to pursue claims against “former officers and directors of the companies, specifically including dealing with insurance providers,” Kasolas said in an ex parte application to the court.
The court appointed Kasolas in December 2014 to sort out alleged fraud by the late Warren Clayton Stephens, founder of Novato-based Warren Capital and Warren Equipment Finance, in an apparent scheme that left nearly 70 investors with losses of about $11.2 million on bogus corporate promissory notes sold by Stephens for the past 14 years. Stephens died in November 2014. About a third of the note holders are from Sonoma County.
A preliminary distribution of $1 million — less than 10 cents on the dollar — will be considered by the court on June 22. Kasolas proposed to the court that the distribution be pro-rated based on a formula for each investor’s share: cash invested minus any distributions made by Warren Capital or Warren Equipment Finance, whether characterized as returned principal or interest. Noteholders who dispute the calculation of their claims have 10 days from the date of service of the interim distribution motion to submit written evidence supporting a different amount. If no agreement is reached, disputes can be brought before the court.
Insiders and family members of insiders made claims based on note purchases and loans to Warren Capital. Kasolas will object to these claims. “The receiver hopes to reach settlement with some or all insiders and family members of insiders,” Kasolas said, “that would obviate adjudication of these claims.”
Insurance policies that McNutt Law Group will pursue were discussed in a report Kasolas filed on June 2. “The receiver is evaluating means to preserve and protect any value in the directors and officers liability and professional liability insurance policies,” Kasolas said. He wrote to Great American Insurance Companies to provide notice of circumstances that may give rise to claims. No policy amounts were specified.
“The receiver obtained copies of any homeowners’ and ‘umbrella policies’ from the estate of W. Clayton Stephens Sr. for other possible sources of recovery,” Kasolas said.
Four life insurance policies with the two companies as beneficiaries already paid the receivership $1.75 million. Other main assets included about $850,000 in cash and about $300,000 from equipment leases on which payments are still due. At the end of April, total cash on hand was less than $1.5 million.
Scott McNutt, partner in the McNutt Law Group that specializes in bankruptcy and other insolvency cases, said his firm will receive a retainer of $30,000, to be credited against any contingency fees earned on recoveries. McNutt will receive a contingency fee of 25 percent of net proceeds in any settlement or other resolution by mediation, and 35 percent of net proceeds where the claim is resolved after McNutt files a motion in court.
McNutt, retained as special counsel, is the second law firm Kasolas hired to represent the receivership. This is the only professional firm hired on a contingency basis such that its compensation is based on results.
Attorney and accounting fees in the Warren Capital case ascended to more than $1.3 million for the period from December 2014 through April 2015, according to documents filed June 2.
The receiver is represented by law firm Arent Fox, which billed nearly $590,000 through April. Kasolas billed about $302,000 for his own fees through April. Hemming Morse, a San Francisco-based firm hired to do forensic accounting in the case, billed more than $191,000 through April. Kokjer, Pierotti, Maiocco & Duck, another accounting firm, billed about $36,000.