A unit of GMAC Financial Services has moved to silence the former chief executive of Mortgage Lenders Network USA Inc., Mitchell Heffernan, who blames the unit and bankruptcy advisers for making decisions that could land him behind bars.
The GMAC unit, Residential Funding Co., is the largest secured creditor in Mortgage Lenders’ Chapter 11 case.
In court documents in March, Residential Funding said it wants to erase “scandalous” statements Heffernan made while fighting criminal prosecution in Connecticut for failing to pay employees up to $2.5 million in wages owed when Mortgage Lenders Network went bankrupt Feb. 5.
Heffernan says he didn’t make the decision not to pay employees. The call to withhold commission checks from at least 61 Connecticut employees was made by Residential Funding and restructuring advisers, Heffernan said in court documents filed in Delaware, where Mortgage Lenders is wrapping up its failed subprime mortgage lending business under the protection of a bankruptcy court.
Residential Funding wants Heffernan’s claims about who stiffed employees and which name names, stricken from the court record.
Mortgage lenders, based in Middletown, is one of a parade of once-booming home lenders that collapsed as consumer defaults rose and backers like Residential Funding retreated.
No Involvement
All but 100 of Mortgage Lenders’ 1,800 employees lost their jobs as a result of the bankruptcy. Many of the remaining 100, including top-tier executives, are sharing up to $500,000 in court-approved secret bankruptcy bonuses in addition to their pay for their final weeks on the job. Mortgage Lenders wants its loans sold and its doors shut by the end of April.
Residential Funding denies it was holding the purse strings during the 45 days before Mortgage Lenders filed for Chapter 11 bankruptcy.
One of the country’s largest lenders to the distressed subprime sector, Residential Funding is part of the GMAC-ResCap group that in 2006 produced $161.6 billion in home loans, $30.6 billion of which went to consumers with bad credit.
Brett Weinberg, spokesman for GMAC-ResCap, declined to comment on the company’s bid to strike Heffernan’s comments from court records.
One of those Heffernan named, Daniel Scouler of Mortgage Lenders’ financial adviser, also declined comment on the matter, except to say he isn’t worried about the possibility of being targeted in a criminal investigation.
The move to hush Heffernan comes as Connecticut readies for a bankruptcy-court showdown in Wilmington, Del., Tuesday over its right to enforce criminal laws against those in charge of companies that don’t pay wages.
Heffernan says Chapter 11 should shield him from arrest. Connecticut says it doesn’t.
“There is a very powerful message that employers must be held accountable to pay for work,” said Connecticut Attorney General Richard Blumenthal, explaining why the state may prosecute Heffernan “or others who may have allegedly broken our criminal laws.”
Connecticut can’t force Mortgage Lenders to pay the employees now that it’s in Chapter 11, the attorney general admitted. Unless companies provide otherwise-and many do-unpaid employees fall in with the rest of those waiting for a fractional recovery that may never arrive.
Connecticut has no intention of asking the bankruptcy court to order the wages paid, Blumenthal said. All the state wants to do is arrest violators of its criminal laws. However, it’s not unheard of for restitution to be part of a plea deal in such cases, he admitted.
“People are often persuaded by criminal prosecutions to do the right thing,” Blumenthal said. “It’s a matter of simple justice.”
Heffernan says Residential Funding and bankruptcy advisers decided who got paid and who didn’t get paid in the six weeks before the bankruptcy filing.
Heffernan’s attorneys did not return calls for comment.
Connecticut officials say the law at issue is meant to safeguard against “intentional and willful” harm to employees, and that its drafters were aware of the limits of bankruptcy-court authority.
The criminal investigation grew out of complaints filed with Connecticut’s Department of Labor. Investigators found that the troubled company refused to pay commissions, and sought a warrant for Heffernan’s arrest.
No warrant has yet been issued and a decision by prosecutors in the ongoing Mortgage Lenders’ wage investigation is not expected for weeks, senior State’s Attorney Maureen Platt, of Middletown, Conn., said Wednesday.
The warrant request says Mortgage Lenders stiffed Connecticut employees to the tune of $1.7 million. However, the real amount is probably closer to $2.5 million, said Gary Pechie, director of the Connecticut Department of Labor’s Wage and Workplace Standards Division.
