CHICAGO - Minneapolis-based underwriter Miller & Schroeder Financial Inc. filed for liquidation under Chapter 7 of the federal bankruptcy code court this week, a move that formally ends the company's 35-year history and leaves investors in $130 million of Heritage Healthcare's defaulted bonds with a tougher road to recoup their losses.
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Dave Reinhart, an attorney and the president of Miller & Schroeder, could not be reached to comment on the firm's filing, which occurred in the U.S. Bankruptcy Court for the District of Minnesota in Minneapolis. He said in a recent interview that the firm's closure was imminent because it had exhausted the limited funds it had on hand to address 25 pending arbitration proceedings related to defaulted bond issues.
Miller & Schroeder was little more than a corporate shell of the brokerage firm it once was since the sale of its assets last year. The firm's institutional broker-dealer business and its loan origination and syndication group was sold last fall in a reported $15 million non-cash sale to the Marshall Group Inc. The broker-dealer arm operates as MM&S Financial Inc.
Miller's former president Jerry Tabolich moved over to Marshall, where he now serves a president. About 10 public finance bankers from Miller also moved with Tabolich.
Miller officials said the board believed the sale was the best option at the time since an infusion of cash was needed and no partner or investor could be found given the pending claims against the firm. Reinhart, a lawyer who had worked on some arbitration proceedings for Miller, took over as president with the task of resolving claims against the firm largely stemming from the defaults of Heritage bonds it had underwritten.
The health care organization defaulted on 11 issues that were sold over the last decade to finance nursing home and assisted-living operations in California, Illinois, and Texas. Miller sold the bonds to its retail client base and to Heartland Fund.
Reinhart said recently that the firm had run out of money due to mounting legal bills related to the pending cases. Just before the sale of assets closed, Miller agreed to pay $350,000 to settle charges by San Bernardino County, Calif., for a breach of fiduciary duty. In October, the National Association of Securities Dealers ordered the firm to pay an arbitration award to two investors. When the firm failed to make the payment on time, the NASD suspended the firm in December. By then, Miller had already withdrawn its NASD registration.
It was unknown Thursday whether some investors will continue to pursue Miller by challenging the sale of assets to Marshall. Several bankruptcy lawyers said the bankruptcy code and state statutes have fraudulent conveyance provisions that could void the sale of assets if it can be proven that there was an intent to defraud creditors.
"Was there an intent to impede or hinder creditors? That's always the issue. It will depend on the facts," said one municipal bond attorney who specializes in bankruptcy law. Federal bankruptcy law allows a sale of assets to be challenged for up to a year, while state statutes vary. The deal closed last fall.
Lawyers said it is a tough claim to prove. The Marshall Group has prevailed on several legal fronts in California and Minnesota in investors' efforts to bring the firm into litigation or arbitration proceedings and hold it financially liable for Miller transactions.
