A bankruptcy judge in Pittsburgh has refused to convert the LeNature’s Inc. bankruptcy case to Chapter 7 liquidation, thereby paving the way for lawsuits against Wachovia Bank and the former bottling company’s accountants.
U.S. Chief Bankruptcy Judge M. Bruce McCullough on Thursday allowed the case to proceed under Chapter 11 reorganization.
In reaching his decision, McCullough said he “read and re-read most of the pleadings” and noted he had held “at least two and perhaps three hearings” on the issue.
Wachovia Bank and BDO Seidman had sought to have the status of the case changed. That would have lessened their chances of being sued over allegations by creditors that they failed to detect widespread fraud, which led to the company’s financial downfall in November 2006.
On Thursday, McCullough will decide whether to approve a reorganization plan submitted by creditors that would enable the hiring of a liquidating trustee who will have a $15 million war chest to sue Wachovia and the accounting firm.
The trustee would replace R. Todd Neilson, who has been conducting an extensive investigation into allegations of fraud by former CEO Gregory Podlucky of Ligonier and other former company executives.
In addition to Neilson’s probe, federal investigators are investigating allegations of money laundering, and bank, wire and mail fraud involving Podlucky and other former company officers.
Wachovia Bank has been waging a relentless legal battle in Pittsburgh, North Carolina and New York to stave off potential lawsuits that a group of hedge funds are expected to file. The funds purchased the bulk of Wachovia’s $275 million in loans to LeNature’s six weeks before the company was forced into bankruptcy.
Harbinger Capital, which owns $86 million in loans, is the lead plaintiff of the group, which filed a civil racketeering lawsuit in federal court in New York against Wachovia seeking to recover its losses. Wachovia has been trying to keep the case in North Carolina where its headquarters are located.
In order to fund the litigation against Wachovia and the accounting firms, the hedge funds have ponied up the money. If they are successful, they could recover hundreds of millions of dollars in damages for the secured and unsecured creditors who are owed up to $1 billion.
The sale of LeNature’s assets so far has generated only about $22 million — of which $8 million was paid to the broker who engineered the sale of the Latrobe plant to Giant Eagle Inc. Also at issue is an estimated $30 million worth of jewelry found inside LeNature’s Latrobe plant could be sold to benefit creditors. The gems were seized by federal agents.