Heller Creditors Sue B of A for $58 Million (Legal Pad)

Saying Bank of America’s “clerical error” would have misled other “hypothetical” creditors, Heller Ehrman’s creditors committee filed suit (.pdf) against the bank on Thursday, seeking the return of $58 million paid to it since the firm dissolved.

The suit comes two days after Judge Dennis Montali issued a final order giving the committee standing to sue the bank and Citibank, for which Bank of America was an agent.

Bank of America was Heller’s only secured creditor, or so everyone thought.

The oops factor, after the jump.

It’s not clear when or how the bank discovered that its last UCC filing in August 2007 actually terminated its security interest in Heller.

About a week after Heller dissolved in late September, the bank attempted to correct the statement, calling the 2007 filing a “clerical error.” Now, the creditors are asserting these actions fall within a 90-day “preference” period during which any actions that affect a debtor’s financial status can be thrown out by the bankruptcy court.

“The resolution of this preference claim will have a large impact on the return to unsecured creditors in this case,” wrote Thomas Willoughby, partner at Felderstein Fitzgerald Willoughby & Pascuzzi, who represents creditors committee, in an e-mail.

If the creditors win, the $58 million goes into the pot for everyone else, but the banks stand a good chance of getting a lot of it back, because they will line up as unsecured creditors, with equal dibs on the money.

One point stands out in particular from the complaint: The creditors committee asserts it was insolvent (Page 6) at the time the money was paid to Bank of America. Solvency will be a key issue in the bankruptcy in determining whether any payments to partners, banks or other entities were fraudulent because they led to the demise of the firm.

While the firm’s assets far exceeded its liabilities at the time of its dissolution, leading many to hope it would be considered solvent, Heller has not been successful in collecting accounts receivable.

It only collected $8 million of $77 million in ARs after it filed for bankruptcy on Dec. 28.

The complaint tries to get across that the financing statements, no matter how routine, really should be an accurate description to other creditors about who is secured and who isn’t, as California law requires.

“ … [T]here was no notice of the Defendants’ security interest to a hypothetical lien creditor whose lien was perfected at the time of the bankruptcy petition. … Accordingly, the security interest of the Defendants is unenforceable pursuant to California law as against a hypothetical lien creditor whose lien was perfected at the time of the bankruptcy petition,” the complaint says.

— Amanda Royal