Judge orders Lynn Tilton to turn over Zohar loan fund documents

By By Tom HalsMarketsReuters

WILMINGTON, Del. (Reuters) - A Delaware judge on Wednesday ordered Lynn Tilton's Patriarch Partners to turn over documents detailing the complex holdings of $2.5 billion distressed debt funds that the embattled investor lost control of this year.

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Tilton created the loan vehicles known as the Zohar funds more than a decade ago. The three funds have financed her investments in ailing companies such as Dura Automotive Systems, earning her the title of "Diva of Distressed."

However, one of the Zohar funds defaulted last year and Tilton's Patriarch Partners investment firm stepped down as the collateral manager and was replaced by restructuring firm Alvarez & Marsal in March.

Alvarez sued Patriarch earlier this year and alleged it had not turned over documents required to assess the Zohar collateral.

Alvarez's lawyer said during an August trial that Tilton was playing a "shell game" with valuable assets, while Tilton insisted that Alvarez had every document needed to manage the Zohar collateral.

Vice Chancellor Joseph Slights determined that Patriarch was obligated to produce the documents sought by Alvarez.

"The collection and production of these documents will no doubt place a burden, perhaps even a significant one, on Patriarch," wrote Slights in a 51-page opinion.

However, Slights added that Patriarch enjoyed the benefits of being the Zohar collateral manager for years and always knew it faced substantial obligations if its services came to an end.

"Patriarch respectfully disagrees with the decision," said Reed Brodsky of Gibson Dunn, the law firm representing Patriarch Partners.

"We are reviewing our legal options and note that this document production issue has no bearing whatsoever on the current SEC administrative trial and the baseless charges made there."

The judge also said he was fully aware the litigation was driven by wider aims of the parties. He said Patriarch believed the Zohar funds were acting on behalf of the MBIA Insurance Corp, which is seeking to push responsibility for an impending Zohar default onto Patriarch.

The judge said the Zohar funds believed Patriarch was trying to conceal Tilton's conflicting roles during her management of the Zohar funds. The judge said he was not expressing a view on those allegations.

Tilton began defending herself at trial this week against a fraud lawsuit brought by the Securities and Exchange Commission. The regulator has accused Patriarch of hiding the poor performance of assets underlying the Zohar funds and allegedly collected nearly $200 million in improper fees.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Lisa Shumaker, Bernard Orr)