Text size:

What's next for American Home Mortgage

BY ELLEN YAN | ellen.yan@newsday.com

6:08 PM EDT, August 14, 2007

Melville-based American Home Mortgage filed for bankruptcy a week ago. Its demise caused a domino chain of events, from shareholders' lawsuits to layoffs and the pending sale of assets to pay debts.

What happens next in the case?
Bankruptcy court Judge Christopher Sontchi in Delaware will hear challenges from banks and other creditors who object to American Home Mortgage's use of available cash, revenues generated by the servicing of current loans and other matters. Temporary orders handed down last week on the first day of the bankruptcy hearing will have to be made permanent or revised, including those that authorized but not necessarily directed the company to pay former employees, critical vendors and taxes. The company hopes to auction off one of its primary assets -- a loan servicing company -- in mid-September. That, along with sales of assets such as equipment, leases and loan portfolios, will pay back creditors.

Was it insider trading when American Home chief executive Michael Strauss sold almost 3 million shares of company stock the day before employees were told the company was shutting down?

Unlikely. His SEC filing describes it as a "forced margin call." Strauss got a loan in October 2005 to buy company shares, a sign of faith in the business and one that gave him a bigger margin of control on stocks. But the investor lender called in his loan as the share price declined. At $1.17 each on Aug. 1, the shares brought in about $3 million when Strauss was forced to sell. But because the shares' value had gone down, the $3 million is probably less than what the investor shelled out to Strauss, which probably means Strauss had to find money elsewhere to make up the difference.

There are at least seven class action suits against American Home, Strauss and Chief Financial Officer Stephen Hozie. What are they about?
Some shareholders have accused the company and officials of violating federal securities laws by issuing quarterly and other reports that made company finances and projections look rosier than reality. Plaintiffs say they bought stock at "inflated prices." Several of the main plaintiffs bought right before or while the company began revising its projections a few months ago. They lost upwards of tens of thousands of dollars and are asking for damages.

Will shareholders get anything from bankruptcy proceedings and the sale of company assets?
Shareholders get whatever's left, if anything, after the company pays financier Wilbur Ross (who's willing to lend $50 million with interest charges for the shutdown); creditors with collateral, including loan portfolios that can be sold; administrative fees from the shutdown; employees' wages; taxes; utilities and others.

What could really delay the quick liquidation of American Home's assets?
Lack of money. Closing down can be expensive -- consultant fees, retention wages for critical employees, vacation reimbursements for laid-off workers, notices to publicize auctions and more. Plus, the company has to keep on paying monthly debt servicing fees. All that could exceed the $50 million from Ross, said bankruptcy attorney Brian Shaw, who's on the board of directors at the American Bankruptcy Institute. "Without the money to operate . . . they can't do anything."