The attorney for the majority owner of four Magnolia companies last week questioned whether a minority owner had the authority to file for bankruptcy protection.
The questioning of Magnolia investor Mark Combs who made the Chapter 11 bankruptcy filing on Sept. 8 came during a meeting of Magnolia creditors in U.S. Bankruptcy Court in Reno.
"Who gave you the authority to speak on behalf of the four companies?" asked Cecilia Rosenauer, a lawyer representing Lizanne Stoever, the majority owner.
Along with Stoever and Combs, 12 other investors are members of MPB Equity Partners LLC, the group that developed office and retail properties carrying the "Magnolia" brand in the Reno area.
MBP Equity Partners owns Magnolia Village LLC, Magnolia Double R I LLC, Magnolia South Meadows III LLC and South Meadows IV LLC.
Combs testified that he took over as managing member of MPB about six months ago. He said he filed for Chapter 11 protection for the four entities on Sept. 8 when he ran out of money to fund them.
During more than an hour of questioning, Stoever's lawyer hammered away at how, where and when Combs received authority to file the bankruptcy action. Her questions included whether there was a meeting of investors where the decision was made, if Stoever had been invited to that meeting, what documentation was available to support his actions, on what date he took over the management of each of the companies and who gave him authority to spend money on behalf of the companies.
To most of those inquiries, Combs testified he either couldn't recall or didn't know. However, Combs said the members who own 45 percent of MBP approved his takeover. He defended his decision to file for bankruptcy protection, saying the properties were unprofitable and he could no longer keep them afloat.
He told a bankruptcy trustee that he's been feeding the Magnolia companies with his own money.
Combs also testified that even with the additional loans the court authorized him to make to the Magnolia properties last month, the companies would not break even until sometime next year.
By that time, Combs suggested the properties would be sold.
"We have an offer on one," Combs said.
The assets of the Magnolia companies, which collectively are valued in excess of $45 million, more than exceed its liabilities.
Rosenauer also questioned why the bankruptcy filing characterized loans made by Combs as valid and undisputed, while larger loans made by Stoever were labeled as inconsistent and in dispute.
"What we have figured out ... is the records don't show the money is owed," Combs said.
The attorney also questioned the relationship, if any, between Combs' company, Investors Financial LLC, and the Magnolia companies, why he wasn't paying rent to Magnolia Double R I LLC for the offices he was occupying as manager and what investigative steps he had taken to find bank accounts he claims are under Stoever's control.
Janet Chubb of the Jones Vargas law firm, who represents four of the secured creditors, also was curious about how the change in management was made. Her clients had done business exclusively with Stoever.
"Are there any documents saying you are the manager? I can't make that leap based on the information provided,'' Chubb said.
"There is a resignation letter (from Stoever)," offered Combs, who also promised to provide a copy of the investment group's operating and subscription agreements to Chubb.
A nationally known expert in bankruptcy law, Nancy B. Rapoport, a professor of law at the University of Houston, said last week that when a person is found not to have standing to file a bankruptcy petition, the party questioning the action can file a motion to dismiss the petition.
After last week's hearing, Combs' attorney, Stephen R. Harris of Belding, Harris & Petroni Ltd. in Reno, said that next steps in the bankruptcy action would include sale of the Magnolia properties.
