Tilton steps down from CLO funds amid legal battle

In the midst of a legal battle with bond insurer MBIA, debt firm Patriarch Partners and its founder and chief executive Lynn Tilton are stepping down as collateral managers of the Zohar credit funds, which total more than $2 billion.

Patriarch, its affiliates and staff will now operate as a family office for its portfolio of more than 70 companies, according to a press release from the firm. Patriarch’s resignation will “have no effect” on Tilton’s role as Patriarch CEO or her roles at the portfolio companies. A replacement collateral manager has yet to be announced.

The funds – Zohar CDO 2003-1 Ltd, Zohar II 2005-1 Ltd and Zohar III – contain loans in distressed companies.

Since 2009, Patriarch and MBIA have been locked in a legal battle over Tilton’s attempt to force one of the funds, Zohar I, into an involuntary bankruptcy proceeding. The “constant litigation” has created an “unproductive and untenable relationship between parties who by definition should be aligned,” according to the Patriarch statement. Concurrent with the resignation, Patriarch Partners XV, the largest creditor of Zohar I, will be withdrawing its opposition to the motion to dismiss the involuntary Chapter 11 cases that it filed for Zohar I.

“The battles have led me to make the decision that I could no longer leave this choice open, but instead my firm and I must step down so we can focus fully on driving the value of the portfolio companies,” Tilton said.

The same Zohar CLOs are the subject of a US Securities and Exchange Commission (SEC) case against Patriarch, in which the regulator claims Tilton misstated the fair value of the underlying loans and gave investors improper financial statements. Tilton denies the allegations and has been fighting the constitutionality of the SEC’s case against her since last year.