Distressed-company investor Lynn Tilton lashed out at the Cayman Islands corporate directors who moved to block her attempt to force one of her debt-investing vehicles into bankruptcy.

She says the directors have ignored their duties to Zohar—a collateralized loan obligation, or CLO, fund—in favor of protecting the interests of the Cayman Islands, which is receptive to creators of sophisticated financial vehicles like Zohar-I.

It is a conduit stuffed with loans to troubled companies, and the conduit itself is in trouble. It missed a payoff date in November and was bailed out by bond insurer MBIA Inc.

Zohar-I’s directors have asked a judge to throw out the bankruptcy petition Ms. Tilton filed against it on the basis that the fund is designed to be bankruptcy-proof, and investors are counting on that. Ms. Tilton says Zohar-I’s best chance is in bankruptcy, where she can force MBIA to come to a restructuring deal.

Ms. Tilton, who was accused of fraud by the Securities and Exchange Commission in connection with her CLO operation, has denied wrongdoing and vowed to fight the charges. Now she is battling directors in the Cayman Islands, who have said her attempt to invoke bankruptcy protection for Zohar-I runs afoul of the agreements that created the specialized investment vehicle.

Zohar-I is one of three CLO funds that form the financial foundation of Ms. Tilton’s collection of troubled companies. A self-style corporate rescuer, Ms. Tilton sells stakes in the loan collections to investors to raise money to turn around distressed businesses. The SEC has accused her of improperly hiding losses, which she has denied.

In court papers, the directors calling the shots for Zohar-I from the Cayman Islands said there is more than $2 trillion invested in funds like Zohar-I, and Ms. Tilton’s move puts the market for those funds under a cloud of doubt.

Bankruptcy isn't part of the deal investors are sold when they invest in CLO funds, and the added risk is unacceptable, lawyers for Zohar-I told the U.S. Bankruptcy Court in Manhattan. Lawyers for Ms. Tilton’s Patriarch Partners responded Tuesday, accusing Zohar-I’s directors of acting on the basis of a “motivation to protect the parochial interests of the Cayman Islands CLO cottage industry” instead of looking out for Zohar-I.

A lawyer for Zohar-I couldn't immediately be reached Wednesday to weigh in on the latest development in the attempted forced bankruptcy of the CLO fund. Zohar-I countered the involuntary bankruptcy petition by asking that the case be dismissed. Existing litigation between Patriarch and MBIA should be sufficient to resolve the differences between the two, Zohar-I said.

When MBIA stepped in to cover Zohar-I’s default, it gained some control over the fund’s fate. In court papers, Ms. Tilton said she feared a precipitous foreclosure on the loans in the CLO would tip her $2.5 billion distressed investing empire into deep trouble.

MBIA has said it has no interest in damaging the value of any of the Zohar CLO funds or in the troubled companies whose loans are held by the funds. The bond insurer has already had to cover Zohar-I’s $149 million default and faces a greater exposure if Zohar II collapses—$800 million or more, according to court papers.

Ms. Tilton’s Patriarch owns equity in the distressed companies whose loans are tied up in the Zohar funds. The Zohar funds also own equity, although the amount isn’t clear. The three funds are linked through the companies, and trouble at Zohar-I threatens to spread throughout Ms. Tilton’s operation.

Ms. Tilton says chapter 11 bankruptcy offers an opportunity to restructure Zohar-I, preserving the rest of her business. However, the default put MBIA in charge of many decisions involving Zohar-I, and the directors in the Cayman Islands have let it be known they won’t sit by quietly.

IMAGE: New York financier Lynn Tilton arrives for an appeal hearing at the U.S. District courthouse in New York, in September. Ms. Tilton has lashed out at the Cayman Islands corporate directors who moved to block her attempt to force one of her debt-investing vehicles into bankruptcy. PHOTO: REUTERS

For more on this story go to: http://www.wsj.com/articles/lynn-tilton-battles-cayman-islands-directors-on-zohar-i-bankruptcy-1451495168

Relayed story:

A fund led by 'Diva of Distressed' Lynn Tilton has filed for bankruptcy

By Jonathan Marino From Business Insider Nov. 23, 2015