As First Magnus Financial Corp. makes its way through bankruptcy court, little light is being shed on what caused the mortgage lender’s sudden collapse Aug. 15. But what was clear at a courtroom hearing Aug. 29 is that U.S. District Court Judge James Marlar, who conducted the hearing by videoconference from San Diego, wants no time wasted in closing out the case.

Although First Magnus made a Chapter 11 bankruptcy filing, allowing for reorganization, Marlar said, "Your plan is to liquidate the company’s assets and pay the creditors. There’s no reason to prolong this, eating up assets through administration expenses."

The judge called on John Clemency, lead attorney for Greenberg Traurig, to justify the 159 employees still on First Magnus’ payroll. Clemency said that’s what the management at First Magnus said they needed for orderly wrap-up of the company’s business, "and I don’t want to second guess them." However, Marlar said that wasn’t a good enough reason. "They put the company into bankruptcy. You’re supposed to second-guess them."

He said it was too many, specifically citing employees who were kept to handle stockholder inquiries, eight in-house attorneys and another six legal staff members, 21 people in risk management and people in the human resources department.

"What it looks like to me is that you have a whole lot of people in the proposed budget that don’t need to be there anymore," Marlar said. "You need to sharpen your pencil and see if you can refine the necessary employees on a going forward basis."

The judge ordered the attorney to immediately cancel leases on two company jets. "I don’t want to see another dime spent on these planes," the judge said.

He also rejected a request to have the approximately 5,000 employees who lost their jobs be paid their back wages first, before other unsecured creditors. "They’ll need to file a claim for their wages, like everyone else," Marlar said.

As for the continuing employees, they will get their back pay, thanks to Washington Mutual Savings Bank, First Magnus’ largest secured creditor.

Marlar initially balked at agreeing to what will be a $500,000 payment without proof it could be done from unsecured funds, but Michael McGrath, an attorney with Mesch Clark & Rothschild representing Washington Mutual, said his bank, with $1.2 billion in loans "in the pipeline," was more concerned about the mortgages being properly completed and sold.

Mistakes could slash their value, McGrath said. Since these mortgages are the principal asset of the company, he said Washington Mutual wanted the remaining First Magnus staff to complete them, and do it right. "We believe there’s enough unencumbered funds to pay them," McGrath said, but if the judge needs secured funds to pay the salaries, "we consent."

For their work Clemency and First Magnus’ other bankruptcy lawyers with Greenberg Traurig will have to make do with their $400,000 retainer fee for the next two months after Marlar rejected their request for interim fees. The judge also limited accounting fees and said he would consider later if they should be allowed to continue beyond September.

Marlar gave attorneys until Sept. 14 to submit a statement of affairs, listing the company’s assets and liabilities. Then, by Oct. 15, he said he wants a complete bankruptcy plan.

In the meantime, he has scheduled a series of weekly update meetings with the attorneys. A meeting is planned for Tuesday (Sept. 4) on what to do with the more than 300 offices the company vacated. Then, on Thursday (Sept. 6), he will consider whether to release $4 million to Summit Finance and Wells Fargo.

Marlar told Clemency to form a committee of unsecured creditors as soon as possible.

"The sooner you get a plan before them, the sooner you can begin soliciting votes, and the sooner we can end this case without dragging it out," the judge said.

One Tucson bankruptcy lawyer, Eric Slocum Sparks, has publicly begun to question just how long First Magnus might have been preparing for its collapse, judging by a $150,000 pre-filing fee from Greenburg Traurig.

"I don’t know how long that would be but at least few months in my mind," Sparks said. "I think this was planned longer than one might have imagined."

Many of the local bankruptcy lawyers contacted said they couldn’t comment because they are involved in the case handling cases for creditors.

But University of Illinois bankruptcy professor Robert Lawless said he doesn’t think the fees raise any red flags. "That’s not a huge amount for a company that size," Lawless said.

Even if the firm was working with First Magnus for several weeks, it does not indicate they intended to file Chapter 11, he said.

"Even if they had retained council 60 days ago, I would not take that as a smoking gun that they planned to file for bankruptcy," Lawless said. "If you’re having financial troubles, retaining an expert lawyer who works in that area is just a prudent thing to do."