Mortgage

Sources: Morris Schneider Wittstadt declaring bankruptcy, closing immediately

LandCastle Title’s operations will not be affected

[Update: Morris Schneider Wittstadt officially filed for bankruptcy on Monday, July 6. Click here for the full details.]

Employees at Morris Schneider Wittstadt were allegedly told Thursday that the firm is bankrupt and is closing immediately, multiple sources told HousingWire.

One source told HousingWire that MSW, a Georgia-based law firm that made national headlines last year when the firm sued its former managing partner for allegedly embezzling $30 million from the firm’s accounts and the accounts of the firm’s subsidiary, LandCastle Title, has not yet filed bankruptcy, perhaps due to the looming July 4th holiday, but the source expects the firm to file bankruptcy as early as Monday.

Multiple sources told HousingWire that MSW’s employees were told of the firm’s demise today in a conference call with all employees.

One source told HousingWire that MSW’s employees were told that the firm will not be able to make payroll and must speak to the firm’s bankruptcy attorney before determining whether the firm will be able pay the employees their last paychecks.

The firm’s website, which is still active as of 4:43 p.m. Eastern, says that the firm currently employs 80 attorneys and 400 staff members.

It is currently unknown what will happen to the firm’s employees, although multiple sources said that several of the firm’s senior partners are forming their own firm and will operate out of the MSW offices. One source added that the senior partners are currently “cherry picking” the employees that they want to keep for the new firm.

Another source said that some of the firm’s attorneys are already reaching out to other firms in the hopes of landing a job.

HousingWire also obtained a copy of an email sent Thursday from MSW’s director of human resources, Sue Crouse, to all MSW employees.

In the email, Crouse does not specifically say that the firm is closing, but her email doesn’t exactly paint the firm’s future in a positive light.

From Crouse’s email:

During the last week we have received formal written resignations (sent to multiple individuals), as well as, verbal notifications of pending resignation without a formal written resignation provided.  To ensure we have accounted for all employees please respond to me with one of the following:

1)    I have already submitted a formal resignation effective _____________.

2)    I have not previously submitted my written resignation; however, I have found employment and will be resigning from the firm effective ________________.

3)    I have not resigned and do not currently have a new position outside of the firm.

Crouse goes on to say that employees that have already resigned (or plan to resign) will be provided with separation materials on Monday or Tuesday. Crouse asks all employees to provide her office with their personal email, contact number and home address.

“For individuals who have not resigned and not secured employment outside the firm, you will either be assigned to the transition team or provided separation materials,” Crouse writes. “It is essential you communicate your status ASAP to me via email.”

However, LandCastle Title will not be affected, according to LandCastle President David Baum, who neither confirmed nor denied HousingWire’s report about MSW’s demise.

“LandCastle is not affected by any difficulties facing Morris Schneider Wittstadt,” Baum told HousingWire Thursday.

Baum was installed as president of LandCastle by Fidelity National Financial (FNF), when it acquired a 70% stake in LandCastle after “substantial escrow account misappropriations” were discovered within LandCastle’s parent company, the law firm of Morris Hardwick Schneider (now Morris Schneider Wittstadt).

Fidelity acquired the 70% stake in LandCastle in exchange for Fidelity agreeing to fund any escrow shortages in the LandCastle’s escrow accounts.

In November 2014, HousingWire reported that Fidelity had contributed approximately $19 million to fund shortages found in LandCastle’s accounts as part of that agreement.

In November, Fidelity disclosed in a filing with the Securities and Exchange Commission that based on its current understanding, the amount needed to fund the escrow shortages could increase by an additional $10 million.

Fidelity later disclosed in its 10-K annual report that it funneled an additional $3 million to LandCastle in the fourth quarter, increasing its total bailout to $22 million.

Additionally, Fidelity disclosed that on Jan. 31, it acquired an additional 5% ownership stake in LandCastle, meaning that Fidelity now owned 75% of LandCastle.

But Baum told HousingWire that Fidelity now owns 100% of LandCastle Title, as of April 1, but could not disclose whether Fidelity funneled any more money to LandCastle for the remaining 25% of the ownership interest.

“LandCastle is doing quite well,” Baum said, adding that the company did get business from MSW, charging the firm the market rate for its services. But Baum said that LandCastle doesn’t expect any interruption in business, despite any issues that MSW may or may not be having.

HousingWire reported extensively on the events surrounding LandCastle Title’s account shortages, including several blockbuster lawsuits.

One lawsuit accused former LandCastle CEO Nathan (Nat) Hardwick of embezzling $30 million from the company, while another was filed by PGA golfer Dustin Johnson, who accused Morris Hardwick Schneider, now known as Morris Schneider Wittstadt, Hardwick and the firm’s managing partners, Mark and Rod Wittstadt of using their positions as Johnson’s “trusted advisors” to steal $3 million from him to cover shortages in the firm’s accounts created by Hardwick himself.

In the wake of those allegations, legal grenades have been lobbed from all sides. The Wittstadts fired back at Johnson’s claims in an attempt to get Johnson’s lawsuit dismissed, saying that Johnson’s lawsuit was without merit, devoid of facts, “patently false” and a “travesty to legal pleading.”

Johnson answered back, leveling blockbuster claims against the Wittstadt brothers, specifically that the Wittstadts conspired to use Hardwick as a pawn and set him up to take the fall for the shortages.

And the Wittstadts answered those claims by calling Johnson’s lawsuit a work of fiction “worthy of John le Carre,” and a “laughable fairy tale.”

The original lawsuit filed against Hardwick alleges that he diverted $6.3 million from the firm’s trust accounts to Divot Holdings, which is referred to as a “holding company controlled solely by Hardwick and unrelated to the plaintiff’s businesses.” Divot Holdings is also named as a defendant in the lawsuit, and its’ “registered agent” is listed as Hardwick.

Additionally, the lawsuit alleges that Hardwick used $1 million of the ill-gotten gains to pay providers of private jet services, used approximately $645,000 to cover losses in failed property investments and sent approximately $4 million to various casinos via wire transfers.

The legal maneuvering didn’t end there though.

According to a report from the Las Vegas Review-Journal, MSW filed suit against the Cosmopolitan of Las Vegas recently, accusing the casino of knowing that Hardwick was using ill-gotten funds to gamble.

From the Las Vegas Review-Journal article:

In court papers, the Georgia firm said Hardwick caused at least 12 wire transfers to be made from the firm’s accounts to the Cosmopolitan, starting on June 29, 2012. The lawsuit claims Hardwick misappropriated money from the firm’s trust accounts and other bank accounts.

“Despite having knowledge of the improper nature of the wire transfers from the firm’s accounts, the Cosmopolitan allowed Hardwick to withdraw some of the funds from his Cosmopolitan account for his personal use and benefit, thus aiding Hardwick in his scheme to defraud the firm,” according to the lawsuit.

The Cosmopolitan was unjustly enriched when it kept the money and has refused formal requests to return it, according to the document. It’s unclear what, if any, money Hardwick may still have on deposit at the Cosmopolitan.

One source suggested that since MSW just filed the lawsuit against the Cosmopolitan, the firm may not be going away completely quite yet.

But that’s a far different message than the firm’s employees were allegedly told on Thursday.

HousingWire attempted to contact several attorneys at MSW for comment, but did not receive a response from any. This article will be updated if MSW responds in an official capacity.

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