Mortgage

EXCLUSIVE: Morris Schneider Wittstadt officially files for Chapter 11 bankruptcy

Butler & Hosch sale, Dustin Johnson lawsuit severely impacted firm

As HousingWire first reported Thursday, Morris Schneider Wittstadt officially filed for Chapter 11 bankruptcy on Monday. The firm did open for business on Monday, but went so far as to tell all employees not to bother reporting to work on Monday morning.

On Thursday, HousingWire reported that the Georgia-based law firm and its partners, which 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, allegedly told the firm’s employees that the firm intended to file for bankruptcy and that the firm’s staff would not be paid for their last three weeks of work.

Morris Schneider Wittstadt followed through on its stated intention of filing for bankruptcy, filing for Chapter 11 protection in the United States Bankruptcy Court for the Eastern District of Virginia – Richmond Division.

“After considering its relatively few options available, MSW chose Chapter 11 filing as a regrettably necessary step for the future of the firm,” the firm said in a statement provided exclusively to HousingWire.

“This is a very sad and difficult circumstance for Morris Schneider Wittstadt, and we share in the disappointment and frustration of the parties involved,” said Mark Wittstadt, executive managing partner of MSW. “MSW was an extraordinary firm with many outstanding lawyers and employees, making this situation exceptionally disheartening.”

In the statement provided exclusively to HousingWire, MSW declined to go into the “specific” reasons it chose to go into Chapter 11, but the firm’s bankruptcy filing sheds some light on how the firm, which once employed 150 lawyers and 700 staff members in 50 offices in 13 states, was left with no choice but to declare bankruptcy.

While the firm may have once employed 850 people, its current payroll is much smaller.

As of July 2, MSW had 128 employees, including 33 attorneys and 95 staff members. And as of Monday, Wittstadt said that the firm currently employs five attorneys and 31 staff members.

In the filing, Mark Wittstadt recounts the history of the firm, the situation that lead to the firm suing its former managing partner, Nathan (Nat) Hardwick, for allegedly embezzling $30 million from the company, the firm then being subject to multiple lawsuits, including one brought by PGA golfer Dustin Johnson.

Johnson sued Morris Hardwick Schneider, now known as Morris Schneider Wittstadt, Hardwick and the firm’s managing partners, Mark and Rod Wittstadt, accusing them of using their positions as Johnson’s “trusted advisors” to steal $3 million from him to cover shortages in the firm’s accounts allegedly created by Hardwick himself.

MSW also acknowledged its bankruptcy filing in a filing in the pending lawsuit involving Johnson. In a Monday filing with the United States District Court for the Northern District Of Georgia – Atlanta Division, MSW asks the court to stay the Johnson lawsuit pending the firm’s bankruptcy proceedings.

According to MSW’s bankruptcy filing, the firm would have been able to survive Hardwick’s alleged embezzlement, after Fidelity National Financial (FNF) acquired a 70% stake in LandCastle after “substantial escrow account misappropriations” were discovered within the company’s accounts.

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

In January, HousingWire reported Fidelity had contributed approximately $22 million to fund shortages in the company’s escrow accounts.

Wittstadt said that upon learning of Hardwick’s “over disbursements,” the firm chose “to part with a significant asset,” in the form of LandCastle.

In the bankruptcy filing, Wittstadt said that LandCastle was a profitable portion of the firm’s business, earning approximately $300,000 per month.

Wittstadt said that Hardwick’s “unauthorized disbursements” from the firm’s trust accounts were “devastating” to the firm, but said that it was “not a death sentence.”

Wittstadt said that with Fidelity’s backing of the firm’s escrow accounts, plus Hardwick’s removal from the firm that once bore his name, the firm was able to convince many of its clients that the firm would be able to “survive and thrive again.”

But Johnson’s lawsuit, which was first reported by HousingWire, and the publicity surrounding it, were “too much for even an otherwise successful firm like MSW to bear,” Wittstadt said.

Wittstadt adds that the “false allegations” levied by Johnson and his attorneys caused many MSW clients to contact the firm and tell them that they would no longer do business with the firm, unless the firm could find a firm to merge with before the end of 2014.

MSW found that firm in the form of Butler & Hosch.

In February, HousingWire reported that MSW agreed to sell its default assets to Butler & Hosch. At the time, details of the sale were scarce, but Wittstadt provides more insight into that deal and its ramifications.

In the bankruptcy filing, Wittstadt said that due to the firm’s concern for its employees, it agreed to sell its foreclosure, bankruptcy and eviction operations to Butler & Hosch, including the assumption of MSW’s lease obligations, in exchange for an unsecured promissory note of $2,072,167.24.

As part of the merger, the client files were turned over to B&H, and the majority of the attorneys who formerly worked for MSW became employees of B&H.

But, soon after the agreement was finalized, Wittstadt said that he learned of serious issues at B&H.

“Unfortunately, almost immediately after the agreement was signed, but before the transition period had ended, I learned that B&H had created false invoices for reviewing each file to be transitioned from MSW to B&H, which B&H surreptitiously used for the purposes of factoring through its secured lender to obtain loans,” Wittstadt told the court in the bankruptcy filing.

In March, B&H filed an Assignment for the Benefit of Creditors, an action analogous to Chapter 7 bankruptcy, shut down and laid off all 700 of its employees.

The combination of those events appears to have been too much for MSW to survive.

On Thursday, HousingWire reported that MSW employees were told they would not be paid for their last three weeks of work, but Wittstadt tells the court that the firm’s former managing partners, Arthur Morris and Randolph Schneider, are attempting to pay the firm’s employees for their work.

Wittstadt said that Morris and Schneider are prepared to loan the firm $200,000 to pay the non-attorney employees at MSW for their last three weeks of work.

“Simply stated, the proposed loan is neither an equity infusion nor a secured loan,” Wittstadt said. “Further, the former partners are not going to receive any interest on account of the loan. This proposed loan is a genuine act of benevolence to benefit the Debtors’ former non-attorney employees who were the backbone of the firm, and the former partners agreed, in essence, to swap the former employees’ claims for wages, salary and commissions which are entitled to a priority under Section 507(a)(4) in exchange for an unsecured claim which receives the same priority.”

Wittstadt notes that as a result of the proposed loan, “MSW’s former rank-and-file employees, some of whom the Debtors understand live paycheck to paycheck, will not have to wait until the conclusion of these cases in order to receive a distribution on account of their uncontested claims for wages.”

The firm’s former employees may end up getting their money after all, but the firm’s current employees were told not to show up to work on Monday morning, according to an email obtained by HousingWire.

The email, sent Sunday by MSW’s director of human resources, Sue Crouse, requested the firm’s employees to not report to the office on Monday, in order to allow management to work through finalizing the transition team and plan.

As of this writing, it is unknown when, or if, MSW’s current employees will be allowed to return to work.

“MSW simply wishes to state that this is an unfortunate situation, especially to the extent it causes hardship or anguish to its former clients, employees and vendors,” the firm said in its statement. “The majority of the former attorneys and staff who served as the backbone of the firm were able to find new jobs, and the firm wishes them the best in their future endeavors. MSW is resolved to do its best in this difficult situation, and hopes this will develop with as little harm and consternation as possible.”

[Correction: A previous version of this article stated that MSW did not open for business on Monday. The firm did open on Monday, but told its remaining employees to not come to work.]

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