Rcs Capital Corporation (fka RCAPQ)

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DJ RCS Fails to Win Court Approval of Reorganization Plan -- Update
bankruptcynews.dowjones.com
May 06, 2016 14:31:00 (ET)

By Lillian Rizzo

RCS Capital Corp. failed to win approval of its reorganization plan after a judge told the brokerage to make some fixes, possibly pushing back the timeline for the company's emergence from bankruptcy.

"At this point, I can't confirm the plan but will consider if the debtor wants to make revisions consistent with my comments," Judge Mary Walrath said during a hearing on Thursday.

Judge Walrath, of the U.S. Bankruptcy Court in Wilmington, Del., is now expected to review the revised plan on Tuesday.

The judge's issues with the plan stem from objections made by RCS founder Nicholas Schorsch's other companies, as well as from a bankruptcy watchdog.

Mr. Schorsch's ARC Group says the plan exposes it to potential lawsuits while seeking to tie the company's hands when it comes to bringing its own lawsuits against RCS's directors and officers. Litigation could be a possible source of creditors' recoveries, according to the restructuring plan.

Mr. Schorsch is a New York-based real-estate investor who branched out into banking and financial services. His $19 billion empire went into a tailspin in 2014 after his American Realty Capital Properties Inc. disclosed it had falsified financial results to cover up accounting errors.

In court papers RCS says it could seek claims against Mr. Schorsch's parties but wants to protect all directors, officers and employees of RCS from possible litigation.

"The releases themselves are just too broad," said Judge Walrath in her ruling. While RCS's attorney argued that the officers and directors went above and beyond during the bankruptcy process to keep the firm afloat, Judge Walrath said she agreed with the ARC Group that "they were just doing their job."

Mr. Schorsch founded RCS in 2007 and later stepped down in 2014 from its board and board of related companies after the accounting errors came to light. He still remains the managing member and controlling shareholder of affiliated companies under the ARC Group umbrella.

ARC Group lawyer Stephen Shimshak said RCS Chief Restructuring Officer David Orlofsky's testimony was "cavalier" when discussing the accounting errors and the relationship between Mr. Schorsch and RCS.

Mr. Orlofsky has said in court papers the accounting errors at Mr. Schorsch's American Realty Capital Properties and affiliates, including the ARC Group firms, "negatively impacted" RCS's reputation and operations. He has also said the relationship between RCS and ARC Group entities could "best be described as adversarial."

Mr. Schorsch and his attorneys say there no basis for these claims, and during the hearing, Mr. Shimshak repeatedly pointed to the lack of investigation or analysis into the accounting errors.

RCS sought bankruptcy protection in February after reaching a deal with key creditors to slash its debt and restructure around its Cetera Financial Group unit. Following the emergence from chapter 11, Cetera will be taken private.

RCS has said it plans to emerge from bankruptcy in May. The firm's attorney, Shmuel Vasser, said the speediness of the case was vital to the reputation and survivor of the independent broker dealer, and that "any type of noise may cause [the Financial Industry Regulatory Authority]" to shut the brokerage down.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)

Write to Lillian Rizzo at [e-mail].