NovaStar Financial Inc. (NFI)

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NovaStar unit faces involuntary bankruptcy filing

Wed Jan 23, 2008 6:44pm EST

NEW YORK, Jan 23 (Reuters) - A unit of subprime mortgage lender NovaStar Financial Inc NOVS.PK was hit with an involuntary Chapter 7 bankruptcy petition accusing it of failing to pay a $48.9 million judgment, court records show.

American Interbanc Mortgage LLC of Irvine, California filed the petition against NovaStar Home Mortgage Inc on Wednesday in the U.S. bankruptcy court in Kansas City, Missouri, the city where NovaStar is based.

According to NovaStar's latest quarterly report, American Interbanc last June won a $46.1 million judgment against the home mortgage unit, following an Orange County, California jury trial in which it accused NovaStar of false advertising and unfair competition. Interest has subsequently accrued on the judgment.

In its report, NovaStar said the home mortgage unit could not afford the judgment, which was appealed, and that the parent "may be forced to consider bankruptcy" if American Interbanc sought to hold it responsible. NovaStar said it does not believe American Interbanc has a legal basis to hold it responsible for the judgment.

Robert Berry, a lawyer for American Interbanc, said on Wednesday that NovaStar Home Mortgage is "not paying its obligations, and doesn't appear likely to pay them." He said his client has not ruled out the possibility of trying to enforce the judgment against NovaStar Financial.

Lance Anderson, NovaStar's chief executive, did not immediately return a call seeking comment.

NovaStar in the last year halted subprime mortgage lending, quit its brokerage operations, and fired most of its staff. It once specialized in making home loans to customers with weak credit, but like dozens of rivals was battered by soaring delinquencies and defaults. NovaStar's business now consists mainly of managing a mortgage securities portfolio.

Shares of NovaStar closed Wednesday down 1 cent at $1.75 on the Pink Sheets. (Reporting by Jonathan Stempel; Editing by Carol Bishopric)

http://www.reuters.com/article/marketsNews/idUKN2333643220080123?rpc=44