For a $4,000 investment, a new company has managed to derail Copia’s bankruptcy plan, and may soon take control of the dissolution of the failed Napa center for wine, food and the arts.

Known in the bankruptcy world as a claims trader, Copia Claims LLC filed an objection to the current Copia bankruptcy plan. Copia Claims charges in court papers that that the 1999 bonds that funded the 12-acre center in Napa’s Oxbow District were fraudulently transferred from one set of bondholders to another when the center refinanced its debt in 2007.

Copia Claims attorneys said they have a “slam dunk” case involving the $71 million transfer between bondholders. Copia bond insurer ACA Financial Guaranty Corporation and bond trustee Bank of New York Mellon disagree, and even U.S. Bankruptcy Judge Alan Jaroslovsky sounded skeptical.

Yet, if Copia Claims can prove the bonds were transferred improperly, it would attempt to reclaim for the estate $65 million currently held in an escrow account for Copia’s 1999 bondholders. Copia Claims stands to earn 20 percent of any recovery, as well as payment for its attorney fees and costs

Buying into bankruptcy

Copia Claims was not among the 385 creditors and vendors to whom the Napa wine center owed money when it collapsed last year. Instead, it paid money to become a creditor and gain the status to challenge Copia’s Chapter 11 bankruptcy plan.

In January, Copia Claims bought the interests of one of Copia’s unsecured creditors for $4,000. The creditor, a San Jose law firm, had provided an appraisal of Copia property and was owed $12,000 by Copia when the center abruptly closed last November. By purchasing the creditor’s claim, Copia Claims became a creditor in the bankruptcy proceedings.

According to court documents, the sole member of Copia Claims LLC is another company, Ferry Claims. Thirty-five percent of that company is owned by the spouses and brother-in-law of the principals of a San Francisco law firm, McGrane Greenfield. McGrane Greenfield lawyers are representing Copia Claims in its challenge to the Copia bankruptcy.

Copia Claims filed a new bankruptcy plan that it wants Jaroslovsky to approve at a hearing on April 10. Under the plan, Copia Claims would pay $1.35 million to help fund Copia’s reorganization, including full payment of all unpaid administrative and priority claims against Copia, such as wages and vacation owed to former employees.

The best deal?

Leaders of Copia have withdrawn their request for approval of a previous plan forged with ACA Financial Guaranty Corporation, which insures the Copia bonds.

Speaking about Copia Claims’ bid, John MacConaghy, the Sonoma attorney who represents Copia, said, “That proposal is, at this point in time, the best economic deal on the table for Copia’s creditors and we are asking the bankruptcy court to approve it.”

The interjection by Copia Claims essentially shuts ACA out of the bankruptcy process. Joe Peatman, the Napa attorney and Gasser Foundation president who is the former chairman of the board of Copia, said, “While this latest turn of events is certainly uncomfortable for Copia and ACA, I want to be clear that our decision to reject the earlier settlement we worked out with ACA and present the McGrane plan instead was due to the nature of Mr. McGrane’s offer, the dynamics of a bankruptcy case, and our related fiduciary duties as we understand them.”

What does all this mean for Copia creditors, the building on First Street, gardens and the future of Copia itself? 

Creditors such as former employers, vendors and wineries may end up receiving more on the dollar than the original bankruptcy plan, said MacConaghy. The plan proposed by McGrane Greenfield “enhances our ability to promptly pay the employees the balance of what they are owed,” and “may create a significantly better return to the trade debt if the litigation is successful.”

As far as the building and gardens go, they remain under the control of ACA, said MacConaghy.

“We’re just trying to keep the lights on until ACA takes possession of the premises,” he said. MacConaghy could give no timeline for the handover. 

Meanwhile, ACA faces troubles of its own. In December 2007, the Maryland Insurance Administration took control over the management of ACA. The company was forced to restructure because its had heavy losses associated with $65 billion in credit-default contracts backed by failing subprime mortgages.

Since then, concerns have been raised about the viability of the company.

The dispute

The fraudulent transfer claim centers on the bonds originally used to pay for Copia. In 1999, Sacramento-based Infrastructure and Economic Development Bank, or I-Bank, issued tax-free municipal bonds to bankroll Copia. These bonds were sold to investors and presided over by a trustee, Bank of New York Mellon.

In May 2007, the 1999 bonds were refinanced through a new set of bonds also issued by I-Bank. Bank of New York Mellon remained thebondholder trustee. I-Bank has since come under fire for issuing the second set of bonds when Copia already appeared to be in financial distress.

Proceeds from the 2007 bonds, then $72 million and now about $65 million, were put into a trust account for the benefit of the investors who bought the 1999 bonds. The Bank of New York Mellon intends to distribute the escrow money to the 1999 bondholders on Dec. 1, 2009.

While Copia Claims alleges the 2007 refinancing was improper, attorney Lou Cisz, representing ACA and Bank of New York Mellon, called the McGrane plan to contest the bond transfer a “sideshow piece of litigation.”

If McGrane’s plan is approved, “you’ll probably see counter claims,” predicted Cisz at a March 6 hearing in United States Bankruptcy Court in Santa Rosa.

“This takes attention away from what we really should be focusing on which is getting the highest and best value for this property, developing it in the best interests of the Napa County citizens and for folks all over who appreciate that area,” Cisz said.

McGrane insisted the litigation is necessary to reap the highest rewards for those to whom Copia owed money.

“We think litigation ought to be pursued and we think it’s a profit opportunity,” McGrane said. “If having a profit motive is a bad thing then I plead guilty.”

The dispute will be litigated before Jaroslovsky in the coming months, who himself seemed keen to keep the case moving forward.

“How long will this take?” asked Jaroslovsky on March 6. “I have this vision of a beautiful building in Napa with spider webs and transients living inside.”

Jaroslovsky, a bankruptcy judge in Santa Rosa since 1987, also grilled McGrane about the merits of his claim that the bond deals were flawed. At the March 6 hearing, he repeatedly said he was confused by McGrane’s accusations.

Said Jaroslovsky, “It’s been my experience that when something is confusing, it’s either a very simple matter that I don’t understand yet, or the emperor has no clothes.”