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After two days of sometimes contentious hearings, a plan to pay creditors of bankrupt lender First Magnus Financial Corp. is awaiting a judge's approval.

Bankruptcy Judge James Marlar said after Monday's hearing on the plan that he would issue a decision as soon as this week.

Approval of the plan is necessary for the Tucson-based mortgage lender to begin paying back creditors, which include its roughly 5,500 employees who did not receive final paychecks.

During the hearing, Marlar questioned First Magnus Chief Financial Officer Gary Malis about the events that led up to the lender's Aug. 16 collapse and the reasons the employees were left unpaid. The Tucson-based firm employed about 800 workers locally.

Testifying under oath, Malis said the effects of the credit crunch caught the company by surprise, and executives worked for about a month before the collapse to try to keep the business afloat. In the end, the company found itself unable to pay workers because much of its cash was tied up in accounts controlled by secured creditors, Malis said.

"We knew it was going to be a crisis, but we did not think it (paying employees) was going to be an issue," Malis told the judge. "It happened quite suddenly, sir."

According to court documents, the company's shareholders contributed about $13 million to First Magnus in the weeks leading up to Aug. 16, enough to pay the bulk of the former employees' wages.

Documents also showed that First Magnus shareholders, including company executives, received more than $110 million from the lender in the year before the Aug. 21 bankruptcy filing.

Marlar asked Malis why the $13 million wasn't used to pay employees, or why shareholders did not pay workers out of their hefty disbursements.

Malis said the $13 million was invested in the company to appease large banks that extended First Magnus lines of credit to make mortgage loans. At the time, that decision seemed "more right than just closing down," setting aside the money and paying off workers, Malis said.

Malis said much of the hefty payout to shareholders was reinvested in the company. Still, Marlar warned Malis that the disbursements could make shareholders targets in later lawsuits.

"Somebody's coming after you for this," Marlar said.

The bankruptcy plan submitted by First Magnus would leave the liquidation and related matters under the control of two trustees selected by First Magnus and an advisory board made up of creditors.

First Magnus representatives have said that employees would be completely repaid, up to $10,000 per person, under the plan. Many other creditors, however, would likely receive pennies on the dollar.

Attorneys representing First Magnus reported that most creditors — about 1,550 out of 1,600 — voted to accept the plan.

The most vocal objections to the plan came from Robert Michael, an attorney representing outsourcing firm WNS North America Inc., which claims that it is owed tens of millions of dollars from a canceled First Magnus contract.

Michael questioned witnesses extensively during the two-day hearing and argued that some creditors were being treated unfairly under the plan.

James Leshaw, an attorney representing First Magnus, told Marlar that Michael's arguments amounted to a "conspiracy theory."

The hearing on the plan began on Thursday, when Marlar also questioned First Magnus President and CEO G.S. Jaggi about the company's failure to pay employees. Jaggi said at that hearing that he wanted to file for bankruptcy quickly in order to get employees paid.

Find continuing coverage on First Magnus and the latest news on local real estate at www.AzStarBiz.com.