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Preview: Financial scars deep a year after Tucson's First Magnus collapse

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If anything could have captured First Magnus Financial Corp.'s pride in its Tucson roots, it was a commercial for the lender made not long before the company's collapse.

The ad features cyclists in El Tour de Tucson, cheering spectators at a University of Arizona basketball game and the auditorium of the Fox Theatre, described as the "jewel of Downtown's revitalization."

"One of the country's largest mortgage lenders is a home-grown company from Tucson," a voice proclaims.

But not for long.

Before the spot ever aired, First Magnus suddenly shut down last August, laid off its 5,500 workers and filed for bankruptcy.

Now, a year later, the company's liquidation is still dragging on. Thousands of former employees are still waiting for unpaid wages. Numerous other creditors — including the producer of the television ads, who says he is owed hundred of thousands of dollars — are struggling with the financial shock of lost business.

Meanwhile, First Magnus executives are establishing a new lender, StoneWater Mortgage, in the company's former headquarters, 603 N. Wilmot Road.

First Magnus occupied the top-of-the-line building continuously during the bankruptcy, paying as much as $140,000 a month to its landlords — who include co-founder Tom Sullivan Sr. — according to operating reports filed with the bankruptcy court.

The events that have unfolded since last August left many creditors stunned and financially scarred, including local real estate appraisers and a delivery service.

While not all blame First Magnus executives for the collapse, several local creditors say they still are wary of trusting StoneWater. They also say the experience taught them tough lessons.

"Maybe we were all a little bit naive," said Kent Maas, an appraiser who said he is owed about $10,000. "I think we've opened our eyes up to what could possibly happen and are better able to read what's going on in the market."

Left holding the bag

Former employees say First Magnus' bankruptcy estate has paid them only a small percentage of the $13 million in back wages owed to workers — despite numerous assurances by attorneys in bankruptcy proceedings that the wage claims would be fully covered. A call for comment placed to a First Magnus liquidation trustee was not returned.

But hundreds of other creditors, including some local businesses, are even less likely to see their bills paid.

Among the claims are about $400,000 owed to Hilton & Myers Advertising and related company Duck Soup Productions, which made the First Magnus commercials.

A locally owned Allegra Print & Imaging franchise is also owed about $170,000, according to court filings.

Also on the list are appraisers and other service providers, some of which were forced to cut workers in part because of the First Magnus collapse.

Gilbert-based TNT Delivery Services was devastated by the loss of business, said owner Todd Truitt. First Magnus owes only $20,000 to TNT, but about 75 percent of TNT's work came from the Tucson lender, Truitt said.

Truitt said he had to lay off six employees and sell half of his company to keep it afloat.

"I also made sure they were paid. I had to eat that loss as well," he said. "There's a lot of people who got left holding some pretty big bags that couldn't afford it."

Stuck in the middle

First Magnus representatives say there were no winners in their company's demise. The collapse came about because of circumstances beyond their control, they said.

Acting as a middleman, the lender made mortgages using money borrowed from big banks and arranged to sell them to investors. As a credit crisis rippled through the financial sector last year, the company suddenly found itself stripped of cash and unable to preserve funding commitments, said court filings on behalf of the company.

"We had no choice," said Tom Sullivan Sr., 74, First Magnus' biggest shareholder and founder of Title Security Agency. "I've never been through bankruptcy. I've never thought that I would endure this through my career."

In an e-mail, former First Magnus executive Karl Young called the collapse "not unlike a multi-car pile-up in which First Magnus was somewhere in the middle."

"Clearly, if Alan Greenspan, Fannie and Freddie and Wall Street didn't see it coming, it is unrealistic to assume that First Magnus did," he wrote.

Both Sullivan and Young, who is now president of StoneWater, said they feel sorry for the employees and other creditors.

"I'd like to see the whole thing just wrap up, and we hope that happens pretty soon," Sullivan said.

StoneWater has begun lending but not in Arizona.

Young noted that First Magnus executives gave gifts of $2,000 to 565 Tucson employees from their personal funds as the company entered bankruptcy. But other employees throughout the country received nothing.

Surviving post-Magnus

The complexity of First Magnus' funding arrangements has helped to bog down the payment process, said Doug Myers, co-owner of Hilton & Myers and owner of Duck Soup Production.

As a major unsecured creditor, Myers was appointed to a committee overseeing the liquidation.

"I couldn't even tell you what kind of dollars will be coming back to the creditors," Myers said, adding that there are numerous appeals ongoing. "The only ones that made out well on it are the law firms."

Myers said he has been lucky. The loss of payment from First Magnus for his commercials and other advertising hurt his businesses, but didn't cripple them, he said. His own creditors have also been understanding about the unpaid debts, he said.

"Unlike a lot of people, I'm not blaming anybody," he said. "It's just happened."

But some creditors are less magnanimous.

Eric Kilstrom, a former First Magnus branch manager in Phoenix, said he has lost 40 pounds from stress after the collapse. He said he managed to start his own company, Smart Financial Mortgage, but is worried about what the future might hold.

He doesn't think he will ever do business with StoneWater.

"They're going to have a black cloud following them everywhere in the industry," he said.