Patriarch Partners CEO Lynn Tilton’s bid to block asset sale rejected as she faces SEC fraud trial

Patriarch Partners Founder Lynn Tilton can’t block a planned sale of assets in one of her former investment funds, a deal she claims was structured to benefit insurer MBIA Inc.

U.S. District Judge Jed Rakoff on Tuesday denied Ms. Tilton’s request to bar the sale of collateral in the Zohar I distressed loan fund pending the outcome of her lawsuit against the trustee of the fund, U.S. Bank NA, and MBIA.

The judge ordered the trustee to issue another notice about the auction on Oct. 24 and to keep the sale open at least until Nov. 23.

Ms. Tilton sued the trustee and the insurer in September, arguing that the auction is structured solely for the benefit of Purchase, New York-based MBIA, which holds a $149 million claim on the collateral. She won an initial court order barring the sale temporarily and sought a permanent ruling.

MBIA argued that Zohar I defaulted on its payments in November 2015, obligating the company to repay the $149 million to noteholders. The default allowed MBIA to instruct the fund’s trustee to sell the collateral, the insurer said.

Judge Rakoff’s two-page ruling follows Ms. Tilton’s decision to drop a lawsuit seeking to halt an SEC probe into allegations she overcharged investors in loan securities.

“The legal challenges to MBIA and U.S. Bank’s sale of assets were never about stopping the auction process from proceeding,” Randy Mastro, a lawyer for Patriarch and Ms. Tilton, said in an e-mailed statement. “Patriarch Partners and Lynn Tilton took this action to ensure that a fair auction would take place and we have succeeded through litigation in securing an improved process that should encourage more bidding.”

The U.S. Securities and Exchange Administration filed an administrative complaint last year accusing Ms. Tilton of overcharging almost $200 million on fees she collected on $2.5 billion of collateralized loan obligations created to help fund her various businesses. A hearing is scheduled for Oct. 24.

Ms. Tilton argued that the agency’s in-house proceedings are unfair because of limitations on defendants gathering evidence. Last month, the U.S. Supreme Court rejected her request to stop the case until it decides on the constitutionality of the agency’s use of in-house judges.

Ms. Tilton is also facing a lawsuit in Delaware over claims she has refused to turn over files to the new managers of some of the Zohar funds. Patriarch Partners agreed last year to step down as overseer of three distressed-loan funds, one of which the firm had sought to force into bankruptcy. The funds’ new managers said Ms. Tilton failed to turn over files about assets used as collateral in deals. Delaware Chancery Court Judge Joseph Slights has yet to rule in the case.

The New York case is Patriarch Partners XV LLC v. U.S. Bank National Association, 16-cv-07128, U.S. District Court, Southern District of New York (Manhattan).