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In a regulatory filing, the former subprime mortgage lender said it would probably seek bankruptcy protection if efforts to restructure the loan terms failed.
The filing came after NovaStar Mortgage Inc., a subsidiary, failed to make $1.7 million in quarterly interest payments. JPMorgan Chase Bank, the trustee of the agreement underlying the loan, notified NovaStar that it intended to pursue its remedies under the agreement.
The default also affected $8.3 million that NovaStar posted as cash collateral for letters of credit issued by Wachovia Bank. As a result of the default, NovaStar said, Wachovia was not obligated to return the money to NovaStar. That could trigger a bankruptcy filing as well, NovaStar said.
NovaStar chief executive Lance Anderson said the company was "in dialogue" with its lenders, but there was no assurance of success.
"We hope to be able to restructure that debt," he said. "Obviously there's no guarantee that we'll be able to. They're putting pressure on us."
Kansas City-based NovaStar has discontinued its lending and loan servicing operations after the subprime mortgage meltdown. Its sole remaining business is managing its portfolio of largely "interest only" mortgage securities.
The company has sold off or closed most of its divisions, laying off all but a few dozen of the 2,000 employees it had at the end of 2006. It recently reported a first-quarter loss of $286 million and now has a negative net worth.
In another development, NovaStar on Tuesday won a court victory when a judge threw out a would-be class action accusing the company and its top officers of securities fraud.
Merely because the complaint was more than 100 pages long didn't mean it was specific enough to withstand dismissal under federal securities legislation, U.S. District Judge Ortrie Smith ruled.
Smith found that the lawsuit's fraud claims against NovaStar were mere generalities -- "precisely what the PSLRA (Private Securities Litigation Reform Act) counsels against."
The case, which was filed last year by investor Robert W. Boyd III and other plaintiffs, alleged that NovaStar and its three top officers had made "materially false and misleading statements" about the company's financial condition, causing its stock to trade at inflated prices.
Boyd said he lost nearly $160,000 after the stock price plummeted. He sought class-action status on behalf of investors who purchased NovaStar securities between May 4, 2006, and Feb. 20, 2007.
Smith said the lawsuit's allegations weren't specific enough under the PSLRA, which Congress enacted in 1995 to discourage frivolous class-action suits by disgruntled investors.
NovaStar was not required "to divulge every 'fact' known to everyone in the company," Smith ruled, "and the PSLRA's effort to combat claims of 'fraud by hindsight' demonstrates a reluctance to countenance claims that attach heightened importance to facts only when looking back at the aftermath of misfortune."
Attorney Darren Robbins, who represented one of the lead plaintiffs, said Smith "clearly has been very thoughtful in his decisions in the context of securities actions."
"But obviously we thought the complaint and the case passed muster and we see he has a different view. ... We'll review the decision and take appropriate action."
To reach Dan Margolies, call 816-234-4481 or send e-mail to dmargolies@kcstar.com.
To see more of The Kansas City Star, or to subscribe to the newspaper, go to http://www.kansascity.com. Copyright (c) 2008, The Kansas City Star, Mo. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
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