'Bunny' investors file bankruptcy petition

Three investors in Radical Bunny LLC, an obscure Phoenix firm that lent almost $200 million to local construction financier Mortgages Ltd., are trying to force the company into bankruptcy.

Cathy Baker of Chandler; Laing Kandel of Brooklyn, New York; and Steven Friedberg of Huntington, New York, filed an involuntary petition Wednesday against Radical Bunny in U.S. Bankruptcy Court in Phoenix.

The filing lists the investors as creditors with a combined claim against Radical Bunny worth nearly $2 million. The investors are seeking a liquidation of the company's assets under Chapter 7 of the U.S. Bankruptcy Code.

Radical Bunny has been the focus of regulatory investigations since Mortgages Ltd. was forced into its own bankruptcy in June by a real-estate developer.

Radical Bunny made nearly $200 million in loans to Mortgages Ltd., making it the real-estate lender's largest creditor.

Mortgages Ltd. used the money along with funds it raised from its own investors to finance about $925 million in land purchases and construction projects.

Investor confusion

According to court filings and interviews with investors, Radical Bunny raised money from about 900 investors.

Many investors were clients of Phoenix certified public accountant Tom Hirsch, Radical Bunny's main principal.

Carlos Arboleda, a Phoenix attorney representing the petitioning investors, said the firm's managers have left investors in the dark about the state of their money.

"At the end of the day, we simply want some court oversight over Radical Bunny and its assets," Arboleda said. "There's been a lack of information and a lack of clarity coming from Tom Hirsch and his associates."

Messages left with Hirsch and the firm's other managers were not returned Thursday.

Shelton Freeman, an attorney representing Radical Bunny in Mortgages Ltd.'s bankruptcy, said that the company has yet to determine its next move.

Under an involuntary bankruptcy filing, Radical Bunny has 20 days to file an objection. The company could file to convert the case to a voluntary Chapter 11 proceeding, which is what happened in Mortgages Ltd.'s case.

The current filing and any subsequent action by Radical Bunny is subject to court approval.

"I don't think the petition is filed in good faith," Freeman said. "I don't think these individuals are legitimate creditors. I think we'll probably push back, but I think we'll look at all the options at this point and figure out the best path for Radical Bunny."

Securities issues

A key question surrounding Radical Bunny is whether the firm's fund-raising methods violated federal or state securities laws.

The company was not licensed as a securities broker or dealer with the Arizona Corporation Commission, which regulates some investment activity in the state.

Freeman has said Hirsch and his partners did not actively market or solicit investments.

Securities laws include numerous exemptions for when a company needs to be register itself or its investment products with regulatory bodies. Securities attorneys note, though, that because a firm does not seek investors does not make it exempt from investment laws.

Some Radical Bunny investors believe management failed to provide accurate information about the nature of their investments, Arboleda said.

The Corporation Commission's securities division and the U.S. Securities and Exchange Commission are investigating Radical Bunny and Mortgages Ltd.

Representatives for both agencies declined to comment about their investigations.

Long relationship

Corporation Commission filings state that Radical Bunny was incorporated in 1999.

Other managers listed are Hirsch's CPA partner Harish Shah, Howard Walder and Berta "Bunny" Walder, for whom the firm is named.

Over the past decade, Radical Bunny financed as many as 90 separate loans to Mortgages Ltd., according to Freeman.

Radical Bunny typically charged Mortgages Ltd. 13 percent interest on the loans. The company's investors received an 11 percent return. The firm's managers retained the rest.

Radical Bunny's loans were secured by Mortgages Ltd.'s assets. Those assets include some real estate holdings and percentages of loans in which Mortgages Ltd. invested.

Radical Bunny's investors received payments when Mortgages Ltd.'s borrowers paid their loans. With at least two-thirds of Mortgages Ltd.'s loan portfolio in default, most investors in either firm are not receiving payments.

For some investors, the payments were a primary income source.

In recent weeks, Radical Bunny and Mortgages Ltd.'s own investors have opposed settlements Mortgages Ltd. has proposed with its borrowers.

They argue the settlements diminish investors' and Radical Bunny's stake in the projects that Mortgages Ltd. financed.

Republic reporter Catherine Reagor contributed to this article.

Reach the reporter at andrew.johnson@arizonarepublic.com or 602-444-8280.