Tilton's Zohar funds get new manager

Bankruptcy consultant Alvarez & Marsal replaces the distressed debt investor at Zohar funds.

Lynn Tilton, CEO of Patriach Partners.
Adam Jeffery | CNBC
Lynn Tilton, CEO of Patriach Partners.

Bankruptcy consulting firm Alvarez & Marsal will replace distressed investor Lynn Tilton as collateral manager of the three Zohar credit funds totaling $2.5 billion in investments.

Tilton stepped down as collateral manager of the three funds earlier this year amid a lawsuit with bond insurer MBIA, CNBC.com has learned. She continues to run Patriarch Partners, the private equity firm she founded in 2000.

Alvarez & Marsal could not be immediately reached for comment.

In late 2015, Tilton filed a Chapter 11 bankruptcy petition for the first Zohar fund she created more than a decade ago. That came after Tilton unsuccessfully sought to extend the fund's deadline with MBIA.

When the fund was raised it had nearly $300 million, and the two remaining Zohar funds that have not yet reached maturity contain in excess of $2 billion.

The second Zohar fund, containing about $1 billion, matures January 2017.

Alvarez & Marsal was tasked with the unwieldy dismantling of Lehman Brothers in the wake of the investment bank's devastating 2008 bankruptcy filing. In the years that followed, it helped distribute about $100 billion to the bank's creditors.

"Patriarch Partners and Lynn Tilton look forward to working with the newly appointed Collateral Manager of the Zohar Funds to ensure a smooth and cooperative transition process," a spokesman for Patriarch Partners told CNBC.com in an email.

"This appointment in no way affects Ms. Tilton's role as CEO of Patriarch Partners, nor her roles at the portfolio companies. Ms. Tilton looks forward to devoting all of her time and energy to managing and creating value at the more than 70 operating companies in the Patriarch portfolio."

Tilton stepped down from the credit funds that have, in part, supported the investments of Patriarch Partners in early February. Her resignation took effect March 1, according to a memo obtained by CNBC.com that states Alvarez & Marsal will become "successor collateral manager" to Tilton.

Tilton is being sued by Norddeutsche Landesbank Girozentrale and Hannover Funding, which invested in her credit funds. The investors, who are seeking more than $40 million, say they were deceived about the accounting standards that would be applied to the Zohar funds in which they invested.

Lynn Tilton is stepping down from credit funds

She is also being sued by the Securities and Exchange Commission, which alleged in March 2015 that Tilton committed fraud and misrepresented the financial health of investments made by Zohar funds. That court case was put on hold in September when a 2nd U.S. Circuit judge issued an order to stay the case. That order has not yet been lifted.

Patriarch Partners has previously defended itself against both suits. "We deny these baseless allegations in the strongest possible terms and we intend to vigorously defend ourselves in court," according to a spokesperson for Patriarch Partners.