Founder Richard Meruelo has been removed from Meruelo Maddux Properties Inc., the company he built into downtown L.A.’s largest property owner.

U.S. Bankruptcy Court Judge Victoria Kaufman late last month ordered Meruelo, his top lieutenants and the entire board of Meruelo Maddux to resign their posts.

Two new major outside investors will have a controlling interest on the company’s board as it formally emerges from bankruptcy later this month: Global Asset Capital LLC of Palo Alto and Mount Kellett Capital Management LLP of New York.

The judge’s order caps a bankruptcy court saga of more than two years, during which Meruelo had sought to retain control of his company until the end.

After the order was filed late June 24, the 46-year-old real estate developer gathered his employees for an emotional farewell speech, according to sources close to the company.

Minority shareholders Charlestown Capital Advisors LLC and Hartland Asset Management Corp. led the effort to wrest control of the company from Meruelo, with Charlestown founder Raj Maheshwari emerging as the lead figure during the long fight.

However, contrary to a previous Business Journal article, Charlestown and Maheshwari will not have a significant part in controlling the reorganized company since they did not put most of the money in to buy out existing shareholders.

Last year, Global Asset agreed to put in the bulk of the money toward the buyout, while Mount Kellett later agreed to put up several million dollars more toward the financing. Together, the two investment firms are putting in roughly $50 million and will end up with 55 percent of the shares of the reorganized company. Charlestown and Hartland will be left with a stake of roughly 5 percent, similar to their stake in the company before bankruptcy.

Global Asset and Mount Kellett will control four seats on the seven-member board, with the other three going to representatives of the bankruptcy shareholder committee.

Calls to Meruelo’s office and his attorneys were not returned late last week.

However, attorneys for Meruelo’s business partner and company president, John Maddux, said in the bankruptcy proceedings that they may appeal the case.

When reached late last week, Maddux said he had no comment on the prospect of an appeal.

New board

Meruelo founded his company some 20 years ago, and became the biggest nongovernmental owner of downtown acreage, mostly industrial and warehouse properties on the east side.

Among the larger holdings are the Union Lofts project at 325 W. Eighth St. and the company’s headquarters in a converted warehouse at 761 Terminal St. The Terminal complex also houses retailer American Apparel Inc.

Meruelo took his company public in 2007, but it was battered by the real estate market collapse in late 2008 and filed for bankruptcy protection in March 2009 after being unable to make debt payments.

The Business Journal published a profile of the normally press-shy Meruelo in 2009 headlined “Won’t Back Down.” The headline referred to his vow to fight to keep his company. The article won the Business Journal a national award a year ago.

Christopher Prince, lead attorney for Charlestown and Hartland, said that a complete overhaul of the board was likely from the beginning of the case and is typical in bankruptcy proceedings when there are parties vying for control of a company.

According to sources familiar with the situation, two board members are in the running for board chair, Chicago-based fund manager Stephen Taylor, who has chaired the shareholder committee, and Riaz Valani, general partner of Global Asset.

Valani is one of two investment bankers who engineered the pioneering David Bowie Bonds deal in 1997, in which the British rock singer sold $55 million worth of bonds, secured by revenue from 25 of his albums.

The board also will decide whether interim executives picked by Charlestown and Hartland to run Meruelo Maddux after it emerges from bankruptcy will be retained. Martin Caverly, a local real estate investment manager, was chosen as interim chief executive and local real estate consultant Ted McGonagle as interim chief operating officer.

Asset sale

Once the management team is in place later this month, the first order of business will be to conduct a review of the company’s real estate portfolio. A new name for the company will likely be chosen, now that Meruelo and Maddux have been ousted.

In their reorganization plan, Charlestown and Hartland said they plan to sell off up to half of the company’s 35 properties in the downtown market, as well as a substantial portion of holdings in other cities around Southern California. But last week, sources said that the review of the portfolio could prompt the new board and management to alter the mix of properties to be sold given changing market conditions. They also said there would be no distressed sale.

“One myth we want to dispel is that all the properties will be unloaded in a fire sale,” one of these sources said. “The selling of the properties will be an orderly process conducted over a substantial period of time.”

These sources also indicated that as the portfolio decreases over time, the company’s staff is likely to be cut and a move to a smaller headquarters is possible.

With the reorganized company set to emerge this month, downtown brokers are relieved. They said that the bankruptcy, along with Meruelo Maddux’s policy to buy and hold properties, kept properties off the market and allowed some to deteriorate.

“There are a lot of non-profits out there that have been eyeing these buildings, just waiting for them to come on the market,” said Chris Runyen, senior managing director in the downtown office of Charles Dunn Co. “If they could have bought the properties, you would have seen some major upgrades and that would have been better for the entire market.”

Exit plan

The bankruptcy plan calls for secured creditors to be made whole through monthly payments made over the next four years at an interest rate of 5.25 percent, while unsecured creditors with undisputed claims receiving full payment at a reduced interest rate

Existing shareholders were given a choice: sell their shares for 35 cents per share or hold on and see how they fared in bankruptcy court. According to Charlestown bankruptcy attorney Prince, about 5 percent of the shareholders chose to sell.

Under the approved bankruptcy reorganization plan, Global Asset and Mount Kellett will purchase 50 percent of each shareholder’s shares for 35 cents a share. The remaining shares will then be subject to a reverse stock split, in which the number of shares would be reduced but the per-share value would increase in order to retain the company’s market capitalization, which stood at $44 million June 29.

The purpose of the reverse stock split, Prince said, is to make it easier for the reorganized company to regain a listing on a major market exchange.

Shares closed at 50 cents June 29 on the Pink Sheets. At their height in 2007, shares topped $10.