It keeps getting worse for 'The Diva of Distressed' Lynn Tilton

Lynn Tilton, the so-called 'Diva of Distressed', is facing a lawsuit alleging she and her firm Patriarch Partners "grossly mismanaged" more than $100 million of investor funds.

Norddeutsche Landesbank Girozentrale and Hannover Funding Co. filed a lawsuit Monday against Tilton and Patriarch alleging that she used funds that were marketed to investors as debt investment vehicles and instead made risky equity deals that went bust.

The two investors previously filed suit against Tilton in May, seeking about $44 million in damages, but did not specify fraudulent actions.

The SEC separately filed fraud charges against her first, in March. Tilton's case with the SEC has been stayed, thanks to a September decision by an appelate court. It is expected the SEC will be allowed to proceed with the case, according to a person familiar with the case.

The SEC has contacted Norddeutsche Landesbank Girozentrale, and an employee from Nord is due to testify against Tilton in the SEC case, according to a copy of the witness list dated August 7, 2015, submitted by the SEC for its case against Tilton.

Hannover, a subsidiary of Norddeutsche Landesbank Girozentrale, spent $135 million investing in Tilton's 'Zohar' funds, which ultimately were used to make equity investments in Patriarch portfolio companies, according to the suit.

This, despite "marketing materials provided... for Zohar (Fund) III describ[ing] that fund as 'a collateralized debt obligation managed by Patriarch Partners, a leading CDO manager," according to the suit.

Tilton's representatives denied the suit's allegations.

"We deny these baseless allegations in the strongest possible terms and we intend to vigorously defend ourselves in court," a spokesperson for Patriarch Partners told Business Insider.

"We particularly take great umbrage at plaintiffs' allegations that Patriarch has at any time put its own interests ahead of the interests of the Zohar note holders or the portfolio companies and their employees."

"Ms. Tilton has personally invested hundreds of millions of dollars in the Zohar funds and their portfolio companies," the spokesperson said. "Since its founding in 2000, Patriarch has successfully restructured myriad businesses and has saved hundreds of thousands of jobs."

Saving jobs

Norddeutsche Landesbank Girozentrale said in its lawsuit that Tilton ran companies into bankruptcy and out of business with six-figure management fees. This includes Patriarch's management of American LaFrance, a fire engine company, which went out of business last year.

It also includes an investment in Military Armored Vehicles LLC which, in spite of a "lack of both operations and sales", according to the suit, has paid substantial management fees to Patriarch and Tilton.

"Defendants controlled every aspect of [American LaFrance] and fired employees at will," the suit alleges.

The suit alleges Tilton's debt instruments were instead used to make equity buys in companies including those already mentioned, plus MD Helicopters; building supplies manufacturer Amweld International; imaging company Scan Optics, advertising business Petry Media and water cooler supplier Oasis International.