(Adds statement from Alvarez & Marsal, number of employees)
By Tom Hals and Jonathan Stempel
WILMINGTON, Del./NEW YORK, March 12 (Reuters) - Colorful New York financier Lynn Tilton has put her Zohar investment funds, a key element of her distressed-debt empire and the subject of several legal battles, into Chapter 11 bankruptcy, with a goal of selling assets or refinancing debt.
Tilton said in papers filed on Sunday night with the U.S. bankruptcy court in Wilmington, Del., that the filing was prompted by litigation with the funds' current manager, restructuring firm Alvarez & Marsal, and bond insurer MBIA Inc , a major creditor.
The Zohar funds were designed as collateralized loan obligations that bundled loans to troubled companies into securities, and had raised about $2.5 billion from investors.
Tilton, who was briefly the subject of a reality TV show called "The Diva of Distressed," once ran the funds through her investment firm Patriarch Partners but gave up control in 2016 to Alvarez & Marsal.
Tilton was cleared of wrongdoing over the Zohar funds twice last year, winning dismissals in September of U.S. Securities & Exchange Commission claims that she bilked investors of $200 million, and in December of a racketeering lawsuit brought by the funds themselves.
In an affidavit, Tilton said the bankruptcy will not affect operations at her 25 operating businesses, which employ more than 50,000 people and include Dura Automotive, MD Helicopters, Rand McNally and Stila Cosmetics, and will put lawsuits on hold.
She said litigation has blocked her from selling one company and financing several others, but the funds retain "tremendous value" and are worth "billions of dollars," and a bankruptcy would let creditors with valid claims be paid in full.
According to the bankruptcy petition, the Zohar funds have up to $10 billion of assets and up to $1 billion of debt.
"Value cannot be maximized in the litigious and charged atmosphere that currently exists," Tilton said in a statement. "Chapter 11 is the only path forward."
The Delaware Supreme Court had been scheduled on March 21 to hear Tilton's appeal of a lower court ruling awarding control of three companies to the Zohar funds.
"These bankruptcy filings are nothing more than a last grasp by Ms. Tilton to retain control of companies she does not own," Bryan Marsal, chief executive of Alvarez & Marsal, said in a statement.
MBIA had no immediate comment. According to court records, MBIA has insured about $1.04 billion of notes issued by the Zohar funds.
Mark Kirschner, of Goldin Associates, was named chief restructuring officer for the funds.
The case is In re: Zohar III Corp, U.S. Bankruptcy Court, District of Delaware, No. 18-10512. (Reporting by Tom Hals in Wilmington, Delaware and Jonathan Stempel in New York Editing by Paul Simao and Steve Orlofsky)