Madoff, Innkeepers, Fisher Island, Windstar: Bankruptcy
May 20, 2011, 8:50 AM EDTBy Bill Rochelle
(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Madoff as first item, PJ Finance and Scovill in Updates and Sun Products in Downgrade.)
May 20 (Bloomberg) -- The trustee liquidating Bernard L. Madoff Investment Securities Inc. filed papers yesterday opposing the motion to dismiss his $1 billion lawsuit in bankruptcy court against Fred Wilpon, Sterling Equities Inc., the owners of the New York Mets baseball club and Wilpon’s friends, family, and associates.
The trustee is aiming to recover $300 million in fictitious profits and $700 million in principal he said the Wilpon group were able to take out of the Madoff firm before the fraud surfaced publicly.
The Wilpon group’s motion to dismiss contended they were “victims” who were “defrauded by Madoff” and “never should have been targeted by the trustee.” They said there were no facts to support the trustee’s complaint.
In his brief, the Madoff trustee pointed to prior Ponzi scheme cases, saying in substance there is no defense to a claim for the return of fictitious profits. Recovering the $700 million in repaid principal must surmount a higher bar, especially given a September opinion in the Bayou Group LLC Ponzi scheme case written by U.S. District Judge Paul G. Gardephe in Manhattan.
The Madoff trustee contends the facts in his complaint meet the standards required in the Bayou Group case.
To recover repaid principal, the trustee concedes he must show the Wilpon defendants weren’t in “good faith.” To do so, the trustee says the law requires that he prove that the defendants had information that would cause a “reasonably prudent investor” to investigate further.
When the defendants are shown to have reason for investigating, the trustee says the burden then shifts to the defendants to demonstrate under the Bayou Group case that a “diligent inquiry would not have discovered the fraudulent purpose.”
In the case of the Wilpon defendants, the trustee says his complaint shows that they “did no diligence whatsoever” and the “red flags” they saw didn’t prompt any inquiry. They “deliberately failed to investigate,” he said.
The Wilpon group can submit a reply in mid-June. The bankruptcy judge will likely hold a hearing before he rules. As a result, a ruling can’t come before late June, at the earliest.
Technically speaking, Wilpon’s motion is known as a motion for summary judgment because it brings facts to the judge’s attention not contained in the complaint. If the bankruptcy judge sees the motion as one for summary judgment, he cannot dismiss the complaint if there are any material disputed issues of fact.
On the other hand, the judge can dismiss the complaint if he concludes that the allegations in it, which must be assumed to be true, don’t make out a valid claim. The trustee contends his 373-page complaint contains more than sufficient facts to withstand a motion to dismiss where his allegations are assumed true.
For details on the issues involved in the Wilpon suit, click here for the March 22 Bloomberg bankruptcy report. For other Bloomberg coverage of the trustee’s opposition to Wilpon’s motion to dismiss, click here.
The Madoff firm began liquidating on Dec. 11, 2008, with the appointment of the trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009.
His bankruptcy case was consolidated with the firm’s liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.
The Wilpon lawsuit is Picard v. Katz, 10-5287, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr- 00213, U.S. District Court for the Southern District of New York (Manhattan).
Updates
Innkeepers Preferred Equity Receiving $3.5 Million
Innkeepers USA Trust received formal approval yesterday for the disclosure statement explaining the reorganization plan coming up for approval at a June 23 confirmation hearing.
The ad hoc committee representing preferred shareholders now urges voting in favor of the plan. Support for the plan by preferred shareholders coincides with revelation in the disclosure statement that the ad hoc committee will be paid $3.5 million as a so-called allowed administrative claim.
In return, preferred shareholders agree to make no claim for reimbursement for making a substantial contribution to the case.
The disclosure statement outlines the primary dispute that will remain after the plan is confirmed.
The two main secured creditors, Midland Loan Services Inc. and Lehman Ali Inc., have a dispute with Innkeepers over whether they waived deficiency claims when they agreed to the protocol setting up the auction. The two lenders contend they made no waiver and object to how Innkeepers’ owner, Apollo Investment Corp., could walk away from confirmation with what the disclosure statement said is about $6.8 million.
The $3.5 million payment to the ad hoc committee also may reduce the lenders’ recovery on their deficiency claims, even if they convince the judge there was no waiver.
Lehman Ali, a non-bankrupt subsidiary of Lehman Brothers Holdings Inc., is to receive $233 million in cash for its $238 million in floating-rate mortgages on 20 of the Innkeepers properties. The disclosure statement says Lehman will be paid in full.
Midland, the servicer for $825 million of fixed-rate mortgages on 45 hotels, is to receive $725.8 million in modified mortgages and $12.8 million in cash. Midland’s recovery is almost 88 percent, according to the disclosure statement.
For other details on the plan that Innkeepers revised on May 9, click here for the May 16 Bloomberg bankruptcy report.
Apollo acquired the company in July 2007 in a $1.35 billion transaction.
Innkeepers, based in Palm Beach, Florida, has 72 extended- stay and limited-service properties with 10,000 rooms in 20 states. The Chapter 11 petition filed in July listed assets of $1.5 billion against debt totaling $1.52 billion.
The case is In re Innkeepers USA Trust, 10-13800, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Bond Not Filed to Support Fisher Island Involuntary
The owner of a development on Fisher Island, Florida, may soon be out from underneath the cloud of an involuntary bankruptcy petition.
After the involuntary Chapter 11 petition was filed in March, the developer filed a motion which the bankruptcy court in Miami granted on April 21 requiring the petitioners to file a $200,000 bond by the next day.
The bond hasn’t been filed, the resort developer said in a motion this week. The motion seeks to have the petitioning creditors held in contempt for failing to post the bond.
The bond was designed by the bankruptcy judge to cover the owner’s costs and attorneys’ fees it would be entitled to recover if the involuntary petition were dismissed.
Two different groups have been contending they properly are in control of the developer. One group includes purported creditors who filed an involuntary Chapter 11 petition on March 17.
The other group claiming to be the actual owners said the involuntary petition was a “last ditch effort to maintain” claims to ownership. There was a lawsuit already pending in Florida state court to decide who properly is in control of the company.
One court filing said there are $100 million in legitimate claims for borrowed money. AIG Annuity Insurance Co. is one of the lenders, the filing said.
The first-filed case is In re Fisher Island Investments Inc., 11-17047, U.S. Bankruptcy Court, Southern District Florida (Miami).
Torchlight Seeks to Terminate PJ’s Right to Use Cash
The secured lender to PJ Finance Co., not content to wait until the June 1 hearing on its motion to dismiss the Chapter 11 case, filed an emergency motion on May 18 to discontinue the use of so-called cash collateral.
PJ, the owner of 32 apartment buildings, answered the allegations the same day.
Torchlight Loan Services LLC, the special servicer for $475 million in mortgage-backed securities, contends PJ violated the order granting the use of cash representing collateral for its secured claim. Torchlight said PJ failed to provide weekly reports showing budget compliance.
Torchlight also alleged that PJ violated the financing order by exceeding a 10 percent variation on line items in the budgets.
PJ responded by saying it has taken “remedial measures” to ensure timely filing of weekly reports. As for excessive spending, it says that overall expenses are below budget, although some items exceeded predictions.
In the motion to dismiss to be heard in U.S. Bankruptcy Court in Delaware on June 1, Torchlight wants the case converted to liquidation in Chapter 7 if the judge isn’t inclined to dismiss. The lender previously mounted unsuccessful challenges to the use of cash representing collateral for the secured debt.
Among the projects’ 9,500 units, 1,700 aren’t in condition to be rented, PJ said in a filing. PJ said it has a commitment to invest $42 million and serve as the foundation for a reorganization plan.
Trade suppliers are owed $4.4 million, according to court papers. The projects are in Arizona, Florida, Georgia, Tennessee and Texas. PJ gave its address as the office of a law firm in Chicago.
The case is PJ Finance Co. LLC, 11-10688, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Scovill Committee Seeks Unsecured Creditors’ Carveout
The creditors’ committee for Scovill Fasteners Inc. opposes final financing approval absent changes. The hearing on the loan is set for May 24.
There will be an auction on June 8 testing whether the $17 million offer from Global Equity Capital LLC is the best bid for the business. The committee says the loan doesn’t put cash aside to wind down case once the sale is completed.
The committee also objects to how lawsuits not making up the lenders’ collateral will be sold and nothing given in return for unsecured creditors.
The committee wants 4 percent of the sale price up to $17 million to be carved out for unsecured creditors. If the price exceeds $17 million, the committee wants 25 percent of the excess.
The committee argues that the $65,000 budget for the committee in the loan is inadequate. It wants $250,000 plus $60,000 to investigate the validity of secured claims.
Scovill, a maker of fasteners for consumer and military clothing, made the agreement with Global Equity before the Chapter 11 filing on April 19. The buyer will also pay the cost of curing contract defaults. The committee previously predicted that the sale would yield “little or no cash recovery” for unsecured creditors.
The bankruptcy judge in Gainesville, Georgia, previously approved $20.8 million of interim financing from General Electric Capital Corp., as agent for lenders.
Based in Clarksville, Georgia, Scovill said assets are less than $50 million while debt exceeds $100 million. Scovill’s trademarks include Gripper, Duramark and Dot.
The case is In re Scovill Fasteners Inc., 11-21650, U.S. Bankruptcy Court, Northern District of Georgia (Gainesville).
Borders Ending Licensing Arrangement with Starbuck’s
Book retailer Borders Group Inc. said in a court filing yesterday that it will soon file a motion to terminate the licensing arrangement with Seattle’s Best Coffee LLC, a subsidiary of Starbucks Corp.
For Bloomberg coverage, click here.
Borders has been searching for a buyer to operate the entire chain, so far without success. The Ann Arbor, Michigan- based company had 642 stores on filing under Chapter 11 on Feb. 16. After closing 225, it said there are now about 405 stores operating.
Borders listed assets of $1.28 billion and liabilities totaling $1.29 billion. Debt included $196 million on a revolving credit and $48.6 million on a term loan. Trade suppliers are owed $302 million for inventory.
Borders is 31 percent-owned by Pershing Square Capital Management LP and 15.4 percent-owned by LeBow Gamma LP.
The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Windstar Approved to Sell Business to Anschutz
Windstar Cruises, the operator of three luxury sailing yachts, went through an all-day contested hearing on May 18 and was given tentative approval yesterday by the bankruptcy judge to sell the business for $39 million in cash to a subsidiary of Anschutz Corp.
Anschutz won the auction where the first bid came from Whippoorwill Associates Inc. The holder of first- and second- lien debt, Whippoorwill was offering to take ownership in exchange for about $40 million in debt, including $10 million promised for the Chapter 11 case.
The official creditors’ committee objected to the sale, contending that Whippoorwill controlled Windstar, manipulated an otherwise unnecessary Chapter 11 filing, and arranged the sale so the price would be enough to cover the debt it was owed plus counsel fees, “but not a dollar more.”
For a rundown on the committee’s objections, which were contained in part in a complaint to subordinate Whippoorwill’s claims, click here for the May 19 Bloomberg bankruptcy report. For Bloomberg coverage of this week’s hearing, click here.
Two Windstar yachts accommodate 148 guests and the third has berths for 312. It filed under Chapter 11 on April 1, having already worked out an agreement for Whippoorwill to buy the business.
Assets are $86.4 million, with debt totaling $87.3 million, according to the petition. Debt includes a first-lien term loan owed to Whippoorwill for $9.6 million. There are $19.7 million in 10 percent second-lien notes, where Whippoorwill holds 88 percent.
In addition, Windstar owes $31.2 million to holders of 3.75 percent convertible notes who aren’t slated to recover anything in the Chapter 11 case.
The case is In re Ambassadors International Inc., 11-11002, U.S. Bankruptcy Court, District of Delaware (Wilmington).
North American Petroleum Pays Off Lender With Sale
North American Petroleum Corp. USA, subsidiary Prize Petroleum Corp. and parent company Petroflow Energy Ltd. received bankruptcy court approval for a settlement agreement on May 17 that pays the secured lender in full and opens the door to filing a Chapter 11 plan.
North American and Prize filed under Chapter 11 in May 2010, at the time owing $103 million on a term loan and revolving credit provided by Texas Capital Bank NA. The settlement, according to the company’s court filing, will give a “substantial recovery” to unsecured creditors while allowing the “reinstatement” of the existing stock.
The settlement ends disputes over how much was owed to an affiliate of Equal Energy Ltd. under a so-called farmout agreement.
In the triangular settlement, Equal will buy North American’s Oklahoma properties for a gross cash price of $93.5 million. North American in turn will pay $98 million for full payment of the bank debt. Equal will waive claims against North American.
The lender will receive 70 percent of certain future state tax refunds. North American said the settlement “brings closure to nearly all outstanding issues in these cases.”
The settlement was the result of rulings by the bankruptcy judge following a trial involving North American, the lender and Equal. Although the second phase of the trial was yet to be held, North American said that the ruling appeared to mean it would recover $26 million from Equal.
North American is an independent exploration and production company drilling unconventional gas wells in Oklahoma under the Equal farmout agreement.
The Chapter 11 filing was precipitated by liens Equal filed against wells, alleging it was owed $15 million. Also alleging North American was in default for missing deadlines on drilling wells, Equal directed customers to send payments to them rather than North American. Customers’ holdbacks totaling $7 million also contributed to the Chapter 11 filing.
Under farmout agreements, North American drilled wells on leases owned by Equal. Once a well was completed, Equal operated the well while giving North American 70 percent of revenue.
The case is In re North American Petroleum Corp. USA, 10- 11707, U.S. Bankruptcy Court, District of Delaware (Wilmington).
HearUSA Given Approval for $10 Million Financing
HearUSA Inc., operator of 134 stores selling hearing aids in 10 states, filed a Chapter 11 petition on May 16 and was given authority from the bankruptcy judge yesterday for $10 million in financing provided by William Demant Holdings A/S.
The loan will be secured by a lien junior to existing bank credits. Demant, based in Denmark, has an agreement to buy the business for $80 million.
The final hearing for financing approval is set for May 31. HearUSA owes $31.3 million to Siemens Hearing Instruments Inc., the principal supplier and primary secured lender.
The Demant contract requires bankruptcy court approval of auction procedures by June 6 and the completion of the auction by July 18. The hearing for approval of the sale must occur by July 19.
In 2010, revenue of $83.5 million resulted in a $2.6 million loss from operations and a $7.9 million net loss. For this year’s first quarter, revenue of $14.8 million resulted in a $2.2 million loss from operations, a court filing said. Projected revenue this year is $61 million.
The petition for the West Palm Beach, Florida-based company said assets are $65.6 million, against debt of $64.7 million.
The case is In re HearUSA Inc., 11-23341, U.S. Bankruptcy Court, Southern District of Florida (West Palm Beach).
Statistics
Liquidity, Covenant Problems Abating on Junk Debt
The number of junk-rated companies experiencing financial distress continues to decline, according to a May 18 report from Moody’s Investors Service.
Moody’s said its liquidity-stress index declined in April to 4.1 percent, a level not seen since March 2005. The index shrank 0.3 percent from the month before. The index measures the percentage of junk-rated companies with the weakest liquidity.
The high for the liquidity-stress index was 14.5 percent in October 2009.
A similar decline was seen among companies under threat of violating loan covenants.
Moody’s covenant-stress index fell to 2.3 percent in April, the lowest since June 2005 when it was 1.9 percent. The covenant index’s high was 17.3 percent in March 2009.
Downgrade
Vestar’s Sun Products Downgraded on P&G Competition
Sun Products Corp., the largest maker of private-label laundry detergents in North America, lost one notch on its corporate credit when Moody’s Investors Service lowered the grade to B2 yesterday.
Moody’s said the company’s weakening performance and the resulting downgrade stemmed from “highly aggressive promotional spending by large, deep-pocketed competitors” and “escalating raw material costs.
The rating for the $225 million second-lien term loan also went one grade lower, to B3.
Sun’s competitors include Procter & Gamble Co. and Church & Dwight Co. Brands belonging to the Wilton, Connecticut-based company include All, Snuggle and Sun Wisk. Revenue in 2010 was $1.9 billion, Moody’s said.
Sun is indirectly controlled by Vestar Capital Partners, according to Moody’s.
Bankruptcy Audio & Video
Borders, Blockbuster, Innkeepers, Merit Group, Windstar
Whether book retailer Borders Group Inc. can survive is the first topic covered on the latest Bloomberg bankruptcy video with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. They use the Blockbuster Inc. case to explain why it’s a good idea to be certain the facts are sound before suing someone like Carl Icahn. The video winds up by explaining why the reorganization of Innkeepers USA Trust can be a test case for whether it’s permissible to hold an auction not formally authorized by the bankruptcy court. To watch, click here.
On the new Bloomberg bankruptcy podcast, Pacchia and Rochelle explain why Merit Group Inc. is an acquisition opportunity for someone in the building-supply business. Next, they talk about how Anschutz Corp. was the surprise top bidder for the three luxury sailing yachts owned by Windstar Cruises. Reasons are sought for the unusually high level of activity by the U.S. Trustee in the Chapter 11 case of an alleged Ponzi scheme called West End Financial Advisors LLC. The podcast concludes with an explanation for why it’s sometimes preferable to have appellate court decisions that aren’t surprising. To listen, click here.
Advance Sheets
Inherited Home, IRA Remain Exempted Assets
U.S. Bankruptcy Judge Cecelia Morris in Poughkeepsie, New York, came down on the side of individual bankrupts with regard to an issue that divides lower courts. The question deals with whether property inherited from a spouse can be exempted.
A husband and wife filed bankruptcy together. The wife, who owned their home in her own name, died during the bankruptcy. In addition to the house, the husband inherited her individual retirement account.
The bankruptcy trustee admitted that the wife, while living, was properly entitled to exempt the home and the IRA, thereby retaining the property even in bankruptcy.
The bankruptcy trustee contended that the home and the IRA were no longer exempt when inherited by the husband. Morris disagreed.
Looking at Sections 541 and 522 of the Bankruptcy Code, she found cases more persuasive that hold a home inherited from a spouse retains its exempt status even though the surviving spouse hadn’t been an owner at the time of bankruptcy.
She also followed those cases concluding that a properly tax-exempt IRA inherited from a deceased spouse is also exempt.
Morris’s conclusion on the IRA is the same as a case we reported in March where a district judge in Texas held that an IRA inherited by a daughter was exempt in the daughter’s bankruptcy. To read, click here and see the Advance Sheet item in the March 18 Bloomberg bankruptcy report.
The case is In re Cutignola, 10-38888, U.S. Bankruptcy Court, Southern District of New York (Poughkeepsie).
--With assistance from Linda Sandler and Tiffany Kary in New York and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Stephen Farr, Mary Romano
To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net.
To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.
