Borders, WaMu, Highview, Windstar, Blockbuster: Bankruptcy
May 23, 2011, 8:15 AM EDTBy Bill Rochelle
(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Borders as first item, AmTrust Financial and Madoff in Updates, Blockbuster Canada in New Filing and section on Bank Failures.)
May 23 (Bloomberg) -- Borders Group Inc. filed an operating report showing a $29.7 million operating loss for the period March 27 through April 30.
The book retailer is seeking a four-month extension of the exclusive right to file a plan and submitted papers to terminate the license for operating Seattle’s Best Coffee shops inside the stores. The hearings to extend exclusivity and terminate the coffee-shop license will be held June 2.
Revenue for the period ending March 30 was $173.1 million. The net loss was $132.2 million after $2.4 million in interest expense and $98.1 million in reorganizations items.
In requesting an extension of so-called exclusivity, Borders claims it has made “significant progress” in the reorganization, along with “significant cost savings.”
The exclusivity motion doesn’t say that any major publishers are providing trade credit. The motion says the business plan remains under discussion with creditors. The motion is likewise silent on whether there is likely to be a going-concern sale or an internal reorganization.
Regarding the license with Seattle’s Best Coffee LLC, a subsidiary of Starbucks Corp., Borders said it’s losing $10 million a year. Borders said the license agreement requires paying fees and purchasing some supplies exclusively from Seattle’s Best. As a result, costs are “excessive,” making the operations unprofitable, Borders said.
After Seattle’s Best is ousted from the stores, Borders plans to continue the coffee-shop operation either on its own or with another provider. Ann Arbor, Michigan-based Borders had 642 stores on filing under Chapter 11 on Feb. 16. After closing 237, 405 stores are now 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).
Updates
Plan Settlement in the Works with WaMu Shareholders
Washington Mutual Inc. pushed back the confirmation hearing for approval of the Chapter 11 plan until June 29, “in light of ongoing discussions,” the company said in a bankruptcy court filing. Approval of the Chapter 11 plan had been scheduled for June 6.
Bloomberg reported a tentative settlement between shareholders and WaMu’s larger creditors. Click here to read the Bloomberg story.
The compromise would give existing shareholders some stock in reorganized WaMu, two people familiar with the proposal said. There would also be $25 million to fund a litigation trust to bring suits for benefit of shareholders.
In return, shareholders will drop claims that the creditors used inside information.
Creditors voted again on WaMu’s modified reorganization plan. Voting ended May 13. Since there is nothing formal about the newest settlement, it’s unclear whether votes must be taken once again.
The judge wrote a 109-page opinion in January explaining why she couldn’t confirm a prior version of the plan. For details on the revised plan, click here for the Feb. 14 Bloomberg bankruptcy report. For details on WaMu’s last-minute changes in the disclosure, click here for the March 21 Bloomberg bankruptcy report. For details on the opinion denying confirmation of the prior plan, click here for the Jan. 10 Bloomberg bankruptcy report.
The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank, once the sixth-largest depository and credit- card issuer in the U.S., was the largest bank failure in the country’s history. The holding company filed formal lists of assets and debt showing property with a total value of $4.49 billion against liabilities of $7.83 billion.
The holding company Chapter 11 case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Highview Point Allegedly Part of Kenwood Ponzi Scheme
The Securities and Exchange Commission had a receiver appointed in February to take over a suspected Ponzi scheme named Kenwood Capital Management LLC. The receiver, John J. Carney, filed a motion in Delaware bankruptcy court last week to dismiss the Chapter 11 petition filed on May 6 by Highview Point Partners LLC.
The receiver says the Highview filing was a bad-faith attempt to preclude him from taking it over as an adjunct to the Kenwood Ponzi scheme.
In the two weeks since Highview filed its bare-bones Chapter 11 petition, few papers were filed aside from lists of creditors and shareholders. The petition said assets are less than $500,000 while debt exceeds $100 million.
The receiver called Highview a non-operating investment adviser that directed “fraudulent and illegal transfers” between Highview funds and Kenwood funds. He said principals of Highview have been under investigation by the SEC and the U.S. Attorney in Connecticut.
Carney described how the Highview petition was signed by an officer who invoked his Fifth Amendment rights not to incriminate himself when called to testify. The receiver says the funds of Highview and Kenwood were “inextricably commingled.”
The receiver had a motion pending in U.S. District Court to extend his receivership to cover Highview. The morning of the hearing, Highview filed the Chapter 11 petition. He contends the filing was intended to “stonewall the receiver’s investigation.”
A call to Highwood for comment on May 20 wasn’t returned.
The case is In re Highview Point Partners LLC, 11-11432, U.S. Bankruptcy Court, District of Delaware (Wilmington).
AmTrust Financial Files Plan with FDIC Suit Pending
AmTrust Financial Corp., a holding company for a failed bank, filed an amended Chapter 11 plan last week.
Although there is no conclusion yet to litigation with the Federal Deposit Insurance Corp. that will determine whether creditors receive anything at all, there will be a hearing on June 10 for approval of the explanatory disclosure statement.
For now, AmTrust has the upper hand with the FDIC. Last year, the U.S. District Judge Donald C. Nugent in Cleveland ruled that documents were ambiguous as to whether the holding company was under a commitment to provide capital to the bank subsidiary. The FDIC claimed the unfulfilled commitment was $550 million.
At trial in April, a jury concluded there was no commitment and thus no right for the FDIC to collect $550 million from the AmTrust holding company, even though the bank failed four days after AmTrust filed under Chapter 11 in November 2009.
After the district judge enters judgment for AmTrust, the holding company assumes the FDIC will appeal. The pendency of the appeal will prevent a distribution to creditors even if the plan is confirmed in the meantime.
There is a second dispute with the FDIC over the entitlement to a $194 million tax refund for 2009 that the Internal Revenue Service is yet to pay. The FDIC claimed the right to collect all but $9 million of the refund. Since the tax refund is the largest asset, the outcome of the dispute will determine whether there is much to distribute to unsecured creditors, even if AmTrust beats back the FDIC on its claim for the $550 million.
AmTrust said there are about $173 million in unsecured claims. The largest component represents $99.5 million owing to holders of 11.78 percent senior notes due 2012.
Shortly before bankruptcy, AmTrust gave security interests to collateralize the notes. Although AmTrust sued to void the security interest as a preference, the noteholders decided spending money on defense would be futile. Consequently, the plan treats the notes as unsecured.
There is about $20 million owing to general unsecured creditors and $51.6 million on subordinated notes. The plan recognizes the subordination. As a result, the distribution on the subordinated notes will go to the senior noteholders until they are paid in full.
The disclosure statement doesn’t say how much creditors could expect to recover assuming victory over the FDIC.
The dispute with the FDIC over the capital commitment involves Section 365(o) of the Bankruptcy Code, which says that a bank holding company in Chapter 11 must make good on any “commitment” with the FDIC to maintain capital at a bank. Further, the commitment is an obligation to be paid in full in the Chapter 11 case and isn’t discharged at pennies on the dollar like pre-bankruptcy unsecured claims.
AmTrust’s bank subsidiary was taken over and transferred by the FDIC to New York Community Bank.
Based in Cleveland, AmTrust Financial said the family of companies had assets of $11.7 billion and $11.5 billion of debt before the bank failed.
At the start of the Chapter 11 case, the assets of the companies in bankruptcy included ownership of the non-bankrupt subsidiaries, $7.3 million cash and $23 million of fixed assets at book value. Debt of the companies in bankruptcy included $169.5 million for borrowed money, made up of $99.5 million on senior notes and $51.6 million on subordinated notes.
The lawsuit with the FDIC in the district court is Federal Deposit Insurance Corp. v. AmTrust Financial Corp., 10-1298, U.S. District Court, Northern District of Ohio (Cleveland). The Chapter 11 case is In re AmFin Financial Corp., 09-21323, U.S. Bankruptcy Court, Northern District of Ohio (Cleveland).
Windstar Sale Without Prejudice to Whippoorwill Suit
Although the bankruptcy judge gave Windstar Cruises authority to sell its three luxury sailing yachts to The Anschutz Corp., the order approving the sale says that creditors’ committee can nonetheless raise claims against the principal secured creditor, Whippoorwill Associates Inc.
The committee unsuccessfully opposed the sale. Along with opposition papers, the committee filed a lawsuit against Whippoorwill contending that the secured lender controlled Windstar, fabricated the basis for 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.”
The order approving the sale says that the seller, Windstar, and the buyer, Anschutz, were both in good faith. Nonetheless, the last paragraph in the sale-approval order says that it’s without prejudice to the ability of the committee to pursue claims against Whippoorwill and Windstar’s managers.
There are grammatical errors in the paragraph making it unclear exactly what the critical paragraph in the order means and the extent to which it won’t prejudice the committee’s suit.
A creditors’ committee isn’t automatically authorized to file claims belonging to a bankrupt company. Because the committee wasn’t authorized to file the complaint, the order also says that it can’t be interpreted as giving the committee the right to pursue the complaint against Whippoorwill.
For a summary of the committee’s complaint, click here for the May 19 Bloomberg bankruptcy report.
Anschutz is paying $35 million cash for two Windstar yachts that accommodate 148 guests and a third with births for 312. Windstar filed under Chapter 11 on April 1, having already worked out an agreement for Whippoorwill to buy the business in exchange for $40 million in secured debt. Anschutz won the auction, beating out Whippoorwill.
The petition said assets are $86.4 million, with debt totaling $87.3 million. Debt includes a first-lien term loan owing to Whippoorwill for $9.6 million. There are $19.7 million in 10 percent second-lien notes, where Whippoorwill holds 88 percent. Whippoorwill was also supplying up to $10 million to finance the Chapter 11 case.
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).
Viceroy Resort Auction on for July 27, Approval Later
The Viceroy Anguilla Resort & Residences on the island of Anguilla was authorized by the bankruptcy court on May 19 to hold an auction for the project in Anguilla on July 27.
The sale will be approved at a later hearing for confirmation of a Chapter 11 plan. The hearing date will be set later.
The committee has taken the position in a court filing that the resort’s management was “bought off” to “do the bidding” of secured creditor Starwood Capital Group LLC, which is expected to buy the resort at auction.
To avoid offending Anguilla law, the auction is without the usual stalking horse protections and breakup fees.
The bankruptcy court held a May 13 hearing on the committee’s motion for appointment of a Chapter 11 trustee. The court docket says that the committee presented its case and that the “parties are talking.”
For details on the proposed Chapter 11 plan, click here for the April 5 Bloomberg bankruptcy report.
Starwood, owed $370 million, is offering $5 million in financing for the Chapter 11 effort. Greenwich, Connecticut- based Starwood acquired the secured debt in October.
Construction began in 2005. Over budget, the resort didn’t open officially until October 2010.
The petition lists assets of $531 million and debt totaling $462 million. The 35-acre project has 166 residences with prices ranging from $600,000 to $6.5 million.
The case is In re Barnes Bay Development Ltd., 11-10792, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Garlock Given Exclusivity and Little Else from Judge
The reorganization of Garlock Sealing Technologies LLC isn’t going exactly the way the company had in mind. Instead, it’s going according to the ideas of U.S. Bankruptcy Judge George R. Hodges in Charlotte, North Carolina.
Garlock filed under Chapter 11 in June 2010 to deal with the last 100,000 asbestos claims. Non-bankrupt affiliates are defendants on 30,000 claims.
For a second time, Garlock asked the judge to require asbestos claimants to file claims. Ordinarily, a claim includes little more than the amount of the debt and a brief statement of the basis for the liability. Garlock instead wanted creditors to include extensive information about the basis for the claim and the resulting illness, if any.
Hodges said “no” in an order last week. Previously, Hodges said he wanted a trial estimating the total amount of asbestos claims, not a valuation on a claim-by-claim basis.
Garlock also wanted discovery from other companies that already completed Chapter 11 reorganization. In addition, Garlock wanted discovery from lawyers for asbestos plaintiffs. Again, Hodges said “no” in an order last week.
Hodges did make one ruling in Garlock’s favor. The creditors’ committee wanted the judge to allow them to file their own plan when the company’s exclusivity expires on May 31. Instead, Hodges extended Garlock’s exclusive right to file a plan until Nov. 28.
Garlock, a Palmyra, New York-based gasket maker, is a subsidiary of EnPro Industries Inc. It said it intends to pay all asbestos claimants in full while using bankruptcy law so EnPro and all subsidiaries will have releases. There is $194 million of insurance remaining, according to a Garlock court filing.
EnPro had assets of $1.18 billion and total liabilities of $678.4 million on the March 31 balance sheet. Net income for EnPro was $15.2 million in the first quarter on net sales of $270 million. For 2010, net income was $155.4 million on $865 million in net sales.
EnPro makes engineered products, including diesel and natural-gas engines. It has 44 plants in the U.S. plus operations in 10 other countries.
The case is In re Sealing Technologies LLC, 10-31607, U.S. Bankruptcy Court, Western District of North Carolina (Charlotte).
Madoff Trustee Sues Switzerland’s Banque Syz
Banque Syz & Co., a Swiss bank, was sued on May 20 for $73.3 million by the trustee liquidating Bernard L. Madoff Investment Securities Inc. For Bloomberg coverage, 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 new lawsuit is Picard v. Banque Syz & Co., 11-02149, 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).
Constar Confirms Second Prepackaged Bankruptcy
Constar International Inc., a manufacturer of blow-molded plastic beverage containers, succeeded in having the judge approve the prepackaged reorganization plan at a May 20 confirmation hearing.
Constar sought refuge in Chapter 11 in January and won approval of the disclosure statement in February. The plan, called prepackaged because it was negotiated before filing, provides for holders of $220 million in senior secured floating- rate notes to receive a new $70 million term loan and $30 million of convertible preferred stock.
The notes being converted were issued in Constar’s prior bankruptcy reorganization about two years ago.
In the first reorganization, $175 million of 11 percent subordinated notes were exchanged for all the new stock. The stock given out in the prior bankruptcy is being extinguished this time. For details on the new plan, click here for the Jan. 12 Bloomberg bankruptcy report.
The previous reorganization began on Dec. 30, 2008, and concluded with a confirmed plan in late May 2009.
The Sept. 30 balance sheet for Philadelphia-based Constar listed assets of $325 million and total liabilities of $321 million. The new petition said assets are $418 million with debt of $414 million.
The new case is In re Constar International Inc., 11-10109, U.S. Bankruptcy Court, District of Delaware (Wilmington). The prior reorganization was In re Constar International Inc., 08- 13432, in the same court.
New Filing
Blockbuster Canada Files Chapter 15 in New York
Blockbuster Canada Co., an indirect subsidiary of Blockbuster Inc., filed a Chapter 15 petition on May 20 in New York.
Directors’ and officers’ liability insurance for Blockbuster Canada was to expire May 3. The day before, all directors and officers resigned. Movie studios, owed $70 million, commenced the receivership in Canada on May 3 in the Ontario Superior Court of Justice under the Bankruptcy & Insolvency Act.
The receiver appointed by the Ontario court filed the Chapter 15 petition to halt creditor actions in the U.S. Relief in Chapter 15 isn’t automatic.
If the U.S. judge determines that Chapter 15 is being properly invoked, he can assist in the collection of assets. In that event, creditors of the Canadian subsidiary would be compelled to submit their claims in Ontario and receive distributions under Canadian law.
The Canadian receiver said in his papers that Dish Network Corp., the purchaser of the U.S. assets, decided not to exercise an option to buy the Canadian business. Dish paid a gross price of $320 million for the U.S. business.
The Blockbuster Chapter 15 petition said assets and debt are both less than $100 million.
Dish completed the U.S. acquisition in April. The price didn’t cover the cost of goods and services supplied during the Chapter 11 case, much less the $630 million in secured notes. For details about who was paid and who isn’t, click here for the April 12 Bloomberg bankruptcy report.
Blockbuster began the attempt at Chapter 11 reorganization in September with 5,600 stores, including 3,300 in the U.S. and the remainder abroad.
The U.S. petition listed assets of $1.02 billion against debt of $1.47 billion. Blockbuster estimated it owed $57 million in accounts payable, in addition to secured and subordinated notes.
The Chapter 15 case is In re Blockbuster Canada Co., 11- 12433, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The parent’s Chapter 11 case is In re Blockbuster Inc., 10-14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Bank Failures
Bank Failures in 2011 Now Total 43
Three banks were taken over on May 20, bringing the year’s total to 43.
The failures collectively cost the Federal Deposit Insurance Corp. $445.7 million. Two of the failed banks were in Georgia. The third was in Washington State.
Last year, there were 157 bank failures, compared with 140 in 2009. Last year’s were the most since 1992, when 179 institutions were taken over by regulators.
Advance Sheets
Requirements Contract for Power is Forward Contact
A so-called requirements contract for electricity was a forward contract, with the result that payments within 90 days of bankruptcy couldn’t be recovered as preferences, according to a May 17 opinion by U.S. District Judge Ivan L.R. Lemelle in New Orleans.
In upholding a ruling in the bankruptcy court, Lemelle disagreed with statements from several other courts, including the U.S. Circuit Court of Appeals in Cincinnati.
The bankrupt owner of 45 apartment projects had a contract where Mxenergy supplied all electricity requirements. A trustee for creditors sued to recover $156,000 in payments made within 90 days of bankruptcy.
The bankruptcy judge dismissed the complaint, saying the case involved a forward contract. Consequently, the so-called safe harbor in Section 546(e) of the U.S. Bankruptcy Code prohibits recovery of a payment in settlement of a forward contract.
The trustee appealed and lost again in Lemelle’s court.
Lemelle ruled that the statue does not require that both sides of the contract must be forward contract merchants to quality for the safe harbor. He also held that the arrangement qualified as a forward contract even though there was no specified amount to be delivered nor a time when the electricity would be delivered.
Lemelle cited several other courts saying that a contract must either provide for delivery of a specified amount or at a specified time to quality for protection as a forward contract. Lemelle disagreed with those cases and said that the statements about specified amounts or time of delivery were so-called dicta.
Dicta is a statement by a court not needed for the result in the particular case. Dicta is not binding although another court can find it to be more or less persuasive.
The case is Lightfoot v. Mxenergy, 10-2794, U.S. District Court, Eastern District of Louisiana (New Orleans).
Daily Podcast
Lehman, Sbarro, A&P, Blisxeth-Yellowstone: Bankruptcy Audio
The bankruptcy judge overseeing Lehman Brothers Holdings Inc. is about to undergo a vote of confidence by a federal district judge, according to the first item analyzed on the new Bloomberg bankruptcy podcast. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle next discuss whether it was good or bad news when Sbarro Inc., the fast-food restaurant operator and franchiser, abandoned the prepackaged Chapter 11 plan. The $34 million operating loss in March from Great Atlantic & Pacific Tea Co. provides the jumping off point for an impromptu discussion about the declining fortunes of the American consumer. The podcast ends with an analysis of a creative ruling by the bankruptcy judge with regard to the involuntary petition filed against Timothy Blixseth, founder of the bankrupt Yellowstone Mountain Club LLC in Montana. To listen, click here.
--With assistance from Linda Sandler in New York, Dakin Campbell in San Francisco and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Glenn Holdcraft, Peter Blumberg
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.
