Bloomberg News

Madoff, Nortel, WaMu, Deb, Lehman, Allen, Vitro: Bankruptcy

July 05, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Vitro; adds Madoff, Nortel, Washington Mutual, PJ Finance, Bear Island and Raser in Updates; Lambuth University in New Filings.)

July 5 (Bloomberg) -- U.S. District Judge Jed S. Rakoff sounded as though he might eventually rule that bankruptcy law doesn’t govern that part of the lawsuit where the trustee liquidating Bernard L. Madoff Investment Securities Inc. is seeking to recover $700 million in principal that Fred Wilpon, Sterling Equities Inc., the owners of the New York Mets baseball club, and Wilpon’s friends, family and associates took out of the Ponzi scheme before the fraud surfaced publicly.

At a hearing July 1, Rakoff said he, not the bankruptcy judge, would initially decide if the Wilpon group had a duty to investigate whether the Madoff firm was a fraud. Rakoff said, “It doesn’t seem to me to be self-evident that bankruptcy law sets the duty of inquiry that a customer of a brokerage has.”

“How can it be that the law governing someone’s duty to inquire is determined, not by what the governing laws in place were at the time, but by the happenstance that the entity later went into bankruptcy?” Rakoff asked at another juncture in the hearing.

The Wilpon group argues that federal securities laws govern and give them no duty to investigate whether the broker is a fraud. For Bloomberg coverage of the July 1 hearing in Rakoff’s court, click here.

Rakoff previously ruled it was appropriate for the district court to make initial rulings about dismissal of the trustee’s lawsuits against HSBC Holdings Plc and UniCredit SpA.

The Madoff firm began liquidating in December 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 motion by Wilpon to remove the suit from bankruptcy court is Picard v. Katz, 11-03605, U.S. District Court, Southern District New York.

In bankruptcy court, the liquidation of the Madoff firm 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, Southern District of New York (Manhattan).

Updates

Nortel Bonds Double on Results From Auction of 6,000 Patents

Bonds issued by Nortel Networks Inc. soared July 1 on news that the auction for 6,000 patents brought in $4.5 billion, a 500 percent increase from the opening bid.

The 6.875 percent Northern Telecom Ltd. unsecured notes due 2023 rose 109 percent in July 1 trading, to close at 69 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Nortel Networks 10.75 percent senior guaranteed bonds due July 2016 rose 9.8 percent, to close on July 1 at 106 cents on the dollar, Trace reported. The day before, the bonds closed at 96.5 cents.

A group composed of Apple Inc., Microsoft Corp., Sony Corp., Research In Motion Ltd., Ericsson AB and EMC Corp. made the winning bid. For Bloomberg coverage of the auction, click here.

The hearing to approve the sale is scheduled to be held on July 11 simultaneously in courts in the U.S. and Canada.

Proceeds from the patent auction are in addition to the $3 billion Nortel already raised from selling most of its other assets and businesses.

The Nortel companies filed for bankruptcy reorganization in January 2009 in the U.S., Canada and London. They reported $11.6 billion in consolidated assets against debt totaling $11.8 billion as of Sept. 30 2008.

The Chapter 11 case is In re Nortel Networks Inc., 09- 10138, and the parent’s Chapter 15 case is In re Nortel Networks Corp., 09-10164, both in U.S. Bankruptcy Court, District of Delaware (Wilmington).

Fulton Homes Confirms Plan After Bank Settlement

Homebuilder Fulton Homes Corp. and bank lenders slugged it out through seven contested confirmation hearings dating back to November. The end result was a settlement with the banks and the signature by the bankruptcy judge on a confirmation order last week approving the company’s Chapter 11 plan.

As part of the settlement, the banks withdrew their competing plan and supported the company plan where they agreed to a $570,000 reduction in reimbursement of their professional fees.

Fulton said that the banks are receiving $57.5 million immediately under the plan. In the future, the company will operate without outside financing, relying entirely on internally generated funds. In the process, all creditors will be paid in full, the company said.

The lending group includes Bank of America NA, JPMorgan Chase Bank NA, and Wells Fargo Bank NA.

Fulton’s plan was based on the notion that the company was solvent despite having filed bankruptcy.

Charlotte, North Carolina-based Bank of America is agent for unsecured lenders owed about $164 million. Fulton had no substantial secured debt. In addition to $1.2 million owing to so-called secured suppliers, general unsecured claims amounted to $1.2 million at the outset of the bankruptcy.

Fulton previously said it accumulated $65 million cash during the Chapter 11 case that began in January 2009.

The case is In re Fulton Homes Corp., 09-01298, U.S. Bankruptcy Court, District of Arizona (Phoenix).

Deb Shops Has Interim Loan and July 21 Bid Hearing

Deb Shops Inc., a 318-store retailer of junior wear for women ages 13 to 25, filed under Chapter 11 on June 26, received interim authority to borrow $15 million two days later, and scheduled a July 21 hearing for approval of procedures to govern the auction and sale of the business.

July 21 is also the date for a final hearing on a $21 million financing package provided by first-lien lenders.

Before bankruptcy, Deb negotiated an agreement for a group of lenders led by Ableco Finance LLC to purchase the business in 44 states in exchange for $75 million in secured debt. The proposed schedule calls for competing bids by Aug. 24, followed by an auction Aug. 31 and a hearing to approve the sale Sept. 9.

Philadelphia-based Deb said in the petition that assets are $124.4 million while debt totals $270.1 million. Revenue for the year ended in April was $297.2 million. First-lien debt is $117 million. The owner Lee Equity Partners has about $25 million in additional first-lien debt that is paid after the other first- lien lenders are paid in full.

Barclays Bank Plc is agent for second-lien lenders owed $58.6 million. There is an unsecured mezzanine loan for $28.9 million.

Lee acquired Deb in 2007 in a $259.4 million transaction. Lee, a holder of some of the secured debt, is part of the purchasing group.

The case is In re DSI Holdings Inc., 11-11941, U.S. Bankruptcy Court, District of Delaware (Wilmington).

WaMu Securities Class Action Settles for $208.5 Million

Although shareholders of Washington Mutual Inc. aren’t in line for any distribution under the pending version of the Chapter 11 plan for the bank holding company, equity holders are in for a payday given the $208.5 million settlement announced last week in consolidated securities class-action suits.

None of the cash comes from WaMu. Individual defendants or their insurance companies are putting up $105 million. Another $85 million comes from underwriters, plus $18.5 million from Deloitte & Touche LLP. For Bloomberg coverage, click here.

The confirmation hearing for approval of the sixth amended Chapter 11 plan for the WaMu holding company is scheduled to begin July 13. The currently pending plan has no distribution for shareholders since a settlement with equity holders fell through.

The sixth plan resulted from the bankruptcy judge’s 109- page opinion in January explaining why she couldn’t confirm a prior version. For details on the opinion denying confirmation of the prior plan, click here for the Jan. 10 Bloomberg bankruptcy report. For details on the plan as revised after the January ruling, click here for the Feb. 14 Bloomberg bankruptcy report. For details on later changes, click here for the March 21 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 securities class action is In re Washington Mutual Inc. Securities, Derivative & ERISA Litigation, 08-01919, U.S. District Court, Western District of Washington (Seattle).

The holding company Chapter 11 case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Bank of America Moving Quick to Reverse Lehman Judgment

Three weeks sooner than required, Bank of America NA filed papers on appeal in U.S. District Court to set aside a $501.8 million judgment from May in favor of Lehman Brothers Holdings Inc. The judgment resulted from what the bankruptcy judge saw as a violation of the so-called automatic stay that occurred when the bank swept away funds Lehman was holding in an account at the bank.

The bank believes the automatic stay didn’t apply and the bankruptcy judge made a mistake when he ruled it did.

In addition to the judgment itself, the Charlotte, North Carolina-based bank will pay more than $90 million in interest accruing before the judgment was made in May.

The bank filed its papers in district court well in advance of the July 22 deadline. Lehman is required to file its responsive brief in two months. Bank of American can file reply papers one month after Lehman. As a result, District Judge Deborah A. Batts will have all the papers by October.

For details on the controversy about the automatic stay violation, click here for the Dec. 7 Bloomberg bankruptcy report. For other Bloomberg coverage, click here.

Lehman filed a modified Chapter 11 plan last week encompassing a compromise between creditors wanting substantive consolidation of the 23 Lehman companies and creditors opposed. For a summary of the plan and its terms, click here for the June 30 Bloomberg bankruptcy report.

The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold office buildings and the North American investment-banking business to Barclays Plc one week later. The remnants of the Lehman brokerage operations went into liquidation on Sept. 19, 2008, in the same court, with a trustee appointed under the Securities Investor Protection Act.

The Bank of America Appeal in district court is Bank of America NA v. Lehman Brothers Holdings Inc. (In re Lehman Brothers Holdings Inc.), 11-03958, U.S. District Court, Southern District New York (Manhattan).

The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding under the Securities Investor Protection Act for the brokerage operation is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Apartment Owner PJ Finance Files Exclusivity Motion

PJ Finance Co. LLC, the owner of 9,500 apartment units in 32 projects, says it’s entitled to an extension of the exclusive right to propose a Chapter 11 plan given how much it has been tied up in litigation with the secured lender since the Chapter 11 case began in March.

PJ cites the lender’s objection to the use of cash, the lender’s motion to dismiss the Chapter 11 case, and the lender’s objection to the retention of a financial adviser.

At a July 20 hearing, the company will ask the judge to extend the exclusive right to propose a plan until Nov. 15.

Torchlight Loan Services LLC, the special servicer for $475 million in mortgage-backed securities, contended that PJ’s proposed financing is nothing except an effort to “entrench insiders” and “maintain control of the case.” As grounds for dismissal of the entire case, Torchlight argued that the Chapter 11 filing wasn’t made in good faith.

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).

Allen Family Foods Offers $200,000 Executive Bonuses

Although Allen Family Foods Inc. already lined up a buyer and scheduled a July 25 auction, the vertically integrated chicken producer wants the bankruptcy judge to approve $200,000 in incentive bonuses for 10 executives and managers.

Allen is asking the bankruptcy court to approve the bonuses at a July 15 hearing.

If approved, one top-level executive, unnamed, would receive a $50,000 bonus on completion of the contract already in hand. If there is a higher bid, the bonus would increase to $65,000. If the remaining assets are sold or there is a confirmed Chapter 11 plan, the total bonus would rise to $75,000.

Nine other managers are each proposed to have bonuses ranging from $5,000 to $50,000, with the total not exceeding $125,000, if a sale is completed.

Poultry producer Montaire Farms of Delaware Inc. is already under contract to buy most of the assets for $30 million plus the value of inventory.

Seaford, Delaware-based Allen has been producing 400 million pounds of chicken products a year. Capacity is 600 million pounds.

Secured debt includes $83.2 million on a term loan and revolving line of credit with MidAtlantic Farm Credit ACA. MidAtlantic is providing financing for the Chapter 11 case.

Allen’s products are sold under brands including Allen’s, Delmarva and Sussex Farms. Operations include 24 owned and 233 contracted growout farms. The assets being sold don’t include the 24 farms or about 3,400 acres of farmland.

The petition says assets and debt are both less than $100 million.

The case is In re Allen Family Foods Inc., 11-11764, U.S. Bankruptcy Court, District of Delaware (Wilmington).

U.S. Vitro Companies Seek Exclusivity Until October 2

The U.S. subsidiaries of Mexican glassmaker Vitro SAB estimate that as much as $10 million will remain from the sale of the business for distribution under a Chapter 11 plan. The statement was made when the U.S. companies filed papers on July 1 in U.S. Bankruptcy Court in Dallas asking for an additional 60 days when no one else can propose a Chapter 11 plan.

If granted, so-called exclusivity will be stretched out to Oct. 2.

A subsidiary named Vitro Packaging de Mexico SA de CV filed for bankruptcy reorganization on June 29 in a court in Mexico and submitted a Chapter 15 petition on June 30 in U.S. Bankruptcy Court in Dallas. Packaging de Mexico is a distributor of Vitro glass container products in the U.S., according to bankruptcy court filings.

An affiliate of Sun Capital Partners Inc. bought the operations of Vitro’s U.S. subsidiaries for about $55 million. The price rose some $15 million at auction. The sale was completed on June 17.

The U.S. Vitro companies say that final price adjustments under the Sun Capital sale won’t be known until around September. Creditors have until Aug. 24 to file claims. Vitro therefore says it won’t know for several months exactly what creditors stand to receive.

The bankruptcy judge ruled on June 24 that U.S. and Mexican Vitro subsidiaries not in bankruptcy in either country cannot use the U.S. courts for protection from efforts by bondholders to collect $1.2 billion in default for more than two years. The bondholders are opposing the Vitro parent’s effort to reorganize in a court in Mexico. For a rundown on the opinion, click here for the June 27 Bloomberg bankruptcy report.

The new filings last week in the U.S. and Mexico were a result of the June 24 ruling. Vitro said that U.S. customers aren’t paying what they owe due to attachments bondholders obtained to collect on $1.2 billion in defaulted bonds. The bankruptcy judge is to hold a hearing today in Dallas to decide if he will use power in Chapter 15 to stop creditor actions in the U.S.

Several Vitro U.S. subsidiaries put themselves into Chapter 11 in April in response to involuntary petitions filed in November by bondholders opposing the Vitro parent’s proposed reorganization. The Vitro parent’s reorganization plan was revived in a court in Mexico after having been dismissed and reinstated on appeal.

The Chapter 11 cases for U.S. subsidiaries is In re Vitro Asset Corp., 11-32600, U.S. Bankruptcy Court, Northern District of Texas (Dallas). The Chapter 15 case for the parent is Vitro SAB de CV, 11-33335, in the same court.

Auto Parts Maker to Confirm Reorganization Plan on Aug. 17

Cadence Innovation LLC, a one-time auto parts maker, scheduled an Aug. 17 confirmation hearing for approval of a liquidating Chapter 11 plan. The bankruptcy court in Delaware approved the explanatory disclosure statement in what is Cadence’s second venture into bankruptcy reorganization.

The disclosure statement says that unsecured creditors with claims from $52 million to $70 million should recover between 7 percent and 21 percent. Cadence expects there will be $4.7 million to $11 million heading eventually for unsecured creditors.

Cadence’s second Chapter 11 filing was in August 2008. It was dismembered by its principal customers when it became impossible to find a going-concern buyer.

At the outset, Cadence said debt included $43.8 million owing on a secured revolving credit plus $107 million in notes. The Troy, Michigan-based company filed in Chapter 11 with five plants and two service centers in the U.S. making interior parts.

The case is in re Cadence Innovation LLC, 08-11973, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Bear Island Repots $355,000 Net Profit in May

Bear Island Paper Co. LLC, a subsidiary of Canada’s White Birch Paper Co., reported a $355,000 net profit and operating profit in the same amount in May on net sales of $12.26 million. During the month, the gross profit was $1.09 million.

Bear Island was authorized by the bankruptcy judge in November to sell the business to a group consisting of Black Diamond Capital Management LLC, Credit Suisse Group AG, and Caspian Capital Advisors LLC. For details on the sale and a breakdown on the assets and liabilities, click here for the Feb. 3 Bloomberg bankruptcy report.

Based in Nova Scotia, White Birch and U.S. subsidiaries filed for reorganization simultaneously in the U.S. and Canada in February 2010. White Birch is the second-largest newsprint maker in North America.

The case is In re Bear Island Paper Co. LLC, 10-31202, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

Geothermal Plant Owner Raser Reports $1.46 Million Loss in May

Raser Technologies Inc., the owner of a 6 megawatt geothermal electric generating plant in Utah, reported a $1.46 million net loss in May on net revenue of $380,000. Reorganization costs in the month were $624,000.

Raser has a plan calling for a sale of the business to a group including Linden Advisors LP and Tenor Capital Management LP in exchange for debt they hold and $2.5 million cash. Unsecured creditors would receive interests in a litigation trust.

Linden and Tenor are providing financing for the Chapter 11 case. They already own about half the $57.2 million owing on 8 percent convertible senior unsecured notes, a court filing said.

In addition to the one plant, Raser has interests in geothermal rights for seven projects in four western states covering 270,000 acres, plus rights in another 100,000 acres in Indonesia.

The petition listed assets of $41.8 million and debt totaling $107.8 million. The company had revenue of $4.25 million in 2010, resulting in a $71.9 million operating loss. The net loss last year was $101.8 million.

Liabilities of the Provo, Utah-based company include a $10.3 million secured debt on the plant. An affiliate of Merrill Lynch & Co. Inc. has a $22.6 million unsecured debt arising from financing for the plant.

The case is Raser Technologies Inc., 11-11315, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filings

Lee’s Famous Restaurant Franchiser Files Chapter 11

Lee’s Famous Recipes Inc., the franchiser of Lee’s Famous Chicken Restaurants, filed for Chapter 11 protection last week in Atlanta, saying assets are less than $10 million while debt exceeds $10 million.

The Fort Walton Beach, Florida-based company has 80 franchisees operating 150 stores, a court paper says.

The “vast majority” of the debt arises from guarantees given in favor of a sister company, Famous Recipe Co. Operations LLC, which filed under Chapter 11 in November in Atlanta.

The case is In re Lee’s Famous Recipes Inc., 11-68463, U.S. Bankruptcy Court, Northern District of Georgia (Atlanta).

Lambuth University in Tennessee Closes, Files Chapter 11

Lambuth University in Jackson, Tennessee, filed for Chapter 11 protection on June 30 in its hometown.

The trustees of the liberal arts school, founded in 1843, decided to close the school effective June 30, the website says.

The petition listed assets of less than $10 million and debt exceeding $10 million.

Bond Buyer said the school has $5.3 million of taxable and non-taxable bonds, insured by Radian Asset Assurance Inc.

The case is In re Lambuth University, 11-11942, U.S. Bankruptcy Court, Western District of Tennessee (Jackson).

Watch List

Buffets, Chapter 11 Survivor, Downgraded to CCC

Buffets Holdings Inc., an operator of family restaurants, received a two-notch downgrade on July 1 from Standard & Poor’s to match the action taken on June 21 by Moody’s Investors Service.

The new CCC rating coupled with S&P’s conclusion there “could likely” be a loan-covenant violation makes Buffets a possible candidate for a return visit to Chapter 11.

S&P noted that Buffets is exploring strategic alternatives, including a sale of the company.

Moody’s in its earlier downgrade said that free cash flow is negative and interest costs aren’t being covered by earnings before interest, taxes, depreciation, and amortization.

Buffets emerged from Chapter 11 reorganization in April 2009. For details on the plan, click here for the April 29, 2009, Bloomberg bankruptcy report.

Eagan, Minnesota-based Buffets operates under the names including Old Country Buffet, HomeTown Buffet, Ryan’s and Fire Mountain. The bankruptcy reorganization was In re Buffets Holdings Inc., 08-10141, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Downgrade

Seacor Losses Investment Grade Status, Demoted to BB+

Seacor Holdings Inc., one of the larger operators of vessels and helicopters to support the offshore oil and gas industry, lost investment grade status on July 1 when Standard & Poor’s issued a one-notch downgrade to BB+, the highest junk grade.

Although S&P says liquidity is “strong,” financial performance has been hurt by the decline in drilling activity in the Gulf of Mexico. The company’s benefit from the Macondo oil spill is wearing off, S&P said.

S&P says adjusted debt for the Fort Lauderdale, Florida- based company is $945 million.

Seacor rose $1.91 on July 1 to $101.87 in New York Stock Exchange composite trading. The three-year high was $114.80 on Dec. 7, and the three-year low was $53.40 on Oct. 27. 2008.

--With assistance from Linda Sandler and Patricia Hurtado in New York; Edvard Pettersson in Los Angeles; and Steven Church, Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Glenn Holdcraft, 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.


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