Bloomberg News

Madoff, Dodgers, Vitro, TerreStar, GSC, Scovill: Bankruptcy

July 08, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Add Madoff as first item; O’Hare InterContinental, Dodgers and TerreStar in Updates; section on Feature Story; and OfficeMax in Downgrade.)

July 8 (Bloomberg) -- Fred Wilpon, Sterling Equities Inc., the owners of the New York Mets baseball club and Wilpon’s friends, family and associates filed papers yesterday telling U.S. District Judge Jed Rakoff that the $1 billion lawsuit by the trustee for Bernard L. Madoff Investment Securities Inc. should be dismissed on a variety of grounds.

The Wilpon group contended in court papers that brokerage customers have “special protection under federal and state securities laws” immunizing them from allegations they received fraudulent transfers when the broker was conducting a fraud. They said in their 94-page brief there can be no fraud from the perspective of a customer because all payments “discharge the broker’s legal obligations to its customers.”

The Madoff trustee will file his opposition papers on July 22. The Wilpon group can submit another filing on Aug. 12 in advance of oral arguments before Rakoff on Aug. 19.

The Madoff trustee is looking to recover $300 million in what he calls fictitious profits plus $700 million in principal taken out in years before fraud was uncovered.

For the trustee to have a recovery, Wilpon says the trustee must prove the group’s members forfeited their status as customers by knowing they were investing in a fraud. On that score, they say there are no facts to prove “willful blindness” or “conscious avoidance” that Madoff was a Ponzi scheme.

An investigation by even a “sophisticated investor” would have been “futile” because “Madoff fooled the Securities and Exchange Commission,” Wilpon argued.

The Wilpon motion attacks the trustee on the facts as well as the law. He explains why 14 allegations erroneously imply knowledge of fraud.

Pointing to a provision in bankruptcy law know as the safe harbor, Wilpon submits that Section 546(e) of the Bankruptcy Code precludes the trustee from making any recovery because all payments were on account of transactions in securities. Wilpon’s lawyers argue that 546(e) precludes even recoveries for preferences received within 90 days of bankruptcy. The section would allow the trustee to prevail only when a customer was involved in an intentional fraud, Wilpon says.

Wilpon’s motion to dismiss has two facets. First, he says the facts laid out in the complaint don’t establish the basis for any recovery. In that regard, Rakoff must assume the facts in the complaint are true and make any inferences in favor of the trustee.

In the second facet of the motion, Wilpon says the undisputed facts show there is no right to recovery. The trustee can defeat the second aspect of the motion by showing there are disputed issues of fact that can be decided only at trial.

In a different Madoff lawsuit, UBS AG in all likelihood will have the opportunity to seek immediate dismissal of all or part of a lawsuit where the trustee seeks $2.6 billion, claiming the bank looked the other way after seeing red flags indicating that the Madoff firm might have been a scam.

U.S. District Judge Colleen McMahon decided yesterday that the UBS suit is similar to the Madoff trustee’s $19 billion complaint against JPMorgan Chase & Co. McMahon previously ruled that the JPMorgan case must be taken away from the bankruptcy judge and handled in her court.

Although she gave the Madoff trustee until July 11 to file papers explaining why the two lawsuits are different, she said in her letter to the lawyers that taking the UBS case into her court “seems likely.”

McMahon removed the JPMorgan lawsuit from bankruptcy court in May, saying it requires “significant interpretation” of federal non-bankruptcy law that isn’t within the province of a bankruptcy court.

If UBS is intent on filing its own motion to dismiss, McMahon said the Zurich-based bank must adhere to the schedule already set for the JPMorgan case. “I am not going to slow down the JPMorgan case just because UBS has gotten onto the train,” she said.

The schedule calls for JPMorgan to file its motion to dismiss by Aug. 1. The trustee will answer Sept. 1, allowing the bank to submit reply papers Sept. 16.

There was already a motion on file to dismiss 13 of the 21 claims in the prior version of the complaint against JPMorgan in its role as Madoff’s principal bank and broker. The trustee’s revised complaint, where he raised requested damages from $6.4 billion to $19 billion, now has 28 claims.

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 Wilpon suit in district court is Picard v. Katz, 11- 03605, U.S. District Court, Southern District New York. The UBS suit in district court is Picard v. UBS AG, 11-04213, U.S. District Court, Southern District New York (Manhattan). The JPMorgan lawsuit in district court is Picard v. JPMorgan Chase & Co., 11-00913, U.S. District Court, Southern District New York. The JPMorgan lawsuit in bankruptcy court was Picard v. JPMorgan Chase & Co., 10-04932, 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

Losing in Court, Vitro Seeks Bondholder Mediation

Vitro SAB, the glassmaker undergoing bankruptcy reorganization in Mexico and the U.S., lost a series of skirmishes with bondholders and is aiming for more success in mediation.

The bondholders, whose $1.2 billion in bonds have been in default for more than two years, don’t oppose the idea of mediation. They proposed that former U.S. Bankruptcy Judge James L. Garrity take on the role of mediator.

June wasn’t a good month for Vitro. On June 24, a U.S. bankruptcy judge in Dallas refused to give protection to Vitro subsidiaries that weren’t in bankruptcy in either the U.S. or Mexico. As a result, bondholders are free to attach assets of subsidiaries that guaranteed the bonds. Those units contain Vitro’s operating assets and generate its sales.

Having failed in the U.S. to prevent bondholders from snatching the valuable subsidiaries, Vitro sought the same protection for the subsidiaries from a Mexican court. The judge in Mexico on June 29 likewise refused to protect the non- bankrupt companies, according to a translation of the ruling filed in the U.S. court.

Following the rulings by the U.S. and Mexican judges, Vitro put a subsidiary, Vitro Packaging de Mexico SA, into reorganization in Mexico accompanied by a Chapter 15 petition in Dallas.

The bondholders are opposing the Vitro parent’s effort to reorganize in a court in Mexico. Vitro intends to use $1.9 billion in intercompany debt in the creditor vote to cram down a plan on dissenting bondholders. For a rundown on the Dallas judge’s June 24 opinion, click here for the June 27 Bloomberg bankruptcy report.

Several Vitro U.S. subsidiaries put themselves into Chapter 11 in April in response to involuntary petitions filed in November by bondholders opposing the parent company’s proposed reorganization. They subsequently sold their businesses to an affiliate of Sun Capital Partners Inc. for $55 million.

The Vitro parent’s reorganization plan was revived in a court in Mexico after having been dismissed and reinstated on appeal. The parent is seeking protection from creditors in the U.S. under Chapter 15.

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.

Confirmed Hotel Plan May Obviate Supreme Court Appeal

There is an approved Chapter 11 plan for the InterContinental Chicago O’Hare hotel near Chicago’s largest airport. The bankruptcy judge in Chicago signed a confirmation order yesterday that might end up preventing the U.S. Supreme Court from deciding a question of bankruptcy law where lower courts have different answers.

There were dueling plans, one by the hotel’s owner, River Road Hotel Partners LLC, and the other by the secured lender Longview Ultra Construction Loan Investment Fund. In approving the lender’s competing plan, U.S. Bankruptcy Judge Bruce W. Black set in motion a process that resulted in a disagreement between federal circuit courts of appeal. The vital question for Chapter 11 reorganization cases may end up in the Supreme Court next year.

Black earlier refused to approve the owner’s plan, under which there would have been an auction of the property where the lender would have been forced to bid cash. The owner appealed directly to the U.S. Court of Appeals in Chicago.

In late June, the Court of Appeals upheld Black by ruling that secured lenders have a right to credit bid, or buy property using their secured claim rather than cash. In the process, the 7th Circuit in Chicago disagreed with Courts of Appeal in New Orleans and Philadelphia, which came out the other way on the same issue within the past two years.

The lender’s now-confirmed plan will give ownership in exchange for $162 million in debt. The lender would waive its deficiency claim on taking title through the plan. For details on the lender’s plan, click here for the April 26, Bloomberg bankruptcy report.

If the lender implements the plan, the current owner may be unable to appeal to the U.S. Supreme Court under a doctrine known as mootness. For details on the Circuit Court’s opinion in June, click here for the June 29 Bloomberg bankruptcy report.

The hotel’s owner filed under Chapter 11 in August 2009 in Chicago along with affiliate RadLAX Gateway Hotel LLC, the owner of the Radisson hotel at Los Angeles International Airport. Both are ultimately controlled by Harp Group.

The O’Hare property listed $155 million in debt. The Radisson property listed debt of $120 million.

The opinion by the Court of Appeals is River Road Hotel Partners LLC v. Amalgamated Bank (In re River Road Hotel Partners), 10-3597, U.S. 7th Circuit Court of Appeals (Chicago). The Chapter 11 case in bankruptcy court is In re River Road Hotel Partners LLC, 09-30029, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

Bud Selig Escapes Testifying for Dodgers and Frank McCourt

Frank McCourt, the owner of the Los Angeles Dodgers baseball team, largely lost a skirmish in bankruptcy court yesterday with Bud Selig, the commissioner of Major League Baseball.

McCourt wanted his lawyers to take testimony under oath from Selig in their dispute over whether the Dodgers should accept $150 million in financing from McCourt’s choice, Highbridge Principal Strategies LLC, or from MLB, which promises to make the same loan on better terms.

The bankruptcy judge at a hearing yesterday precluded the Dodgers from putting Selig under oath. On the other hand, the judge is allowing MLB to question McCourt under oath.

The Dodgers didn’t lose entirely. The judge is letting the team take testimony from a league official.

Selig succeeded in preventing McCourt from forcing the production of documents revealing confidential financial information about other major league teams.

Disagreement over taking testimony was the opening round in a dispute that will culminate at a July 20 hearing in bankruptcy court, where the judge will decide whether Highbridge or MLB will make the loan.

The Dodgers began their Chapter 11 reorganization on June 27 in Delaware, saying the assets are valued at more than $500 million while debt is less than $500 million. The team plans to solve financial problems by selling Fox Entertainment Group Inc. a 17-year extension on exclusive cable-television rights under the current arrangement that runs through the 2013 season.

McCourt purchased the team in 2004 from Fox for $330 million plus $100 million for the stadium, land and parking lots. He needs to raise money from the team to pay a divorce settlement with his former wife, Jamie, who is claiming an ownership interest in the team.

For a summary of the team’s financial problems and how McCourt would borrow $385 million from Fox as part of a long- term TV-rights deal to finance a reorganization plan, click here for the June 28 Bloomberg bankruptcy report.

The case is In re Los Angeles Dodgers LLC, 11-12010, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Dish’s Acquisition of TerreStar Approved by Bankruptcy Judge

TerreStar Networks Inc. was formally authorized by the bankruptcy judge yesterday to sell the business to Dish Network Corp. for $1.38 billion.

A June 30 auction was canceled when there were no competing bids. For details on the Dish contract, click here for the June 16 Bloomberg bankruptcy report.

Dish is in the midst of three purchases in bankruptcy court. It paid $320 million for part of the U.S. operations of Blockbuster Inc. Dish is also paying $1.49 billion for DBSD North America Inc., a company similar to TerreStar.

For Bloomberg coverage of yesterday’s hearing, click here.

TerreStar, based in Reston, Virginia, provides mobile satellite coverage throughout the U.S. and Canada where traditional mobile networks are unavailable. It listed assets $1.4 billion and debt totaling $1.64 billion.

In addition to $944 million in 15 percent senior secured pay-in-kind notes and $179 million in 6.5 percent exchangeable pay-in-kind notes, debt includes $86 million on a purchase money credit agreement.

The operating company’s case is In re TerreStar Networks Inc., 10-15446, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The holding company case is In re TerreStar Corp., 11-10612, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Bankrupt Freed from Perpetual Condo Fee Liability

When a bank lender refuses to foreclose, the bankruptcy judge can order a sale of the property and thus counteract a “legislated wrong without a remedy,” U.S. Bankruptcy Judge George C. Paine II in Nashville, Tennessee, ruled in a June 23 opinion.

Paine fashioned a remedy to avoid the unintended consequences of a change Congress made in bankruptcy law to help cooperative and condominium associations. The perceived inequity arises when a home mortgage lender refuses to foreclose.

The case involved an individual whose condominium was ruined during a flood in May 2010 in Nashville. She filed Chapter 7 bankruptcy in September and declared her intention to abandon the home, thereby entitling the lender Bank of America NA to foreclose. The bank didn’t foreclose, to avoid being liable for condominium fees after becoming the owner.

Congress altered bankruptcy law in 2005 to provide in Section 523(a)(16) of the Bankruptcy Code that a bankrupt individual remains responsible for paying the full amount of condo or coop fees so long as he or she retains ownership. Consequently, the bankrupt would remain liable for condo fees “in perpetuity,” Paine said in his opinion, because the bank refused to foreclose.

Paine said that revised Section 523 “deprives the debtor of a fresh start and thwarts the goals of the entire Bankruptcy Code.” Because he couldn’t force the bank to foreclose, Paine set about fashioning a remedy that would be in accord with bankruptcy law while respecting the bank’s rights.

Paine in substance brought the bankruptcy case back to square one and directed the trustee to sell the condo unit, distributing the proceeds in accordance with lien priorities. Paine said he could cause a sale on account of the bank’s “inaction.”

The problem Paine solved is faced not only by bankrupts who are victims of natural disasters. Lenders also will hold off foreclosing condos or co-ops to avoid paying association dues or common-area maintenance until a buyer is lined up. By putting the property up for sale, Paine in effect is forcing the bank either to abandon the property or bid its lien and take title.

The time for the bank to appeal hasn’t begun to run because there is no order as yet implementing Paine’s June decision.

The case is Pigg v. BAC Home Loans Servicing LP (In re Pigg), 11-00642, U.S. Bankruptcy Court, Middle District Tennessee (Nashville).

Judge to Proceed with Trustee’s Sale of GSC Group

GSC Group Inc.’s Chapter 11 trustee overcame opposition from minority lenders and persuaded the bankruptcy judge in New York at a July 6 hearing to proceed with a sale to Black Diamond Capital Finance LLC, as agent for the secured lenders.

U.S. Bankruptcy Judge Arthur Gonzalez ruled that the sale worked out by the trustee is preferable because there is “little likelihood of any plan being confirmed,” court records show. To confirm a plan would require that minority lenders convince the court that Black Diamond should be precluded from voting on a plan, Gonzalez said. Otherwise, Black Diamond itself holds enough debt to prevent approval of the plan by creditors.

A sale is the “only plausible exit strategy,” Gonzalez said. In deciding to sell, the judge said the trustee “properly exercised business judgment.”

In his ruling, Gonzalez said the state court is the proper forum to allocate sale proceeds between Black Diamond and the minority lenders. The judge indefinitely postponed consideration of the disclosure statement the minority lenders filed along with their Chapter 11 plan.

Gonzalez said he appointed former Bankruptcy Judge James L. Garrity as trustee because of a “lack of confidence in the debtor’s management.” The hearing for approval of the sale was to go forward yesterday.

Garrity is proposing to sell the business at a price fully covering $256.8 million in secured claims, with $18.6 million in cash left over. The trustee’s liquidating plan would provide $4.6 million for unsecured creditors.

Black Diamond, as agent, will buy most of the assets with a $224 million credit bid, a $6.7 million note, $5 million in cash, and debt assumption. For details on the sale, click here for the June 9 Bloomberg bankruptcy report.

GSC filed under Chapter 11 at the end of August and held an auction at the end of October. Although Black Diamond won the auction with a bid of $235 million, GSC later withdrew the motion for approval of the sale to Black Diamond.

Originally named Greenwich Street Capital Partners Inc. when it was a subsidiary of Travelers Group Inc., GSC became independent in 1998 and at one time had $28 billion of assets under management. Market reverses, termination of some funds, and withdrawal of customers’ investments reduced funds under management at the time of bankruptcy to $8.4 billion.

Based in Florham Park, New Jersey, GSC listed assets of $119.8 million against debt totaling $313.6 million.

The case is In re GSC Group Inc., 10-14653, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Scovill Chapter 11 Trustee Wants Chapter 7 Conversion

The Scovill Fasteners Inc. case shows how the U.S. Bankruptcy Court in Gainesville, Georgia, can move with exceptional speed.

The maker of fasteners for consumer and military clothing completed the sale of the business on June 24. The company knuckled under to a motion by the official creditors’ committee and allowed the bankruptcy judge to oust company management by installing a Chapter 11 trustee on June 30.

The same day as his appointment, the trustee joined with the creditors’ committee and filed a motion for conversion of the Chapter 11 case to a liquidation in Chapter 7, where a trustee also will be in charge. The motion for conversion to Chapter 7 is on the court’s calendar for July 12.

The committee said that lawsuits are virtually the only remaining assets after the business was sold. Chapter 7 will be the cheapest method for completing the liquidation, in the opinion of the trustee and the committee.

Gores Group LLC bought the business.

Based in Clarksville, Georgia, Scovill said assets were less than $50 million while debt exceeded $100 million. Scovill’s trademarks included Gripper, Duramark and Dot.

The case is In re Scovill Fasteners Inc., 11-21650, U.S. Bankruptcy Court, Northern District of Georgia (Gainesville).

Portion of Gardens of Grapevine Sold for $6.9 Million

Former Major League Baseball player Rafael Palmeiro was given authority by the bankruptcy judge on June 6 to sell part of the property owned by his Gardens of Grapevine Development LP, a real-estate development that filed for Chapter 11 protection on June 6 in Fort Worth, Texas.

The project in total is 192 acres of undeveloped land in Grapevine, Texas. The bankruptcy judge authorized Lincoln Property Co. Southwest Inc. to buy 16.8 acres for $6.9 million. The project has a $19 million first mortgage and $8 million in second mortgages.

The entire project was appraised for $53.3 million in October, according to a court filing.

Palmeiro played for the Texas Rangers, Baltimore Orioles and Chicago Cubs from 1986 to 2005 and had 569 home runs and 3,020 hits. He served a suspension for failing a steroid test.

The case is In re Gardens of Grapevine Development LP, 11- 43260, U.S. Bankruptcy Court, Northern District of Texas (Fort Worth).

New Filings

Las Vegas Development Owner Returns to Chapter 11

A part owner in the Park Highlands master-planned community in North Las Vegas is back in Chapter 11 less than two years after confirming a Chapter 11 plan.

The new petition by November 2005 Land Investors LLC, also in Las Vegas, is a so-called bare-bones filing because little was submitted to the court aside from the three-page printed form petition.

The 2,675-acre project was purchased from the Bureau of Land Management in 2005.

Assets are less than $50 million while debt exceeds $100 million, according to the new petition.

The new case is In re November 2005 Land Investors LLC, 11- 20704, U.S. Bankruptcy Court, District of Nevada (Las Vegas). The prior case, with the same name in the same court, was 09- 17474.

Fruitcake Maker Beatrice Bakery Files in Nebraska

Beatrice Bakery Co., the producer of Grandma’s Fruitcake, filed a Chapter 11 petition on July 5 in Lincoln, Nebraska, 40 miles north of its hometown of Beatrice, Nebraska.

The company, also known as Grandma’s Bake Shoppe, sought bankruptcy protection to stop a lawsuit from an investor aiming to collect on a $279,000 defaulted note.

The petition says assets are $824,000 while liabilities total $1.9 million. Secured debt of $1.13 million is owing to Union Bank & Trust Co.

The case is In re Beatrice Bakery Co., 11-41828, U.S. Bankruptcy Court, District of Nebraska (Lincoln).

Landlord for Best Buy in Gulfport Files Bare-Bones

The owner of the building housing the Best Buy Co. electronics store in Gulfport, Mississippi, filed for Chapter 11 protection on July 6 in Houston, where the owner is based.

The case began as a so-called bare-bones filing because little was submitted with the petition aside from a list of creditors.

The papers say the property is worth $9.5 million while there are $6.82 million in mortgages. Regions Bank holds the $6.56 million first mortgage. There is a $1.75 million second mortgage.

The case is In re Best Buy Plaza LP, 11-35881, U.S. Bankruptcy Court, Southern District of Texas (Houston).

Feature Story

For a Bloomberg feature story on how Blackstone Group LP, the private-equity shop, has a leading restructuring practice, click here. The story parses the advantages and disadvantages when an active investment firm also counsels troubled companies.

Downgrade

OfficeMax Downgraded to B- Following Losses

OfficeMax Inc., the third-largest office supply distributor in the U.S., was demoted another notch by Standard & Poor’s to a B- corporate rating. The company had investment-grade status until April 2008.

S&P said that the company’s business is “particularly susceptible to weakening economic conditions.” S&P said it also has an “unfavorable reassessment of OfficeMax’s competitive position as demonstrated by its greater-than-expected decline in its already weak profitability.” Liquidity is “adequate,” S&P said.

OfficeMax, based in Naperville, Illinois, trails Staples Inc. and Office Depot Inc. in the office-supply market.

Daily Podcast

Acquisitions, Incomprehensible Law: Bankruptcy Audio

Opportunities to buy a hospital in Massachusetts and an ethanol plant in North Carolina kick off the Bloomberg bankruptcy podcast. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle discuss how the judges on the U.S. Court of Appeals in New Orleans are nearing the point of deciding whether they will follow the lead of Chief Judge Edith H. Jones when it comes to interpreting bankruptcy law. The podcast ends with discussion of a new case showing how Congress sometimes writes bankruptcy laws that are difficult to comprehend. To listen, click here.

--With assistance from David McLaughlin and Linda Sandler 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.


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