Bloomberg News

Lehman, Borders, Vitro, Boston Generating: Bankruptcy

July 22, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Lehman and Borders and adds Vitro, Blockbuster, Nebraska Book and Ambac in Updates; Bionol Clearfield in New Filing; and section on Daily Podcast.)

July 22 (Bloomberg) -- Lehman Brothers Holdings Inc. reported that unrestricted cash grew $820 million in June, to end the month at $21.8 billion.

Cash inflows, according to the monthly operating report filed with the bankruptcy court, were $1.6 billion. Restricted cash at the month’s end was another $2.6 billion.

The bankruptcy judge signed a series of orders yesterday affecting matters ranging from the reorganization plan to real estate investments, lawsuits and insurance coverage. State taxing authorities in New Jersey appealed one of the orders even before it was signed by U.S. Bankruptcy Judge James M. Peck.

Peck approved an agreement between Lehman and proponents of competing plans that puts the two other plans and related investigations on ice while Lehman’s compromise plan moves forward. The disclosure statement explaining Lehman’s plan is scheduled for approval at an Aug. 30 hearing.

Lehman received authority to make larger investments in the real estate portfolio, with fewer requirements for notice or court approval. For a summary, click here for the June 2 Bloomberg bankruptcy report.

Lehman’s current directors were given the right to reimbursement for expenses in defending lawsuits, so long as they state in writing that their conduct was in good faith and reasonably believed to be in the company’s best interest. If it turns out that an action was in bad faith, the director is required to repay any covered legal expenses.

U.S. Airways Inc., which received a $15 million arbitration award against Lehman officers or directors, won approval to collect from Lehman’s directors’ and officers’ insurance policy. New Jersey taxing authorities already appealed, fearing the insurance policy will be used up before their lawsuit comes to trial. For details, click here for the July 14 Bloomberg bankruptcy report.

The Evangelical Christian Credit Union was given permission to foreclose on a property where Lehman has a junior mortgage. For details, click here for the April 28 Bloomberg bankruptcy report.

Lehman paid $27.5 million in professional fees during June, bringing the total to $1.35 billion since the beginning of the bankruptcy in September 2008, according to the operating report.

Lehman Brothers Special Financing Inc. remains in the lead among the Lehman companies with $8.95 billion in unrestricted cash. Lehman Commercial Paper Inc. has $3.4 billion, followed by the holding company with $2.05 billion, a decline of $56 million during the month.

Fees for Alvarez & Marsal LLC, Lehman’s financial advisers, now total $451.1 million, including $9 million in June. Fees for Weil Gotshal & Manges LLP, Lehman’s principal bankruptcy lawyers, total $318.9 million, including $9.1 million in June.

In the lawsuit with Barclays Plc stemming from the sale of the investment-banking business, Lehman hasn’t given up on its effort to recover $500 million in bonuses that weren’t paid to employees. Click here to read Bloomberg coverage on how Lehman contends the price would have been higher had Barclays not promised to pay the bonuses.

For a rundown on Lehman’s reorganization plan, 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 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).

Updates

Borders Receives Approval for GOB Sales at All Stores

Borders Group Inc. was given authority from the bankruptcy court yesterday to hire liquidators to run going-out-of-business sales at the remaining 399 bookstores.

The creditors’ committee previously said Borders expected to generate $252 million to $284 million in cash from the GOB sales.

Books-A-Million Inc., based in Birmingham, Alabama, is negotiating to buy the inventory and leases for as many as 35 stores. The order signed by the judge yesterday allows a sale to Books-A-Million if Borders, the liquidators and the creditors’ committee consent. For Books-A-Million to acquire a lease without approval from the judge, a landlord must consent in writing.

For Bloomberg coverage of the hearing, click here.

The GOB sales will begin today. Separately, Borders will attempt to sell leases for individual stores.

Borders had 642 stores on entering bankruptcy in February and is currently operating 399. It 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 were owed $302 million for inventory.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Vitro’s Chapter 15 Petition Granted by Judge in Dallas

Vitro SAB, the Mexican glassmaker, won a round yesterday in the continuing battle with bondholders that the bankruptcy judge in Dallas called a “knock down, drag out,” where “every matter filed by one party is objected by the other.”

The issue before the court was whether the U.S. would recognize Vitro’s Mexican reorganization as the “foreign main proceeding.” In a four-page opinion, U.S. Bankruptcy Judge Harlin DeWayne Hale came down on the side of Vitro and granted the company’s petition for protection under Chapter 15 of the U.S. Bankruptcy Code.

The dispute was over whether Vitro could select the person to serve as the foreign representative in the U.S. case. Hale said that six companies previously had their Mexican bankruptcies recognized as the foreign main proceeding. He listed four where the Mexican company had Chapter 15 approval after selecting its own foreign representative.

Vitro argued that Chapter 15 allows a foreign company to be its own foreign representative, just as U.S. companies retain control over their own operations as debtors-in-possession. Vitro said that Mexican law is the same in terms of allowing companies to remain in the driver’s seat during bankruptcy.

The Chapter 15 petition was opposed by holders of some of the $1.2 billion of bonds in default for more than two years. The bondholders said Hale could rule later on whether to enforce a Mexican reorganization plan in the U.S. if it was approved using insider votes to cram down on bondholders opposed to the plan.

Vitro and the bondholders will clash again in bankruptcy court on July 25. The bondholders want the judge to declare that they are free to attach assets of Vitro subsidiaries not in bankruptcy in either the U.S. or Mexico.

The bankruptcy judge refused to put several Vitro subsidiaries into bankruptcy involuntarily in the U.S. The bondholders want Hale to declare that the so-called automatic stay from the involuntary filings disappeared when the petitions were denied.

The Vitro parent’s reorganization was revived by an appellate court in Mexico after having been dismissed in a lower court. The Vitro parent now has protection from creditors in the U.S. under Chapter 15, where U.S. courts have the power to enforce rulings from foreign bankruptcy courts.

Several Vitro U.S. subsidiaries put themselves into Chapter 11 in April following involuntary petitions filed in November by bondholders. The subsidiaries subsequently sold their businesses to an affiliate of Sun Capital Partners Inc. for $55 million.

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.

Boston Generating Heading for Aug. 30 Confirmation

Power producer Boston Generating LLC has an Aug. 30 confirmation hearing for approval of the liquidating Chapter 11 plan that gives unsecured creditors with $820 million in claims what’s known in the bankruptcy business as hope certificates.

Boston Generating completed the sale of its five Boston- area power plants in January to Constellation Energy Group Inc. After completion of the sale, first-lien secured lenders with $1.142 billion in claims will have received a 98.4 percent recovery, according to the disclosure statement the bankruptcy judge in New York approved on July 20.

Unsecured creditors have the right to participate in a lawsuit initiated by the official committee contending that a refinancing in late 2006 was a fraudulent transfer that can be voided in bankruptcy. The eventual recovery by unsecured creditors is “unknown,” according to the disclosure statement.

Unsecured creditors have the right to opt out and pursue the claims on their own. For details on the suit, click here for the Dec. 13 Bloomberg bankruptcy report.

In addition to the first-lien debt, where an affiliate of Credit Suisse Group AG is agent, Boston Generating’s debt includes $350 million on a second lien, a $423 million mezzanine debt liability, and less than $10 million owing to trade suppliers.

Boston Generating filed under Chapter 11 in August 2010.

The bankruptcy case is In re Boston Generating LLC, 10- 14419, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Dish to Keep 1,500 of 3,300 U.S. Blockbuster Stores

Blockbuster Inc. announced yesterday that Dish Network Corp. worked out agreements with landlords so that more than 1,500 stores will remain in operation.

Dish bought the business in April under a contract with a $320 million sticker price. Dish said it was able to take 90 percent of the stores offered in the sale. Dish blamed the closings of the remaining stores on landlords who wouldn’t accept “reasonable terms.” For other Bloomberg coverage, click here.

Blockbuster began the attempted Chapter 11 reorganization in September with 5,600 stores, including 3,300 in the U.S. 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 parent’s Chapter 11 case is In re Blockbuster Inc., 10- 14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Canadian subsidiary’s Chapter 15 case is In re Blockbuster Canada Co., 11-12433, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Madoff Trustee May Face Mass Dismissal Motions

Plans are in the works for customers of Bernard L. Madoff Investment Securities Inc. who had no knowledge of the fraud to join together in filing motions to dismiss lawsuits filed by the trustee.

The motions would test whether the Madoff trustee has the right to sue innocent customers.

For Bloomberg coverage, click here.

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 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).

Nebraska Book Has Final Approval on $200 Million Loan

Nebraska Book Co., a bookseller to college students, filed under Chapter 11 on June 27 and was given final approval yesterday for $200 million in secured financing, including a $75 million revolving credit.

Previously, $125 million was approved as an interim loan. Financing is from a group of banks led by JPMorgan Chase Bank NA.

Unsecured creditors have until Sept. 26 to challenge the validity of secured claims. Before the bankruptcy filing, the company worked out an agreement to swap some of the existing debt for new debt, cash and the new stock, after first-lien and second-lien debt is paid in full.

The stock will be divided between subordinated noteholders of the operating company and holders of notes issued by the holding company. The plan was designed to remove $150 million of debt from the balance sheet. For details on the plan, click here for the July 19 Bloomberg bankruptcy report.

Based in Lincoln, Nebraska, the company sells used textbooks and operates more than 290 college bookstores. The company said $598 million in sales during fiscal 2011 resulted in a net loss of $98 million, including an $89 million writedown on intangible assets.

The case is In re Nebraska Book Co. Inc., 11-12005, U.S. Bankruptcy Court, District of Delaware (Wilmington).

PJ Finance Must Have Acceptable Plan by Aug. 31

PJ Finance Co., the owner of 9,500 apartment units in 32 projects, has an Aug. 31 deadline to come up with a reorganization plan acceptable to the secured lender.

At a hearing this week, PJ was less successful than it hoped. Rather than extending the exclusive right to propose a Chapter 11 plan until Nov. 15, the bankruptcy judge only pushed out exclusivity until Aug. 31.

The end of August is also the deadline for coming up with a plan “reasonably acceptable” to Torchlight Loan Services LLC, the special servicer for $475 million in mortgage-backed securities, according to the July 20 order allowing continued use of cash representing the lenders’ collateral.

If there isn’t an acceptable plan by the deadline, PJ’s right to use cash ceases.

Torchlight had been arguing for dismissal of the bankruptcy, contending 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).

Ambac Retains Freeze on Employees’ Savings Plan Suit

Ambac Financial Group Inc., the parent company for an insurer partly in rehabilitation, persuaded the bankruptcy judge to maintain the freeze on a lawsuit where employees sued company officers for mismanagement of Ambac’s Savings and Investment Plan.

In her July 20 order, the bankruptcy judge did give the plaintiff the ability to mediate with Ambac over a settlement. For background on the suit, click here for the July 18 Bloomberg bankruptcy report.

Ambac has a proposed Chapter 11 plan and disclosure statement on file that the Wisconsin insurance commissioner said he would “vigorously contest.” For details of the plan, click here for the July 11 Bloomberg bankruptcy report.

Ambac’s insurance subsidiary stopped paying dividends to the parent in 2007 and stopped writing new business entirely in mid-2008. The parent filed under Chapter 11 in November, listing assets of $90.7 million and liabilities totaling more than $1.6 billion, virtually all unsecured. Almost all the debt is made of up $1.62 billion owing on seven note issues. One issue for $400 million is subordinated.

The parent’s Chapter 11 case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District New York (Manhattan). The state insurance rehabilitation case is In re The Rehabilitation of Segregated Account of Ambac Assurance Corp., 2010cv001576, Dane County, Wisconsin, Circuit Court (Madison).

Retailer Deb Shops to Hold Auction on Aug. 31

Retailer Deb Shops Inc., which filed under Chapter 11 on June 26, was given authority to hold an auction on Aug. 31 testing whether an offer from secured lenders is the best bid for the business.

The bankruptcy court in Wilmington, Delaware, also gave final approval yesterday for $21.7 million in secured financing. Other bids must be submitted by Aug. 24. The hearing to approve the sale is set to take place Sept. 13.

Unless outbid, lenders led by Ableco Finance LLC will purchase the business in 44 states in exchange for $75 million in secured debt. The lenders are also providing the financing. The lenders have the right to withhold the last $6.7 million in financing.

When the reorganization began, Philadelphia-based Deb operated 318 stores selling junior wear for women ages 13 to 25. The sale to the lenders was worked out before the bankruptcy filing.

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 to be paid after the other first-lien lenders are paid in full.

Barclays Bank Plc is the 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).

Raser Subsidiary’s Creditor Objects to Reorganization Plan

When Raser Technologies Inc. comes to bankruptcy court on July 26 for approval of the disclosure statement, the owner of a six-megawatt geothermal generating plant in Utah will face opposition from a secured creditor owed $3.6 million by a subsidiary known as Lightning Dock, a project in development.

The secured creditor, Evergreen-FE Lightning Dock LLC, described in its July 19 papers how the plan would take away the subsidiary’s property and give it to the parent without any payment to the subsidiary’s creditors.

Evergreen controls the only two voting classes in Lightning Dock’s plan. Since the subsidiary’s plan can’t be confirmed, the parent’s plan provides that the secured lender for the Chapter 11 case will foreclose the subsidiary’s property.

Evergreen noted that it has an appeal pending against the bankruptcy court order approving the Chapter 11 financing. Evergreen contends the financing didn’t provide any value to the subsidiary and shouldn’t have been approved given that the subsidiary’s assets were pledged to secure a loan for the parent.

Raser’s plan would sell 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 of 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. 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).

National Envelope to Receive $1 Million from Ace

National Envelope Corp., once largest closely held envelope manufacturer in the U.S., won the right to use another $1 million and avoid running out of cash by the end of next month.

NEC sold the business in September and said the last $1 million for paying bills would run out by the end of August. To resupply the coffers, NEC in March sued Ace American Insurance Co., one of its insurance providers. NEC wanted the bankruptcy judge to force Ace to return collateral it was holding in excess of the amount NEC said was necessary to cover outstanding claims.

NEC and Ace were pointed toward a settlement in June, when the bankruptcy judge turned down Ace’s attempt to have the dispute sent to arbitration. The settlement calls for Ace to turn over $1 million cash to NEC and retain the remainder.

To guarantee that NEC could pay the deductible portion of claims, NEC had deposited $4.7 million cash and $3.4 million in letters of credit with Philadelphia-based Ace.

At the July 20 hearing, the bankruptcy judge also granted NEC’s request and pushed out the exclusive right to propose a Chapter 11 plan until Oct. 5. NEC said it is “vetting” a draft Chapter 11 plan with interested parties.

Gores Group LLC bought the assets under a contract at an advertised price of $208 million, including $149.9 million in cash. Since then, NEC settled disputes with Gores over adjustments in the price.

Based in Uniondale, New York, NEC filed under Chapter 11 in June 2010, saying assets and debt were both less than $500 million. Liabilities included $74.3 million on a secured term loan, $70.6 million on a secured revolving credit, and $89 million owing on unsecured debts to trade suppliers.

The case is In re NEC Holdings Corp., 10-11890, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Downgrade

AES Eastern Lowered on Break-Even Operating Cash Flow

AES Eastern Energy LP, the operator of four coal-fired electric generating plants in western New York, received a two- notch downgrade yesterday from Moody’s Investors Service, lowering the rating on pass-through certificates to Caa2.

The downgrade resulted from market conditions where competitors with gas-fired plants benefit from low natural gas prices while AES’s operating costs have risen as a consequence of higher coal prices, Moody’s said.

Moody’s noted that AES Eastern paid $30 million of interest this month using a rent-payment reserve. The $75 million working capital loan has expired.

AES Eastern’s parent, AES Corp., has already written its interest in AES Eastern down to zero and is looking for a buyer, Moody’s said.

The four AES Eastern plants have a combined generating capacity of 1,166 megawatts, Moody’s said. Cash flow from operations is “break-even at best,” according to Moody’s.

To read about a downgrade given to the Arlington, Virginia- based parent AES, click here for the May 18 Bloomberg bankruptcy report.

The $181 million in 9 percent series 1999A AES Eastern pass-through certificates maturing in 2017 traded yesterday at 63.5 cents on the dollar, to yield 20.4 percent according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $286 million in 9.67 percent series 1999B pass-through certificates traded on July 15 at 70 cents on the dollar, to yield 14.4 percent, according to Trace.

The parent’s stock closed yesterday at $12.78, up 20 cents in New York Stock Exchange trading. The three-year closing high was $17.11 on July 21, 2008. The low for the period was $4.91 on March 9, 2009.

Watch List

Jefferson Country Interviewing Bankruptcy Lawyers

Jefferson County, Alabama, is interviewing law firms to hire should filing become necessary under Chapter 9 of U.S. bankruptcy law designed for municipalities.

For Bloomberg coverage, click here.

New Filing

Pennsylvania Ethanol Plant Opts for Chapter 7 Liquidation

Bionol Clearfield LLC, the owner of an ethanol plant in Clearfield, Pennsylvania, didn’t even try to reorganize. The company filed a petition for liquidation in Chapter 7 on June 20 in Delaware.

The petition said assets are less than $100 million while debt exceeds $100 million.

The company said it used proprietary biocatalyst technology at the plant that began operation in 2009.

The case is In re Bionol Clearfield LLC, 11-12301, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Daily Podcast

Bankruptcy Venue, Vitro, Refinancing Junk: Bankruptcy Audio

A proposed bill in Congress to preclude most companies from filing for bankruptcy in Delaware or New York is the opening topic on the new Bloomberg bankruptcy podcast. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle explain why a professor from American University in Washington believes that success by Vitro SAB in cramming a plan down on creditors could raise financing costs for Mexican companies. The podcast closes with discussion about how junk- rated companies are finding increasing difficulty in refinancing existing debt. To listen, click here.

Advance Sheets

5th Circuit Narrows United Operating on Suit Disclosure

The U.S. Court of Appeals in New Orleans handed down an opinion yesterday narrowing a controversial 2008 ruling in a case known as United Operating.

The United Operating opinion, written by Chief Circuit Judge Edith H. Jones, ruled that a lawsuit must be described specifically and unequivocally before plan confirmation to survive after emergence from Chapter 11.

In the reorganization of a company called Texas Wyoming Drilling Inc., the Chapter 11 plan and the explanatory disclosure statement said a trustee for creditors could sue shareholders for fraudulent transfers and recovery of dividends.

In an 11-page opinion yesterday, Circuit Judge Edith Brown Clement said the description of the suit was sufficient to survive confirmation of the plan. She said that United Operating “never held that intended defendants must be named in the plan.” The disclosure statement “did identify the prospective defendants as various prepetition shareholders,” she said.

Clement’s ruling for the 5th Circuit in New Orleans is also important because it resolved a split among lower courts by saying that the disclosure statement, not just the plan, could be consulted to determine if there was sufficient identification of a suit to be filed after bankruptcy.

The case is Spicer v. Laguna Madre Oil & Gas II LLC (In re Texas Wyoming Drilling Inc.), 10-10717, U.S. 5th Circuit Court of Appeals (New Orleans).

--With assistance from Tiffany Kary, Alex Sherman and Linda Sandler in New York and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editor: Stephen Farr

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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