Bloomberg News

Dodgers, Madoff, Ambac, Lehman, Vitro: Bankruptcy

July 27, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Corrects typographical error in fourth paragraph of Sbarro item.)

July 27 (Bloomberg) -- The Los Angeles Dodgers baseball club was refused financing by a list of lenders that reads like Who’s Who on Wall Street. In papers unsealed this week, the team said that institutions declining to offer financing included Goldman Sachs Group Inc., Bank of America NA and General Electric Capital Corp.

The Dodgers said that Goldman Sachs and GECC decided not to participate “due to potential concerns” about Major League Baseball. The team didn’t describe the nature of the concerns. Others declined to finance for reasons not having to do with MLB, the Dodgers said.

The Dodgers were proposing to draw a $150 million secured loan from Highbridge Principal Strategies LLC, an affiliate of JPMorgan Chase & Co. JPMorgan had been agent for the lenders in the bankruptcy reorganization of the Texas Rangers baseball club. Highbridge was requiring the payment of about $10 million in fees were it approved to be the lender for the Dodgers.

When the Dodgers were preparing for the July 20 courtroom fight with Major League Baseball over who would make the team a $150 million loan, the Dodgers redacted portions of their papers. Although the bankruptcy judge later ruled that the papers should be filed in their entirety, they didn’t become public until July 25, after the judge ruled in substances that the team should take an unsecured loan from MLB.

The unredacted papers showed that the team was incurring a $50 million loss before interest, taxes, depreciation and amortization in 2003 before Frank McCourt bought the team. Ebitda was a positive $50 million in 2009, according to the papers, which don’t include Ebitda for 2010. The Dodgers made more than $200 million in revenue-sharing payments since McCourt became owner, the papers show.

In testimony taken before the July 20 trial, the MLB witness said that the baseball commissioner “had no desire even to make a profit on the loan” the league was willing to make. When the commissioner offered to make the unsecured loan, the team said that MLB hadn’t at that time made arrangements to obtain the needed $150 million.

The team said it was precluded from taking testimony from the MLB’s witness about the reason the baseball commissioner opposed a long-term television-rights contract as the means for solving financial problems.

When the Dodgers filed papers asking permission for portions of the papers to be kept secret, the sealing motion itself had blanks where explanation may have been given about the need for secrecy.

The bankruptcy judge, in a written opinion on July 22, refused to allow the Dodgers to take a $150 million secured loan from Highbridge. Instead, the judge in substance directed the team to take the same amount in an unsecured loan from MLB. For details on the court’s ruling, click here for the July 25 Bloomberg bankruptcy report.

The Dodgers began bankruptcy reorganization on June 27, listing assets as being worth more than $500 million with debt less than $500 million. At the outset, the team said it intends 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.

For a summary of the financial problems and the team’s plans to finance reorganization by borrowing $385 million from Fox as part of the long-term television-rights deal, 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).

Updates

UniCredit, Bank Austria Seek Madoff RICO Suit Dismissal

UniCredit SpA and subsidiary UniCredit Bank Austria AG each filed papers this week seeking dismissal of the largest part of the $59 billion lawsuit filed against them by the trustee liquidating Bernard L. Madoff Investment Securities Inc. The ruling will be made by U.S. District Judge Jed Rakoff, who said he would send the case back to the bankruptcy judge after addressing threshold issues.

UniCredit and Bank Austria take aim at the trustee’s claims under the Racketeer Influenced & Corrupt Organizations Act, commonly known as RICO. If a plaintiff can prove at least three instances of participation in a racketeering scheme, damages can be trebled. Thus, the trustee is seeking three time the damages suffered by all Madoff customers.

The trustee’s suit contends that Bank Medici AG and Sonja Kohn, its founder, were in cahoots with Madoff going back at least until the mid-1980s. The trustee alleges that Kohn and her bank funneled money into Madoff through foreign investment funds.

UniCredit and Bank Austria say they didn’t come on the scene until 20 years later. They point to the complaint as being deficient about their participation in the necessary predicate acts. They say the complaint doesn’t show they were knowing participants or even had knowledge of the Kohn-Madoff scheme.

Without looking at the facts, they contend RICO cannot be applied to foreigners. In addition, they say the complaint is based on allegations of securities fraud which by law can’t be the basis for a RICO complaint.

The trustee is to file his answering papers by Aug. 29. UniCredit and Bank Austria will file replies on Sept. 12 in advance of a hearing before Rakoff on Sept. 19. For other 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 UniCredit case in district court is Picard v. Kohn, 11- 1181, U.S. District Court, Southern District New York (Manhattan).

The liquidation in bankruptcy court in 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, Southern District of New York (Manhattan).

Ambac Mediating with Insurance Commissioner in August

Ambac Financial Group Inc. will participate in mediation in August with the Wisconsin insurance commissioner, who is rehabilitating part of its insurance subsidiary. Consequently, the hearing for approval of the disclosure statement was put off until Sept. 8.

Ambac is requesting a three-month extension of the exclusive right to solicit acceptances of a Chapter 11 plan. If granted by the court at an Aug. 10 hearing, the new deadline would be Dec. 5, theoretically long enough to confirm a plan if mediation results in settlement.

The plan Ambac filed earlier this month gave the commissioner a deadline of July 29 to accept a compromise on sharing the benefit from tax-loss carryforwards. The Wisconsin commissioner said he would “vigorously contest” the plan. Ambac decided to mediate rather than press ahead with a hearing to approve the disclosure statement. For details on the plan, click here for the July 11 Bloomberg bankruptcy report.

The mediation is currently scheduled for Aug. 16 and 17.

Ambac’s insurance subsidiary stopped paying dividends to the parent in 2007 and stopped writing new business entirely in mid-2008. The Ambac parent filed under Chapter 11 in November, listing assets of $90.7 million and liabilities totaling more than $1.6 billion. 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).

Lehman Selling Virginia Project to Goldman Sachs

Lehman Brothers Holdings Inc. filed papers yesterday for authority to sell its 78.5 percent interest in a 3 million- square-foot commercial real estate project in Rosslyn, Virginia, to an entity in which Goldman Sachs Group Inc. is the general partner.

The price for Lehman’s interest is $385 million. If approved by the bankruptcy court at an Aug. 17 hearing, there would be no auction. Marketing has been adequate, Lehman said.

Lehman and the trustee for the brokerage subsidiary reached an agreement on how to split $14.6 million in unclaimed funds held by the New York State Office of Unclaimed Funds. Assuming the bankruptcy court gives approval at an Aug. 17 hearing, the trustee for Lehman’s brokerage will take $13.2 million while the Lehman parent will receive $1.32 million.

Lehman and the Bundesbank are in a U.K. courtroom dispute over whether there has been a default allowing the German central bank to liquidate a 2.9 billion-euro ($4.2 billion) securitization vehicle known as Excalibur Funding No. 1.

The Bundesbank was sold 2.1 billion euros of senior notes in the vehicle. Liquidation could mean the loss of Lehman’s 722 million euros of junior debt. For Bloomberg coverage, click here.

Lehman lost in a U.K. appellate court on the issue of whether a so-called flip clause is enforceable. Because Lehman was in bankruptcy, the flip clause inverted the payout waterfall so Lehman would come behind other participants, not before. The bankruptcy judge had ruled the other way. The main case in the U.S. was settled before an appeal was decided. For Bloomberg coverage of the U.K. appeal, click here.

For a Bloomberg story about the prices being paid to buy debt of various Lehman subsidiaries, click here.

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.

For a summary of Lehman’s compromise reorganization plan, click here for the June 30 Bloomberg bankruptcy report. The hearing for approval of the disclosure statement explaining the plan is scheduled to take place Aug. 30. The plan represents a settlement between creditors favoring substantive consolidation and those opposed.

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).

Citibank Moves to Dismiss $430 Million Madoff Suit

Citibank NA served a motion yesterday to dismiss the $430 million complaint filed in December by the trustee liquidating Bernard L. Madoff Investment Securities Inc.

The trustee claims a right to recover funds that came to Citibank after passing through Fairfield Sentry Ltd. and Rye Select Broad Market Prime Fund LP.

In technical legal terms, the Madoff trustee characterizes Citibank as a subsequent transferee of fraudulently transferred money. As such, the trustee contends Citibank must return the funds unless it can prove it received the money in good faith.

The trustee will file his answering papers by Nov. 14. The New York-based bank will reply on Dec. 5. A hearing on the motion to dismiss is currently set for Jan. 24. The suit so far hasn’t been transferred to federal district court.

Citibank based its dismissal motion in part on non-factual issues. It claims that its receipt of the funds was protected under the so-called safe harbor in Section 546(e) of the Bankruptcy Code immunizing recovery of transfers in securities transactions.

The bank also says the transactions with Fairfield and Rye Select were part of swap agreements that are protected by Section 546(g) of the Bankruptcy Code.

Also based on law alone, Citibank contends that the Madoff trustee hasn’t yet obtained a court declaration that the initial transfers to Fairfield Sentry and Rye Select were voidable. Citibank argues that a settlement with Fairfield Sentry precludes ever having the required judgment.

With regard to the facts, Citibank contends that the trustee’s complaint fails to allege facts showing that it knew or should have known that the money coming from Madoff was part of a fraud. For other 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 Citibank suit is Picard v. Citibank NA, 10-05345, U.S. Bankruptcy Court, Southern District 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).

South Korea’s Harim Wins Auction for Chicken Producer Allen

South Korean poultry producer Harim Co. won the July 25 auction for Allen Family Foods Inc., a vertically integrated chicken producer based in Delaware.

The sale will come to bankruptcy court today for approval. The price bid by Harim wasn’t disclosed by early this morning.

Poultry producer Montaire Farms of Delaware Inc., the so- called stalking-horse at the auction, made the first bid of $30 million, plus as much $38 million for inventory. Montaire served notice that it will demand that $4.1 million be placed in escrow from the sale to Harim to cover the claim it has arising from business dealings during Allen’s Chapter 11 case.

Montaire wants the money in escrow because otherwise Allen may not have enough funds to pay claims arising during bankruptcy. Montaire cited the bankruptcy judge as saying that any offer had to cover the cost of the case.

Allen, based in Seaford, Delaware, has been producing 400 million pounds of chicken products a year from plants with a 600 million-pound capacity.

Secured debt includes $83.2 million on a term loan and revolving line of credit with MidAtlantic Farm Credit ACA, which 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 farms. The assets being sold include neither the 24 farms nor some 3,400 acres of farmland.

Assets and debt were both less than $100 million, according to the bankruptcy petition.

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

Rothstein Firm’s Trustee Sues TD Bank for $1.2 Billion

The trustee liquidating the law firm once run by Scott Rothstein, a confessed Ponzi scheme operator, filed a $1.2 billion lawsuit alleging TD Bank NA allowed Rothstein to use its name and facilities to deceive investors.

The complaint, filed this week, contains claims based on receipt of preferences and fraudulent transfers under federal and state law. In addition, there are claims including breach of fiduciary duty, unjust enrichment, and wire transfer liability.

The bank said it would defend against the suit vigorously. For Bloomberg coverage, click here.

Rothstein was a co-founder of the law firm Rothstein Rosenfeldt Adler PA. Creditors filed an involuntary Chapter 11 petition against the firm in Fort Lauderdale, Florida, in November 2009. When the firm was formally inducted into Chapter 11 later that month, the previously appointed state court receiver became the bankruptcy trustee.

Rothstein pleaded guilty in January 2010 and is serving a 50-year sentence.

The new lawsuit is Stettin v. TD Bank NA (In re Rothstein Rosenfeldt Adler PA), 11-02368, U.S. Bankruptcy Court, Southern District of Florida (Fort Lauderdale). The Chapter 11 case is In re Rothstein Rosenfeldt Adler PA, 09-34791, U.S. Bankruptcy Court, Southern District of Florida (Fort Lauderdale).

Pizza Maker Sbarro Shows $2.23 Million June Net Loss

Sbarro Inc., an operator and franchiser of fast-food Italian restaurants, filed an operating report showing a $2.23 million net loss for the five weeks ended July 3 on total revenue of $30.75 million.

Since the Chapter 11 case began on April 4, the cumulative net loss is $15.23 million on total revenue of $75.52 million.

The lending for the Chapter 11 case originally required filing a Chapter 11 plan by July 3. The deadline was extended to July 21 and later to July 30, a court filing says.

The creditors’ committee was given the right by the bankruptcy judge in New York to compel the accounting firm Ernst & Young LLP to turn over a quality of earnings report it prepared for Ares Management LLC, a prospective investor. Although Ares consented, E&Y wouldn’t turn over the documents unless each member of the creditors’ committee signed a confidentiality agreement and agreed to indemnify the accounting firm. The bankruptcy judge compelled turnover without the conditions.

The bankruptcy court extended Sbarro’s exclusive right to propose a reorganization plan until Oct. 31. Sbarro said in asking for more exclusivity that a steering committee for first- lien lenders had “recently” made a “preliminary proposal” for a “restructuring transaction.”

On entering Chapter 11 in April, Sbarro had already negotiated an outline for a Chapter 11 plan. In May the company dropped the prepackaged plan, saying it had an offer at a higher value from what it called a “qualified bidder.”

Sbarro said its investment advisers are scouring the market for other potential purchasers.

MidOcean Partners, Ares Corporate Opportunities Fund II LP, and first-lien lenders concurred with the decision to drop the previously-negotiated plan, Sbarro said. MidOcean acquired Sbarro in January 2007 for $417 million. Ares is the largest holder of senior notes, a court filing says.

The petition listed assets of $471 million and debt totaling $486.6 million. The balance sheet at Sept. 26 included $352.2 million of goodwill and trademarks as part of the assets.

Melville, New York-based Sbarro owned or franchised 1,045 restaurants in 42 countries when the bankruptcy began. From the total, 472 were owned at the time.

The case is In re Sbarro Inc., 11-11527, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Vitro Subsidiaries Involuntary Petitions Dismissed

Vitro SAB bondholders won a victory when the bankruptcy judge in Dallas formally dismissed involuntary bankruptcy petitions they filed against several of the Mexican glassmaker’s subsidiaries. The bankruptcy court extended the exclusive right of bankrupt U.S. Vitro subsidiaries to file a Chapter 11 plan until Oct. 4.

The bankruptcy judge denied involuntary Chapter 11 petitions against several Vitro subsidiaries. Because the judge did not explicitly say that the petitions were dismissed, it was unclear whether the so-called automatic stay was still in effect. If it were, the bondholders couldn’t attempt to collect on the $1.2 billion in defaulted bonds without violating the stay.

The bondholders filed papers seeking a clarification. In a July 25 ruling, U.S. Bankruptcy Judge Harlin DeWayne Hale clarified the situation by signing an order saying the involuntary petitions were dismissed. Hale reserved the right to determine whether the bondholders must pay damages to Vitro as a result of the loss on the involuntary petitions.

By having their involuntary petitions formally dismissed, the bondholders won themselves the right to undertake collection actions against non-bankrupt Vitro subsidiaries which guaranteed the debt.

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. Hale did not say whether he would enforce a Mexican reorganization in the U.S. if it’s approved by a Mexican court using $1.9 million of insider claims to cram down on the bondholders who oppose the reorganization.

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.

Paint Distributor Merit Sells Assets to Fund Plan

The Merit Group Inc., a 10-state painting supply distributor, was authorized this week by the bankruptcy judge in Spartanburg, South Carolina, to sell the business for $44 million to MG Distribution LLC.

The sale was accompanied by a settlement where the secured lender, Regions Bank, agreed to set aside more than $6 million from the purchase price to pay costs of the Chapter 11 case and $4 million for unsecured creditors.

On account of its deficiency claim, the bank will not participate in the pool for unsecured creditors until the non- bank creditors have recovered 10 percent. The bank will take the next $1.6 million before any distributions could be made on subordinated claims.

Before the settlement, the official unsecured creditors’ committee was opposing the sale. There were no competing bids at auction.

The settlement contemplates that the company and the committee together will propose a liquidating Chapter 11 plan. The plan already filed will be revised to reflect the settlement and the sale.

Merit filed under Chapter 11 on May 17, at the time owing the bank $53.5 million. The bank provided financing for the Chapter 11 effort.

Other debt included $12 million on a second lien with Stonehenge Opportunity Fund II LP, and $2.5 million on a subordinated loan from the owners.

Unsecured creditors were owed $37 million at the outset, a court filing said.

Merit’s annual revenue in 2010 was $200 million.

The case is In re The Merit Group Inc., 11-03216, U.S. Bankruptcy Court, District of South Carolina (Spartanburg).

Barzel Plan Has Estimated 11% for Unsecured Creditors

Barzel Industries Inc., a steel processor and manufacturer, sold the assets and scheduled a Sept. 8 confirmation hearing for approval of the liquidating Chapter 11 plan. The U.S. Bankruptcy Court in Delaware approved the explanatory disclosure statement yesterday.

Barzel sold most of the assets in November 2009 for $75 million to Norwood, Massachusetts-based Chriscott USA Inc. Secured lenders agreed to a settlement later where they received a release of claims in return for giving up $800,000, including $500,000 earmarked solely for unsecured creditors.

The disclosure statement says that unsecured creditors with $4.5 million in claims are estimated to have an 11 percent recovery from the carveout from the lenders’ collateral. Secured creditors are not participating in the pot for unsecured creditors on account of their deficiency claims.

The disclosure statement says that secured noteholders, still owed $250 million, will recover an additional $18.7 million from the plan, assuming recovery in full on a $18 million tax refund claim.

Barzel once had 15 facilities. The petition listed assets of $366 million against debt totaling $385 million, including $315 million on senior secured notes. There was another $18.4 million owing on an asset-backed loan with a first lien on accounts receivable.

The case is In Barzel Industries Inc., 09-13204, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Downgrade

Sunoco Demoted to Junk on Spinoff of SunCoke Energy

Oil refiner and marketer Sunoco Inc. lost investment-grade status yesterday as a result of the forthcoming spinoff of SunCoke Energy Inc., which Standard & Poor’s said was “one of the more stable business segments.”

S&P now gives Philadelphia-based Sunoco a BB+ corporate grade after the one-notch downgrade. S&P also estimated that holders of senior unsecured debt would recover as much as 50 percent in the event of payment default.

S&P described Sunoco’s business-risk profile as being “materially weaker” as a result of the spinoff.

Watch List

Jefferson County, Alabama Votes to Retain Bankruptcy Lawyers

The Jefferson County, Alabama, commissioners voted yesterday to retain the Los Angeles law firm Klee Tuchin Bogdanoff & Stern LLP to represent the county in the event of bankruptcy.

Tomorrow, the commissioners will vote on whether to file for municipal reorganization under Chapter 9 of federal bankruptcy laws. A standstill agreement with lenders is to expire after the commissioners are scheduled to vote on bankruptcy.

The county, which includes Birmingham, is trying to deal with $3 billion in defaulted sewer bonds. For Bloomberg coverage, click here.

Daily Podcast

Madoff-Fred Wilpon, Crystal, Texas Industries: Bankruptcy Audio

The Bloomberg bankruptcy podcast opens by explaining how the liquidation of Bernard L. Madoff Investment Securities Inc. could end up establishing a rule of law where customers of a broker are immunized from so-called clawback suits if they invested in a Ponzi scheme when investors in a hedge fund wouldn’t be. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle explain how the Catholic Diocese of Orange County, California is willing to pay at least $50 million to take over the home of Crystal Cathedral Ministries. The podcast concludes with a look at cement and concrete supplier Texas Industries Inc. To listen, click here.

--With assistance from Kit Chellel in London; Martin Z. Braun and Linda Sandler in New York; Kathleen Edwards in Birmingham, Alabama; and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Mary Romano, 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.


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