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(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Lehman, Madoff and Vallejo in Updates; Penson Worldwide, PMI, New Enterprise Stone and Lafarge in Downgrades; section on Bank Failures; and equitable mootness and claim-trading items in Advance Sheets.)
Aug. 8 (Bloomberg) -- The Los Angeles Dodgers baseball club came to agreement with the Commissioner of Major League Baseball on a definitive agreement for a $150 million unsecured loan to finance the Chapter 11 reorganization begun June 27.
The loan is remarkable for being unsecured. It’s also unusually brief. The Dodgers asked the bankruptcy judge to give formal approval to the loan without a hearing given how MLB, the official creditors’ committee, the originally proposed lender, and the U.S. Trustee all consented.
When he refused to approve a $150 million secured loan on July 22, the U.S. bankruptcy judge in Delaware told the Dodgers to accept the competing offer for a loan from MLB.
MLB persuaded the judge to disapprove the loan the team was proposing to draw from Highbridge Principal Strategies LLC, an affiliate of JPMorgan Chase & Co. MLB said its loan didn’t have some $10 million in fees that Highbridge would have charged. In addition, MLB is charging lower interest, saving another $5 million.
The MLB loan documents are brief. The order approving the loan is 16 pages when similar documents are typically 50 pages. The loan agreement is 23 pages, again shorter than usual for loans to bankrupt companies.
The documents could be brief because MLB has few of the controls lenders often demand from bankrupt companies. There are few defaults apart from failure to pay interest. By maturing Nov. 30, 2012, the loan has a longer term than most.
There are no so-called milestones, where the bankrupt is required to sell the business, usually on a short timetable. Should there be a default, MLB agreed that the professionals can be paid for their services rendered prior to default.
For details on the court’s ruling refusing to approve the Highbridge loan, click here for the July 25 Bloomberg bankruptcy report. For other Bloomberg coverage on the MLB loan, click here.
The Dodgers began bankruptcy reorganization on June 27, listing assets of more than $500 million and 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 issues 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).
Lehman, JPMorgan Debate Meaning of High Court Opinion
Lehman Brothers Holdings Inc. and JPMorgan Chase Bank NA couldn’t be any more in disagreement over the meaning of a ruling in late June by the U.S. Supreme Court.
Lehman contends the Supreme Court would allow the entire lawsuit against JPMorgan to proceed in bankruptcy court while the New York-based bank takes the high court opinion to mean that none of the suit belongs in bankruptcy court.
Lehman and its creditors’ committee sued the bank in May, contending JPMorgan used its “immense leverage” as Lehman’s clearing bank to secure new guarantees and billions of dollars in assets. Lehman contends that JPMorgan had no right under the clearing agreement to demand more collateral.
Both sides already submitted papers on the question of whether Lehman makes a good claim or the complaint should be dismissed. Last month, U.S. Bankruptcy Judge James M. Peck asked both sides to submit papers on the issue of whether the Supreme Court’s case, called Stern v. Marshall, requires the suit to be in federal district court.
Describing its suit as founded on common law, Lehman says the entire suit can be in bankruptcy court. JPMorgan, on the other hand, points to how the Supreme Court said that a bankruptcy court can’t undertake a suit even against a creditor who filed a claim if the suit is based on state law. The bank argued in papers filed last week that Lehman’s entire suit must be in district court.
Assuming the suit remains in bankruptcy court, a trial isn’t scheduled until August 2012. Both sides have the right to file motions in April to dispose of the suit one way or the other if there are sufficient undisputed facts so a trial isn’t required. For a discussion of the Stern decision, click here for the June 24 Bloomberg bankruptcy report.
JPMorgan contends the suit should be dismissed as being protected by the so-called safe harbor, which insulates swap agreements and securities transactions from being attacked as fraudulent transfers. Lehman says there are loopholes allowing the suit to stand.
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.
A hearing is scheduled for Aug. 30 where Lehman intends for the bankruptcy court to approve a disclosure statement so creditors can begin voting on the compromise Chapter 11 plan. For a summary of Lehman’s reorganization plan, click here for the June 30 Bloomberg bankruptcy report.
The lawsuit is Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank NA, 10-03266, U.S. Bankruptcy Court, Southern District of 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).
Madoff Trustee Proposes Solution for Discovery Nightmare
The trustee liquidating Bernard L. Madoff Investment Securities Inc. is proposing new procedures for dealing with the document-production nightmare created by the 900 lawsuits he filed against almost 5,000 defendants.
Before starting the lawsuits, the trustee took 108 examinations of witnesses under oath and required customers and those who dealt with Madoff to turn over more than 5 million documents. Most of the information he received is covered by confidentiality agreements and can’t be given to anyone without permission from the person who gave the information to the trustee in the first place.
The trustee now is receiving the first requests to turn over documents to those he sued. Once all defendants are demanding documents, the trustee anticipates he would be saddled with “enormous costs and administrative burdens” were he required to obtain permission for every for every document he needs to turn over.
The trustee filed papers last week in bankruptcy court setting up a hearing on Sept. 7 where he will ask the judge to appoint two special masters to resolve disputes over producing documents and contentions that some documents are secret and shouldn’t be shown to anyone.
In addition, the trustee wants to do away with all existing confidentiality agreements. In their place, he would put all documents received from outsiders in a separate electronic document production room, where access can only be gained by signing a confidentiality agreement.
All information previously given to the trustee by third parties could be examined by creditors in the document room, unless there’s a new objection filed by the party that originally produced a document.
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).
Jackson Hewitt Creditors Committee Approves Chapter 11 Plan
Tax preparer Jackson Hewitt Tax Service Inc. had been facing a confirmation hearing today where the official unsecured creditors’ committee would oppose approval of the Chapter 11 plan. The committee was in opposition because their constituency was to receive nothing.
Opposition turned into support when the secured lenders, who are to end up owning Jackson Hewitt, agreed to create a $1.1 million cash fund for distribution to unsecured creditors. There are other objections still to be resolved or tossed out by the bankruptcy judge at today’s hearing.
The confirmation hearing originally had been scheduled for July 8. It was pushed back one month due to the creditors’ opposition. To confirm the plan, the judge will nonetheless be obliged to use the cramdown procedure because the classes of unsecured and subordinated creditors voted against the plan.
The plan, negotiated before Jackson Hewitt’s Chapter 11 filing in late May, gives all the new stock along with a new $100 million term loan to secured lenders owed $357 million. The lenders unanimously voted in favor of the plan. For details on the plan, click here for the May 25 Bloomberg bankruptcy report.
Based in Parsippany, New Jersey, Jackson Hewitt has about 1,110 company-owned offices and almost 4,900 operated by franchisees. The company and franchisees also have kiosks in 2,000 stores operated by Wal-Mart Stores Inc.
The petition listed assets of $388.6 million and debt of $444.8 million as of Jan. 31.
The case is In re Jackson Hewitt Tax Service Inc., 11- 11587, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Precision Parts Sets Oct. 28 Confirmation Hearing
Precision Parts International Services Corp., a producer of metal formed components for the auto and aerospace industries, scheduled an Oct. 28 confirmation hearing for approval of the liquidating Chapter 11 plan. Last week, the bankruptcy judge in Delaware approved the disclosure statement giving creditors the information needed to decide how to vote.
The disclosure statement tells unsecured creditors they can expect to recover between 0.15 percent and 0.35 percent on their $103 million in claims. PPI filed for reorganization in December 2008 and sold the assets in March 2009, producing net proceeds of $16 million. Secured lenders received $9.8 million immediately.
The plan resulted from a settlement with secured lenders where $575,000 was carved out for creditors with lower priorities. In addition to $150,000 cash, unsecured creditors are to receive some recoveries from lawsuits, plus excess cash, if any.
The Rochester Hills, Michigan-based company had six plants in North America. It owed more than $85 million on bank loans to Golub Capital and Norwest Mezzanine Partners II LP. Court papers listed other debts including $184.5 million in secured and unsecured loan obligations plus $30 million owing to trade suppliers. The revolving credit and term loans were $89 million while there was an $88.5 million mezzanine loan. First Atlantic Capital Ltd. acquired control of the company in 2005.
The case is In re PPI Holdings Inc., 08-13289, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Vallejo, California, Has Formal Plan Confirmation Order
The city of Vallejo, California has the green light to exit the municipal reorganization that began in May 2008.
The bankruptcy judge in Sacramento, California, signed a confirmation order last week formally approving the plan and overruling the remaining two objections. Other objections were resolved by the confirmation hearing in July.
The plan restructures $50 million of publicly held debt secured by leases on public buildings. Although the plan doesn’t affect pensions, it adjusts the claims and benefits of current and former city employees. For details on the plan when it was first filed, click here for the Jan. 20 Bloomberg bankruptcy report.
Vallejo, with a population of 117,000, is the largest California city to seek bankruptcy protection. Assets are more than $500 million while debt is less than $500 million, according to the petition.
The case is In re City of Vallejo, 08-26813, U.S. Bankruptcy Court, Eastern District of California (Sacramento).
Commercial and Individual Bankruptcies Down in July
The 110,000 bankruptcy filings in the U.S. during July were about the same as June, although 9.6 percent fewer than the same month last year.
For the first seven months of 2011, total bankruptcies trail the same period in 2010 by 9 percent, according to data compiled from court records by Epiq Systems Inc.
Commercial bankruptcies continued dropping faster still. The 5,760 business bankruptcies in July were 27.3 percent below the same month in 2010.
Filings in Chapter 11, where larger companies reorganize or liquidate, totaled 826 in July, or one-third fewer than July 2010.
The states with the highest per capita bankruptcies are Nevada, Georgia and Tennessee.
Bankruptcies declined in all 50 states.
There have been 841,400 bankruptcies of all types this year, compared with 1.56 million for 2010 as a whole. Last year had the most since 2005, when a record 2.1 million were filed. Americans in 2005 were filing bankruptcy ahead of new laws making it more difficult for individuals to cancel debt. In the last two weeks before the law changed, 630,000 American sought bankruptcy protection.
Penson Downgraded After Loan to Insider Goes Sour
Penson Worldwide Inc., a provider of clearing and margin lending services for the brokerage industry, received a one- notch downgrade on Aug. 5 from Moody’s Investors Service when the corporate rating fell to B2.
Moody’s said that the Dallas-based company’s “financial flexibility is severely limited as a result of continued operating losses due to industry-wide low trading volumes and the current historic low interest rate environment.”
Moody’s also cited a $48 million net loss in the second quarter on revenue of $78 million. The loss was exaggerated by a $43 million asset writedown from a margin loan to a company with which a former director was affiliated. Moody’s said that the writedown raised “concerns regarding the company’s governance and risk management controls.”
For 2010, Penson had a $19.8 million net loss on revenue of $288.3 million.
Penson closed at a record low of $2.12 on Aug. 5 in Nasdaq Stock Market trading.
PMI Mortgage Insurance Downgraded, Stock at 25 Cents
For mortgage insurer PMI Mortgage Insurance Co., “statutory insolvency is possible by the end of 2011 or in early 2012,” Standard & Poor’s said in an Aug. 5 report.
S&P also said that PMI “could be placed into regulatory supervision or court-ordered receivership by the Arizona Department of Insurance at or before the occurrence of statutory insolvency.”
S&P lowered the counterparty and financial strength ratings to CCC- from B-. At the same time, S&P downgraded the counterparty and senior debt ratings of holding company PMI Group Inc. to CC from CCC-.
S&P was reacting to the net operating loss of $338.4 million for the second quarter of 2011.
The holding company’s $250 million in 6 percent notes due 2016 traded at 34 cents on the dollar on Aug. 5, to yield 34.2 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The stock of the Walnut Creek, California-based holding company closed at a record low of 25 cents on Aug. 5 in New York Stock Exchange composite trading. The three-year closing high was $7.20 on April 15, 2010.
Moody’s Downgrades New Enterprise to Line Up with S&P
New Enterprise Stone & Lime Co., a supplier of aggregates for construction, received a one-notch downgrade on Aug. 5.
The new B3 corporate rating from Moody’s Investors Service lines up with the demotion issued in June by Standard & Poor’s. Moody’s based its action on the “expectation that public construction will face further slowing through 2012.”
Moody’s simultaneously lowered the $250 million in senior unsecured notes by one grade to Caa2. The notes traded on Aug. 5 at 98 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
When S&P downgraded the notes to B- in June, it predicted the holders would recover 30 percent to 50 percent in the event of payment default.
The closely held company is based in New Enterprise, Pennsylvania. It serves Pennsylvania, western New York and surrounding states.
Cement Producer Lafarge Demoted to Top Junk by Moody’s
Lafarge North America Inc., a producer of cement and cement-related products, lost investment-grade status on Aug. 5 from Moody’s Investors Service when the senior unsecured rating was lowered one peg to Ba1, the highest junk grade.
Standard & Poor’s made a similar move to junk in March.
Lafarge’s French parent, Lafarge SA, received an identical downgrade to top junk. Moody’s noted that most of the funded debt is at the parent level and thus structurally subordinated to trade debt.
Lafarge North America, based in Herndon, Virginia, was acquired in 2006 in a $2.95 billion transaction. The parent’s $600 million in 7.125 percent senior unsecured notes due 2036 traded on Aug. 5 at 93.8 cents on the dollar, to yield 7.69 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Two Bank Failures Bring Year’s Total to 63
Bank failures in Washington and Illinois on Aug. 5 brought the year’s total to 63. The combined cost to the Federal Deposit Insurance Corp. was $160.4 million. For Bloomberg coverage, click here.
Last year, there were 157 bank failures. The failures in 2010 were the most since 1992, when 179 institutions were taken over by regulators.
Artificial Impairment No Bar to Cramming Down Plan
Paying a small clutch of unsecured claims in full over three months isn’t a form of artificial impairment that precludes cramming a reorganization plan down on a dissenting secured lender, U.S. Bankruptcy Judge Michael Lynn ruled on Aug. 4.
The case involved a real estate project with $32.3 million owing on the mortgage. The plan put the lender in one class and $60,000 in unsecured claims in another. The lender was to be paid in full over five years with interest at 5.83 percent. Unsecured creditors would be paid in equal installments over three months.
The lender contended that unsecured creditors would be artificially impaired and that the plan wasn’t proposed in good faith. Lynn, from Fort Worth, Texas, disagreed and confirmed the plan so long as the interest rate was raised to 6.4 percent.
The lender made Lynn’s job easier by admitting it bought the mortgage with the intent of taking ownership of the property. Lynn found the result in the plain language of the U.S. Bankruptcy Code.
He said that the drafters “did not intend to create a system in which a lender could use its overwhelming share of the claims in a case to divest other creditors and equity owners of their economic interest.” Lynn said “Congress clearly contemplated protecting equity interests as well as those of creditors.”
To keep ownership, Lynn required the owners to contribute a new $1.5 million in equity on the condition that they couldn’t take money out until the lenders were fully paid.
Lynn said that the owner’s motive wasn’t “tainted” if the only way it could reorganize was “through minimal impairment” of unsecured creditors. He said that the plan fits within the “plain meaning of Sections 1124 and 1129(a)(10)” of the Bankruptcy Code.
The case is In re Village at Camp Bowie I LP, 10-45097, U.S. Bankruptcy Court, Northern District Texas (Fort Worth).
Evading Equitable Mootness Fails on Delaware Appeal
A district judge from New Jersey turned back an effort by a group of subordinated debenture holders to skirt the general rule requiring a stay pending appeal if an objecting creditor intends to appeal a confirmation order approving a Chapter 11 reorganization plan.
The case involved an appeal of the 2010 confirmation of the reorganization plan for Spansion Technology Inc., a manufacturer of flash-memory semiconductors. The debenture holders attempted to go ahead with the appeal even though the plan had been implemented and they were denied a stay pending appeal.
U.S. District Judge Robert B. Kugler didn’t buy the debenture holders’ argument that the appeal wouldn’t “overturn the confirmed plan.” His 24-page opinion on Aug. 4 surveys law in the 3rd Circuit, governing Delaware, on the doctrine of equitable mootness.
Picking apart the debenture holders’ argument, Kugler said that reversing the bankruptcy court would indeed “require the court to alter its general distribution scheme.” In particular, the court could not recover distributions already made “without imposing a new reorganization plan.”
Spansion implemented its Chapter 11 plan in May 2010. It reduced debt from $1.5 billion to less than $480 million. For details, click here for the June 23, 2010, Bloomberg bankruptcy report.
Before filing under Chapter 11 in March 2009, Sunnyvale, California-based Spansion hadn’t reported a profit since being spun off by Advanced Micro Devices Inc. in 2005.
The appeal is Ad Hoc Committee of Convertible Noteholders v. Spansion Inc., (In re Spansion Inc.), 10-369, U.S. District Court, District of Delaware. The Chapter 11 case is Spansion Inc., 09-10690, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Court Finds No Loopholes in Assignment of Claim
A buyer who paid 89 cents on the dollar for a claim against Delphi Corp. failed to find a loophole creating the right to force the seller to repurchase the $2.1 million claim against the company that once was the largest U.S. auto-parts maker.
The buyer, Longacre Master Fund Ltd., purchased the claim when Delphi had a Chapter 11 plan on file where unsecured creditors were to be paid in full. Although the plan was confirmed, it could never be implemented.
Longacre contended it was entitled to force the original holder to repurchase the claim under several theories arising from the purchase agreement. None of the theories persuaded U.S. District Judge Robert W. Sweet in New York.
Part of Longacre’s lawsuit was based the idea that a preference suit filed against the seller was an “impairment” of the claim, enabling the buyer to recover the purchase price plus interest.
Sweet said that making a claim against the buyer didn’t affect the validity of the claim, even though Section 502 of the Bankruptcy Code automatically disallowed the claim unless the preference were repaid.
Sweet’s opinion in large part rested on a 2007 opinion written by U.S. District Judge Shira Scheindlin in the liquidation of Enron Corp. Sweet drew a distinction between a complete sale of the claim and an assignment, where the seller retains some of the attributes of the claim. In the Delphi situation, it was an assignment.
Sweet also ruled that the seller’s knowledge that it received payments within 90 days of Delphi’s bankruptcy didn’t amount to knowledge at the time of the sale that that there was a valid preference claim in existence. The result might have been different were the preference suit not ultimately dismissed.
The case is Longacre Master Fund Ltd. V. ATS Automation Tooling Systems Inc., 10-8024, U.S. District Court, Southern District of New York (Manhattan).
Lehman, Extended Stay, Important Opinions: Bankruptcy Audio
How Lehman Brothers Holdings Inc. moved a long way, although not all the way, toward successful reorganization is explained in the new Bloomberg bankruptcy podcast. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle point to Extended Stay Inc. as an example for how even representatives of bankrupt companies and their creditors are voluntarily removing lawsuits from bankruptcy court in the wake of a landmark decision from the U.S. Supreme Court in June. Rochelle discusses two important, new appellate-level bankruptcy decisions and concludes with discussion of kingfishers, barn swallows, wild minks, and red foxes. To listen, click here.
--With assistance from Dakin Campbell in San Francisco and Steven Church, Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Glenn Holdcraft, Peter Blumberg
To contact the reporter on this story: Bill Rochelle in New York at firstname.lastname@example.org.
To contact the editor responsible for this story: John Pickering at email@example.com.