Bloomberg News

Offshore Funds, Madoff, Innkeepers, Giordano’s: Bankruptcy

August 30, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds GM, Madoff and Innkeepers in Updates; and Ashland in Downgrade.)

Aug. 30 (Bloomberg) -- The Bermudian liquidators for Millennium Global Emerging Credit Master Fund Ltd. are entitled to use bankruptcy courts in the U.S., Bankruptcy Judge Allan Gropper ruled in a 36-page opinion on Aug. 26.

The master fund and an affiliated feeder fund filed petitions in New York in late June for protection from creditors under Chapter 15 after having begun their liquidations in Bermuda in October 2008 when they couldn’t meet a margin call from the prime broker. Gropper ruled that the court in Bermuda should be the primary court in charge of the bankruptcy.

BCP Securities LLC, which is being investigated by the liquidators and may be sued, objected to a finding that Bermuda was the companies’ “center of main interests.” Gropper disagreed, ruling that Bermuda is entitled to recognition as the “foreign main bankruptcy.” He therefore approved the Chapter 15 petition.

The ruling means that the liquidators from Bermuda may use U.S. courts to perform an investigation and file suits. Meanwhile, Bermuda will distribute assets to creditors and determine the validity of claims.

Gropper, a U.S. bankruptcy judge in New York, disagreed with two prior rulings from other courts and ruled that the location of the COMI, or center of main interests, should be based on facts existing when the first liquidation began in Bermuda.

He disagreed with other courts believing that the plain meaning of Chapter 15 requires using facts when the Chapter 15 petition was filed.

The funds’ COMI was in Bermuda, Gropper said, because two of the three directors were from Bermuda while a bank, the custodian, and the auditor were also in Bermuda.

Gropper said that Bermuda was the “only reasonably ascertainable” COMI even though there were no creditors nor any investors in Bermuda and the funds’ manager was in the U.K. To find the COMI anywhere else would be “pure speculation,” Gropper said.

Gropper also said there was “insufficient evidence” to find a COMI anywhere besides Bermuda.

Gropper distinguished a Chapter 15 case involving two hedge funds created by Bear Stearns Cos. where U.S. Bankruptcy Judge Burton Lifland concluded that the Cayman Island weren’t the COMI because the business was run out of New York.

Gropper ended his opinion by ruling that the liquidators were entitled to a two-year extension on time limits for filing lawsuits under Section 108 of the Bankruptcy Code.

The funds were created to invest in sovereign and corporate debt instruments. The liquidators said they collected about $22 million in assets for the two funds and had about $170 million in claims filed by prime brokers and swap counterparties. Gropper said in his opinion that some $9 million already was spent by the liquidators for lawyers in Bermuda and the U.S.

Chapter 15 is not a full-blown bankruptcy. It’s designed to assist a primary bankruptcy pending outside the U.S.

The case is In re Millennium Global Emerging Credit Master Fund Ltd., 11-13171, U.S. Bankruptcy Court, Southern District New York (Manhattan).


New GM’s $450 Million UAW Dispute Headed to Michigan

General Motors Co., the formal name for new GM, won’t be having the bankruptcy court rule on a $450 million dispute with the United Auto Workers Union. In sending the suit to Michigan, a bankruptcy judge in New York wrote a 28-page opinion where he said, “Frankly, I bring nothing to the table here.”

The controversy traces its roots to 1999 when old GM, then formally named General Motors Corp., spun off parts maker Delphi Corp., which emerged from its own bankruptcy reorganization in 2009 after new GM brought assets from old GM. In the spinoff, old GM agreed to make a $450 million contribution to a trust providing retiree health benefits. After old GM sold the business, the union filed suit in Michigan in April 2010 demanding that new GM make the contribution.

The U.S. district judge in Michigan put the lawsuit on ice while U.S. Bankruptcy Judge Robert E. Gerber in New York ruled on a request by new GM that he take over the suit.

Gerber decided last week that his approval of the sale to new GM gave him the exclusive right to take over the union’s lawsuit. Nonetheless, he declined to hear the case, saying the bankruptcy court had no “particular knowledge or expertise,” such as “knowing what I intended” in approving the sale.

Given that the dispute is between two non-bankrupt entities, Gerber said it was proper for him to hear a suit only where the “New York bankruptcy court has a significant interest or that truly involves bankruptcy law or policy.” Gerber said it was also important that the lawsuit would have no effect old GM’s bankrupt estate or its creditors’ recovery.

Gerber said the situation might have been different were it a case where the buyer purchased an asset free of a claim. Here, he said, both sides have good arguments based on the underlying documents.

Now formally named Motors Liquidation Co., old GM implemented its Chapter 11 plan in March and made a first distribution in April of some of the stock and warrants it received from new GM. There have been additional distributions since.

GM’s was the largest manufacturing reorganization in history. The plan created four trusts. One distributes the stock and warrants issued by new GM as consideration for the sale of the assets. Creditors of old GM split 10 percent of the stock of new GM plus warrants for 15 percent. For details on the plan, click here for the Sept. 1, 2010, Bloomberg bankruptcy report.

Old GM filed for reorganization under Chapter 11 on June 1, 2009. The sale to new GM was completed on July 10, 2009. Old GM listed assets of $82.3 billion against debt totaling $172.8 billion.

The case is In re Motors Liquidation Co., 09-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Madoff Trustee Fights to Keep UniCredit Suit Alive

The trustee liquidating Bernard L. Madoff Investment Securities Inc. and the Securities Investor Protection Corp. each filed 38-page briefs yesterday opposing dismissal of the trustee’s $59 billion lawsuit against UniCredit SpA and subsidiary UniCredit Bank Austria AG.

The 76 pages of briefs, not counting supporting papers, represent the trustee’s and SIPC’s attempts at preventing U.S. District Judge Jed Rakoff from dismissing the suit for the reasons he gave in late July when he threw out the largest part of a separate $9 billion suit against HSBC Holdings Plc.

SIPC used the majority of its brief yesterday to explain why it “respectfully disagrees” with Rakoff’s grounds for dismissal of claims against HSBC. SIPC once again propounded a theory why a trustee appointed under the Securities Investor Protection Act has a unique duty imposed by statute to recover so-called customer property, which in this instance is money stolen from customers of the Madoff Ponzi scheme.

The Madoff trustee takes a different tack in his 38-page brief by explaining how the UniCredit suit is different from HSBC. In support of his claims under the Racketeer Influenced & Corrupt Organizations Act, commonly known as RICO, the trustee argues that the UniCredit “defendants ran their own criminal organization, independent of Madoff.” The trustee’s argument is designed to avoid the so-called in pari delicto defense, where one participant in a fraud can’t sue another.

Countering the contention that RICO can’t apply outside the U.S., the trustee lays out facts designed to show that more than half of the underlying activities, including wire fraud, mail fraud and money laundering, took place in the U.S.

Even if Rakoff were correct in dismissing claims against HSBC based on common law, the Madoff trustee points out that RICO claims aren’t based on common law. For a summary of the grounds on which Rakoff dismissed parts of the HSBC suit, click here for the July 29 Bloomberg bankruptcy report. For a summary of UniCredit’s motion to dismiss, click here for the July 27 Bloomberg bankruptcy report.

UniCredit and Bank Austria will file replies on Sept. 12 in advance of a hearing before Rakoff on Sept. 19.

The trustee’s suit contends that Bank Medici AG and Sonja Kohn, its founder, worked in tandem with Madoff going back at least until the mid-1980s. The trustee alleges that Kohn and her bank funneled more than $9 billion into Madoff through foreign investment funds.

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).

Innkeepers’ Cerberus Suit May Be Capped at $20 Million

Innkeepers USA Trust filed a lawsuit in bankruptcy court yesterday aimed at compelling Cerberus Capital Management LP and Chatham Lodging Trust to complete a $1.12 billion acquisition of 64 hotels. The sale was formally approved at the end of June as part of the confirmation of the Innkeepers Chapter 11 reorganization plan.

Innkeepers argues in the complaint that the obligation of Cerberus and Chatham to complete the purchase was “binding and irrevocable.” Earlier this month, Cerberus sought to lower the sale price, given conditions in the equity markets, the complaint says.

On Aug. 19 the buyers gave notice they were terminating the purchase agreement under a so-called material adverse change clause in the contract. Innkeepers points out that the contract does not allow termination for changes in general market conditions, only for deterioration in Innkeepers’ own business. Innkeepers says its business hasn’t suffered in the least.

Innkeepers believes that canceling the purchase was part of a strategy where the buyers sought “leverage” to lower the price.

In addition to arguing they properly ended the contract, Cerberus and Chatham may contend they can’t be liable for more than the loss of their $20 million deposit. They can point to court-approved sale procedures which prescribe that loss of the deposit is Innkeepers’ “sole remedy at law and in equity” for the buyers’ breach of contract. It also says that loss of the deposit is “liquidated damages.”

Nonetheless, the complaint seeks to compel Cerberus and Chatham to complete the purchase. Alternatively, it seeks damages that could exceed the $20 million deposit.

If Innkeepers can force completion of the sale, the confirmed Chapter 11 plan would give Lehman Ali Inc., a non- bankrupt subsidiary of Lehman Brothers Holdings Inc., $233 million cash for its $238 million in floating-rate mortgages on 20 of the Innkeepers properties. The disclosure statement said Lehman would be paid in full.

Midland Loan Services Inc., the servicer for $825 million of fixed-rate mortgages on 45 hotels, would receive $725.8 million in modified mortgages and $12.8 million cash. Midland’s recovery would amount to almost 88 percent, according to the disclosure statement.

Cerberus and Chatham won an auction in May. They were to contribute $400.5 million in equity. For details on the plan, click here for the June 24 Bloomberg bankruptcy report.

Apollo Investment Corp. acquired Palm Beach, Florida-based Innkeepers in July 2007 in a $1.35 billion transaction. It had 72 extended-stay and limited-service properties with 10,000 rooms in 20 states. The Chapter 11 petition filed in July 2010 listed assets of $1.5 billion against debt totaling $1.52 billion.

The lawsuit is Innkeepers USA Trust v. Cerberus Four Holdings LLC (In re Innkeepers USA Trust), 11-02557, U.S. Bankruptcy Court, Southern District New York (Manhattan). The Chapter 11 case is In re Innkeepers USA Trust, 10-13800, in the same court.

Giordano’s Pizza Selling Real Estate for 14 Stores

The trustee for Giordano’s Enterprises Inc., the owner of Chicago’s World Famous Stuffed Pizza, is seeking buyers for 14 stores that an affiliate owns. Buyers can purchase the properties either as a going concern or as real estate only, according to materials from the consultant Hilco Real Estate LLC.

Procedures for approval of sales haven’t yet been set up by the bankruptcy court. The properties for sale include four company-operated stores, two run by a joint venture with Giordano’s, and six operated by franchisees.

The bankruptcy court in Chicago scheduled a Sept. 6 hearing to approve settlements with franchisees who were on what the trustee called a “royalty strike.” Half of unpaid franchise fees will be brought current when the settlement is approved. The other half will be due Oct. 15. Unpaid advertising fees will be brought current on a longer schedule. A new pricing policy will be developed next year.

Franchisees in the Chicago area will be given a 10-year extension on their franchise agreements. In June the trustee sued about 30 franchisees to prevent them from interfering with sale efforts by refusing to pay royalties.

The pizza maker filed to reorganize in February. The Chapter 11 trustee was appointed in May after Giordano’s fired its bankruptcy lawyers and hadn’t paid $47,450 in fees owing to the U.S. Trustee system. The company has six company-owned stores and joint ventures for four more. In addition, 41 stores are operated by franchisees or a joint venture. The company owns the real estate for 20 of the stores, prior court filings said.

Fifth Third Bank was owed $45.5 million on two loans, court papers said. The business was acquired in 1988 by the Apostolou family.

The case is In re Giordano’s Enterprises Inc., 11-06098, U.S. Bankruptcy Court, Northern District Illinois (Chicago).

Plan Confirmed, Louisville Symphony Cancels Concerts

Although the Louisville Symphony Orchestra confirmed its Chapter 11 plan on Aug. 17, last week the ensemble announced the cancellation of concerts scheduled for September and October.

The symphony said that the musicians’ union threatened to fine members who worked so long as there is no new contract.

The symphony said it was offering musicians $925 a week plus benefits, the same as last season’s wages.

The reorganization plan resulted from negotiations with JPMorgan Chase Bank NA and Fifth Third Bank, the two principal secured lenders.

The non-profit symphony was founded in 1937 and filed for Chapter 11 relief last December in its hometown.

The case is Louisville Symphony Orchestra Inc., 10-36321, U.S. Bankruptcy Court, Western District Kentucky (Louisville).

University of Memphis Leasing Lambuth Facilities this Year

Lambuth University in Jackson, Tennessee, will survive as an institution of higher learning, although not under its own name.

The Tennessee Board of Regents approved purchasing Lambuth’s facilities to be operated as part of the University of Memphis. Lambuth, a liberal arts school founded in 1843, ceased operations on filing for Chapter 11 protection on June 30 in its hometown.

So University of Memphis could begin using the facilities this academic year, the bankruptcy judge this month approved a one-year lease for $1. In response to objection on behalf of secured bondholders, the Regents were required by the judge to insure the property.

Lambuth’s petition listed assets of less than $10 million and debt exceeding $10 million.

The school has about $5 million of bonds, bond insurer Radian Asset Assurance Inc. said in a court filing.

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

New Filings

WSAH, TV 42 in Bridgeport, Files in Delaware to Sell

The owner of television station WSAH, channel 42 in Bridgeport, Connecticut, filed under Chapter 11 on Aug. 26 in Delaware, intending to sell the business on a $12 million credit bid to secured lenders owed $5.3 million on a first-lien revolving credit and $68.6 million on two first-lien term loans.

NRJ TV LLC acquired the first-lien debt in September 2010. One of the owners of NRJ, Titan Broadcast Management LLC, is currently operating the station. Four other sister stations were already sold for cash.

There is also $46.3 million in second-lien debt. Drawbridge Special Opportunities Fund LP is agent for the senior lenders. The loans were in default since 2007.

NRJ is proposing to be the so-called stalking horse bidder at an auction to be sanctioned by the bankruptcy court. Rather than cash, NRJ would purchase the station in exchange for $12 million in secured debt and the obligation to pay the cost of curing contract defaults on contracts to be taken over in the sale.

The lenders are providing $650,000 in secured lending to finance the Chapter 11 case.

The station currently broadcasts 12 hours of programming each day provided on a barter basis by Retro Television Network. The other 12 hours are paid programming.

The case is In re MTB Bridgeport-NY Operating LLC, 11- 12707, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Bend Oregon’s Primary Newspaper Files to Reorganize

Western Communications Inc., the publisher of the Bend Bulletin and five other newspapers in Oregon, filed for Chapter 11 protection last week in Portland, saying assets and debt both exceed $10 million.

Bank of America NA, the newspapers’ secured lender, called the loan in default for violation of covenants in early 2009. The newspapers were operating under a forbearance agreement until it expired in June.

The newspapers blamed the filing on the “poor real estate market.”

The case is In re Western Communications Inc., 11-37319, U.S. Bankruptcy Court, District of Oregon (Portland)., Affiliates File Chapter 11 in Santa Ana

The owner of,,, and seven other e-commerce web sites filed for Chapter 11 protection earlier this month in Santa Ana, California.

The company, Ritz Interactive Inc., said in court papers that its last profitable year was 2008 when revenue was $107 million. The Irvine, California-based company said that the primary asset is the right to use trademarks under license from Ritz Camera & Image LLC, the principal supplier and primary secured creditor owed $3.6 million.

Assets are $809,000 while liabilities total $7.2 million, the Chapter 11 petition said.

The company blamed its financial problems on the Chapter 11 filing in 2009 by RCI, which curtailed the availability of merchandise. Another major supplier refused to provide goods as a consequence of losses from the RCI filing, a court filing says. For a rundown on the confirmation of RCI’s Chapter 11 plan, click here for the April 21, 2010 Bloomberg bankruptcy report.

The case is In re Ritz Interactive Inc., 11-21690, U.S. Bankruptcy Court, Central District California (Santa Ana).

New York’s Crawford Furniture to Reorganize in Buffalo

Crawford Furniture Manufacturing Corp., a 120-year-old furniture manufacturer from Jamestown, New York, filed a Chapter 11 petition last week in Buffalo, New York, faced with running out of cash by the end of September.

The company makes solid-wood bedroom and dining room furniture. It also has five retail stores. A landlord locked the company out of two locations before the Chapter 11 filing.

The petition says assets are less than $10 million with debt exceeding $10 million. Liabilities include $80,000 owing to a secured creditor, $1.4 million owing to trade suppliers, and $300,000 for arrears on leases.

Crawford had 120 employees early this year. It now has 20 workers after production workers were put on furlough until manufacturing resumes, a court paper said.

The case is In re Crawford Furniture Manufacturing Corp., 11-12945, U.S. Bankruptcy Court, Western District New York (Buffalo).

Watch List

Aquilex at Risk of Becoming Cash-Short in October-November

Aquilex Holdings LLC, a provider of cleaning and maintenance services for the energy industry, has been running cash operating deficits this year, Moody’s Investors Service said in a report last week.

With the revolving credit fully drawn, Moody’s said the $35 million cash “may not sufficiently cover seasonal working capital needs that typically rise in the October-November period.” In addition, the ability to comply with covenants on the first-lien debt is “doubtful,” Moody’s said.

Moody’s lowered the corporate credit rating by two clicks to Caa2. There was a prior downgrade in October.

Even with few debt maturities, Moody’s said “the capital structure could become untenable” without an increase in earnings.

The $225 million in 11.25 percent senior unsecured notes were demoted to Caa3, a lowering by two notches. The notes traded yesterday at 70.04 cents on the dollar, to yield 20.683 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Revenue for Atlanta-based Aquilex was $475 million for 12 months ended in June, Moody’s said. For six months ended in June, the net loss was $13.9 million on revenue of $226.6 million, according to a regulatory filing. The loss would have been larger without a $4.4 million tax benefit.


ISP Acquisition Demotes Ashland to S&P’s BB Corporate

Ashland Inc. made another major acquisition and was dealt another downgrade.

As the result of the $3.2 billion cash acquisition of International Specialty Products Inc., Standard & Poor’s lowered Ashland’s corporate rating by one grade last week to BB. Ashland’s subsidiary Hercules Inc. was also demoted to BB. In addition, one-notch downgrades were issued to the senior unsecured notes, now BB-, and to the subordinated debt, now B+.

S&P says that Ashland has a “satisfactory business risk profile and aggressive financial risk profile.”

Ashland was downgraded in November 2008 as a consequence of the Hercules acquisition.

Ashland, based in Covington, Kentucky, is a distributor of chemicals and lubricants under the Valvoline brand. Hercules is a specialty-chemical producer. Ashland rose $2.07 yesterday to $51.92 in trading on the New York Stock Exchange. Since 2008, the high was $68.34 on May 31, 2011. The low for the period was $5.60 on March 3, 2009. The $650 million in 9.125 percent senior unsecured notes traded yesterday at 111.75 cents on the dollar, to yield 4.587 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Hercules Inc. isn’t to be confused with a similarly named company, Hercules Chemical Co., a Passaic-New Jersey based outfit that filed under Chapter 11 in August 2008 to deal with asbestos claims.

--With assistance from Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: John Pickering, Glenn Holdcraft.

To contact the reporter on this story: Bill Rochelle in New York at

To contact the editor responsible for this story: John Pickering at

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