(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates with M Waikiki hotel, Ambac and Southwest Georgia Ethanol in Updates; General Maritime and Harrisburg in Watch List.)
Sept. 2 (Bloomberg) -- Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities Inc., undeterred by the recent dismissal of large portions of his $9 billion lawsuit against HSBC Holdings Plc, is still suing major international financial institutions. Yesterday, Picard started six new lawsuits, seeking almost $220 million from Sumitomo Mitsui Trust Holdings Inc. and affiliates of Barclays Plc, among others.
The lawsuits are almost identical. They all allege that the defendants were subsequent recipients of stolen customer funds that initially went to Fairfield Sentry Ltd., one of the largest feeder funds into Madoff’s Ponzi scheme. The lawsuits were made possible by the Madoff trustee’s settlement in June with Fairfield Sentry, which is in liquidation in Bermuda along with affiliates.
The complaints describe how withdrawals from the Madoff firm went first to Fairfield Sentry and then to the defendants. The complaints allege that the payments were fraudulent transfers the defendants must give back.
The Madoff trustee was careful to avoid asserting the type of common law claims that led U.S. District Judge Jed Rakoff to dismiss major portions of the suit against HSBC. Nonetheless, the new suits raise other dismissal issues that Rakoff has yet to decide in the $1 billion lawsuit Picard has brought against Fred Wilpon, Sterling Equities Inc., the owners of the New York Mets baseball club, and Wilpon’s friends, family and associates.
Wilpon argued to Rakoff last month that he received returns of principal from Madoff in good faith and thus has a defense to a fraudulent transfer suit. The Madoff trustee argued in response that Wilpon saw enough red flags about possible fraud that he wasn’t in good faith and thus has no defense to giving up fraudulent transfers. Rakoff said he would decide whether to dismiss part or all of the Wilpon suit by the end of September.
Rakoff has been taking suits away from the bankruptcy court where claims are based on common law. The new suits only make claims under bankruptcy law. Still, Rakoff has yet to rule on a motion by a customer who wants a fraudulent transfer suit under bankruptcy law taken away from the bankruptcy judge.
Some of the defendants may contend they can’t be sued in the U.S. because they dealt with the feeder fund in Bermuda and never transacted any business with Madoff in the U.S.
The Madoff trustee’s complaints seek $67.4 million from the Barclays affiliates, $54.3 million from Tokyo-based Sumitomo Mitsui, $41.7 million from Taiwan’s Cathay Life Insurance Co., $10.5 million from Italy’s Banca Carige SpA, $11.4 million from Switzerland’s Banque Privee Espirito Santo SA, and $33.6 million from South Korea’s Korea Exchange Bank.
In the settlement with Fairfield Sentry, the Madoff trustee received a $3.054 billion judgment against the feeder fund, plus other judgments against affiliates. Picard was given the right to sue Fairfield’s fund managers, directors and officers. The settlement set up a formula for dividing recoveries of redemptions from the Fairfield funds. For a discussion of the settlement, click here for the May 10 Bloomberg bankruptcy report.
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.
For other Bloomberg coverage of the new Madoff suits, click here.
The lawsuit against the Barclays affiliates is Picard v. Barclays Bank (Suisse) SA, 11-02569, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The other suits, in the same court, are numbers 11-02568 and 11-02570 through 02573.
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).
Marriott, Honolulu Hotel Owner Trade Barbs in Filings
Marriott International Inc., which had been the manager of what was known as the Edition hotel in Honolulu, said yesterday that the Chapter 11 filing by the owner on Aug. 31 was a “self- destructive step that will ultimately involve the destruction of significant value.” M Waikiki LLC, the owner, filed bankruptcy to prevent Marriott from retaking management pursuant to a temporary restraining order signed by a state court judge in New York just before the Chapter 11 filing.
As the story is told by the owner, which renamed the property Modern Honolulu when installing new management on Aug. 28, Marriott had “mismanaged” the 353-room hotel since opening in September 2010. In the first 10 months, the net operating loss was $8.4 million, the owner said, followed by a projected $1.9 million loss for the remainder of 2011.
Saying in bankruptcy papers that Marriott’s performance was “abysmal,” the owner started the state court lawsuit in May to terminate Marriott’s management agreement. Marriott filed a motion to dismiss the suit in July. Without authority from the state court, the owner terminated Marriott’s management contract on Aug. 28 and removed Marriott personnel from the premises, the former manager said in court filings.
Back in state court on Aug. 31, Marriott obtained a temporary restraining order directing the owner to reinstall Marriott as manager and return confidential information. The Chapter 11 filing, according to the owner, prevented Marriott from enforcing the order.
Yesterday Marriot filed a motion to modify the so-called bankruptcy automatic stay. Stopping short of asking the bankruptcy judge to return Marriott to management, the former manager is seeking to enforce only the portion of the state court order requiring the owner to return Marriott’s software, customer lists, and other confidential information.
Yesterday the owner filed papers in bankruptcy court to terminate Marriott’s management agreement, in case it wasn’t validly terminated before bankruptcy.
The hotel is now being managed by Aqua Hotels & Resorts, which Marriott characterized as a competitor.
The owner previously said it would use Chapter 11 to “reaffirm” Marriott’s termination. The owner’s statement also said the owner will seek tens of millions of dollars in damages from Bethesda, Maryland-based Marriott. In Marriott’s statement late yesterday, the former manager said it would seek tens of millions of dollars in damages from the owner.
The bankruptcy petition said assets and debt both exceed $100 million.
The case is In re M Waikiki LLC, 11-02371, U.S. Bankruptcy Court, District of Hawaii (Honolulu).
$117 Million Ambac Tax Claim Reduced to $3.2 Million
Ambac Financial Group Inc. agreed to settle a $116.8 million New York City tax claim by paying $2 million cash immediately and waiving a $1.2 million carry-forward tax credit. The hearing to approve the settlement is set for Sept. 21.
Without the settlement, Ambac said it might not be able to confirm the pending Chapter 11 plan. A hearing for approval of the explanatory disclosure statement is currently on the court’s calendar for Oct. 5. Lack of agreement with the Wisconsin insurance commissioner has been holding up global agreement on the plan. For details on 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 subsidiary is partially in rehabilitation in Wisconsin.
The Ambac parent filed under Chapter 11 in November. The Ambac parent listed assets of $90.7 million and liabilities totaling $1.624 billion, virtually all unsecured. Almost all the debt is made of up $1.622 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 of 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).
Southwest Georgia Ethanol Files Plan with Stock for Lenders
Southwest Georgia Ethanol LLC, the owner of a 100 million- gallon-a-year plant in Mitchell County, Georgia, filed a Chapter 11 reorganization plan last week where lenders owed $107.6 million are to receive $105 million in preferred stock plus 25 percent of the common stock.
The explanatory disclosure statement estimates the lenders’ recovery at 97.5 percent.
Unsecured creditors with $2.1 million in claims and bondholders owed $8.7 million are to receive proceeds from a litigation trust expect to produce a recovery of 3 percent.
If lower classes accept the plan, the lenders will waive their deficiency claim.
The plant began production in 2008 and sought Chapter 11 protection in February. The petition listed assets of $164.7 million and debt totaling $134.1 million. In addition to bank debt, liabilities initially included $12.6 million owing on two subordinated notes. Revenue was $168.9 million for the fiscal year ended in September 2010, resulting in a $2.2 million net loss. The company is owned by First United Ethanol LLC which didn’t file bankruptcy.
The case is In re Southwest Georgia Ethanol LLC, 11-10145, U.S. Bankruptcy Court, Middle District of Georgia (Albany).
Borders Sues Next Jump for Trademark Infringement
Borders Group Inc., the liquidating book retailer, filed a lawsuit against Next Jump Inc., which had been running a Borders Web site, bordersrewardsperks.com.
The Aug. 31 complaint contends that Next Jump modified the web site to direct customers to its own, similar web site.
Borders is suing for trademark infringement, among other things. In addition to an injunction to stop Next Jump from using Borders’ customer list, the book retailer wants compensatory and punitive damages in unspecified amounts.
Borders began going-out-of-business sales at all of its remaining locations on July 22. The creditors’ committee said before the liquidation began that Borders expected to generate $252 million to $284 million in cash from GOB sales. Borders arranged separate sales for the store leases and intellectual property.
Ann Arbor, Michigan-based Borders had 642 stores on entering bankruptcy in February and was operating 399 when the liquidation began. 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).
West End Financial Files Liquidating Chapter 11 Plan
Bankrupt fund adviser West End Financial Advisors LLC filed a liquidating Chapter 11 plan and explanatory disclosure statement on Aug. 31. If approved by creditors and the bankruptcy court in New York, creditors will be paid in the order of priority outlined in bankruptcy law.
There are three secured creditors with claims aggregating about $13 million. West End believes that the security interest for a $5 million claim is invalid, according to the disclosure statement.
There are $13 million in general unsecured creditor claims and $67 million in unsecured investor claims. The investors’ claims will be treated as claims rather than equity and share pro rata with general creditors.
Valid secured claims will be paid with five-year, interest- bearing secured notes. The notes can be paid before maturity. One secured claim, for $1.7 million, will be paid in full if the lender receives $1 million by March.
The investment portfolio was hedged. The plan presumes that the investments will be collected over time to avoid a $12 million penalty for swap termination, the disclosure statement says. The secured claims are to be paid over time to avoid the swap-breakage fees.
The plan would create a trust to pursue lawsuits and distribute proceeds to creditors.
In July the bankruptcy judge ruled that West End should be substantively consolidated with affiliates. Consequently, unsecured creditors of all the companies presumptively would receive the same percentage distribution.
Consolidation, however, was with qualifications. The bankruptcy judge ruled that the rights of parties with regard to plan confirmation, voting, and distribution weren’t affected by consolidation. The qualification was designed in part so that secured creditors would receive neither more nor less collateral as the result of consolidation. It also left open the question of whether some investors come ahead of others.
West End filed under Chapter 11 in March along with 15 affiliates, shortly after the U.S. District Court appointed a monitor at the behest of the Securities and Exchange Commission. Before bankruptcy, West End was accused by the SEC of committing securities fraud and misusing client funds.
West End’s founder William Landberg was arrested for securities fraud, the U.S. Trustee said in a court filing. West End’s two principal funds made so-called hard money loans on real estate and loans to food-service franchises. West End originally listed $55.4 million in assets. Secured debt originally was said to total $189.9 million while there were $4.5 million in unsecured claims, a prior court filing said.
The case is In re West End Financial Advisors LLC, 11- 11152, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Body Armor Maker Point Blank Posts $1.7 Million Loss
Point Blank Solutions Inc., manufacturer of soft body armor for police and military, filed an operating report showing a $1.67 million net loss in July on net sales of $6.4 million.
An $849,000 gross profit led to a $1 million operating loss. Reorganization items totaled $1.48 million while interest expense was $312,000.
Point Blank filed under Chapter 11 in April 2010. It lacks a reorganization plan as the consequence of disputes with the official equity holders’ committee. Based in Pompano Beach, Florida, Point Blank has two plants. Revenue in 2009 exceeded $153 million.
The Chapter 11 petition listed assets of $64 million against debt totaling $68.5 million. Debt included a $10.5 million secured loan paid off by financing for the Chapter 11 case. Point Blank said it also owes $28.2 million to trade suppliers.
The case is In re Point Blank Solutions Inc., 10-11255, U.S. Bankruptcy Court, District of Delaware.
Window Maker Atrium Downgraded, Liquidity ‘Uncertain’
Atrium Cos. Inc., a recent graduate of the bankruptcy reorganization process, may need a return visit to Chapter 11 if the housing and remodeling markets don’t improve. S&P yesterday demoted the corporate rating to Caa1 while saying the liquidity profile is “uncertain.”
Moody’s lowered the corporate credit by one grade, given “compression in operating margins, resulting in weakening credit metrics and an uncertain liquidity profile.” Moody’s also cited “tight covenant compliance.”
Moody’s calculated that adjusted earnings before interest, taxes, depreciation, and amortization aren’t covering interest expense. Revenue for a year ended in June was about $520 million, Moody’s said.
Dallas-based Atrium implemented a Chapter 11 plan in April 2010 where existing investors Kenner & Co. and Golden Gate Capital Corp. retained 92.5 percent of the equity by making new investments. For details on the plan, click here for the April 29 2010 Bloomberg bankruptcy report.
The Chapter 11 case was In re Atrium Corp., 10-10150, U.S. Bankruptcy Court, District of Delaware (Wilmington).
General Maritime May Need Restructuring, Moody’s Says
For General Maritime Corp., the owner of 31 crude oil and petroleum product tankers, there is “increasing prospect,” according to Moody’s Investors Service, for a “a restructuring of the terms of certain of its credit facilities, if not the entirety of its debt.”
Yesterday, Moody’s lowered the General Maritime’s corporate rating by three notches to Caa3. The senior unsecured notes fell to Ca.
Over the next 15 months, the majority of the charter agreements will expire, Moody’s said, leaving the company exposed to “mainly lower spot market freight rates.” Moody’s said the company’s financial difficulties are due to “ongoing weak sector fundamentals.”
For six months ended June 30, the New York-based company reported a $55.5 million net loss on revenue of $208.1 million. The operating loss in the period was $20.2 million.
The $300 million in 12 percent senior unsecured notes due 2017 traded yesterday at 54.9 cents on the dollar, to yield 27.545 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The stock fell 1.5 cents yesterday to 39.5 cents in New York Stock Exchange trading. The three-year high was $18.33 on Sept. 4, 2008. The low was 38 cents on Aug. 25, 2011.
Harrisburg City Council Rejects Fiscal Rescue Plan
The city council in Harrisburg, Pennsylvania’s capital, for a second time voted down a financial rescue plan, leaving doubt about how the city will cover a $3.3 million payment due Sept. 15 on general obligation bonds.
Compounding problems, the city may lose state aid if a recovery plan isn’t in place by Sept. 6. Under a newly enacted state law, the city is prevented from filing for Chapter 9 municipal bankruptcy protection until July 2012.
There is legislation pending to allow the state to take over. The bill would enable a state-appointed board to take over a distressed city that doesn’t adopt a recommended recovery plan. For Bloomberg coverage, click here.
Harrisburg’s financial difficulties result from guarantees of $282 million in bonds sold to finance an incinerator that converts trash to energy. The bonds are insured by Assured Guaranty Municipal Corp.
Farenco, Bulk Shipper, Files Chapter 15 in New York
Farenco Shipping Co. LLC, a time-charter operator in liquidation in the British Virgin Islands, filed a petition on Aug. 31 in New York for protection in the U.S. under Chapter 15.
The liquidator, who was appointed at the end of May, explained in a court filing how the company’s financial problems were the result of the “dramatic collapse” of the bulk cargo market in 2008. The company was a time-charter operator hauling bulk cargo such as iron, coal, and steel.
Although there are no assets or lawsuits in the U.S., the liquidator intends on using Chapter 15 to garner information about the company’s financial transactions from banks operating in the U.S. The liquidator also intends to use Chapter 15 to gain possession of books and records of the company’s affairs in the hands of affiliates in Hong Kong and Singapore.
The liquidator believes the U.S. court has power to require the turnover of company records because the foreign affiliates were registered to do business in New York.
The assets, according to the liquidator, consist of $346,000 in cash plus potential lawsuits.
Chapter 15 is not a full blown bankruptcy like a reorganization in Chapter 11.
If the petition is approved, the U.S. court assists a bankruptcy primarily pending elsewhere. Although the U.S. court can assist in collecting assets, the foreign court administers distributions to creditors and decides which claims are valid and for how much.
The case is In re Farenco Shipping Co. Ltd., 11-14138, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Not Lender’s Collateral, Trustee Owns Commercial Tort
Commercial tort claims, unlike other types of torts, belong to a bankrupt company’s trustee and typically wouldn’t be collateral for a secured creditor, the U.S. Court of Appeals in Boston ruled on Aug. 31.
The case involved a company that eventually was liquidated in Chapter 7. The secured creditor was permitted to foreclose virtually all of the assets. Later, the creditor brought suit against a third party. The bankruptcy trustee claimed he was entitled to own the lawsuit.
The bankruptcy court ruled in favor of the trustee, as did the district court and the Court of Appeals, in a 23-page opinion by Circuit Judge Bruce M. Selya.
Selya explained that the Uniform Commercial Code applies to the creation of a security interest in commercial tort claims, unlike other types of torts. He said that the claim at issue was a commercial tort because it was for breach of fiduciary duty, conversion, and interference with contractual relationships.
Unlike other types of collateral that may be described generally in a security agreement, commercial torts must be described with “specificity” and can’t come within the ambit of an after-acquired property clause, the judge said.
Although the secured creditor had a valid secured claim, it couldn’t foreclose and own the commercial tort because it wasn’t part of the collateral. The tort claim wasn’t in the collateral pool because the claim didn’t exist when the security agreement was signed. It also wasn’t described specifically.
Ruling on an issue that had not previously been decided by the 1st Circuit in Boston, Selya said that a commercial tort can’t be proceeds of the secured party’s collateral.
The opinion also has a lengthy discourse on when claims belong to individual creditors as opposed to the bankruptcy trustee. In that regard, Selya’s opinion could find its way into the lawsuits where the trustee for Bernard L. Madoff Investment Securities Inc. contends he owns claims against third parties.
The case is City Sanitation LLC v. Allied Waste Services of Massachusetts LLC (In re American Cartage Inc.), 10-2284, U.S. 1st Circuit Court of Appeals (Boston).
Panel Resolves Ambiguity in Section 547(c)(9) Defense
If a security interest is granted during the 90-day preference period, the entire security interest is voided, not just the portion in excess of $5,475, the U.S. Bankruptcy Appellate Panel for the 9th Circuit in San Francisco ruled on June 30.
The opinion by U.S. Bankruptcy Judge James D. Pappas interpreted Section 547(c)(9) of the Bankruptcy Code, which was added to bankruptcy law in 2005. Pappas said that the preference defense applies only when the entire preferential transfer was less than $5,475, not to the portion in excess when the security interest is larger.
The case is Western States Glass Corp. of Northern California v. Barris (In re Bay Area Glass Corp.), 10-1525, U.S. 9th Circuit Bankruptcy Appellate Panel (San Francisco).
--With assistance from William Selway in Washington; Thom Weidlich in New York, Linda Sandler in London and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: John Pickering, Glenn Holdcraft.
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