Bloomberg News

Madoff, Solyndra, Lehman, NewPage, Inspirada: Bankruptcy

September 09, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Lehman, Nebraska Book, Philadelphia Orchestra and Perkins in Updates; Blackboard in Downgrades, and section on Bankruptcy Podcast & Video.)

Sept. 9 (Bloomberg) -- Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities Inc., can pretty much expect that some customers will object to virtually everything he proposes. Objections are understandable given how the trustee has filed 900 lawsuits against 5,000 customers and others.

In early August, Picard proposed new procedures for dealing with the document-production nightmare created by the 900 lawsuits he filed against almost 5,000 defendants. Several customers, themselves the targets of lawsuits, are objecting to the idea that the trustee would give their sensitive personal financial information to anyone else for any reason.

PJ Administrator LLC contends in a court filing that Picard is attempting to abrogate confidentiality agreements “largely for his own personal benefit.” In its filing, Plaza Investments International Ltd. opposes vitiating the agreements to allow what it characterizes as “broad-scale availability of that information to persons who have no legitimate reason for knowing it.”

Customer and defendant Maxam Capital Management LLC similarly doesn’t like the idea of allowing 5,000 other defendants to have access to its sensitive, confidential financial information.

The bankruptcy court will sort out the dispute at a Sept. 22 hearing. The hearing originally was set for Sept. 7. The trustee might use the interval to work out objections. For details on the trustee’s proposal, click here for the Aug. 8 Bloomberg bankruptcy report.

The Madoff firm began liquidating on Dec. 11, 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, Southern District of New York (Manhattan).


Defaults to Continue to Decline, Assuming No Double Dip

Default rates are declining while the percentage of junk- rated companies with distressed debt rose, Moody’s Investors Service reported yesterday.

In July, Moody’s junk-grade distress index stood at 8.9 percent. The index measures the percentage of issuers with debt trading at distress levels.

By August, the distress index more than doubled, to 19.3 percent, Moody’s said. One year ago, the distress index was 15.3 percent.

While distress is on the upswing, defaults aren’t. There were no defaults in August on debt rated by Moody’s. For the year so far, there have been 16 rated defaults, compared with 38 in the same period last year.

The worldwide default rate for junk-rated companies declined in August by 0.1 percentage point to 1.8 percent, Moody’s reported. In the U.S. the junk default rate contracted by 0.2 percentage point to 2.1 percent.

Given Moody’s base case assumption for the overall economy in the next year, the default rate in the U.S. should decline to 1.5 percent by year’s end. Under the same assumption, Moody’s projects the junk default rate a year from now will be 2.2 percent.

If there’s a double-dip recession in the U.S., Moody’s projects that the global junk default rate will jump to 6.7 percent a year from now.


FBI Raids Solyndra, Recipient of Government Loan

Solyndra LLC, the manufacturer of cylindrical solar systems for commercial rooftops partly financed with a federal government loan, was raided yesterday by the Federal Bureau of Investigation.

The search warrant was executed in conjunction with the U.S. Energy Department, which issued the federal guarantee for a $535 million loan.

For Bloomberg coverage, click here.

The FBI didn’t disclose the purpose of the search, which could include an investigation into whether the company was truthful to the government in loan-workout talks early this year when the government was persuaded to subordinate a portion of its existing debt to new financing.

Solyndra, based in Fremont, California, filed for Chapter 11 protection on Sept. 6, saying assets were $859 million while debt totaled $749 million as of Jan. 1. When the petition was filed, Solyndra said secured debt was $783.8 million. The venture was financed in part with $709 million from eight issues of preferred stock, plus $179 million in convertible notes.

Construction of the plant began in September 2009. The plant began production in January 2011 and shut down in late August when new financing failed to materialize. Revenue in 2010 of $142 million resulted in a $329 million net loss.

The case is In re Solyndra LLC, 11-12799, U.S. Bankruptcy Court, District of Delaware (Wilmington.)

Giants Stadium Claims Lehman Misunderstood Deal

Lehman Brothers Holdings Inc. and Giants Stadium LLC are set to square off in bankruptcy court on Sept. 14 in a dispute over production of documents relating to the financing of the stadium and the stadium’s $300 million claim.

Although the stadium produced 64,000 pages of documents, Lehman contends that some were improperly withheld under a claim of privilege. Lehman believes that e-mails with the stadium’s counsel should be turned over because the privilege was waived when non-lawyers for the stadium’s financial adviser were copied on the communications.

In opposing production, the stadium contends that Lehman “misunderstands” the nature of the transaction. Auction-rate bonds were issued while Lehman wrote swap agreements where the stadium would pay a fixed rate for 40 years.

Creditors will be voting on Lehman’s Chapter 11 plan. The confirmation hearing for approval of the plan is set for Dec. 6.

The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold office buildings and the North American investment-banking business to Barclays Plc one week later. The remnants of the Lehman brokerage operations went into liquidation on Sept. 19, 2008, in the same court, with a trustee appointed under the Securities Investor Protection Act.

The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding under the Securities Investor Protection Act for the brokerage operation is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

NewPage Gets New Loan to Take out Existing Revolver

NewPage Corp., acquired in 2005 by Cerberus Capital Management LP, can keep its plants operating after receiving interim loan approval yesterday in bankruptcy court in Delaware.

North American’s largest producer of coated paper was seeking approval for a $495 million interim loan, increasing to $600 million after the final financing hearing.

The so-called DIP loan consists of a $350 million revolving credit and a $250 million term loan. The new loan, to come first in the pecking order, will be used in part to repay about $232 million in obligations on the existing first-lien revolving credit.

The lenders include affiliates of JPMorgan Chase & Co., Barclays Plc and Wells Fargo & Co.

In the Sept. 7 Chapter 11 filing, Miamisburg, Ohio-based NewPage listed assets of $3.4 billion and debt totaling $4.2 billion. Bankruptcy resulted from what the company said were “burdensome long-term debt obligations” arising from the 2005 acquisition.

Debt at the outset included $232 million on the revolving credit, including $101 million in undrawn letters of credit, plus $1.77 billion outstanding on 11.375 percent senior secured first-lien notes.

Second-lien obligations include $802 million in 10 percent secured notes and $225 million in floating-rate notes.

In addition to $200 million in 12 percent senior unsecured notes, $498 million is owing on two issues of floating-rate pay- in-kind notes.

NewPage reported a $229 million net loss in the first half of 2011 on revenue of $1.79 billion, following a $674 million net loss in 2010 on revenue of $3.6 billion. It has 16 paper- making machines operating in seven plants in the U.S. and Nova Scotia. The Canadian affiliate filed for reorganization in Nova Scotia.

The case is In re NewPage Corp., 11-12804, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Nebraska Book Brings Shareholders on Board with Plan

Nebraska Book Co., a bookseller to college students, won bankruptcy court approval this week for an agreement under which holders of two-thirds of the existing equity will support the reorganization plan.

Previously, shareholders were to receive warrants for 5 percent of the new equity exercisable at a price equating to an enterprise value of $500 million for the reorganized company.

The plan-support agreement calls for shareholders to receive warrants for 3 percent of the equity based on a $500 million enterprise value and warrants for 5 percent based on a $550 million valuation.

The confirmation hearing for approval of the plan is set for Oct. 4. The remainder of the plan was negotiated before the Chapter 11 filing in late June.

The plan will swap existing debt for new debt, cash and the new stock, after first-lien and second-lien debt is paid in full. The stock will be divided mostly among subordinated noteholders of the operating company and holders of notes issued by the holding company.

The plan was designed to remove $150 million of debt from the balance sheet. For details on the plan, click here for the July 19 Bloomberg bankruptcy report.

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

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

Philadelphia Orchestra and Musicians to Mediate

The Philadelphia Orchestra and the musicians’ union agreed to mediate on Sept. 15 and 16 with regard to a new collective bargaining agreement.

Stephen Raslavich, a bankruptcy judge in Philadelphia, will serve as mediator.

The union agreed to extend the expiration of the existing contract to Dec. 2 from Nov. 18, while the orchestra agreed not to takes steps for bankruptcy termination of the existing contract until Sept. 19.

The union also agreed to file no new complaints about unfair labor practices with the National Labor Relations Board.

When the Chapter 11 reorganization began, the orchestra said it needs relief from pension obligations, a new lease with the Kimmel Center where it performs, and a new union contract with musicians.

The orchestra’s Chapter 11 petition in April said assets and debt were both less than $50 million.

The case is In re The Philadelphia Orchestra Association, 11-13098, U.S. Bankruptcy Court, Eastern District Pennsylvania (Philadelphia).

Perkins Plan Up for Vote Now Has Cash for Unsecureds

Restaurant operator Perkins & Marie Callender’s Inc. negotiated changes in the reorganization plan and received a commitment from the bankruptcy judge yesterday to approve the explanatory disclosure statement.

The confirmation hearing for approval of the plan is scheduled to take place Oct. 31 at U.S. Bankruptcy Court in Wilmington, Delaware.

Previously, the plan had stock for general unsecured creditors and holders of senior unsecured notes. Now, the holders of $204 million in senior notes take the equity while general unsecured creditors with $20 million to $25 million in claims have the option of receiving 14 percent cash, up to an adjustable cap of $6.75 million for the class as whole.

Secured creditors with $103 million in debt will receive a new term loan plus cash for accrued interest.

The plan is designed for funds managed by Wayzata Investment Partners LLC to take control when the plan is confirmed. For details on the plan, click here for the July 18 Bloomberg bankruptcy report.

Assets were $290 million while debt totaled $440.8 million, according to court papers. When the bankruptcy began, the company owned 85 Marie Callender’s stores in nine states and franchised 37 in four states. It owned 160 Perkins stores in 13 states and franchised 314 in 31 states.

Along with the filing, the company said it was closing 58 stores. It was acquired in 2005 by Castle Harlan Inc. for $245 million in cash.

The case is In re Perkins & Marie Callender’s Inc., 11- 11795, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Melvin Weiss Wants Madoff Suit Out of Bankruptcy Court

Melvin Weiss, the convicted and disbarred former lawyer, joins the list of defendants asking a U.S. district judge to take out of bankruptcy court a lawsuit filed last year by Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities Inc.

Weiss claims he’s the only defendant among the hundreds of Madoff lawsuits where the trustee is asking to recover money transferred more than six years before bankruptcy, excluding situations where the trustee claims the defendant had a special relationship with Madoff.

Weiss says he is another of Madoff’s innocent victims who didn’t know about the fraud while withdrawing more cash from the account that he put in. For other Bloomberg coverage, click here.

U.S. District Judge Jed Rakoff said he would issue a ruling in another case by Sept. 15 on the question of whether a lawsuit should reside in district court where the trustee is only making claims for fraudulent transfer based on bankruptcy law and similar state law. Where Rakoff was quick to take lawsuits out of bankruptcy court that involve federal securities laws, he had reservations about the pure bankruptcy-based suits.

On the face of the Weiss complaint, Picard is only alleging fraudulent transfers under the U.S. Bankruptcy Code and New York state law. To read about the prior case, involving a customer named Greiff, click here for the July 29 Bloomberg bankruptcy report.

The Weiss suit is Picard v. The M&B Weiss Family Limited Partnership, 10-04241, U.S. Bankruptcy Court, Southern District New York (Manhattan).

The appeal is In re Bernard L. Madoff Investment Securities, 10-2378, U.S. 2nd Circuit Court of Appeals (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, also in Manhattan bankruptcy court. The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court, Southern District of New York (Manhattan).

Inspirada Development’s Plan Set for Confirmation

The Chapter 11 plan covering South Edge LLC, the owner of the 2,000-acre Inspirada residential development in Henderson, Nevada, will come to U.S. Bankruptcy Court in Las Vegas for an Oct. 17 confirmation hearing.

The bankruptcy judge approved the explanatory disclosure statement yesterday. The plan is designed to implement a settlement negotiated by South Edge’s Chapter 11 trustee with KB Home and other homebuilders who were some of the ultimate owners of the project.

Settlement was reached with owners holding a 92 percent interest in the project. For details on the settlement to be carried out through the Chapter 11 plan, click here for the June 17 Bloomberg bankruptcy report.

KB has 49 percent of the project. Other owners joining in the settlement include Coleman Toll LP with 10.5 percent, Pardee Homes Nevada Inc. with 4.9 percent and Beazer Homes USA Inc. with 2.6 percent, a KB regulatory filing said.

Bankruptcy began with an involuntary petition filed by secured lenders. The U.S. district court in April upheld a decision from February by the bankruptcy judge to put South Edge in bankruptcy involuntarily and simultaneously appoint a trustee.

The project ultimately was to cost $1.25 billion and would have 8,500 homes. The lenders were to provide $595 million in financing. Other financing includes $102 million in public bonds for improvements.

The Chapter 11 case is In re South Edge LLC, 10-32968, U.S. Bankruptcy Court, District of Nevada (Las Vegas).

Georgian Project in Silver Spring up for Bid in October

The Georgian, an 891-unit apartment project in Silver Spring, Maryland, goes up for bid in October under procedures approved by the U.S. Bankruptcy Court in Greenbelt, Maryland.

Absent a cash buyer, there is agreement for a secured creditor to end up with ownership under a Chapter 11 plan.

The project, 90 percent occupied, has twin 14-story towers on a 3.25-acre plot. There are $185 million in original principal amount of first mortgages, not including a $30 million mezzanine loan.

The holder of the $60 million junior portion of the senior debt is the designated buyer, absent a cash offer.

Third parties are to submit initial bids by Oct. 18. Second-round bids are due Oct. 26.

The plan calls for reinstating the $125 million first-tier mortgage. The owner of the junior secured debt is intended to take ownership in the plan by forgiving some of the debt.

The case is In re Stellar GT TIC LLC, 11-22977, U.S. Bankruptcy Court, District of Maryland (Greenbelt).

Fiddler’s Creek Quickly Consummates Confirmed Plan

Fiddler’s Creek LLC didn’t waste any time implementing the Chapter 11 plan confirmed on Aug. 29 by the U.S. Bankruptcy Court in Fort Myers, Florida. The plan was consummated four days later, even before the time for appeal ran out.

Confirmation wasn’t easy. The trial on the plan ended up consuming eight days. The plan incorporates agreements with the official creditors’ committee, an ad hoc group of homeowners and two lenders, Regions Bank NA and Fifth Third Bank.

Fiddler’s Creek is the developer of a master-planned community in Naples, Florida. It filed for bankruptcy reorganization in February 2010, saying assets and debt both exceeded $100 million. At completion, the project is to have 100 communities situated on almost 4,000 acres.

The case is In re Fiddler’s Creek LLC, 10-03846, U.S. Bankruptcy Court, Middle District of Florida (Fort Myers).


Moody’s Matches S&P on Hovnanian Downgrade to Caa2

Homebuilder Hovnanian Enterprises Inc. was downgraded yesterday by Moody’s Investors Service to a Caa2 corporate grade, matching the action taken in June by Standard & Poor’s.

Moody’s demoted the senior unsecured notes by a notch to Caa3.

Moody’s cited “operating losses, weak gross margins, very high homebuilding debt leverage.” Moody’s said that the new ratings were supported by the “satisfactory” although “weakening” cash balance, which was $273 million in July.

S&P mentioned the “declining cash position as the company invests in land and new communities as a way to bolster gross profits.” Profitability is “unlikely” through 2012, S&P said.

The Red Bank, New Jersey-based company reported a $136.8 million net loss for the six months ended in April on revenue of $507.7 million. The loss before income taxes in the period was $138.2 million.

For the fiscal year ended in October, revenue of $1.37 billion translated into a $295 million loss before tax benefits and $2.6 million of net income.

The $155 million in 11.875 percent senior unsecured bonds maturing in October 2015 traded yesterday at 58.7 cents on the dollar, to yield 30 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Hovnanian closed yesterday at $1.64, down 1 cent a share in New York Stock Exchange composite trading. The three-year high was $9.05 on Sept. 19, 2008. The low in the period was 58 cents on March 6, 2009.

Blackboard Downgraded by S&P on LBO by Providence

Blackboard Inc., a provider of Internet educational software, was downgraded one step yesterday to a B corporate grade by Standard & Poor’s over debt from its leveraged buyout by Providence Equity Partners Inc.

Blackboard announced in early July that it would be acquired by Providence in a $1.64 billion transaction. The deal is resulting in a “significant increase in leverage” for Blackboard, S&P said.

For the six months ended in June, Washington-based Blackboard reported net income of $9.4 million on revenue of $208.8 million.

Bankruptcy Podcast & Video

Cerberus’s NewPage Filing, Two Madoff Judges: Bankruptcy Audio

The $4.2 billion Chapter 11 filing by NewPage Corp., the largest North American producer of coated paper, is the first item on the new Bloomberg bankruptcy podcast with Bloomberg News bankruptcy columnist Bill Rochelle and Bloomberg Law’s Lee Pacchia. They analyze the capital structure of NewPage, a 2005 acquisition by Cerberus Capital Management LP. The podcast ends with a discussion about how one federal district judge in New York is recommending how another district judge should rule on an important issue for the hundred of lawsuits brought by the trustee liquidating Bernard L. Madoff Investment Securities Inc. To listen, click here.

In their new video, Pacchia and Rochelle discuss NewPage and the two district judges with similar Madoff disputes. To watch, click here.

Advance Sheets

Defect in MERS Ownership, Judge Prevents Foreclosure

U.S. Bank NA, as trustee for a securitization of home loans, ran into a buzz saw when attempting to foreclose a mortgage. Although neither the Chapter 7 trustee nor the individual bankrupt objected, U.S. Bankruptcy Judge Martin Glenn refused to allow foreclosure because U.S. Bank failed to prove it owned the mortgage note.

Glenn himself examined the evidence the bank submitted on the so-called motion to modify the automatic stay. He found that the case fit squarely within the holding of a case called Bank of New York v. Silverberg decided this year by a New York intermediate appellate court.

When the loan was made, a lender was listed as the owner of the note. On the mortgage, Mortgage Electronic Registration System, known as MERS, was listed as the “nominee” for the lender. It said that MERS had only legal title to the mortgage.

In Silverberg, the New York court ruled that because MERS wasn’t the “lawful holder” of the note, it didn’t have the right to foreclose the mortgage.

In his case, there was an assignment that purported to transfer both the note and the mortgage to U.S. Bank. As the holder only of a legal interest, Glenn ruled that MERS didn’t have power to transfer the note.

For lack of a paper trail showing that U.S. Bank owned both the note and mortgage, Glenn rejected the motion for leave to foreclose, because no one may foreclose without being the owner of both the note and mortgage.

The case is In re Lippold, 11-12300, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Linda Sandler in London; Bob Van Voris in New York; Dawn McCarty, Steven Church and Michael Bathon in Wilmington, Delaware; and Seth Stern in Washington. Editors: John Pickering, Stephen Farr

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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