Bloomberg News

Lehman, Venue, Innkeepers, Thornburg, Sbarro: Bankruptcy

September 12, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Lehman as first item, Innkeepers, Thornburg, Wilmington Diocese, Modern Honolulu and Solyndra in Updates; Beazer in Downgrade; and sections on Bank Failure, California Municipal Bankruptcy and Advance Sheets.)

Sept. 12 (Bloomberg) -- Lehman Brothers Holdings Inc. disclosed last week that holders of guarantee claims arising from securities lending agreements don’t quality as senior claims and thus will have a smaller recovery under the pending Chapter 11 plan.

In another development at the end of the week, class-action defendants asked the bankruptcy court to prevent former Lehman officers and directors, including former Chief Executive Officer Richard S. Fuld Jr., from exhausting coverage under the $250 million directors’ and officers’ insurance policy for the 2007- 2008 policy year.

Even though the bankruptcy court approved the disclosure agreement in August, Lehman in a court filing last week said it decided that claims against the Lehman parent arising from guarantees of subsidiaries’ securities-lending agreements don’t qualify as Class 5 senior debt under the Chapter 11 plan.

Consequently, Lehman scheduled an emergency hearing on Sept. 14 for authority to modify the disclosure statement by deleting guarantees of securities-lending claims from the list of parent-company senior debt.

Unless the bankruptcy judge in confirming the plan overrules Lehman’s opinion about the status of securities- lending guarantee claims, holders of the claims will have a smaller recovery because they won’t benefit from the subordination of parent-company subordinated debt.

With approval to modify the previously approved disclosure statement, Lehman said it intends to send out disclosure and voting materials to creditors between Sept. 23 and Sept. 30.

In another court filing, former executives from bankrupt Lehman subsidiary Structured Asset Securities Corp. objected to a motion coming up for approval on Sept. 14 where Fuld and other former executives will seek authority to use $90 million in so- called D&O insurance to settle a class suit brought by shareholders who bought stock or call options from May 2007 until bankruptcy in 2008.

Executives from SASCO contend that Fuld and other executives will soon propose settlements of other suits that would exhaust the $250 million in coverage on the 2007-2008 policy.

The SASCO executives said they have an offer to settle their suit for $45 million. According to their court papers, former executives of the Lehman parent threatened to sue if SASCO settles and proposes using part of the limited D&O coverage. The SASCO defendants say the potential settlement is in the range of reasonableness.

The SASCO defendants want the bankruptcy judge to withhold approval of using $90 million of D&O insurance to settle the suit against parent-company directors. Instead, they want the judge to set up a “fair and reasonable allocation” of the remainder of the D&O insurance.

The confirmation hearing for approval of Lehman’s 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).

Beltway News

House Hearing Held on Bankruptcy Venue Legislation

The House subcommittee on Courts, Commercial and Administrative Law held a hearing last week on a bill that would prevent bankruptcy courts in Delaware and New York from playing host to most of the country’s major corporate reorganizations.

U.S. Bankruptcy Judge Frank J. Bailey, chief bankruptcy judge in the District of Massachusetts, said in prepared testimony that the current system “simply has not worked out the way Congress intended.” Allowing companies to reorganize far from where they operate, in Bailey’s opinion, makes participation difficult or expensive for small creditors, vendors, employees and pensioners.

Bailey said that the “driving force in venue decisions” has “become what is best for the lawyers and other turnaround and workout professionals.” Since 2000, Bailey counted at least 30 large- and mid-cap Massachusetts companies that reorganized elsewhere.

The bill was introduced in the U.S. House of Representatives in July by Lamar Smith of Texas, the Republican chairman of the House Judiciary Committee, and by John Conyers Jr. of Michigan, the committee’s ranking Democrat.

Melissa B. Jacoby, a professor at the University of North Carolina at Chapel Hill, also favored ending the dominant role of New York and Delaware. Jacoby, a member of the National Bankruptcy Conference, reported that 70 percent of the largest 200 public-company filings since 2005 ended up in New York or Delaware.

Jacoby pointed out how the late Lawrence P. King of New York University didn’t support having the state of incorporation as a proper venue. King was the country’s leading authority on bankruptcy law and a principal author of the Collier bankruptcy treatise.

The present system wasn’t without supporters. David A. Skeel of the University of Pennsylvania Law School testified that “removing the domicile and affiliate options would be an enormous mistake.” Skeel said a change “would undermine the effectiveness of our corporate bankruptcy system.”

Skeel predicted that changing venue rules “would not help the very parties the proposal is ostensibly designed to help” because it would “increase the administrative costs of the system.”

Attorney Peter C. Califano from San Francisco testified in favor of the bill for the Commercial Law League of America.

The bill, H.R. 2533, titled the “Chapter 11 Bankruptcy Venue Reform Act of 2011,” would permit “a corporation” to file under Chapter 11 only where it has its principal assets or principal place of business.

Current law allows companies to file where they are incorporated or where even a small affiliate has filed. The proposed new law would allow a company to file in the same district with an affiliate only if the affiliate owns more than half the voting stock.

Previous efforts to change bankruptcy venue rules died in the Senate. Those then opposing a change in venue rules included Vice President Joe Biden, a senator from Delaware at the time.


Cerberus, Chatham Say Innkeepers’ Max is $20 Million

Cerberus Capital Management LP and Chatham Lodging Trust filed papers on Sept. 9 denying allegations in the complaint where Innkeepers USA Trust contends that Cerberus and Chatham improperly terminated an agreement to buy 64 hotels in a $1.12 billion acquisition.

Leading into the trial scheduled for Oct. 10 through Oct. 12, Cerberus and Chatham both began their papers by reciting provisions from the documents where Innkeepers’ only recourse is to keep the erstwhile buyers’ $20 million deposit as liquidated damages. The complaint argues that Cerberus and Chatham should be required to complete the acquisition or pay more than $20 million in damages.

The failure of the sale puts Innkeepers at risk of being unable to implement the Chapter 11 reorganization plan that was approved by the bankruptcy court in a June 29 confirmation order. The plan called for transferring most of the hotels to the two primary secured creditors -- Lehman Ali Inc., a non- bankrupt subsidiary of Lehman Brothers Holdings Inc., and Midland Loan Services Inc., the servicer for $825 million of fixed-rate mortgages. For details on the plan, click here for the June 24 Bloomberg bankruptcy report.

The buyers terminated the contract on Aug. 19, contending there was a material adverse change in the business. For a summary of Innkeepers’ lawsuit, click here for the Aug. 30 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.

Barclays Fails to Win Dismissal of Thornburg Suit

The Chapter 11 trustee for Thornburg Mortgage Inc. avoided dismissal of the main portion of his $94 million lawsuit against Barclays Capital Inc. The trustee’s complaint is based on claims that Barclays made unauthorized margin calls under documents governing a reverse repurchase agreement for mortgage-backed securities.

U.S. District Judge Ellen L. Hollander ruled on Sept. 7 that the trustee’s breach-of-contract claims were sufficient to withstand Barclay’s dismissal motion at an early stage of the lawsuit where the facts laid out in the complaint must be taken as true and the plaintiff must be given favorable inferences from the facts.

Hollander dismissed the trustee’s claim for breach of an implied covenant of good faith and fair dealing. She cited a “legion” of New York cases not recognizing a separate claim for breach of the implied covenant “when a breach of contract claim based on the same facts is also pled.” To read Hollander’s opinion, click here.

The Thornburg trustee didn’t oppose having his lawsuit taken from the bankruptcy court to Hollander’s court.

Barclays’s unsuccessful motion to dismiss was based on the idea that the documents and the facts in the complaint by themselves demonstrated that Barclays had the right to demand more collateral and call a default when it wasn’t forthcoming.

At the same time he sued Barclays in April, the trustee filed complaints against JPMorgan Chase & Co., Citigroup Inc., Credit Suisse Group AG, Royal Bank of Scotland Group Plc and UBS AG for almost $2 billion. He also sued Bank of America Corp. and Countrywide Home Loans Inc.

The suits allege that the banks made “unjustified margin calls” that led to the demise of Thornburg, a former jumbo mortgage lender and securitizer.

Thornburg filed for reorganization in May 2009. It was servicing 29 securitizations containing mortgages with outstanding balances totaling $11.1 billion when it applied to the judge to sell the portfolio. The mortgage-servicing business was sold to a Credit Suisse affiliate for 0.77 percent of the unpaid principal balances of the mortgage loans.

The trustee was appointed after a whistle-blower disclosed that the top two officers formed a new company to carry on Thornburg’s business plan and used Thornburg employees to work on their new venture. The trustee later sued the executives.

Thornburg’s petition listed assets of $24.4 billion and debt totaling $24.7 billion, including $304 million owing on 8 percent senior unsecured notes, $1.3 billion on senior subordinated notes, and $214 million on junior subordinated notes. The Santa Fe, New Mexico-based company listed assets and debt both exceeding $26 billion on the September 2008 balance sheet.

The lawsuit is Sher v. Barclays Capital Inc., 11-01982, U.S. District Court, District of Maryland (Baltimore). The Chapter 11 case is In re TMST Inc., 09-17787, U.S. Bankruptcy Court, District of Maryland (Baltimore).

Judge Compels Insurance Companies to Fund Abuse Trust

The Catholic Diocese of Wilmington Inc. secured the signature of the bankruptcy judge on a Sept. 9 order compelling insurance companies to carry out their agreements to contribute $15.4 million to the trust being created under the Chapter 11 plan confirmed July 28.

The plan contained a Sept. 26 deadline for funding the trust, to contain $77.4 million in total. Without money from the insurance companies by the deadline, confirmation of the plan was to be revoked.

The snag occurred because two priests filed appeals from the confirmation order. Insurance companies said they wouldn’t provide the $15.4 million because their settlement agreements required there be no outstanding appeal from confirmation.

U.S. Bankruptcy Judge Christopher S. Sontchi directed the insurance companies to fund the trust even with the appeals. The diocese argued that the priests were appealing parts of the plan and confirmation order having nothing to do with the insurance- company settlement.

In return for receiving releases, non-bankrupt Catholic entitles are contributing $62 million to the trust.

The diocese filed under Chapter 11 in October 2009 to deal with sexual-abuse claims.

The case is In re Catholic Diocese of Wilmington, 09-13560, U.S. Bankruptcy Court, District of Delaware, (Wilmington).

Sbarro Given Permission to Hold Auction for Plan Sponsorship

Sbarro Inc., an operator and franchiser of fast-food Italian restaurants, fought off opposition from the indenture trustee for holders owed $157.8 million on senior unsecured notes and won approval from the bankruptcy court late last week to hold a Sept. 27 auction to learn if there’s a better offer for a bankruptcy reorganization plan.

Bank of New York Mellon Corp., as indenture trustee for unsecured note holders, unsuccessfully argued that secured lenders were aiming to use their secured claims to buy property not part of their collateral.

Other bids are due Sept. 21. The hearing for approval of the disclosure statement explaining Sbarro’s plan is set for Sept. 26.

Absent a better offer, the senior lenders will convert a maturing $35 million loan for the bankruptcy case plus $75 million from pre-bankruptcy secured debt into a $110 million term loan to kick in on emergence from bankruptcy. The remainder of the pre-bankruptcy loan, about $100 million, will convert to ownership of the reorganized business.

Trade suppliers who continue doing business will split up $250,000 cash. Everyone else comes away from bankruptcy with nothing. Those losing out include the unsecured noteholders and other unsecured creditors.

The lenders will also provide a fresh $18.6 million credit on emergence from Chapter 11.

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

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

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

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

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

Viceroy Unit Purchasers Object to Plan Classification

Whether Viceroy Anguilla Resort & Residences on Anguilla in the British West Indies has a reorganization plan that improperly discriminates among unit purchasers will be the topic at a hearing on Sept. 14 at U.S. Bankruptcy Court in Delaware.

An ad hoc group and purchasers with contracts to buy units filed papers opposing confirmation of the plan, contending it improperly discriminates by proposing different treatment for similarly situated creditors. The ad hoc group’s papers say the resort’s developers took in $52.9 million in deposits before bankruptcy toward the purchase of 25 units.

The erstwhile purchasers ended up as creditors because the deposits weren’t held in escrow.

The plan offers full payment to general unsecured creditors. Purchasers who exercised a contractual right to terminate their agreements would receive 50 percent in the plan.

Other purchasers are slated to receive 15 percent. Purchasers must elect between taking cash or receiving varying amounts of credit toward the purchase of a unit. Or, a purchaser may take neither option while suing in Anguilla to enforce any rights against the property.

The ad hoc committee says there’s no justification for some buyers to receive three times more than others. The bankruptcy judge in Delaware previously ruled that purchasers could call on the court in Anguilla to declare what their rights are.

There being no opposition, secured creditor Starwood Capital Group LLC walked away as the winner of a July auction that forms the basis for the plan. Owed $370 million, Starwood would take ownership when the plan is confirmed and implemented.

For details on the plan, click here for the June 15 Bloomberg bankruptcy report.

Over budget, the resort didn’t open officially until October 2010. Construction had begun in 2005.

The petition listed assets of $531 million and debt totaling $462 million. The 35-acre project has 166 residences with prices ranging from $600,000 to $6.5 million.

The case is In re Barnes Bay Development Ltd., 11-10792, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Evergreen Solar Wins Approval to Hold Nov. 1 Auction

Evergreen Solar Inc. overcame opposition from the creditors’ committee and received approval on Sept. 9 from the U.S. Bankruptcy Court in Delaware to hold an auction and determine whether lenders have the best offer to buy the business.

Other bids are due Oct. 26. If there is competition, an auction will take place Nov. 1, followed on Nov. 4 by a hearing for approval of the sale.

The committee was against a quick sale where secured note holders intend to buy all the assets in exchange for debt. The committee complained about the inadequacy of $200,000 being set aside for unsecured creditors.

Marlboro, Massachusetts-based Evergreen filed under Chapter 15 on Aug. 15 intending to sell the entire business quickly and listing assets of $424.5 million against debt totaling $485.6 million. Liabilities include $165 million on senior secured notes and about $208.3 million on two issues of convertible debt.

The case is In re Evergreen Solar Inc. 11-12590, U.S. Bankruptcy Court, District of Delaware (Wilmington).

US Fidelis Creditors Sue to Subordinate Lender’s Debt

The creditors’ committee for US Fidelis Inc. sued last week to subordinate the $57 million secured claim filed by Mepco Finance Corp.

Fidelis, which had been a marketer of automobile service contracts, received most of the financing for the business from Mepco. According to the complaint, Mepco by late 2008 was financing 94 percent of all of Fidelis’ customer contracts.

The committee contends that Mepco “cannot credibly contend that it was unaware” of Fidelis’ illegal business practices. Given its familiarity with the Fidelis business, the committee is asking the bankruptcy judge to put Mepco’s secured claim behind unsecured creditors’ claims, when it comes to distributing assets.

Wentzville, Missouri-based US Fidelis stopped writing new business in December 2009 and filed for reorganization in March 2010. The petition listed assets of $74.4 million against debt totaling $25.8 million, including $14.5 million owing to a secured creditor.

The case is In re US Fidelis Inc., 10-41902, U.S. Bankruptcy Court, Eastern District Missouri (St. Louis).

Patriarch Partners Fund Picks Up Spiegel Catalog

The owner of the Spiegel catalogue was given authorization from the U.S. Bankruptcy Court last week to sell the business to a fund associated with Patriarch Partners LLC, the owner and lender through affiliated funds. The contract with Patriarch was negotiated before the Chapter 11 filing June 6.

Patriarch’s fund will pay $2 million cash, assume up to $10 million owing on gift cards and assume specified debt, including $30 million on a term loan and revolving credit.

New York-based Signature Styles LLC owns the Spiegel catalog. It listed assets of $48.6 million and debt of $87.6 million. It purchased the Spiegel business for $21.7 million at a foreclosure sale in June 2009. Net sales of $119.9 million in 2010 resulted in a $25.6 million operating loss and a $31.1 million net loss. Listed debt included $37.2 million owing on a secured term loan and revolving credit. Other debt includes $9.8 million owing to trade suppliers and $23.2 million in customer obligations.

The company’s other businesses include Newport News and Shape Fx. Spiegel produces 75 percent of revenue, a court filing said.

The case is In re Signature Styles LLC, 11-11733, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Marriott Getting Software Back from Modern Honolulu

Marriott International Inc., the former manager of what was then known as the Edition hotel in Honolulu, won a preliminary ruling on Sept. 8 requiring M Waikiki LLC, the hotel’s owner, to give up Marriott’s intellectual property, including computer software.

The bankruptcy court in Honolulu will hold a final hearing on Oct. 13.

For details on the disputes between Marriott and the hotel, now called Modern Honolulu, click here for the Sept. 2 Bloomberg bankruptcy report. Among other things, the hotel filed in Chapter 11 on Aug. 31 to prevent Marriott from retaking management under a temporary restraining order signed by a state court judge in New York just before the bankruptcy filing.

The owner previously said it would use Chapter 11 to “reaffirm” Marriott’s termination. The owner also said it will seek tens of millions of dollars in damages from Bethesda, Maryland-based Marriott. Marriott said in its own statement that it would seek tens of millions of dollars in damages from the owner.

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

The case is In re M Waikiki LLC, 11-02371, U.S. Bankruptcy Court, District of Hawaii (Honolulu).

Solyndra Lobbied Government for $535 Million Loan

Solyndra LLC lobbied the Obama administration for the $535 million government-backed loan that turned sour when the manufacturer of cylindrical solar systems for commercial rooftops filed for reorganization in Chapter 11. For Bloomberg coverage, click here.

The Federal Bureau of Investigation raided Solyndra’s offices last week, executing a search warrant in conjunction with the U.S. Energy Department.

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.)

NewPage’s Revolving Loan Interest Rate Declines

NewPage Corp., the coated paper manufacturer acquired in 2005 by Cerberus Capital Management LP, is making a better deal on the $250 million term-loan portion of the $600 million in financing for the bankruptcy reorganization begun last week.

Originally, the term loan was to bear interest at a rate 7.5 percentage points higher than the London interbank offered rate, with a 1.5 percent floor. The plan now is for 7 percentage points above Libor, according to a person who declined to be identified because the terms are private.

The loan may be offered to investors for 99 cents on the dollar, the person said. For Bloomberg coverage, click here.

The final hearing in bankruptcy court for approval of financing is set for Oct. 4. The lenders include affiliates of JPMorgan Chase & Co., Barclays Plc and Wells Fargo & Co.

In last week’s Chapter 11 filing, Miamisburg, Ohio-based NewPage listed assets of $3.4 billion and debt totaling $4.2 billion. Liabilities include $232 million on a revolving credit plus $1.77 billion 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, there is $498 million owing on two issues of floating- rate pay-in-kind notes.

NewPage 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 company 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.

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

AmTrust Heading for Oct. 25 Confirmation Hearing

AmTrust Financial Corp. persuaded a bankruptcy judge in Cleveland to overrule objections last week and approve a disclosure statement explaining the Chapter 11 plan. The confirmation hearing for approval of the plan is set for Oct. 25, according to court records.

Success of the plan may turn on the outcome of an appeal taken by the Federal Deposit Insurance Corp. from a ruling by a U.S. district judge in Cleveland in favor of the company. The judge ruled that the FDIC failed to prove there was a commitment for AmTrust to provide $550 million in capital to the bank subsidiary that subsequently failed.

Had the FDIC won, its priority claim for a commitment would have come ahead of all AmTrust unsecured creditors. The appeal is scheduled to be fully briefed in the U.S. Court of Appeals in Cincinnati by the end of October. For details on the decision by U.S. District Judge Donald C. Nugent, click here for the June 8 Bloomberg bankruptcy report.

There’s a second dispute with the FDIC over the entitlement to a $194 million tax refund for 2009 that the Internal Revenue Service is yet to pay.

Based in Cleveland, AmTrust Financial said the family of companies had assets of $11.7 billion and $11.45 billion of debt before the bank was taken over and transferred by the FDIC to New York Community Bank. At the commencement of the Chapter 11 case, the assets of the companies in bankruptcy included ownership of the non-bankrupt subsidiaries, $7.3 million in cash and $23 million of fixed assets at book value. Debt of the companies in bankruptcy included $169.5 million for borrowed money, made up of $99.5 million on senior notes and $51.6 million on subordinated notes.

The Chapter 11 case is In re AmFin Financial Corp., 09- 21323, U.S. Bankruptcy Court, Northern District of Ohio (Cleveland). The lawsuit with the FDIC in the district court is Federal Deposit Insurance Corp. v. AmTrust Financial Corp., 10- 1298, U.S. District Court, Northern District of Ohio (Cleveland).

Barzel Confirms Liquidating Plan Without Objection

Barzel Industries Inc., a steel processor and manufacturer that sold its assets, fielded no objections, allowing a U.S. bankruptcy judge in Delaware to sign a confirmation order last week approving the liquidating Chapter 11 plan.

Barzel sold most of the assets in November 2009 for $75 million to Norwood, Massachusetts-based Chriscott USA Inc. Later, secured lenders settled by taking a release of claims in return for giving up $800,000, including $500,000 earmarked solely for unsecured creditors.

The disclosure statement said that unsecured creditors were estimated to have an 11 percent recovery from the carve-out from the lenders’ collateral. Secured creditors won’t participate in the pot for unsecured creditors on account of their deficiency claims.

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

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

Charlie Brown’s Plan Disclosure Hearing Adjourned

The former operator of Charlie Brown’s Steakhouse restaurants filed a liquidating Chapter 11 plan in early August that the company said in a court filing should be “largely consensual.” In case amendments are needed, the company filed papers asking for a 90-day extension of the exclusive right to propose a liquidating plan.

If approved by the bankruptcy judge at an Oct. 18 hearing, the new plan deadline would be Dec. 12.

The hearing for approval of the disclosure statement, originally set for Sept. 9, was pushed back 10 days.

The company completed sales of the three branches of the business between April and the end of July. The plan distributes proceeds from sales of the businesses in accordance with priorities in bankruptcy law. For details on the plan, click here for the Aug. 3 Bloomberg bankruptcy report.

After filing for Chapter 11 protection in November, the company sold 20 Charlie Brown’s locations for $9.5 million. The 12 remaining Bugaboo Creek stores realized $10.05 million while the seven The Office Restaurants produced $4.675 million. Forty- seven stores were closed before the Chapter 11 filing in November.

At the outset of the Chapter 11 case, the lenders were owed $70.2 million. In addition, debt at the beginning of the case included $14 million owing on second-lien senior subordinated notes and $30 million on a mezzanine loan. The company is controlled by Trimaran Capital Partners.

The senior secured lenders are Ableco Finance LLC, Wells Fargo Capital Finance Inc. and Ally Commercial Finance LLC.

The case is CB Holding Corp., 10-13683, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Bank Failure

Florida Bank Failure Bring Year’s Total to 71

The failure on Sept. 9 of First National Bank in Milton, Florida, was the year’s 71st. The branches and customers’ accounts were transferred to CharterBank of West Point, Georgia.

The new failure cost the Federal Deposit Insurance Corp. $46.9 million. Last year, there were 157 bank failures. The failures in 2010 were the most since 1992, when 179 institutions were taken over by regulators.

Watch List

Buffets, Chapter 11 Survivor, Hiring Advisers

Buffets Restaurants Holdings Inc., an operator of family restaurants that emerged from bankruptcy reorganization in April 2009, hired advisers for restructuring or sale, according to two people with knowledge of the situation.

Conway Del Genio Gries & Co. has been hired to assist with strategic options while Moelis & Co. is advising on a possible sale, the people said.

Buffets was downgraded to a CCC corporate rating in July by Standard & Poor’s, which said there “could likely” be a loan- covenant violation. S&P said at the time that Buffets was exploring strategic alternatives, including a sale of the company.

Moody’s Investors Service said in an earlier downgrade that free cash flow was negative and interest costs weren’t being covered by earnings before interest, taxes, depreciation and amortization.

For details on Buffets’ reorganization plan in 2009, click here for the April 29, 2009 Bloomberg bankruptcy report.

Eagan, Minnesota-based Buffets operates as Old Country Buffet, HomeTown Buffet, Ryan’s and Fire Mountain.

The bankruptcy reorganization was In re Buffets Holdings Inc., No. 08-10141, U.S. Bankruptcy Court, District of Delaware (Wilmington).

California Muni Bankruptcies Limited

California Restricts Municipal Bankruptcy Filings

The California Legislature adopted a bill putting limits on the ability of counties and municipalities to file for municipal bankruptcy reorganization under Chapter 9 of federal bankruptcy law.

The bill was in reaction to the more than three-year reorganization of Vallejo, California, that concluded in August.

The bill requires a municipality and interested parties to meet for as long as 60 days with a neutral evaluator. Otherwise, filing bankruptcy requires the municipality’s elected body to declare a fiscal emergency that “jeopardizes the health, safety, or well-being of the residents.” Or, the municipality must show that it will run out of money in 60 days.

Federal law gives states the ability to limit or preclude filing for federal bankruptcy reorganization. Because the bankruptcy judge must approve a Chapter 9 petition, creditors or employees could ask for dismissal of a California municipal bankruptcy if they could show that requirements in the new law weren’t met.

For Bloomberg coverage, click here.


Beazer Downgraded to Caa2, Unsecured Bonds Yield 17%

Homebuilder Beazer Homes USA Inc. was demoted by one notch to a Caa2 corporate rating on Sept. 9 by Moody’s Investors Service in light of “operating losses, negative cash flow generation, and elevated debt leverage.”

Moody’s also lowered the senior unsecured notes by one click to Caa3.

Moody’s expects “declines in deliveries and revenues into 2012,” given that it does not “see a macro environment in the coming two years that would materially help the company’s operating performance.”

Beazer, based in Atlanta, operates in 16 states and is among the 10 largest homebuilders in the U.S. The shares closed on Sept. 9 at $1.63, down 22 cents, or 12 percent, in New York Stock Exchange composite trading.

The $300 million in senior unsecured notes due 2018 traded on Sept. 8 at 68.75 cents on the dollar, to yield 17.1 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $250 million in second-lien notes due 2017 traded on Sept. 9 at 106 cents on the dollar, to yield 10.2 percent.

Daily Podcast

Madoff, L.A. Dodgers, Court Reporter Gallo: Bankruptcy Audio

The insistence by the trustee for Bernard L. Madoff Investment Securities Inc. that his adversaries not exceed page limitations in papers filed in the U.S. Court of Appeals is the first item on the new bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. They examine the reasons the creditors’ committee for the Los Angeles Dodgers decided to hire Lazard Freres & Co. as the panel’s investment banker. Rochelle picks apart the capital structure of Alexander Gallo Holdings LLC, the litigation- services provider that filed in Chapter 11 so the business can be sold to Bayside Capital Inc. The podcast ends with an analysis of the latest decline in bankruptcy filings. To listen, click here.

Advance Sheets

Creditor Can’t Give Bankruptcy Court Power by Consent

When a non-bankrupt third party intervenes in a lawsuit in bankruptcy court to assert state law-based claims against a creditor already a party in the lawsuit, the principle of Stern v. Marshall applies, preventing the bankruptcy court from entering a final judgment on the third-party claims, U.S. District Judge John McBryde in Fort Worth, Texas, ruled on Sept. 7.

The defendant in the suit argued to McBryde that the bankruptcy court had so-called core jurisdiction because the third party voluntarily availed itself of the bankruptcy court. McBride disagreed, quoting from the Stern decision where the Supreme Court said there is no jurisdiction in the bankruptcy court when the issues in the suit wouldn’t be decided in the course of ruling on the third party’s proof of claim in the underlying bankruptcy case.

McBryde concluded that the suit brought by the third party wasn’t even related to the bankruptcy. He took the case into his court because there was diversity of citizenship jurisdiction since the third party and the defendant resided in different states.

The bankruptcy court ruling that was reversed had been issued before the U.S. Supreme Court issued its decision in Stern in June, holding that a bankruptcy court doesn’t have constitutional power to rule on state-law claims against a creditor.

The case is Meyers v. Textron Financial Corp. (In re AIH Acquisitions LLC), 11-379, U.S. District Court, Northern District Texas (Fort Worth).

--With assistance from James Nash in Sacramento; Krista Giovacco, Jonathan Keehner and Kristen Haunss in New York; and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: John Pickering, Andrew Dunn

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

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

The Aging of Abercrombie & Fitch
blog comments powered by Disqus