Bloomberg News

WaMu, Seaarland, WLIB, Ambac, Lehman, Madoff: Bankruptcy

September 14, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Washington Mutual as first item, Hawker Beechcraft in Watch List and Deb Shops, Solyndra and Harry & David in Updates.)

Sept. 14 (Bloomberg) -- Washington Mutual Inc.’s full- payment Chapter 11 plan was denied approval for a second time in eight months when U.S. Bankruptcy Judge Mary F. Walrath wrote a 139-opinion refusing confirmation.

The ruling yesterday in Wilmington, Delaware, was a victory for shareholders in their battle with noteholders, whom they accuse of violating insider-trading laws.

Walrath made several rulings of note for corporate reorganization generally. Most prominently, she said that creditors who participate in secret negotiations on a reorganization plan can be sued if they later trade in the bankrupt company’s securities by using material, non-public information about the substance of negotiations that didn’t result in an agreement.

Walrath rejected the argument that allowing an insider trading lawsuit would disincline creditors from negotiating Chapter 11 plans. Creditors can avoid problems by not trading or by establishing an “ethical wall” between traders and those participating in negotiations, she said near the end of her opinion.

WaMu filed its sixth amended plan in March following the bankruptcy judge’s 109-page opinion in January refusing to confirm a prior version. Walrath held hearings on the plan in July, took briefs from the parties for and against the plan in August, and heard oral argument Aug. 24.

The shareholders’ committee accused noteholders Aurelius Capital Management LP, Centerbridge Partners LP, Appaloosa Management LP and Owl Creek Asset Management LP of trading on inside information.

Although Walrath ruled that shareholders didn’t have the right to sue for subordination of the noteholders’ claims, she said they do have the right to sue for disallowance of the claims. Because WaMu itself elected not to sue noteholders, Walrath gave shareholders the right to sue.

To prevent the case from turning into a litigation meltdown, Walrath directed the parties to participate in mediation. In the meantime, she froze the lawsuit against noteholders. Walrath directed the parties to attend an Oct. 7 status conference in her court.

Walrath again ruled that the global settlement agreement with JPMorgan Chase & Co. and the Federal Deposit Insurance Corp. was reasonable and should be approved. If it were implemented through the plan, it would result in the distribution of $7 billion to creditors.

WaMu issued a statement last night saying it would seek confirmation of a revised plan “as soon as practicable.” The plan was opposed by the shareholders’ committee, holders of trust-preferred securities, holders of litigation tracking warrants, and a few noteholders.

Walrath rejected an argument that the Supreme Court’s Stern v. Marshall decision from June prevents her from ruling on the plan because it would settle state-law claims. She said that although Stern might prevent her from hearing a lawsuit on the claims, it didn’t preclude her from approving a settlement.

Walrath found several defects in the plan. The court, she said, must approve fees for the bank noteholders and the liquidating trustee. The trustee must be removable at the discretion of the advisory board, and the board must reflect the constituents with interests in the trust, the judge said.

Once creditors are paid in full, with interest, Walrath said shareholders are entitled to control the trust.

Walrath also found fault with the plan with regard to the rate of post-bankruptcy interest to be paid on unsecured claims. Interest is owing because WaMu is solvent, with money left over for shareholders.

The lower federal judgment rate is the proper rate of post- bankruptcy interest, Walrath said, a victory for shareholders whose recovery will increase as a result of less money flowing to creditors.

The 1.95 percent federal judgment rate in effect at the time of the bankruptcy filing is the correct rate to apply, not the 0.18 percent rate in effect in June, she ruled. Interest must be compounded annually, Walrath said.

In other rulings that affect how much certain creditors receive from the plan, Walrath said that unsecured creditors must receive interest on their claims before any distributions are made to bank bondholders. She said it was also acceptable to require shareholders to give releases of claims as a condition to receiving distributions in the plan.

Walrath identified a tax problem created by the plan. Creditors might be required to pay capital gains taxes on the creation of the trust, even before receiving distributions from it. Given the delay in plan approval, the judge told the parties to work on a solution to avoid adverse tax consequences.

The judge didn’t rule definitively that noteholders who negotiated the plan are guilty of insider trading. She only ruled that there was enough evidence to justify having a lawsuit. She said that more discovery is needed to determine if the non-public information was “material to their trading decisions.”

For details on the opinion early this year rejecting the prior version of the plan, click here for the Jan. 10 Bloomberg bankruptcy report. For details on the plan as revised after the January ruling, click here for the Feb. 14 Bloomberg bankruptcy report. For details on later changes, click here for the March 21 Bloomberg bankruptcy report.

The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank, once the sixth-largest depository and credit- card issuer in the U.S., was the largest to fail in the country’s history.

The holding company filed formal lists of assets and debt showing property with a total value of $4.49 billion against liabilities of $7.83 billion.

The holding company Chapter 11 case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filing

WLIB-WBLS in Chapter 11 in Deal with Secured Lenders

Inner City Media Corp., the largest privately owned African-American radio broadcaster in the U.S., consented to being in Chapter 11 last week and announced yesterday there is agreement with secured lenders on a reorganization plan.

Lenders owed $228 million, including affiliates of Yucaipa Cos., started the ball rolling by filing an involuntary Chapter 11 petition against Inner City and affiliates on Aug. 19, just after seizing the company’s bank accounts. The Manhattan-based company’s 17 stations include WLIB and WBLS in New York. Inner City claims it’s the 22nd largest radio broadcaster in the U.S.

The company said yesterday that the agreed reorganization plan, to be filed by mid-October, will pay unsecured creditors in full. Details of the plan weren’t provided. Inner City expects to emerge from bankruptcy by the year’s end, the statement said.

The lenders contended that involuntary bankruptcy was “the only means to break the apparent impasse caused by the entrenched equity holders who have disregarded their fiduciary duties as directors and officers.” The lenders also claimed that Inner City Chairman Pierre Sutton blocked a reorganization by removing the incumbent board.

The bankruptcy court on Sept. 9 gave Inner City the right to use more than $1 million of the lenders’ cash collateral, under arrangements negotiated with the lenders. A final hearing on cash use is set for Oct. 4.

The case is In re Inner City Media Corp., 11-13967, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Watch List

Blackstone’s Travelport Downgraded on Refinancing Risk

Travelport LLC, the travel service provider controlled by Blackstone Group LP, was demoted by two grades yesterday to a CCC corporate rating from Standard & Poor’s, which said it will be “difficult” to refinance $693 million of pay-in-kind debt maturing in March.

S&P said there will be “tight covenant headroom” in the next few quarters.

S&P lowered the unsecured notes to a CCC-rating, coupled with a prediction that holders won’t recover more than 30 percent following payment default.

The subordinated and pay-in-kind debt is now rated CC along with a projection that holders don’t stand to receive more than 10 percent in default and could get nothing.

Problems for the Parsippany, New Jersey-based company include a “leveraged capital structure, partially pledged asset base, and currently weak debt capital markets,” S&P said.

Travelport’s $438 million in 9.875 percent senior unsecured notes due 2014 traded yesterday at 82.5 cents on the dollar, to yield 17.722 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The $247 million in 11.875 percent senior subordinated notes due 2016 traded yesterday at 66 cents on the dollar, for a 23.941 percent yield, Trace reported.

Net revenue in 2010 of $2.29 billion yielded a $43 million net loss. The balance sheet on Dec. 31 was upside down, with assets of $4.5 billion and total liabilities of $5.17 billion.

Hawker Beechcraft Capital Structure ‘Unsustainable’

Hawker Beechcraft Acquisition Co., a designer and manufacturer of small jet, turboprop and piston aircraft, has a capital structure that is “unsustainable,” in the judgment of Moody’s Investors Service.

In issuing downgrades yesterday, Moody’s said the ability to remain in compliance with loan covenants “seems unlikely.” Moody’s lowered the corporate rating by one click to Caa3, while the unsecured note ratings went to Ca.

The $183 million in 8.5 percent senior unsecured notes due in 2015 traded on Sept. 12 at 45 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $145 million in 9.75 percent senior subordinated notes last traded in August at 38 cents on the dollar, Trace reports.

The balance sheet for the Wichita, Kansas-based company was upside down on June 30, with assets of $3.02 billion and liabilities of $3.34 billion. Sales of $1.14 billion in the first half of 2011 resulted in a $126.1 million net loss. For 2010, sales of $2.8 billion resulted in a $173.9 million operating loss and a $304.9 million net loss.

Updates

Lender Wants Seaarland Tossed for No U.S. Contacts

Seaarland Shipping Management, a Dutch ship owner and manager, will give a U.S. bankruptcy judge an opportunity to decide whether a company with few if any ties to the U.S. can file for bankruptcy reorganization to stop foreclosure by foreign creditors.

Amsterdam-based Seaarland sought Chapter 11 protection in New York in July, to preclude secured lender Credit Agricole Corporate & Investment Bank from seizing two more of its six vessels. The French bank had seized one vessel and was on the cusp of arresting the other two. The bank is agent for lenders owed $89.7 million secured by the three vessels.

Although Credit Agricole already called the U.S. bankruptcy filing a “sham,” Royal Bank of Scotland drew first blood on the issue by filing papers this week asking U.S. Bankruptcy Judge James M. Peck to dismiss the bankruptcy.

Edinburgh-based RBS alleges that Seaarland has no officers or employees in the U.S. The assets sail the high seas; the loans are governed by foreign law; the main creditors are foreign, and the creditors’ committee is populated with “foreign entities,” RBS said in court papers.

RBS contends that allowing a U.S. bankruptcy would defeat the bank’s “legitimate commercial expectation that RBS would not be hauled into a U.S. Bankruptcy Court.”

The dispute is scheduled for a hearing in Peck’s courtroom on Oct. 3. In its papers, RBS cites a 2003 ruling by another New York bankruptcy judge in a case called Cenargo International Plc where a foreign ship owner’s U.S. bankruptcy was ultimately dismissed.

The ship owner and the lenders might get some sense of the direction Peck is headed at a hearing tomorrow for approval of financing from one of the bankrupt company’s affiliates. RBS and Credit Agricole are both objecting to the financing. For details on the financing, click here for the Sept. 1 Bloomberg bankruptcy report.

Seaarland’s other three vessels are collateral for the $117.7 million owing to RBS as agent.

The petition said assets are $926 million while debt totals $926 million. Liabilities include $19 million in unsecured debt, of which $10 million is owing to trade suppliers.

The case is In re Marco Polo Seatrade BV, 11-13634, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Ambac’s Class-Action Settlement Reapproved by Chapman

Ambac Financial Group Inc. rectified a procedural snafu when the bankruptcy judge for a second time approved a settlement of class-action securities lawsuits. Assuming a federal district judge also anoints the settlement, the parent holding company for an insurance company partially in rehabilitation will pay $2.5 million cash to resolve several securities law class-action suits first filed in January 2008.

Earlier this year, Ambac used mediation to reach settlement with plaintiffs in securities class actions. Lawyers representing plaintiffs in derivative suits were excluded from the mediation.

When U.S. Bankruptcy Judge Shelley C. Chapman originally approved the settlement in July, she was erroneously told that the derivative plaintiffs were given notice of the settlement and didn’t object.

As it turns out, the derivative plaintiffs weren’t formally notified about the settlement, leading Chapman to hold another hearing earlier this month to revisit the issue of whether the settlement should be approved, even though some plaintiffs were opposed.

Once again approving the settlement and overruling objection from derivative-suit plaintiffs, Chapman read her opinion into the record in the courtroom on Sept. 12. The opinion took 30 minutes to read, Richard Reinthaler, an attorney for Ambac from Dewey & LeBoeuf LLP, said in an interview.

Chapman formally approved the settlement yesterday. It has the effect of barring the derivative plaintiffs from pursuing their lawsuits.

Chapman recited prior cases saying that derivative claims, unlike securities-law claims, belong to the company once it’s in bankruptcy. She found that Ambac properly exercised its business judgment in approving the settlements.

In response to contentions by the derivative claimants that the settlement wasn’t rich enough, Chapman said the law doesn’t require “a debtor to gamble with the estate’s interest at the behest of an out-of-the-money party who has nothing to lose by a roll of the litigation dice.”

Noting that the creditors’ committee supported the settlement, she said that the interest of creditors is “paramount.”

Because the settlement involves securities class actions, it must also be approved by a U.S. District Judge in New York. The hearing is scheduled for late this month.

Insurance companies that provided directors’ and officers’ liability insurance put up an additional $24.6 million. Ambac’s $2.5 million has been in escrow since before the Chapter 11 filing.

The Ambac holding company has a Chapter 11 plan on file. A hearing for approval of the explanatory disclosure statement is 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 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).

Lehman Generates $900 Million for Creditors with ADR

Lehman Brothers Holdings Inc. reported that it has so far generated more than $900 million using alternative dispute resolution procedures approved by the bankruptcy judge in September 2009.

Lehman invoked the ADR process for dealing with 164 disputes with 190 counterparties, a letter to the judge said. Settlements were reached in 101 disputes with 114 counterparties.

Of the 55 disputes that went to mediation, 50 resulted in settlements.

Creditors will soon be voting on Lehman’s Chapter 11 reorganization plan. 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).

UniCredit Bank Austria Argues to Dismiss Madoff Suit

UniCredit SpA and subsidiary UniCredit Bank Austria AG filed their last papers this week leading up to a Sept. 19 hearing where they will ask U.S. District Judge Jed Rakoff to dismiss five counts from the complaint by Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities Inc.

The UniCredit defendants were responding to the trustee’s papers where he was trying to convince Rakoff that his reasons for dismissing the largest part of a separate $9 billion suit against HSBC Holdings Plc don’t apply to the UniCredit suit.

Where the Madoff trustee was trying to justify claims under the Racketeer Influenced & Corrupt Organizations Act, the UniCredit defendants contend that he failed to allege any of the required predicate acts.

Supporting the defense that RICO can’t be applied to events occurring outside the U.S., UniCredit said the “nerve center” of the illegal scheme by Sonja Kohn was in Europe.

For a summary of UniCredit’s motion to dismiss, click here for the July 27 Bloomberg bankruptcy report. For details on the trustee’s response in August, click here for the Aug. 30 Bloomberg bankruptcy report.

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).

Deb Shops Sale to Ableco Approved by Judge

Retailer Deb Shops Inc., which filed under Chapter 11 in late June, was given authority from the bankruptcy judge yesterday to sell the business to secured lenders in exchange for $75 million in secured debt. There were no competing bids, so an auction was canceled.

Lenders led by Ableco Finance LLC are taking the stores in 44 states. When the reorganization began, Philadelphia-based Deb operated 318 stores selling junior wear for women ages 13 to 25. The sale to lenders was worked out before the bankruptcy filing. For other Bloomberg coverage, click here.

Deb said in the petition that assets were $124.4 million while debt totaled $270.1 million. Revenue for a year ended in April was $297.2 million. First-lien debt is $117 million. The owner, Lee Equity Partners, has about $25 million in additional first-lien debt coming after the other first-lien lenders are paid in full.

Barclays Bank Plc is the agent for second-lien lenders owed $58.6 million. There is an unsecured mezzanine loan for $28.9 million.

Lee acquired Deb in 2007 in a $259.4 million transaction. Lee is part of the purchasing group.

The case is In re DSI Holdings Inc., 11-11941, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Solyndra Becoming Political Football on Government Investment

The Solyndra LLC bankruptcy and the U.S. government’s $535 million loan is becoming the focal point of argument between those in favor of more government investment in new power sources and those opposed.

For Bloomberg coverage on the role of government in new energy technology, click here and here. For a Bloomberg story about negotiations for when Solyndra executives will testify in Congress, click here.

With help from a $535 million government-backed loan that was partly subordinated, Solyndra developed technology and built a plant making cylindrical solar systems for commercial rooftops. The company filed for Chapter 11 reorganization after halting operations.

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, shutting 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.)

Harry & David Implements Confirmed Chapter 11 Plan

Harry & David Holdings Inc., the specialty-food retailer and direct marketer from Medford, Oregon, implemented the bankruptcy reorganization plan yesterday that the court approved on Aug. 29. For details on the plan, click here for the Aug. 31 Bloomberg bankruptcy report.

The plan was mostly worked out before bankruptcy with holders of 81 percent of the senior notes, including Wasserstein & Co., which also owns 63 percent of the stock. Wasserstein is the largest senior noteholder.

Harry & David filed in Chapter 11 owning 3,400 acres in Oregon. It was operating 70 stores after closing 52. The balance sheet listed assets of $304.3 million on Dec. 25 with liabilities totaling $360.8 million.

The case is In re Harry & David Holdings Inc., 11-10884, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Daily Podcast

A Proposal for Venue and Article III Status: Bankruptcy Audio

The new assault against the stranglehold held by courts in New York and Delaware over bankruptcy reorganization is the first topic in the new Bloomberg bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle.

As a compromise on the venue fight starting again in the House Judiciary Committee, Rochelle proposes limiting venue to a company’s nerve center while at the same time assigning major corporate reorganizations to a few experienced bankruptcy judges in each circuit. Those bankruptcy judges, handling complex reorganizations, should be elevated to Article III status under the Constitution, to avoid the need for sending some disputes to district court for final resolution.

The elevated bankruptcy judges in each district could also take over all appeals from bankruptcy courts, thus relieving federal district judges of the need to preside over bankruptcy appeals where they may not be so familiar with the subject matter.

The podcast ends with an examination of a ruling by a bankruptcy judge in Delaware who ordered compliance with a settlement agreement although one of the conditions hadn’t been met to the effectiveness of the reorganization plan for the Catholic Diocese of Delaware. To listen, click here.

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

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.


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