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(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Lehman and adds Crystal Cathedral and Innkeepers in Updates, Jefferson County and Solyndra in Briefly Noted and section on Daily Podcast.)
Sept. 15 (Bloomberg) -- Barclays Plc fended off the last effort by Lehman Brothers Holdings Inc. to recover anything in what was originally an attempt to take back $11 billion from the London-based bank arising from the sale of the North American investment-banking operation one week after the Chapter 11 filing in September 2008.
U.S. Bankruptcy Judge James M. Peck wrote an 11-page opinion yesterday concluding that Lehman had a “baseless” claim to recover $500 million in employee bonuses that allegedly weren’t paid by Barclays. Lehman’s theory was based on the notion that the purchase contract obliged the bank to pay $2 billion in bonuses to Lehman workers. When it turned out that Barclays paid only $1.5 billion, Lehman included the difference in its $11 billion suit against the bank.
In February, Peck wrote an opinion denying all of the Lehman parent’s major claims. The dispute over $500 million in unpaid bonuses was left for later determination. Peck said that Lehman’s claim for $500 million was based on “perhaps wishful thinking.”
Peck said that Lehman “misconstrued” his February opinion and based its argument on a reading of the critical contract provision “that departs from the most logical reading of the passage.”
Even if Barclays had an obligation to pay the full $2 billion, Peck said Lehman still would lose because it suffered no damage. The contract didn’t provide that any shortfall would go back to Lehman, and Lehman isn’t being held liable by any former workers. Unable to prove damages, Lehman has no claim, Peck ruled.
While the Lehman holding company has now sustained a complete loss in the litigation with Barclays, the trustee for the remnants of the Lehman brokerage was somewhat more successful. The bankruptcy judge awarded the trustee $2.05 billion from Barclays Capital Inc. on account of so-called margin assets. The Lehman brokerage trustee was ordered to pay Barclays more than $1.1 billion on account of the so-called clearance-box assets.
Lehman, the Lehman brokerage trustee and Barclays already are all appealing from the February ruling.
The Lehman creditors’ committee isn’t taking any position on whether the company was correct in deciding that holders of guarantee claims arising from securities lending agreements don’t quality as senior claims, and thus don’t benefit from subordination agreements.
Lehman filed an emergency motion last week for authority to modify the disclosure statement the bankruptcy judge approved in August. Lehman 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.
Although the committee said Lehman has some basis for its conclusion, the company’s belief doesn’t matter, the panel said. Any creditor who believes a guarantee of a securities lending contract qualifies as senior debt is entitled to object to the plan when it comes up for approval.
Whether or not Lehman is correct, the committee calculates that the effect on distributions will be “de minimis.”
Creditors will begin voting on Lehman’s Chapter 11 reorganization plan by the end of the month if not sooner. 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 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).
Allen Family Lenders’ Secured Claim Challenged in Suit
The creditors’ committee for Allen Family Foods Inc. sued the secured lenders this week, alleging that the security interest didn’t cover all of the property sold by the vertically integrated chicken producer in Delaware.
Korean poultry producer Harim Co. Ltd. completed acquisition of the business on Sept. 6 following approval by the bankruptcy court. After adjustments, the sale produced $45.2 million. Harim will make additional payments once the inventory count is completed.
Secured debt when the Chapter 11 case began included $83.2 million on a term loan and revolving line of credit with MidAtlantic Farm Credit ACA, as agent. The committee, in its Sept. 13 complaint, contends that the lenders didn’t properly file mortgages on real property and fixtures. The complaint also contends that the security agreement didn’t cover equipment, machinery, furniture, bank accounts, and general intangibles.
The committee wants the bankruptcy court to value the property not covered by the lenders’ security interest, so the money will be free for unsecured creditors.
The complaint says that $12.7 million was already paid to the lender in satisfaction of the loan made to finance the Chapter 11 case.
Harim won the auction in which the opening bid, by another prospective buyer, was $30 million plus as much as $38 million for inventory.
Seaford, Delaware-based Allen had been producing 400 million pounds of chicken products a year from plants with a 600 million pound capacity.
Allen’s products were sold under brands including Allen’s, Delmarva, and Sussex Farms. Operations included 24 owned and 233 contracted growout farms.
The petition says assets and debt are both less than $100 million.
The case is In re Allen Family Foods Inc., 11-11764, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Crystal Cathedral’s Confirmation Set for November 14
The official creditors’ committee for Crystal Cathedral Ministries, a mega-church in Garden Grove, California, received tentative approval yesterday for the disclosure statement explaining the committee’s proposed Chapter 11 plan.
The confirmation hearing for approval of the plan is set for Nov. 14. The plan calls for selling the church property for no less than $50 million. Secured creditors would be paid first, with the remainder going to unsecured creditors, who would receive interest on their $12.5 million in claims.
The committee already has several purchase offers. There won’t be an auction. The committee will announce selection of the buyer two weeks before the confirmation hearing.
Church insiders, with $2 million in claims, would be paid after unsecured creditors, with interest. If insiders don’t accept the plan, the committee says it will ask the court to subordinate the insiders’ claims.
The committee says that subordination is proper because insiders continued paying large compensation to members of the family of retired minister Robert H. Schuller, even though contributions had fallen and creditors weren’t being paid.
The offers include a $50 million proposal from Chapman University and a bid of $53.6 million from the Roman Catholic Bishop of Orange County, California. The Chapman offer would allow the church to lease back and eventually repurchase part of the facility. The Bishop would use the property for a new cathedral and require the church to vacate within three years.
Crystal Cathedral filed under Chapter 11 in October in Santa Ana, California, saying assets and debt both exceeded $50 million.
Schuller retired from his role as senior pastor of Crystal Cathedral in 2006. His daughter Sheila Schuller Coleman has been senior pastor since July 2009. Contributions declined 24 percent in 2009, partly on account of “unsettled leadership,” according to a court filing.
The case is In re Crystal Cathedral Ministries, 10-24771, U.S. Bankruptcy Court, Central District California (Santa Ana).
Madison 92 Hotel Has Examiner to Recommend on Plan
A trustee won’t take over Madison 92nd Street Associates LLC, owner of the Upper East Side Courtyard by Marriott in Manhattan. Instead, the bankruptcy judge in New York called for the appointment of an examiner.
Some of the company’s owners were asking the judge to appoint a trustee or dismiss the case outright. On the eve of the hearing, they agreed on having an examiner.
U.S. Bankruptcy Judge Stuart M. Bernstein charged the examiner with making a recommendation on the best reorganization strategy, whether it be sale, refinancing, or something else. The examiner will also look into whether the hotel’s lawyers satisfy the so-called disinterestedness test for representing a company in bankruptcy.
Bernstein said the examiner must report within 45 days. The budget will be $100,000. The U.S. Trustee selects the examiner, after conferring with the parties.
In the motion for dismissal, some of the owners said the bankruptcy was filed without corporate authority. They also alleged that some of the owners reneged on an agreement to sell the hotel for $86 million, or enough to pay creditors in full with a “significant return” to equity.
Papers filed along with the Aug. 16 Chapter 11 petition said Chapter 11 was intended to avoid foreclosure and pursue mortgage refinancing.
Assets are $84.5 million while debt totals $75.4 million, including $74 million in secured debt owing to General Electric Capital Corp., a court filing says.
The property is a 226-room hotel on East 92nd Street in Manhattan that opened in 2006. The company has a pending lawsuit against Courtyard Management Corp. alleging fraud and said it would seek to end the existing management agreement, according to the filing.
The case is In re Madison 92 Street Associates LLC, 11- 13917, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Vitro in Sale Dispute with Banc America, Sun Capital
The U.S. subsidiaries of Vitro SAB that sold their assets three months ago filed papers yesterday intended to compel the buyer, American Glass Enterprises LLC, an affiliate of Sun Capital Partners Inc., to prove its ability to make payments under a lease with Banc of America Leasing & Capital LLC.
Before the newly-created Sun Capital company could take over the lease, BALC wanted proof that the buyer could pay the remaining $3.1 million owing. To resolve an objection to the sale, the U.S. Vitro subsidiaries provided BALC with $2.4 million cash to assure future performance by the buyer.
The sale contract required the buyer to provide the lessor with proof of its financial ability to perform.
BALC refused to release Vitro’s $2.4 million because, it said, the buyer is a newly-formed company with no history of operations and projections for a negative cash flow.
At an Oct. 6 hearing, the Vitro companies, which are subsidiaries of a Mexican glass maker, want the bankruptcy judge in Fort Worth, Texas, to compel the buyer to produce financial information about its ability to perform. If the information is adequate, Vitro wants the judge to force BACL to release the $2.4 million. Vitro said the sale contract “imposed no obligations on the debtors to secure American Glass’s performance under the BACL leases.”
Holders of some of Vitro’s $1.2 billion in defaulted bonds filed involuntary Chapter 11 petitions last year against the Vitro subsidiaries and others. Some put themselves into Chapter 11 this year and later sold their businesses. In April, the bankruptcy judge in Texas denied the involuntary petitions against 10 subsidiaries that hadn’t elected Chapter 11 voluntarily.
The Vitro parent’s reorganization was revived by an appellate court in Mexico after having been dismissed in a lower court. The Vitro parent now has protection from creditors in the U.S. under Chapter 15, where U.S. courts have the power to enforce rulings from foreign bankruptcy courts.
The Sun Capital Partners affiliate purchased Vitro’s U.S. businesses for $55 million.
The Chapter 11 cases for U.S. subsidiaries is In re Vitro Asset Corp., 11-32600, U.S. Bankruptcy Court, Northern District of Texas (Dallas). The Chapter 15 case for the parent is Vitro SAB de CV, 11-33335, in the same court.
Innkeepers Has Exclusivity Extension to November 10
Innkeepers USA Trust was given an extension of the exclusive right to propose a reorganization plan after trimming back the its original request for a new deadline of Jan. 19. As approved yesterday, exclusivity was extended to Nov. 10.
Although Innkeepers confirmed its reorganization plan in late June, the hotel owner needed longer plan exclusivity because Cerberus Capital Management LP and Chatham Lodging Trust purported to cancel the agreement under which they would largely fund the plan by purchasing 64 hotels in a $1.12 billion transaction.
The dispute with Cerberus and Chatham is scheduled for trial in bankruptcy court from Oct. 10 to Oct. 12. For Bloomberg coverage of yesterday’s hearing, click here.
Innkeepers’ plan would have sold the hotel to deal with the claims of the 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 of New York (Manhattan). The Chapter 11 case is In re Innkeepers USA Trust, 10-13800, in the same court.
HearUSA Wants Exclusivity Extension Until October 28
HearUSA Inc., the operator of 134 stores selling hearing aids in 10 states, completed the sale of the business on Sept. 9 and filed papers this week for an extension until Oct. 28 of the exclusive right to file a Chapter 11 plan.
The sale, to an affiliate of Siemens Hearing Instruments Inc., commanded a high enough price at auction so money would be left over for shareholders. Siemens was the principal supplier and primary secured lender.
The stock, which was mostly trading in the vicinity of 40 cents a share during bankruptcy, spiked to about 90 cents when the results of the auction were known. The stock closed yesterday at 94 cents, up 2 cents a share in over-the-counter trading.
HearUSA said the Siemens acquisition was worth $129 million, plus the waiver of a distribution on the 6.4 million shares of HearUSA stock that Siemens owns. The waiver was worth another $6 million to $7 million, HearUSA said.
The opening bid at auction was an offer of $80 million from William Demant Holdings A/S.
In 2010, HearUSA’s revenue of $83.5 million resulted in a $2.6 million loss from operations and a $7.9 million net loss. Projected revenue this year was $61 million.
The Chapter 11 petition filed in May by the West Palm Beach, Florida-based company said assets were $65.6 million, against debt of $64.7 million.
The case is In re HearUSA Inc., 11-23341, U.S. Bankruptcy Court, Southern District Florida (West Palm Beach).
Dallas Stars May File Soon for Sale to Tom Gaglardi
The Dallas Stars may file in Chapter 11 this week to set up an auction testing whether an offer from Tom Gaglardi is the best bid for the National Hockey League team, according to a person who declined to be identified because the plan is not yet public.
Gaglardi is chairman and chief executive officer of Sandman Hotels, Inns & Suites.
The sale has been approved by lenders holding more than two-thirds of the secured debt, the person said. The filing is likely to be in Delaware.
For Bloomberg coverage, click here.
Supreme Court News
Law Professors Want High Court Credit Bidding Review
The U.S. Supreme Court should hear an appeal and resolve a split among the circuit courts of appeal on the question of whether a secured creditor can force a bankrupt company to hold an auction where the lender would have a right to bid its secured debt rather than cash.
Seven law school professors filed papers last week urging the high court to hear an appeal from an opinion by the U.S. Court of Appeals in Chicago ruling that a secured lender has the right to make a so-called credit bid. The Courts of Appeal in New Orleans and Philadelphia ruled that credit bidding could be denied in some circumstances. The Philadelphia case was a split decision by a three-judge panel.
The owners of the InterContinental Chicago O’Hare hotel near Chicago’s largest airport filed a petition in early August asking for Supreme Court review. The lenders, who won in the 7th Circuit in Chicago, will submit their papers on Oct. 11. Presumably, they will oppose review.
The law professors want Supreme Court review because, they said, “an unusually permissive venue statute” allows companies to “forum shop” and file in a court where the rule on credit bidding falls in the preferred direction. They urge review because the issue will often escape appeal since a consummated plan may render the issue moot.
The professors filing the friend of the court brief include teachers from the University of Chicago, Fordham University, and Stanford University. The professors include Douglas Baird from Chicago and Susan Block-Lieb from Fordham.
For details on the opinion in the Chicago Court of Appeals, click here for the June 29 Bloomberg bankruptcy report. For details on confirmation of the hotel’s plan, click here for the July 8 Bloomberg bankruptcy report.
The hotel’s owner filed under Chapter 11 in August 2009 in Chicago along with affiliate RadLAX Gateway Hotel LLC, the owner of the Radisson hotel at Los Angeles International Airport. Both are ultimately controlled by Harp Group. The O’Hare property listed $155 million in debt. The Radisson property listed debt of $120 million.
The Supreme Court has already agreed to review a case in the term to begin in October. The case involves a tax question affecting family farmers reorganizing in Chapter 12.
The credit bidding case in the Supreme Court is RadLAX Gateway Hotel LLC v. Amalgamated Bank, 11-166, U.S. Supreme Court.
The opinion by the Court of Appeals is River Road Hotel Partners LLC v. Amalgamated Bank (In re River Road Hotel Partners), 10-3597, U.S. 7th Circuit Court of Appeals (Chicago). The Chapter 11 case in bankruptcy court is In re River Road Hotel Partners LLC, 09-30029, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).
Jefferson County Near Deal, Solyndra Remains Political Football
Jefferson County, Alabama, appears to be close to an agreement with lenders on restructuring $3.1 billion in defaulted sewer bonds. County commissioners can approve a workout when they meet tomorrow. For Bloomberg coverage, click here.
The bankruptcy of solar-panel maker Solyndra LLC continued garnering headlines in the political arena yesterday, when a House committee held a hearing following up an investigation into approval of a $535 million government loan guarantee. For Bloomberg coverage, click here.
Solyndra filed for Chapter 11 protection on Sept. 6 and was raided by the Federal Bureau of Investigation, executing a search warrant in conjunction with the U.S. Energy Department. The Solyndra case is In re Solyndra LLC, 11-12799, U.S. Bankruptcy Court, District of Delaware (Wilmington.)
Lehman D&O Insurance, A&P PI Claims, Judges: Bankruptcy Audio
The effects of exhausting the $250 million in Lehman Brothers Holdings Inc.’s directors’ and officers’ liability insurance for one policy year are examined in the new Bloomberg bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. Rochelle also explores how more than $1.3 billion in personal-injury claims may affect distributions to creditors when supermarket chain Great Atlantic & Pacific Tea Co. is ready to emerge from Chapter 11 reorganization. The podcast ends with quotations from Jack Ayer, emeritus professor of law at the University of California at Davis, who explains why a smart young lawyer appointed to the bench sometimes ends up being like “Mickey Mouse in the Sorcerer’s Apprentice” when he or she is older. To listen, click here.
Sales Taxes Are Nondischargeable under 507(a)(8)(c)
If an individual collected sales taxes from customers and failed to remit to the state, the resulting liability in the individual’s Chapter 13 case is a so-called trust fund tax not discharged under Section 507(a)(8)(c) of the Bankruptcy Code, U.S. District Judge Noel L. Hillman from Newark, New Jersey ruled on Sept. 13.
Hillman upheld a ruling by the bankruptcy judge and decided to follow similar cases from the U.S. Courts of Appeal in New York and San Francisco.
Hillman acknowledged there is an overlap between subsections 507(a)(8)(e) and 507(a)(8)(c). He resolved the ambiguity in the statute by saying that sales taxes “collected by a third party and owed to the state pursuant to state law is a tax clearly held in trust and nondischargeable” under subsection (a)(8)(c).
The case is In re Calabrese, 10-6583, U.S. District Court, District of New Jersey (Newark).
--With assistance from Tiffany Kary in New York and Steven Church, Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: John Pickering, Fred Strasser
To contact the reporter on this story: Bill Rochelle in New York at firstname.lastname@example.org.
To contact the editor responsible for this story: John Pickering at email@example.com.