Bloomberg News

Fairfield Sentry, Lehman, Nebraska Book, Idearc: Bankruptcy

September 21, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates with Boeing comment in Alabama Aircraft item.)

Sept. 21 (Bloomberg) -- Liquidators for Fairfield Sentry Ltd. and affiliated funds, which had been the largest feeder funds for Bernard L. Madoff Investment Securities Inc., may not be able to sue foreign customers in the U.S. Bankruptcy Court in New York as the result of a Sept. 19 ruling by Chief U.S. District Judge Loretta A. Preska in New York. The liquidators might have a tactical advantage were they able to keep the more than 200 lawsuits in bankruptcy court.

In May Bankruptcy Judge Burton R. Lifland ruled that liquidators for the Fairfield Sentry funds from the British Virgin Islands have the right to bring lawsuits in bankruptcy court under the umbrella of the funds’ Chapter 15 cases. Under the Advance Sheets heading in today’s report, we discuss a ruling by another federal district judge ruling that Lifland was correct in allowing the liquidators to use the U.S. Bankruptcy Court under Chapter 15.

The liquidators filed lawsuits in state courts before they sought bankruptcy court assistance in Chapter 15. All together, the liquidators had more than 200 suits which they brought into the bankruptcy court after they received Chapter 15 relief. Lifland in May ruled that customers, even those located abroad, could be sued in bankruptcy court.

Defendants in 41 lawsuits filed an appeal, contending the suits should be sent back to state courts. In the 41 lawsuits, the liquidators are suing the investors to recover $3 million.

Lifland didn’t fare so well in Preska’s opinion as he did in the other opinion reported today on Fairfield Sentry’s eligibility for Chapter 15. Preska began by granting customers the right to appeal.

Reaching the merits of the case, she reversed Lifland by holding that a suit in Chapter 15 against a foreign customer isn’t a so-called core matter. She also ruled that attempting to exercise core jurisdiction against foreign customers would offend the doctrine handed down in June by the U.S. Supreme Court in Stern v. Marshall. In that case, the high court ruled that a bankruptcy court doesn’t have the right under the U.S. Constitution to make final rulings on state-law claims against creditors. Preska said that foreign-law claims, like those brought by the liquidators, are the same as state claims.

Preska rested much of her opinion on territorial restrictions in Chapter 15. Where Chapter 11 cases can affect property anywhere in the world, Chapter 15, Preska said, deals only with property in the U.S. As to claims against foreigners, she said there was no U.S. property giving rise to core jurisdiction.

Just like a foreign liquidator may not sue to void transfers under Chapter 15 without filing a petition in Chapters 7 or 11, Preska said they don’t have the right to use the bankruptcy court to make final rulings voiding transfers under foreign law when the property sought is outside the U.S.

Preska didn’t decide whether the bankruptcy court has so- called related-to jurisdiction because she sent the case back to bankruptcy court so Lifland could decide if it’s mandatory for him to abstain and send the cases to state courts. Preska read most the issues on mandatory abstention as pointing toward sending the cases back to state court.

To read Preska’s opinion, click here. For details on the suits and the bankruptcy court’s ruling in May, click here for the May 31 Bloomberg bankruptcy report.

The appeal in district court is In re Fairfield Sentry Ltd., 11-mc-224, U.S. District Court, Southern District New York (Manhattan). The liquidators’ lawsuit in bankruptcy court is Fairfield Sentry Ltd. v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.), 10-03496, U.S. Bankruptcy Court, Southern District New York.

Updates

Lawyer Suspended for Demeaning Comments about Judge

A Florida lawyer named Kevin C. Gleason was suspended from practicing in bankruptcy court for 60 days after making “disrespectful and impertinent” attacks on U.S. Bankruptcy Judge John K. Olson in Fort Lauderdale, Florida.

The suspension was meted out by all seven bankruptcy judges in Southern District of Florida. In their collective, 25-page opinion handed down yesterday, the judges pointed to the “extraordinary nature of the language” in papers filed in bankruptcy court. The judges quoted from Gleason’s papers where he said, referring to Olson, “It is sad when a man of your intellectual ability cannot get it right when your own record does not support your half-baked findings.”

The panel called Gleason’s language “shockingly sarcastic and unprofessional.” They said there was “no material justification for his diatribe.” They said that his attempted apology “was a refusal to acknowledge the wrongful nature of his conduct.”

On top of precluding Gleason from practicing in bankruptcy courts in southern Florida for two months, they referred the matter the Florida Bar Association for disciplinary conduct.

To read the opinion, click here. Gleason declined to comment.

The case is In re New River Dry Dock Inc., 06-13274, U.S. Bankruptcy Court, Southern District Florida.

Nebraska Book Lacks $250 Million Loan for Plan Confirmation

Nebraska Book Co., a bookseller to college students, has been unable to arrange $250 million in financing required for confirmation and implementation of the reorganization plan that was scheduled for approval Oct. 4.

The company said in a court filing this week that potential lenders pointed to “various macroeconomic indicators, including a tightening of capital markets, as possible concerns with the debtors’ procuring the exit financing at this time.”

The lenders want to see the results of back-to-school sales before committing to a new loan, the filing said. Sale results won’t be available from the stores until the end of October, and then several weeks can be required to “get behind” the numbers, the company said.

For now, the confirmation hearing has been pushed back to Oct. 27. The plan would exchange existing debt for new debt, cash and the new stock, after first-lien and second-lien debt is paid in full. The stock would be divided mostly among subordinated noteholders of the operating company and holders of notes issued by the holding company. The plan was crafted to remove $150 million of debt from the balance sheet. For details on the plan after a settlement with shareholders, click here for the Sept. 9 Bloomberg bankruptcy report. For details on the original 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. The company said $598 million in sales during fiscal 2011 resulted in a net loss of $98 million, including an $89 million writedown of intangible assets.

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

Idearc Creditors’ Suit against Verizon Remains Alive

Idearc Inc., a yellow-pages publisher, was a subsidiary of Verizon Communications Inc. until it was spun off in 2006, about 28 months before Idearc filed for Chapter 11 reorganization.

Idearc’s Chapter 11 plan, implemented in January 2010, created a trust for creditors that sued Verizon in U.S. District Court in Dallas, alleging that the spinoff was a fraudulent transfer designed to generate $9.5 billion for the second- largest phone company in the U.S.

Verizon filed a motion to dismiss, alleging that the suit didn’t make sufficient allegations to stand on its own. This week, U.S. District Judge A. Joe Fish allowed almost all of the complaint to stand.

Fish said that the trust’s “factual allegations are sufficient to plead a claim for actual fraudulent transfer.” Fish also said it was proper for the trust to base claims on an alleged breach of fiduciary duty. Although directors of a parent owe no duties to creditors of a subsidiary such as Idearc, there are duties that can be violated when the subsidiary becomes insolvent, he said.

Fish noted that the complaint alleged that the spinoff left Idearc insolvent and without sufficient assets.

Fish did throw one bone to the defendants. He said there is no claim to punitive damages for breach of fiduciary duty. For details on the complaint, click here for the Sept. 17, 2010 Bloomberg bankruptcy report. The creditors’ trust is represented in the lawsuit by Haynes & Boone LLP and Nelligan Foley LLP.

After emerging from Chapter 11, Dallas-based Idearc changed its name to SuperMedia Inc. It had been the second-largest yellow pages directory publisher in the U.S.

The company implemented a reorganization plan in January 2010, mostly worked out before the Chapter 11 filing in March 2009. The plan reduced debt to $2.75 billion from $9 billion.

The creditors’ lawsuit is U.S. Bank National Association v. Verizon Communications Inc., 10-01842, U.S. District Court, Northern District Texas (Dallas). The bankruptcy case was In re Idearc Inc., 09-31828, U.S. Bankruptcy Court, Northern District Texas (Dallas).

Boeing Sued in Alabama Court by Alabama Aircraft

Alabama Aircraft Industries Inc. filed a lawsuit this month in a state court in Alabama alleging that Boeing Co. deprived it of one half of a $1.3 billion government contract. AAI previously said that it intended to sue Boeing.

AAI also claims that Boeing forced the company to work on another contract at “minimal prices under false pretenses.” Boeing then inflated the prices when it billed the government, according to the complaint.

Boeing in turn appealed this month’s approval by a Delaware bankruptcy judge of the creation of the trust that sued Boeing and the sale of AAI’s business for $500,000 to Kaiser Aircraft Industries Inc.

The contract allowed Kaiser to pursue lawsuits through the litigation trust, while giving 10 percent of recoveries to AAI creditors. Kaiser Aircraft, a subsidiary of Kaiser Group Holdings Inc., is funding the trust.

The lawsuit is “unfounded” and “baseless,” Forrest Gossett, a Boeing spokesman, said in an e-mailed statement. The claims were already denied by the U.S. Government Accountability Office, the U.S. Court of Claims and the U.S. Court of Appeals, Boeing said.

Previously known as Pemco Aeroplex Inc., AAI had a long- term lease at the Birmingham International Airport in Alabama. It chiefly maintains and repairs military transport, tanker and patrol aircraft.

Pension Benefit Guaranty Corp. was listed as having the largest unsecured claim at $68.5 million. Assets were on the books for more than $32 million in September 2010, according to a court paper.

The lawsuit is Alabama Aircraft Industries v. Boeing Co., 01-cv-2011-903218.00, Circuit Court for Jefferson County, Alabama. The case is In re Alabama Aircraft Industries Inc., 11- 10452, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Qimonda Confirms 6% to 13% Liquidating Plan

Qimonda North America Corp. and affiliate Qimonda Richmond LLC won approval of their Chapter 11 plan at the scheduled confirmation hearing on Sept. 19. The plan was accepted by all creditor classes entitled to vote.

Based in Cary, North Carolina, Qimonda North America filed under Chapter 11 in February 2009 and sold most of the assets to Texas Instruments Inc. The disclosure statement predicts that unsecured creditors with claims between $33 million and $35 million would have a recovery between 6.1 percent and 11.1 percent. No secured claims of significance remained.

Unsecured creditors of Qimonda Richmond were predicted to see a recovery between 8.7 percent and 13.4 percent on claims ranging between $390 million and $600 million.

Qimonda Richmond expects to have $72.7 million in cash when the plan becomes effective in October, not including $40.4 million being held aside if the challenge to the validity of a secured claim succeeds. Qimonda North American expects to have $21.1 million in cash when the plan takes effect.

At the outset of the Chapter 11 cases, the companies said assets and debt both exceeded $1 billion. They had a manufacturing plant in Virginia and three other facilities in the U.S. In addition, they were the North American marketing and sales arm for the German parent, Qimonda AG, which was controlled by Germany’s Infineon Technologies AG.

Qimonda AG filed in June 2009 for Chapter 15 protection from creditors in the U.S. in Alexandria, Virginia.

The U.S. company’s case is In re Qimonda Richmond LLC, 09- 10589, U.S. Bankruptcy Court, District of Delaware (Wilmington). The parent’s Chapter 15 case is Qimonda AG, 09-14766, U.S. Bankruptcy Court, Eastern District Virginia (Alexandria).

Caribe Media Has November 3 Plan Confirmation Hearing

Yellow pages publisher Caribe Media Inc. scheduled a Nov. 3 confirmation hearing for approval of the Chapter 11 plan when the bankruptcy judge in Delaware signed an order yesterday approving the explanatory disclosure statement.

The company said it dealt with an objection from the U.S. Trustee who said it wasn’t proper to give a release to venture capital investor Welsh, Carson, Anderson & Stowe, whose funds control the equity. The judge also extended the company’s exclusive right to propose a plan until Nov. 30.

The company and affiliates filed the plan in August after seeking Chapter 11 relief in early May. The plan calls for secured lenders owed $127 million to take ownership and receive a $55 million loan, for a projected recovery of 77 percent to 93 percent.

Subordinated noteholders owed about $58.6 million are to receive noting under the plan.

Caribe Media sought relief in Chapter 11 so claims could be brought against affiliates to recover $44.2 million in dividends paid to the parent Local Insight Regatta Holdings Inc. between May 2009 and September 2010.

Local Insight is a group of publishers that filed under Chapter 11 in November. Caribe’s case was not consolidated for procedural purposes with Local Insight’s.

In addition to the $127 million on senior bonds, liabilities include $58.6 million on senior subordinate notes. Cantor Fitzgerald Securities is agent for the senior bondholders. WACS Capital Partners IV LP is holder of the subordinated notes, court papers say.

Caribe publishes yellow page directories in Puerto Rico and the Dominican Republic. It was acquired in 2006 by Local Insight, the publisher of 870 directories for 115 phone companies.

The Caribe case is In re Caribe Media Inc., 11-11387, and The Local Insight case is In re Local Insight Media Holdings Inc., 10-13677, both in U.S. Bankruptcy Court, District of Delaware (Wilmington).

PJ Finance Files Plan to Fend Off Lender Torchlight

PJ Finance Co. LLC, hoping to fend off what might be the end of its reorganization effort at a hearing tomorrow, filed a proposed Chapter 11 plan and explanatory disclosure statement this week, arm in arm with the official creditors’ committee.

The owner of 9,500 apartment units in 32 projects has been jousting since the case began with secured lender Torchlight Loan Services LLC. The plan, which offers Torchlight two alternatives, is to be financed with a fresh $10 million investment by the owners.

Torchlight can elect to keep the full amount of a $370 million secured claim on the properties. The new debt would start off paying 3.5 percent interest and mature in 2019. In that event, unsecured creditors would split up $5 million cash to cover $10 million in claims.

Or, Torchlight can elect to have a new secured debt equal to whatever value the judge assigns to the collateral. The new secured debt would start off paying 3 percent interest and mature in 2022. In that case, unsecured creditors would receive $4 million cash, and Torchlight would receive a new unsecured note for 40 percent of its estimated $165 million deficiency claim. The 40 percent is to represent the same distribution received by unsecured creditors.

At tomorrow’s hearing, Torchlight, as special servicer for $475 million in mortgage-backed securities, is scheduled to ask the bankruptcy judge in Delaware to end the company’s exclusive right to propose a Chapter 11 plan. Torchlight will also beseech the bankruptcy judge to end PJ Finance’s use of the lenders’ cash collateral.

Torchlight had been seeking dismissal of the case, contending the Chapter 11 filing was not made in good faith.

Trade suppliers are owed $4.4 million, according to court papers. The projects are in Arizona, Florida, Georgia, Tennessee, and Texas. PJ gave its address as the office of a law firm in Chicago.

The case is PJ Finance Co. LLC, 11-10688, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Confirmation Denied, Anguilla Resort to Modify Plan

The Viceroy Anguilla Resort and Residences on Anguilla in the British West Indies failed to persuade the bankruptcy judge to sign a confirmation order approving its reorganization plan. U.S. Bankruptcy Judge Peter J. Walsh ruled that the plan improperly discriminated among those who had contracts to purchase units in the project.

Walsh said he will file a written opinion later. Meanwhile, he told the resort to file a revised plan by tomorrow, in advance of a renewed confirmation hearing Sept. 23.

A lawyer for the resort said that the new plan won’t give purchasers anything aside from the ability to carry out the contract and buy a unit. Or, they can sue in Anguilla. Walsh previously said that purchasers could use the courts in Anguilla to establish if they have any rights in the property.

For Bloomberg coverage of the hearing, click here. For details on the purchasers’ opposition to the plan, click here for the Sept. 12 Bloomberg bankruptcy report.

Secured creditor Starwood Capital Group LLC was the winner of a July auction underlying the plan. Owed $370 million, Starwood would assume 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 began 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).

Downgrade

Willbros Downgraded to B+ on Covenant Headroom

Willbros Group Inc., a Houston-based engineer and contractor for the energy industry, was demoted one click yesterday by Standard & Poor’s to a B+ corporate rating.

Although the backlog has grown, S&P downgraded partly because “liquidity is less than adequate” and there is “minimal headroom” under loan covenants.

The shares closed yesterday at $5.54, down 31 cents, or 5.3 percent, in New York Stock Exchange trading. The three-year closing high was $35.22 on Sept. 22, 2008. The closing low in the period was $4.91 on Aug. 22.

The company reported a $47.9 million net loss in the first six months of 2011 on revenue of $787.2 million. For 2010, the net loss was $37 million on revenue of $1.19 billion.

Daily Podcast

Madoff, L.A. Dodgers, Federal Magistrates: Bankruptcy Audio

Two U.S. district judges are on the verge of deciding the same issues in the liquidation of Bernard L. Madoff Investment Securities Inc., according to the new bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. Rochelle lays out arguments Fox Entertainment Group Inc. can use in trying to head off an attempt by the Los Angeles Dodgers to re-sell television broadcast rights. The podcast ends with an examination of how the U.S. Supreme Court’s June ruling in the Stern v. Marshall bankruptcy case may end a venerable procedure where parties consent to holding a trial before a federal magistrate judge. To listen, click here.

Advance Sheets

District Judges Disagree on Who Rules on Safe Harbor

U.S. District Judge John G. Koeltl in New York issued an opinion last week in the liquidation of Lehman Brothers Holdings Inc. at odds with rulings by District Judge Jed Rakoff in the liquidation of Bernard L. Madoff Investment Securities Inc. The judges reached opposite conclusions on whether the bankruptcy court should be allowed to make the first rulings on the applicability of the so-called safe harbor in bankruptcy law.

Koeltl’s ruling, made from the bench on Sept. 14, arose from a lawsuit the Michigan State Housing Development Authority filed against Lehman regarding interest-rate swaps. Lehman later made a counterclaim for $23 million, contending there was a violation of the so-called ipso facto clause because the swap contract contained a provision changing the how much Lehman would receive solely as a result of its bankruptcy.

The housing authority filed a motion asking Koeltl to take the entire lawsuit out of bankruptcy court and rule on whether Section 546(e) of the Bankruptcy Code, known as the safe harbor, barred Lehman’s counterclaim because it would upset a transaction in securities.

To decide if he should withdraw the lawsuit from bankruptcy court, Koeltl said that issues surrounding the safe harbor were “plainly” core matters. There was no basis for taking the case away from the bankruptcy judge because the Lehman case, unlike Supreme Court’s Stern v. Marshall decision, is based entirely on bankruptcy law, not state law.

Koeltl is allowing U.S. Bankruptcy Judge James M. Peck to keep the suit given how “efficiency, judicial economy, and the uniform administration of bankruptcy law weigh strongly against withdrawing the reference.” Having a ruling first from Peck on the issue “would be useful to this court in analyzing ipso facto and safe harbor provisions at issue in Lehman’s counterclaims,” Koeltl said in his bench opinion.

Koeltl also said that “concerns about forum shopping weigh heavily against” removing the suit from Peck, who has ruled previously in other cases that the so-called ipso facto clause invalidates flip clauses. Koeltl said that the housing authority’s desire to avoid “an unfavorable decision is not a proper basis for withdrawing the reference.”

As he had done before in cases involving financial institutions, Rakoff last week took part a Madoff lawsuit out of bankruptcy court so he could make the first decision on whether the safe harbor bars the trustee from suing customers who took out more cash than they put in. Rakoff is a district judge in New York like Koeltl.

The housing authority’s suit in district court is Michigan State Housing Development Authority v. Lehman Brothers Holdings Inc. (In re Lehman Brothers Holdings Inc.), 11-3392, U.S. District Court, Southern District New York (Manhattan). The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

U.S. Fund Can be Liquidated Abroad, Two Judges Rule

U.S. Bankruptcy Judge Burton R. Lifland and District Judge George B. Daniels combined to write opinions ruling that investment funds that operated for decades in the U.S. can be liquidated properly abroad. The opinions stemmed from the liquidation of Fairfield Sentry Ltd. and affiliated funds, which had been the largest feeder funds for Bernard L. Madoff Investment Securities Inc.

Managed by the New York-based Fairfield Greenwich Group, the Fairfield Sentry funds had been run out of New York for 18 years before the Madoff Ponzi scheme exploded in December 2008, Daniels said in his Sept. 15 opinion upholding Lifland’s July 2010 ruling. The funds ceased operations and ended their ties with the U.S. manager officially in May 2009.

By April 2009, shareholders sought the appointment of a receiver in the British Virgin Islands. The liquidators appointed in July 2009 filed a Chapter 15 petition in New York in June 2010. Lifland approved the Chapter 15 petition the next month, ruling in the process that the Virgin Islands was the funds’ “center of main interests.”

Daniels upheld Lifland’s factual determinations about COMI as not clearly erroneous. He cited other cases where the activities of liquidators “for an extended period of time” is “both relevant and important” to a COMI determination.

Daniels noted that the funds had no place of business, no management, and no tangible assets in the U.S. He also ruled that “the relevant time for determining a debtor’s COMI is when the Chapter 15 petition was filed.”

Making the Virgin Island the COMI means that the liquidators and the court abroad are entitled to direct the fund’s liquidation. Chapter 15 gives the U.S. court ability to assist and stop lawsuits in the U.S. against the fund. Creditors must lodge their claims in the Virgin Island, and the foreign court oversees distributions to creditors.

To read Daniels’ opinion, click here. For details on Lifland’s decision, click here for the July 27, 2010 Bloomberg bankruptcy report.

The appeal was In re Fairfield Sentry Ltd., 10-07311, U.S. District Court, Southern District of New York (Manhattan).The Fairfield Chapter 15 case is In re Fairfield Sentry Ltd., 10- 13164, U.S. Bankruptcy Court, Southern District New York (Manhattan).

--With assistance from David McLaughlin in New York and 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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