Central Falls, Madoff, Blockbuster, Point Blank: Bankruptcy
September 23, 2011, 9:20 AM EDTBy Bill Rochelle
(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Central Falls and Madoff, and adds Petters, Dallas Stars and Borders in Updates and Advance Sheets item.)
Sept. 23 (Bloomberg) -- The City of Central Falls, Rhode Island, will tell the bankruptcy court at a status conference today how “it is possible” there will be new contracts negotiated with municipal unions by Oct. 31. Discussions are on what the city characterized as a “fast-track.”
Yesterday, the city filed its proposed debt adjustment plan and explanatory disclosure statement. The city won’t be affecting bondholders.
Assuming the plan is approved by creditors and the bankruptcy judge, some city workers will start paying 20 percent of health-care premiums. Former workers with pensions of less than $10,000 a year won’t have their pensions cut.
Workers with larger pensions will see their benefits cut as much as 55 percent, although no pension will be less than $10,000 a year.
Unsecured creditors will split up a pool of $613,000 to be paid over five years. It’s impossible at this time to estimate the percentage recovery, according to the disclosure statement. For other Bloomberg coverage of the plan, click here.
To avoid entangling the city and unions in litigation while they attempt to hammer out new contracts, the city wants the bankruptcy judge to push back the deadline until Oct. 31 for the unions to file formal objections to the city’s right to be in a Chapter 9 municipal reorganization.
The bankruptcy judge already moved back the deadline to Oct. 31 for the unions to object to the city’s request for termination of the existing collective bargaining agreements.
Through a former justice of the Rhode Island Supreme Court who was appointed the city’s receiver in February, Central Falls sought Chapter 9 protection on Aug. 1. The receiver, Robert G. Flanders Jr., said the city, population 18,000, is insolvent largely as a result of $80 million in unfunded pension and health benefits for retirees. Along with the Chapter 9 petition, Flanders filed papers to terminate three union contracts.
The bankruptcy judge and creditors in municipal bankruptcies have fewer powers than in Chapter 11. If a municipality eventually can’t craft a plan acceptable to creditors, the judge can only dismiss the case. There is likewise no power to appoint a trustee or force the sale of property.
The case is In re City of Central Falls, 11-13105, U.S. Bankruptcy Court, District of Rhode Island (Providence).
Updates
Judge Upholds Suit Against Madoff Brother, Sons and Niece
The lawsuit against Peter, Mark, Andrew, and Shana Madoff by the trustee liquidating Bernard L. Madoff Investment Securities Inc. survived dismissal, in a 58-page opinion yesterday by U.S. Bankruptcy Judge Burton R. Lifland.
Lifland also approved a settlement yesterday that will bring in $1.025 billion cash from the second-largest group of feeder funds that funneled money into the Madoff Ponzi scheme.
Making an analogy to the game of horseshoes, Lifland said that the trustee’s $198 million lawsuit against Madoff family members “is a leaner rather than a ringer in that it misses the target, but comes close enough to score.” Finding technical deficiencies in the complaint, Lifland is allowing Irving Picard, the trustee, to file an amended complaint in 45 days.
Peter Madoff, Bernard Madoff’s brother, was the firm’s chief compliance officer. Sons Mark and Andrew were also responsible for compliance. Niece Shana was the inside lawyer and compliance director. Mark died by his own hand in December. The lawsuit continues against his estate.
Generally speaking, Lifland said that the complaint adequately lays out claims for actual and constructive fraud. He gave Picard 45 days to sharpen allegations with regard to some of the actual fraud and preference claims. In addition, Picard must give more details about claims to recover subsequent transfers of fraudulently obtained property.
The opinion gave Lifland an opportunity to address questions to be decided by U.S. District Judge Jed Rakoff where customers contend they can’t be sued under the so-called safe harbor in bankruptcy law.
The safe harbor, as described by Lifland, prevents anyone from being sued to recover a settlement payment made by a stock broker. Like U.S. District Judge Kimba Wood, who effectively upheld a ruling by Lifland in a suit with another customer, Lifland said it was at least “dubious” whether the Madoff firm should be considered a stockbroker since transactions in securities were all fictional.
Lifland cited another court saying that the safe harbor, intended to promote investor confidence, doesn’t apply to a fraudulent securities scheme.
Lifland also addressed a ruling Rakoff already made where he dismissed common-law claims against HSBC Holdings Plc. Lifland said that the principle relied on by Rakoff only protects third parties. Since the Madoff family members were insiders, common law claims by a bankruptcy trustee aren’t barred.
Similarly, Lifland said that the so-called in pari delicto defense doesn’t apply to insiders who control the company.
Yesterday’s settlement resulted from a lawsuit the trustee filed in December against Tremont Group Holdings Inc., Oppenheimer Acquisition Corp., Massachusetts Mutual Life Insurance Co. and affiliates. Oppenheimer owns the Tremont hedge fund. Unsealed in March, the trustee’s complaint was seeking a recovery of about $2.1 billion that the funds received directly from the Madoff firm.
Lifland rejected objections to the settlement from two customers of the settling funds. For details on the settlement and the suit, click here for the July 29 Bloomberg bankruptcy report.
The Madoff trustee continues suing investors who took out money through feeder fund Fairfield Sentry Ltd. The suits by the Madoff trustee against Fairfield’s customers were made possible by a settlement in June with Fairfield’s liquidators from the British Virgin Islands. In the settlement, the liquidators and the Madoff trustee agreed how to split up recoveries against investors in the Fairfield funds. In addition, the Madoff trustee received a $3.05 billion judgment against the Fairfield funds. For Bloomberg coverage of the latest lawsuits, click here.
The Madoff trustee accused Maxam Absolute Return Fund Ltd. of violating the so-called automatic stay in bankruptcy by filing suit in the Cayman Islands to declare that the fund has no obligation to return $25 million the Madoff trustee previously sued to recover in bankruptcy court. The bankruptcy judge scheduled an Oct. 5 hearing to decide if there is a stay violation.
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 Maxam lawsuit in bankruptcy court is Picard v. Maxam Absolute Return Fund LP, 10-05342, U.S. Bankruptcy Court, Southern District New York (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, also in Manhattan bankruptcy court. The criminal case is U.S. v. Madoff, 09-cr- 00213, U.S. District Court for the Southern District of New York (Manhattan).
JPMorgan Fails to Stop Petters Bankruptcy Court Suit
JPMorgan Chase & Co. and its private-equity fund One Equity Partners LLC aren’t having the same success as banks sued in the Madoff Ponzi scheme, which have had lawsuits removed from bankruptcy court.
JPMorgan and One Equity failed in their first attempt at having a lawsuit taken out of bankruptcy court, where they are being sued to recover money lost in the Ponzi scheme orchestrated by Thomas Petters.
JPMorgan, in its role as the former owner of Polaroid Corp., is being sued in bankruptcy court for the recovery of fraudulent transfers resulting from the acquisition by Petters’s entities. In December, the federal court receiver for Petters and some of his companies filed a separate suit against JPMorgan in federal district court in Minneapolis. In his dual role as bankruptcy trustee, the receiver previously sued JPMorgan in bankruptcy court.
In a 24-page opinion on Sept. 21, U.S. District Judge Susan Richard Nelson turned down a request by the bank to take the suits out of bankruptcy court and consolidate them with the case in her court. Nelson didn’t credit the bank’s argument that judicial economy justified having the suits in one court.
Nelson pointed out that the bankruptcy judge is managing more than 200 lawsuits against more than 380 defendants attempting to recover money lost in the Ponzi scheme. Nelson said it is more efficient for the bankruptcy judge to supervise the cases at least until they are trial-ready.
Nelson gave JPMorgan the right to come back and request taking the suit out of bankruptcy court when it’s ready for trial.
The opinion contains an analysis of the meaning of the June bankruptcy decision by the U.S. Supreme Court in Stern v. Marshall. Nelson said the Stern case gave no grounds for taking the suit away from the bankruptcy judge because the Petters suits involve fraudulent transfer suits which are pure bankruptcy claims, not state-law claims of the type in Stern.
The receiver, Douglas A. Kelley, alleges that JPMorgan “knew or should have known” that Petters was running a Ponzi scheme. The ability to know, according to the receiver, arose from the due diligence the bank conducted in connection with Petters’ $426 million acquisition of Polaroid from One Equity in early 2005.
Petters was convicted in December 2009 on 20 counts including fraud, conspiracy and money laundering and given a 50- year prison sentence. After a raid by federal investigators, the receiver was appointed for Petters’s companies. The receiver put them into Chapter 11 in October 2008.
The lawsuits in bankruptcy court are Kelley v. JPMorgan Chase & Co., 10-04443 through 10-04445, U.S. Bankruptcy Court, District of Minnesota (Minneapolis). The withdrawal motion in district court is the same name, 11,193, U.S. District Court, District of Minnesota (Minneapolis). The suit in federal district court is Kelley v. JPMorgan Chase & Co., 10-04999, U.S. District Court, District of Minnesota (Minneapolis). The bankruptcy cases for two Petters companies are In re Petters Co. and In re Petters Group Worldwide LLC, 08-45257 and 08-45258, U.S. Bankruptcy Court, District of Minnesota (St. Paul).
Dallas Stars Set to Exit Bankruptcy by Late November
The Dallas Stars of the National Hockey League are in a position to exit bankruptcy around the end of November under a schedule approved yesterday by the U.S. Bankruptcy Court in Delaware.
The combined hearing to approve a sale of the team and confirm the prepackaged reorganization plan is set for Nov. 23.
Before the Chapter 11 filing on Sept. 15, the team solicited acceptances of the plan from creditors and signed up Vancouver businessman Tom Gaglardi to buy the hockey club. Yesterday, the bankruptcy judge required the submission of other offers by Oct. 22. An auction will occur on Nov. 21.
Sports lawyer Chuck Greenberg, who was part of the group that purchased the Texas Rangers baseball club last year in a bankruptcy auction, told the judge yesterday through his lawyer that he intends to bid. Greenberg left the Rangers after disagreements with club President Nolan Ryan.
If Gaglardi buys the team under the original contract, he will pay off the $51.4 million loan from the NHL and give a $100 million term loan payable to holders of the $250.9 million in first-lien debt. The reorganization plan provides for the holders of $146.2 million in second-lien debt to share $500,000 in cash.
Before the bankruptcy filing, the plan was accepted by all holders of the first-lien debt and holders of 89.6 percent of the second-lien obligation.
Thomas O. Hicks, the Stars’ owner, also owned the Texas Rangers.
The case is In re Dallas Stars LP, 11-12935, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Canadian Blockbuster No More Successful than U.S.
Since the bankruptcy of the Canadian affiliate of Blockbuster Inc. has been largely unsuccessful, the Canadian company is asking for dismissal of the Chapter 15 case it began in May in a failed attempt at preserving the ability to use the Blockbuster name in Canada.
U.S. Blockbuster was authorized by the bankruptcy court in New York to sell assets in April to Dish Network Corp. under a contract with a $320 million sticker price. Dish, which didn’t buy the Canadian operation, later said it would keep 1,500 U.S. stores in operation.
Immediately after the sale to Dish, Blockbuster filed papers in the U.S. court to end the Canadian affiliate’s use of trademarks. To retain use of the marks, the Canadian company, through its court-appointed receiver, commenced a Chapter 15 case in New York on May 20.
The Canadian receiver said he negotiated a settlement with Dish allowing use of the trademarks throughout liquidation of the Canadian business now in process. The right to use the marks secured, the Canadian receiver said there is no further purpose to the Chapter 15 case.
The bankruptcy court in New York will hold a hearing on Oct. 6 to approve dismissal of the U.S. side of the Canadian bankruptcy.
The Canadian receiver had even less success in maintaining the business. The receiver closed 150 stores and tried to sell the remaining 254. The receiver couldn’t even find a liquidator to run going-out-of-business sales. Consequently, the receiver ran a self-liquidation.
U.S. Blockbuster began its attempted Chapter 11 reorganization in September 2010 with 5,600 stores, including 3,300 in the U.S. and the remainder abroad. The U.S. petition listed assets of $1.017 billion against debt of $1.465 billion. Blockbuster estimated it owed $57 million in accounts payable in addition to secured and subordinated notes.
The parent’s Chapter 11 case is In re BB Liquidating Inc., 10-14997, U.S. Bankruptcy Court, Southern District New York (Manhattan). The Canadian subsidiary’s Chapter 15 case is In re Blockbuster Canada Co., 11-12433, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Barnes & Noble Delayed in Buying Borders’ Trademarks
Borders Group Inc., the liquidated book seller, was delayed in selling trademarks and intellectual property for $15.8 million. When defects in the sale are corrected to protect customers’ confidential information, competitor Barnes & Noble Inc. will buy most of the intellectual property for $13.9 million.
Studying a report by the consumer privacy ombudsman, the bankruptcy judge told Borders to repair defects in the protection of customer information. The hearing to approve the sale was pushed back to Sept. 26. For Bloomberg coverage of yesterday’s hearing, click here.
Barnes & Noble won the auction where the first bid had been $3.5 million.
Borders is completing the store liquidation using going- out-of-business sales that began at all of remaining locations in July. The creditors’ committee said before the liquidation began that Borders expected to generate $252 million to $284 million in cash from GOB sales. Borders arranged separate sales for the store leases and intellectual property.
Ann Arbor, Michigan-based Borders had 642 stores on entering bankruptcy in February and was operating 399 when the liquidation began. It listed assets of $1.28 billion and liabilities totaling $1.29 billion. Debt included $196 million on a revolving credit and $48.6 million on a term loan. Trade suppliers were owed $302 million for inventory.
The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Point Blank Selling Non-Bullet Proof Fabric
Point Blank Solutions Inc., a manufacturer of soft body armor for police and military, is selling 155,000 pounds of Zylon, a fiber used to make bullet-proof vests that didn’t stop bullets.
If the bankruptcy judge in Delaware goes along with the idea at an Oct. 12 hearing, company will sell the material to whomever makes an acceptable offer, assuming the creditors’ committee doesn’t object.
Point Blank is selling the material “without representations or warranties of any kind.”
The company is stuck in Chapter 11 given an inability to reach agreement with the official equity committee on a plan. To break the log jam, Point Blank filed papers in August for authority to sell the business for $30 million, subject to adjustment for working capital, assuming no better offer turns up at auction.
The so-called stalking horse buyer is an affiliate of the Gores Group LLC from Boulder, Colorado.
The bankruptcy court originally scheduled a hearing in mid- September to consider approving bidding procedures. The hearing has been pushed back and is currently on the calendar for Oct. 5.
Point Blank filed under Chapter 11 in April 2010. Based in Pompano Beach, Florida, Point Blank has two plants. Revenue in 2009 exceeded $153 million.
The Chapter 11 petition listed assets of $64 million against debt totaling $68.5 million. Debt included a $10.5 million secured loan paid off by financing for the Chapter 11 case. Point Blank said it also owes $28.2 million to trade suppliers.
The case is In re Point Blank Solutions Inc., 10-11255, U.S. Bankruptcy Court, District of Delaware.
Statistics
Junk Defaults Predicted to Rise Only Fractionally
The default rate by junk-rated companies should barely rise in the next year, despite the threat of sovereign default in Europe and a double-dip recession in the U.S., Moody’s Investors Service said in a Sept. 21 report.
Despite the August plunge in junk debt issuance, Moody’s predicts that the default rate for speculative-grade companies will only rise from 2.1 percent at present to 2.2 percent a year from now.
For companies with a B3 or lower rating coupled with negative outlooks, Moody’s predicts a 12 percent default rate in the next year. During the peak of the last recession, the default rate among similar companies was 45 percent.
There currently are 170 companies rated B3 or lower, along with a negative outlook.
The predicted 2.2 percent junk default rate a year from now compares with the 14.5 percent peak in November 2009.
The issuance of $1.6 billion in junk corporate bonds in August represented a 92 percent decline from the year before and a 90 percent drop from July, Moody’s said in a Sept. 16 report.
New Filings
Peninsula Hospital in the Rockaways Files in Brooklyn
Peninsula Hospital Center, a non-profit 173-bed acute-care hospital on Rockaway Peninsula in New York City, succumbed to an involuntary bankruptcy petition filed in mid-August and put itself into Chapter 11 this week in Brooklyn.
The hospital was accompanied into bankruptcy court by Peninsula General Nursing Home Corp., the operator of the affiliated 200-bed nursing home.
Court papers say assets were $34.6 million and debt totaled $70.8 million as of May 31.
The Chapter 11 case is to be financed with $8 million provided by the new management company.
The hospital, one of two in the Rockaways, said in court papers that it can survive using more aggressive management techniques and by capturing patients on the peninsula who seek hospitalization in the city.
Jamaica Hospital Medical Center, with a claim of $2.6 million, is one of five creditors named to the creditors’ committee.
The case is In re Peninsula Hospital Center, 11-47056, U.S. Bankruptcy Court, Eastern District New York (Brooklyn).
Spanish Inn Resort in Palm Springs Files Chapter 11
The Spanish Inn & Villas, a resort in Palm Springs, California that once catered to movie stars, filed for Chapter 11 protection yesterday in Riverside, California.
Debt is more than $10 million, while assets are less than $10 million, the petition says.
The property, near the Palm Springs airport, has 59 rooms, according to the website.
The case is In re Spanish Inn Inc., 11-39840, U.S. Bankruptcy Court, Central District California (Riverside).
Advance Sheets
Deepening Insolvency Claim Survives in Appeals Court
The U.S. Court of Appeals in Philadelphia ruled that a creditors’ committee laid out sufficient facts to justify a jury trial on claims against former managers of a bankrupt nursing home for breach of fiduciary duty and deepening insolvency.
The Third Circuit appeals court reversed the district court, which had dismissed the lawsuit using the business judgment rule and the in pari delicto defense.
The appeals court, in an opinion by Thomas I. Vanaskie, ruled that the business judgment rule wasn’t a sufficient defense because the committee produced enough allegations to raise a question of fact as to whether the board had a reasonable basis to believe that the top executives were reliable and competent.
When the evidence could “support a conclusion that the directors did not exercise reasonable diligence,” the business judgment rule cannot lead to dismissal on a summary judgment motion, Vanaskie said.
The in pari delicto defense didn’t work, Vanaskie said, because the committee had shown enough evidence that the officers’ breaches of fiduciary duty didn’t benefit the company “but instead benefitted their own self-interest.” The in pari delicto defense seems to be less rigorous in Pennsylvania than it is in New York, where officers must be shown to have abandoned benefit to the company completely before the defense is lost.
On deepening insolvency, Vanaskie noted that the Pennsylvania Supreme Court hasn’t ruled on whether the claim exists. The Third Circuit, however, previously determined that the Pennsylvania top court would ruled that the claim exists.
Vanaskie ruled that the committee was justified in going to a jury by showing an element of fraud underlying the deepening insolvency theory. Deepening insolvency can’t be based only on negligence, he said.
The case is Lemington Home for the Aged v. Baldwin, 10- 4456, U.S. Court of Appeals for the Third Circuit (Philadelphia).
--With assistance from Tiffany Kary 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.
