Bloomberg News

Viceroy, Dodgers, NewPage, Solyndra, Windstar: Bankruptcy

September 26, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Los Angeles Dodgers, David Barton Gyms, Claim Jumper and Howrey in Updates, and Bank Failure section.)

Sept. 26 (Bloomberg) -- The reorganization of the Viceroy Anguilla Resort and Residences on Anguilla in the British West Indies, which seemed near completion a week ago, could end in dismissal and failure at an Oct. 3 hearing.

U.S. Bankruptcy Judge Peter J. Walsh in Delaware said last week that he wouldn’t approve the resort’s reorganization plan because it unfairly discriminated among creditors who put down deposits to buy units. Last week, the resort’s lawyer said the problem would be solved by filing a revised plan to pay nothing to any erstwhile buyers. No revised plan was filed.

A buyer named Jonathan Simon filed papers last week to dismiss the Chapter 11 case entirely. At a Sept. 23 hearing, Walsh scheduled the dismissal motion for hearing Oct. 3.

Simon said in his dismissal motion that financing from Starwood Capital Group LLC, the lender and proposed buyer, expires at the end of September. He argued that it’s proper for the court in Anguilla decide what rights buyers have in the resort’s property to recover deposits not held in escrow.

Simon said he understands that Starwood would not sponsor any revised plan, including one giving nothing to buyers. Starwood’s reluctance to move ahead may result in part from a prior ruling by Walsh allowing a buyer to have its rights determined by a court in Anguilla.

The resort’s reorganization is at the outer limits of the ability of a U.S. court to restructure a project abroad, where the rights of some creditors are not determined by U.S. law. Court papers said that buyers had made $50 million in deposits.

Starwood was the winner of a July auction to determine who would sponsor the reorganization plan. The plan called for Starwood to assume ownership on account of its $370 million secured claim. For details on the plan, click here for the June 15 Bloomberg bankruptcy report.

The resort, over budget, 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).

Updates

Bud Selig Aims to Sell Dodgers, Disqualify Team’s Lawyers

Bud Selig, the commissioner of Major League Baseball, initiated a two-front assault on the Los Angeles Dodgers.

The commissioner wants to disqualify the ballclub’s two law firms. In addition, he wants the right to file a Chapter 11 plan and sell the team out from underneath the current owner, Frank McCourt, whom he characterizes as “cash strapped.”

Selig made the same factual arguments in support of both requests, which are scheduled for hearing Oct. 12, the same day the team has a motion on the bankruptcy court’s calendar to sell broadcast rights for the 2014 season and beyond.

The commissioner alleged the Dodgers’ two law firms, Dewey & LeBoeuf LLP and Young Conaway Stargatt & Taylor LLP, have a conflict of interest. He claimed they are advancing McCourt’s interests rather than those of the team and its stakeholders.

Selig says that if the team were sold in Chapter 11, creditors would be paid in full with perhaps hundreds of millions of dollars left over for McCourt. If the team sells broadcast rights in violation of league rules, it will lead to “severe sanctions,” including the termination of the major league franchise, according to the commissioner’s papers.

In addition, selling broadcast rights in violation of the existing contract with Fox Entertainment Group Inc. will lead to large damage claims, the commissioner said. A sale of broadcast rights would help McCourt with his immediate financial problems while mortgaging the team’s future, Selig said.

The commissioner said the team’s two law firms demonstrated a conflict of interest by opposing his superior financing offer for the Chapter 11 case. According to Selig, the firms opposed the league’s loan because it would have made McCourt personally liable to pay a $5.25 million fee to the team’s proposed lender.

The two law firms are beholden to McCourt and not to the team because he paid their retainers, the commissioner said. Rather than represent what’s best for the team, the firms are orchestrating the bankruptcy case to help McCourt “cure his own personal financial woes,” the commissioner said.

If the U.S. Bankruptcy Judge in Delaware isn’t inclined to allow the commissioner to file a Chapter 11 plan, Selig wants the judge to require the team to make an immediate election between assuming or terminating agreements with Major League Baseball.

The team filed under Chapter 11 on June 27 when it was faced with missing payroll because the commissioner refused to approve an agreement to sell an extension on the existing broadcasting license to Fox. For a summary of the pre-bankruptcy agreement with Fox, click here for the June 28 Bloomberg bankruptcy report. Assets are more than $500 million while debt is less than $500 million, according to the Chapter 11 petition.

The case is In re Los Angeles Dodgers LLC, 11-12010, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Indenture Trustees, Union, PBGC on NewPage Committee

NewPage Corp., the coated paper manufacturer acquired in 2005 by Cerberus Capital Management LP, has an official creditors’ committee with nine members. NewPage filed for Chapter 11 protection on Sept. 7.

The committee includes three indenture trustees, the steelworkers’ union, the Pension Benefit Guaranty Corp. and the litigation trustee under the confirmed Chapter 11 plan for Quebecor World (USA) Inc.

For lawyers, the committee selected Paul Hasting LLP and Young Conaway Stargatt & Taylor LLP.

NewPage, based in Miamisburg, Ohio, listed assets of $3.4 billion and debt totaling $4.2 billion. Liabilities include $232 million on a revolving credit plus $1.77 billion on 11.375 percent senior secured first-lien notes. Second-lien obligations include $802 million in 10 percent secured notes and $225 million in floating-rate notes.

In addition to $200 million in 12 percent senior unsecured notes, there is $498 million owing on two issues of floating- rate pay-in-kind notes.

NewPage has 16 paper-making machines operating in seven plants in the U.S. and Nova Scotia. The Canadian affiliate filed for reorganization in Nova Scotia. The company reported a $229 million net loss in the first half of 2011 on revenue of $1.79 billion, following a $674 million net loss in 2010 on revenue of $3.6 billion.

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

Solyndra Executives Take the Fifth in House Hearing

Solyndra LLC’s chief executive and its chief financial officer declined to answer questions on Sept. 23 in a U.S. House subcommittee hearing, invoking their rights to avoid self- incrimination under the Constitution’s Fifth Amendment. For Bloomberg coverage, click here.

Now that Solyndra managers staked out a position that their testimony might bespeak criminal activity, it remains to be seen whether anyone in the Chapter 11 case, such as the U.S. Trustee, will file a motion for appointment of a Chapter 11 trustee or an examiner.

Before a trustee is appointed, bankruptcy law requires “cause” or the showing of fraud or gross mismanagement by current management. If a bankruptcy judge turns down a motion for a trustee, the judge is obliged in bankruptcy law to appoint an examiner to conduct an examination.

Solyndra has a hearing on the bankruptcy court calendar tomorrow to approve auction and sale procedures intended to sell the assets not later than Dec. 1.

Despite receiving a $535 million government-guaranteed loan, Solyndra filed for Chapter 11 reorganization on Sept. 6 after halting operations. Two days later, it was raided by the Federal Bureau of Investigation, executing a search warrant in conjunction with the U.S. Energy Department.

Solyndra, located in Fremont, California, said assets were $859 million while debt totaled $749 million as of Jan. 1, 2011. When the petition was filed, Solyndra said secured debt was $783.8 million. The startup business 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. Production commenced in January 2011, to halt 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.)

Whippoorwill Says Committee’s Windstar Plan No Good

Secured creditor Whippoorwill Associates Inc. may have the upper hand at a hearing tomorrow where the creditors’ committee for the former owner of Windstar Cruises is scheduled to seek court approval for the disclosure statement explaining the committee’s proposed liquidating Chapter 11 plan.

The sale of the assets completed, Whippoorwill says that the company only has $1.5 million cash remaining, not enough for full payment on administrative and priority claims that must be paid in full before a plan can be confirmed. Unpaid expenses are $1.8 million, not including additional priority claims that must be paid in full.

The committee’s plan would pay unsecured creditors with proceeds from a lawsuit the committee filed against Whippoorwill. The committee’s suit alleged that the secured lender controlled Windstar, fabricated the basis for an otherwise unnecessary Chapter 11 filing, and arranged the sale so the price would be enough to cover the debt it was owed plus counsel fees, “but not a dollar more.”

Whippoorwill points out how the committee hasn’t moved the suit forward since it was filed in May. For a summary of the committee’s complaint, click here for the May 19 Bloomberg bankruptcy report.

Windstar’s three luxury sailing yachts were sold to The Anschutz Corp. for $35 million cash. Windstar filed under Chapter 11 in April after working out a contract for Whippoorwill to buy the business in exchange for $40 million in secured debt. Anschutz won the auction, beating out Whippoorwill.

The petition said assets are $86.4 million, with debt totaling $87.3 million. Debt includes a first-lien term loan owing to Whippoorwill for $9.6 million. There are $19.7 million in 10 percent second-lien notes, where Whippoorwill holds 88 percent. Whippoorwill was also supplying up to $10 million to finance the Chapter 11 case. In addition, Windstar owes $31.2 million to holders of 3.75 percent convertible notes.

The case is In re Ambassadors International Inc., 11-11002, U.S. Bankruptcy Court, District of Delaware (Wilmington).

David Barton Gyms Confirm Plan on Schedule

Club Ventures Investments LLC and affiliates, the operators of six upscale fitness clubs under the name David Barton Gym, walked out of the confirmation hearing on Sept. 23 with the bankruptcy judge’s signature on an order approving the Chapter 11 plan.

Unsecured creditors will share $150,000, for a return of 5.3 percent on claims totaling about $2.8 million.

Bank of America NA, the secured lender, will have its $11.1 million claim reinstated.

LBN Holdings LLC, one of the existing owners, and Praesidian Capital Investors LP, both junior secured lenders, will have ownership interests along with new notes for $11.5 million and $5 million, respectively. LBN was owed at least $22.4 million while Praesidian’s debt was $30.6 million.

The gyms filed for Chapter 11 protection in March. Revenue in 2010 was $28.3 million. Total debt was about $65 million, court papers said.

Before bankruptcy, Praesidian and LNB signed a plan-support agreement calling for conversion of their debt to equity.

The clubs are in New York, Chicago, Miami Beach and Seattle. There are 13,500 members, who weren’t affected by the plan.

The case is Club Ventures Investments LLC, 11-10891, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Claim Jumper to Exit Chapter 11 with Confirmed Plan

The remnants of Claim Jumper Restaurants LLC secured approval of a liquidating Chapter 11 plan at a Sept. 23 confirmation hearing, court records show. Confirmation was made possible through mediation between the official creditors’ committee and subordinated noteholder Black Canyon Capital LLC. The committee had been seeking subordination of Black Canyon’s claim.

Secured creditors with claims of $69.2 million could expect a 54 percent recovery, according to the disclosure statement.

Early in the case when the business was being sold, secured lenders agreed to a carveout from sale proceeds to obviate objection to the sale from the creditors’ committee. The disclosure statement said that the trust for creditors was funded with $1.84 million.

As a consequence of the settlement, Black Canyon won’t participate in the trust for unsecured creditors. Instead, it will receive $475,000 from the trust.

Claim Jumper sold the chain of 45 western-themed restaurants to Landry’s Restaurants Inc. in a transaction valued at $76.6 million, comprising $48.3 million in cash, the assumption of $23.3 million in debt, and $5 million in cash to collateralize existing letters of credit.

When the sale concluded, the lenders were paid $37.3 million. Claim Jumper changed its name to Goldcoast Liquidating LLC.

In addition to $69.5 million in secured debt, Claim Jumper at the outset of the case said it owed $112 million on subordinated notes. Assets were valued at more than $50 million while debt exceeded $100 million, according to the petition.

The case is In re Goldcoast Liquidating LLC, 10-12819, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Howrey Firm Being Taken over by Chapter 11 Trustee

Partners from the law firm Howrey LLP lost control of the liquidation when the bankruptcy court last week authorized appointment of a Chapter 11 trustee. The firm, once known for expertise in antitrust and intellectual property law, filed under Chapter 11 in June.

In mid-September, Citibank NA, the secured lender, sought either a trustee or conversion of the case to Chapter 7 after deciding to withdraw permission to use cash after Sept. 23. The cash represented proceeds from accounts receivable that were part of the bank’s collateral pool.

Citibank complained that $5.8 million of its cash already had been used up for costs of the Chapter 11 case without producing an agreement with the creditors’ committee on a budget for a liquidating plan.

With consent from the firm and the committee, the bankruptcy judge on Sept. 22 authorized the U.S. Trustee to select a trustee.

The firm put itself into Chapter 11 in response to an involuntary Chapter 7 petition filed in April by three creditors with $36,600 in unsecured claims.

The involuntary petition was filed in San Francisco, where the firm had one of its 19 offices around the world. The firm shut down March 15.

Howrey’s main office had been in Washington. It previously was known as Howrey & Simon and Howrey Simon Arnold & White LLP. At one time, the firm had more than 700 lawyers.

The case is In re Howrey LLP, 11-31376, U.S. Bankruptcy Court, Northern District California (San Francisco).

Truck Wheel Importer Trade Union Confirms Reorganization Plan

Trade Union International Inc., an importer and distributor of aftermarket aluminum wheels and truck accessories, confirmed a reorganization plan this month in Riverside, California where the owners maintain control in return for a contribution of about $500,000.

The secured bank debt of some $11.5 million was rolled over into a new secured obligation. Unaffiliated unsecured creditors with claims of about $900,000 will be paid $750,000 in installments through 2016. The owners in effect subordinated unsecured claims of some $9 million.

The company along with an affiliate filed under Chapter 11 in January after the bank cut off access to the bank account and said sought appointment of a receiver. The filing was made along with Duck House, which supplies sports licensing products. Both are located in Montclair, California and are owned by Wen Ping Chang and Mei Lien Chang.

The companies import from China and Taiwan. They owed $11.5 million to Cathay Bank and China Trust Bank.

The petition says assets and debt both exceed $10 million.

The case is In re Trade Union International Inc., 11-13071, U.S. Bankruptcy Court, Central District California (Riverside).

Downgrade

Del Monte Downgraded Following KKR Buyout on Declines in Sales

Del Monte Foods Co., the target of a leveraged buyout completed in March, saw its senior unsecured note rating lowered to CCC on Sept. 23 by Fitch Ratings.

Fitch was reacting to the report for the July 31 quarter showing a 3.5 percent decline in sales. Fitch said liquidity is “adequate.”

Fitch noted that operating income declined 58.7 percent as the result of lower sales and higher commodity costs. For the July 31 quarter, the net loss was $27.6 million on net sales of $776.2 million.

San Francisco-based Del Monte is a producer, distributor, and marketer of branded food and pet products. The brands include Del Monte, Contadina, Milk-Bone and Gravy Train.

The buyers were Kohlberg Kravis Roberts & Co. LP, Vestar Capital Partners V LP and Centerview Capital LP.

Standard & Poor’s calculated that the LBO increased debt about $2.6 billion.

Bankruptcy Audio & Video

Fairfield Sentry, Nebraska Book, Lehman: Bankruptcy Audio

Fairfield Sentry Ltd., the largest feeder fund for the Bernard L. Madoff Investment Securities Inc. Ponzi scheme, made law in two important cases discussed in the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. Rochelle points to Nebraska Book Co. as an example of a company struggling to emerge from bankruptcy as a result of newly-found distaste in the credit markets for junk debt.

Pointing to Lehman Brothers Holdings Inc., Rochelle finds another example where two federal district judges are ruling on the same issue at the same time. The podcast wraps up with a tale about a Florida lawyer who got in trouble for calling a judge’s rulings “half-baked.” To listen, click here.

In the new Bloomberg bankruptcy video, Rochelle looks at the judge-shopping phenomenon as exemplified in the Madoff case and surveys recent statistics from the credit markets predicting tough times ahead for companies headed toward bankruptcy. To watch, click here.

New Filing

No Lawyer Retained, Petition May Be Dismissed

The owner of a building at 56 Walker Street in Manhattan filed for Chapter 11 protection on Sept. 23, although it remains to be seen how long the case lasts.

The petition was filled out in longhand and signed by an individual identifying himself as the sole member of the company that owns the property. No lawyer signed the petition.

U.S. Bankruptcy Judge Allan Gropper immediately scheduled an Oct. 3 hearing where he will dismiss the case unless the building by then has a lawyer.

Although an individual can go through bankruptcy without a lawyer, corporations or partnerships must have a lawyer or the case will be dismissed.

The petition says the property is worth $11 million while secured debt is $15.2 million.

The property is just below Canal Street in lower Manhattan.

The case is In re 56 Walker LLC, 11-14480, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Bank Failure

Virginia, California Bank Failures Bring Year’s Total to 73

Bank failures in Virginia and California on Sept. 23 brought the year’s total to 73. The two banks’ branches were transferred to other banks.

The latest failures cost the Federal Deposit Insurance Corp. $305.5 million. Last year, there were 157 bank failures. The failures in 2010 were the most since 1992, when 179 institutions were taken over by regulators.

For Bloomberg coverage, click here.

Advance Sheets

Lehman Investor Suit Not ‘Related To’ in 7th Circuit

A lawsuit against a non-bankrupt investment vehicle created by Lehman Brothers Holdings Inc. is on the brink of being sent back to state court.

A family trust invested in real estate through an entity named Lehman Brothers Real Estate Fund III LP. The trust sued for rescission in state court in Chicago. The Lehman fund had the suit transferred to federal court, invoking the bankruptcy jurisdiction of the U.S. District Court for the Northern District of Illinois.

The Lehman fund claimed that the Chicago case was “related to” the Lehman bankruptcy in New York. The family trust filed a motion to remand the suit to Illinois state court.

U.S. District Judge Rebecca R. Pallmeyer in Chicago began her analysis by noting that the U.S. Court of Appeals in Chicago doesn’t adopt the “conceivable effect” basis for finding “related to” bankruptcy jurisdiction.

In respect for Article III of the Constitution, Pallmeyer said that the 7th Circuit requires a showing that a lawsuit will affect distributions to creditors.

There being no evidence in the record to show how the bankrupt Lehman companies could be affected by the Chicago lawsuit, she tentatively said she would remand the suit to state court.

Pallmeyer afforded Lehman 14 days to produce evidence showing how the Chapter 11 case could be affected by the suit.

The case is Mazzolin v. Lehman Brothers Real Estate Fund III LP, 11-953, U.S. District Court, Northern District Illinois (Chicago).

New Consideration Theory Nixed on Debt Reaffirmation

The U.S. Court of Appeals in New Orleans nipped in the bud an emerging line of cases that allow a bankrupt to reaffirm a pre-bankruptcy debt without court approval.

The case involved a reorganized company that signed a new contract with a creditor. The new contract provided that the formerly bankrupt company would make good on a pre-bankruptcy debt. No one sought permission from the bankruptcy court under Section 524 of the Bankruptcy Code to reaffirm the debt.

In an unsigned opinion on Sept. 22, the 5th Circuit rejected the idea that the requirement of court approval to reaffirm a debt can be circumvented by signing a new contract containing new consideration.

Circuit Judge Carolyn D. King was one of the judges on the three-judge panel.

The case is Sandburg Financial Corp. v. American Rice Inc., 11-40301, U.S. 5th Circuit Court of Appeals (New Orleans).

Absolute Priority Rule Terminated in Individual Cases

The absolute priority rule was deleted for individuals in Chapter 11 as a result of 2005 amendments to the Bankruptcy Code, U.S. District Judge Susan Bucklew from Tampa, Florida ruled on Sept. 21. Bucklew also held that the unsecured deficiency claim of the secured creditor was properly in a separate class.

The case involved individuals who were owners of a company in Chapter 11. The company confirmed a plan paying the secured creditor in full over time.

When the secured creditor sued the individuals on personal guarantees, they filed in Chapter 11 and later confirmed a plan where the lender would be paid by the company. Contending the absolute priority rule was violated, the secured creditor argued it was improper to cram down the plan.

Although courts disagree, Bucklew said the governing language in Section 1129(b)(2)(B)(ii) is plain on its face. As revised in 2005, the statute says that an individual can cram down on a dissenting class while retaining property that was in the estate before bankruptcy or acquired later. She said Congress therefore “has done away with the absolute priority rule in the context of individual cases.”

Bucklew said that putting the secured creditor’s unsecured claim in a separate class from other unsecured creditors didn’t amount to improper gerrymandering. The evidence showed that the secured creditor’s claims were of a different character, she said.

Bucklew upheld the ruling of the bankruptcy court confirming the individuals’ Chapter 11 plans.

The case is SPCP Group LLC v. Biggins, 10-2381, U.S. District Court, Middle District Florida (Tampa).

--With assistance from Dakin Campbell in San Francisco and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Fred Strasser, 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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