Bloomberg News

Madoff, Lehman, Dodgers, Seahawk, Palm Harbor: Bankruptcy

September 29, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Lehman, Dodgers, Point Blank, Philadelphia Orchestra and Perkins & Marie Callender’s in Updates, and ProQuest in Downgrades.)

Sept. 29 (Bloomberg) -- The Bernard L. Madoff Investment Securities Inc. opinion written this week by U.S. District Judge Jed Rakoff is costing Madoff customers significant amounts of money, now and in the future, the Madoff trustee said after a court hearing yesterday. The trustee also said he will soon appeal Rakoff’s ruling.

In court yesterday, David Sheehan, a lawyer for the Madoff trustee, said that a $272 million distribution scheduled to be made to customers tomorrow will be held up given uncertainty generated by Rakoff’s Sept. 27 opinion.

The opinion this week in substance limited the trustee to recovering false profits and principal taken out of Madoff’s firm within two years before bankruptcy in December 2008. Until Rakoff dismissed the largest part of claims against owners of the New York Mets, the trustee was suing to take back fictitious profits going back six years.

Talking to reporters after the hearing, Sheehan said that limiting recoveries to two years roughly cuts potential recoveries in half from the approximately 1,000 pending lawsuits, sometimes referred to as clawback actions. Where the trustee sought $6 billion for distribution to customers, the maximum recovery under Rakoff’s ruling would be about $3 billion, Sheehan said.

For Mets owner Fred Wilpon along with his friends, family and associates, Rakoff’s opinion dramatically reduces their exposure in the suit. Originally, the trustee was seeking to take back $300 million in false profits and $700 million in principal taken out within six years of bankruptcy.

Sheehan said that limiting the lawsuit to two years means the maximum recovery is about $386 million for profits and principal combined. The fictitious profits, which are easier for the trustee to recover, amount to about $85 million of the total, Sheehan said.

The Madoff trustee is attempting to level the playing field among customers who were fortunate in taking money out of the Madoff firm and those who weren’t. Were his lawsuits to succeed, money the trustee recovers would be redistributed to all customers, thus placing everyone in much the same position.

By limiting recoveries to two years, Rakoff’s ruling has the effect of decreasing the eventual recoveries by customers who left money with Madoff until the bitter end.

Sheehan said the trustee decided not to make the scheduled $272 million distribution to customers tomorrow because it was predicated on several settlements where customers gave back money beyond Rakoff’s two-year cutoff.

The Madoff trustee is considering whether he can make the distribution without fear that the underlying calculations were inaccurate. Sheehan said the trustee would likely decide next week when and whether to make the distribution.

For a rundown on Rakoff’s Sept, 27 opinion, click here for the Sept. 28 Bloomberg bankruptcy report.

In court, Sheehan said the trustee would file papers with Rakoff by Oct. 11 requesting permission to appeal. Because Rakoff’s opinion wasn’t the final ruling in the case, there is no automatic right to appeal. An appeal can be taken only if Rakoff or the U.S. Court of Appeals grants permission.

The Madoff trustee can argue there should be an immediate appeal for several reasons. For one, there is stark disagreement between two U.S. District Judges. In a case raising nearly the same issues, U.S. District Judge Kimba M. Wood ruled a month ago in another Madoff lawsuit that all of the trustee’s claims could stand, including claims for recoveries going back six years. For a summary of Wood’s opinion, click here for the Sept. 7 Bloomberg bankruptcy report.

At yesterday’s hearing, Rakoff set down a schedule for the trial, to commence March 19. After both sides complete discovery on Jan. 11, either side can make a motion for summary judgment, where they argue there are no disputed issues of fact, thus allowing Rakoff to rule without holding a trial. Summary judgment papers will be filed initially on Feb. 9, with opposing papers Feb. 16. Oral argument on summary judgment will take place Feb. 23. Rakoff said he may rule in court on Feb. 23

The trustee and Wilpon disagree over whether the trustee is entitled to a jury trial. Both sides will file briefs simultaneously on Oct. 14 and Oct. 28.

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 Wilpon suit in district court is Picard v. Katz, 11- 03605, U.S. District Court, Southern District New York. The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court for the Southern District of New York (Manhattan).

Updates

Bank of America Settles with Lehman over $500 Million Setoff

Lehman Brothers Holdings Inc. settled its dispute with Bank of America Corp. over a $500 million setoff that the Lehman said violated the automatic stay in bankruptcy. In addition, Lehman settled derivative claims with Merrill Lynch & Co., a Bank of America subsidiary.

Lehman is proposing a bonus scheme for the workers continuing to resolve Lehman’s positions in derivatives.

Lehman successfully sued Charlotte, North Carolina-based Bank of America for violating the automatic stay by improperly setting off against a Lehman account following the Chapter 11 filing. The bankruptcy judge entered a judgment in favor of Lehman for $501.8 million plus $94 million in pre-judgment interest. The bank appealed.

The settlement calls for Bank of America to pay Lehman 71 percent, or $356 million. In addition, the bank will reduce derivatives claims against Lehman by $2.4 billion and reduce guarantee claims on derivatives by another $2.1 billion.

For details on the Bank of America setoff lawsuit, click here for the July 5 Bloomberg bankruptcy report.

The bank’s Merrill Lynch subsidiary will lower its derivative claims by $1.5 billion and guarantee claims on derivatives by $1.5 billion. The settlements are on the bankruptcy court’s calendar for Oct. 19.

Lehman filed papers yesterday proposing to retain 95 workers to continue resolving the derivatives portfolio. If approved by the bankruptcy judge, the workers could receive as much as $12 million in incentive bonuses for 2012.

Lehman said that the derivatives workers recovered $1.4 billion in the first eight months of 2011, bringing total derivatives recoveries since the inception of the bankruptcy to $13.6 billion.

Lehman executives settled a securities lawsuit where six California municipalities were aiming to recover $35 million for securities they purchased, some shortly before Lehman’s bankruptcy. To cover the settlement, Lehman is seeking bankruptcy court permission to use $1 million from the directors’ and officers’ liability insurance policy. For Bloomberg coverage, click here.

The disclosure statement approved, Lehman creditors are voting on the Chapter 11 plan in advance of a Dec. 6 confirmation hearing. The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold office buildings and the North American investment-banking business to Barclays Plc one week later.

The remnants of the Lehman brokerage operations went into liquidation on Sept. 19, 2008, in the same court, with a trustee appointed under the Securities Investor Protection Act.

The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding under the Securities Investor Protection Act for the brokerage operation is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Dodgers Season-Ticket Holders Want Official Committee

Five holders of season tickets for the Los Angeles Dodgers baseball club are seeking appointment of an official committee to represent ticket holders. All member of the ad hoc committee have held season tickets for at least 30 years.

The ticket holders contend it’s “just plain wrong” when the team says they won’t be affected by the Chapter 11 case. There will be an Oct. 25 hearing on the motion for appointment of an official committee.

There are 17,000 season-ticket holders, the motion says. The ad hoc committee says the fans have an interest in how the team spends its money. They claim to be affected if the Dodgers use resources for purposes that don’t benefit the team, the stadium or fans.

The team intends to extricate itself from Chapter 11 by auctioning off broadcast rights for the 2014 season and beyond. To accomplish the goal, the team must overcome opposition from the commissioner of Major League Baseball and from Fox Entertainment Group Inc., which has broadcasting rights through the 2013 season.

The Dodgers filed under Chapter 11 on June 27 when faced with missing payroll because the commissioner refused to approve an agreement to sell Fox an extension on the existing broadcasting license. For a summary of the pre-bankruptcy agreement with Fox, click here for the June 28 Bloomberg bankruptcy report.

In mid-September, the team filed papers designed to set up an auction and sale procedure for telecasting rights beginning in 2014. The hearing on the sale-procedure motion is set for Oct. 12, the same day when the commissioner has motions on the calendar to end exclusivity and disqualify the team’s two law firms. Fox initiated a lawsuit to block the auction process.

Assets are more than $500 million while debt is less than $500 million, according to the team’s Chapter 11 petition.

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

Point Blank Reduces Price on Gores Purchase Agreement

Point Blank Solutions Inc., a manufacturer of soft body armor for police and military, for a third time is asking the bankruptcy court for permission to sell the business.

In the new motion filed this week, the purchase price was reduced by $10 million, to $20 million. The buyer remains Barrier Acquisition LLC, an affiliate of Gores Group LLC of Boulder, Colorado.

There will be a hearing on Oct. 28 to approve the sale.

Possibly narrowing the price reduction, the new contract lowered the benchmark for a working capital adjustment to $25 million from $30 million. Barrier has completed due diligence, so there is less room for canceling the contract. Secured lenders this time can bid their debt rather than pay cash.

Point Blank is pursuing a sale as a means for extricating itself from Chapter 11. The company has been unable to reach agreement with the official equity committee on a plan after the bankruptcy judge rejected the first effort to sell the business out from underneath shareholders.

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 (Wilmington).

Philly Orchestra Arranges Loan with Ohio Credit Union

The Philadelphia Orchestra decided it needs financing and filed papers yesterday for authority to draw a $3.1 million loan from Sun Federal Credit Union of Maumee, Ohio. The loan- approval hearing is set for Oct. 26.

The loan will bear interest at 7.5 percent. Unless extended, the loan will mature in April, when the orchestra will have been in Chapter 11 for one year.

Yesterday, the bankruptcy judge approved an agreement where the Philly Pops, directed by Peter Nero, is separating from the symphony. For details on the settlement, click here for the Sept. 20 Bloomberg bankruptcy report.

The orchestra’s Chapter 11 petition in April said assets and debt were both less than $50 million. The orchestra said it intends to use Chapter 11 to gain relief from pension obligations, secure a new lease with the Kimmel Center where it performs, and structure new union contract with musicians.

The case is In re The Philadelphia Orchestra Association, 11-13098, U.S. Bankruptcy Court, Eastern District Pennsylvania (Philadelphia).

Seahawk Drilling Confirms Full-Payment Chapter 11 Plan

Seahawk Drilling Inc. sold its 20 shallow-water jackup rigs for $155 million, resolved objections to the Chapter 11 plan, and received a commitment from the U.S. Bankruptcy Judge in Corpus Christi, Texas, to sign a confirmation order this week approving the plan, court records say.

Hercules Offshore Inc. bought the business in April for $25 million cash plus 22.3 million of its shares. Based on the closing price for the stock at the time, the total came to $155 million.

Unsecured creditors with claims up to $18 million will be paid in full with pre- and post-bankruptcy interest. Litigation claimants, with claims up to $4.5 million, will likewise be paid in full, the disclosure statement said.

The excess after creditors are paid will go to shareholders. Because they will receive a distribution, shareholders voted on the plan. The stock closed yesterday at $2.77, down 7 cents a share in over-the-counter trading.

Seahawk listed assets of $504.9 million and debt of $124.5 million, including $41.4 million cash and $397 million in property, plant and equipment. Houston-based Seahawk was spun off from Pride International Inc. in August 2009.

The case is In re Seahawk Drilling Inc., 11-20089, U.S. Bankruptcy Court, Southern District Texas (Corpus Christi).

Palm Harbor Homes Plan Set for Nov. 17 Confirmation

Palm Harbor Homes Inc. sold the assets to Fleetwood Enterprises Inc. in April for $83.9 million and scheduled a Nov. 17 confirmation hearing to approve a Chapter 11 plan. The bankruptcy court in Delaware approved the explanatory disclosure statement on Sept. 27.

The disclosure statement includes a prediction that holders of 3.25 percent convertible senior notes will recognize a recovery between 16.7 percent and 21 percent on their $54.8 million in claims. General unsecured creditors with $36.4 million to $47.3 million in claims will receive an identical recovery.

Palm Harbor filed under Chapter 11 in November. The petition said assets were $321 million with debt totaling $280 million. In addition to $34 million owing to Textron Financial Corp., there was $53.8 million owing at the time on the convertible senior notes due 2024.

The case is In re Palm Harbor Homes Inc., 10-13850, U.S. Bankruptcy Court, District of Delaware.

Perkins-Marie Callender’s Restaurants Both Post Losses

Restaurant operator Perkins & Marie Callender’s Inc. filed an operating report showing a $4.1 million net loss for the Perkins operation for four weeks ended Sept. 4. Revenue in the period was $20.4 million.

For the Marie Callender’s stores, revenue of $5.3 million resulted in a $597,000 net loss.

From the inception of the Chapter 11 case in mid-June, the cumulative losses are $13.2 million and $1.3 million for Perkins and Marie Callender’s, respectively.

Creditors are voting on a Chapter 11 plan in advance of a confirmation hearing on Oct. 31.

The holders of $204 million in senior notes are to receive the equity while general unsecured creditors with $20 million to $25 million in claims have the option of receiving 14 percent cash, up to an adjustable cap of $6.75 million for the class as whole.

Secured creditors with $103 million in debt will receive a new term loan plus cash for accrued interest.

Funds managed by Wayzata Investment Partners LLC would assume control of the company when the plan is confirmed. For details on the plan, click here for the July 18 Bloomberg bankruptcy report.

Court papers said assets were $290 million while debt aggregated $440.8 million. When the bankruptcy began, the company owned 85 Marie Callender’s stores in nine states and franchised 37 in four states.

It owned 160 Perkins stores in 13 states and franchised 314 in 31 states. Along with the filing, the company said it was closing 58 stores. It was acquired in 2005 by Castle Harlan Inc. for $245 million cash.

The case is In re Perkins & Marie Callender’s Inc., 11- 11795, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Downgrades

Tekni-Plex, After Restructuring, Demoted to Caa1

Tekni-Plex Inc., a manufacturer of packing materials for consumer products, health-care, and food, was demoted by one notch yesterday to a Caa1 corporate rating from Moody’s Investors Service in view of “lower-than-expected earnings and free cash.”

Moody’s also said there is “limited cushion” on loan covenants and negative free cash flow. For the future, Moody’s said Tekni-Plex is exposed to “resin and other raw material cost volatility.”

Tekni-Plex completed a debt-for-equity exchange in mid-2008 with holders of $342 million in 12.75 percent senior subordinated notes. They exchanged the debt for stock. The transaction gave 80 percent of the equity to Oaktree Capital Management LLC and Avenue Capital Group.

King of Prussia, Pennsylvania-based Tekni-Plex had missed an interest payment in December 2007 on the subordinated notes. Trade creditors were paid in full.

Library Content Provider ProQuest Demoted to B-

ProQuest LLC, a provider of electronic content for 12,000 libraries, was downgraded yesterday to a B- corporate rating by Standard & Poor’s in view of “tight covenant compliance” and earnings before interest, taxes, depreciation and amortization that declined 30 percent in the past year.

S&P was influenced in part by what it called the company’s “history of debt-financed acquisitions and debt-financed distributions to its owners.”

S&P demoted the second-lien term loan to B-, with an estimate that the holders wouldn’t recover more than 30 percent following payment default.

The unsecured notes likewise became B-, although S&P predicts post-default recovery could be as high as 50 percent.

S&P said the Ann Arbor, Michigan-based company may need to modify loan covenants in the first half of 2012.

Daily Podcast

Solyndra, Garrison Keillor, Elizabeth Warren: Bankruptcy Audio

Whether Solyndra LLC should auction the business before the end of October is the first topic on the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. Rochelle looks into issues that arise when an accounting firm like Deloitte & Touche LLP is charged with missing fraud being conducted by one its audit clients. A Denver beef processor with a new Chapter 11 filing is mentioned as a possible takeover candidate. Rochelle concludes the podcast by explaining why a skit by Garrison Keillor on “A Prairie Home Companion” signals the beginning of a populist movement in the U.S. To listen, click here.

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

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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