Bloomberg News

Real Mex, NewPage, Dodgers, Lehman, Viceroy: Bankruptcy

October 04, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Dodgers about mediation; adds Real Mex as first item; Lehman, Viceroy Resorts, and Innkeepers in Updates; Decorator Industries in New Filings; Daily Podcast section; and Corry Communications in Advance Sheets.)

Oct. 4 (Bloomberg) -- Real Mex Restaurants Inc., the operator of a chain of Mexican food restaurants, filed for Chapter 11 protection early this morning in Delaware and said that second-lien lenders may end up as the new owners following an auction three months from now.

Real Mex, based in Cypress, California, operates under the names El Torito Restaurants, Acapulco Mexican Restaurants and Chevys Fresh Mex. It has 178 restaurants, with 149 in California. There are also 30 franchised locations. It acquired Chevys Inc. for $90 million through confirmation of Chevy’s Chapter 11 plan in 2004.

Assets are $272.2 million while debt totals $250 million, according to the petition.

Real Mex missed a $9.1 million interest payment due in July to holders of $130 million in second-lien notes. An affiliate of Sun Capital Partners Inc. provided funds to make up the payment. Real Mex is controlled by funds affiliated with Boca Raton, Florida-based Sun Capital, a private-equity investor.

Real Mex filed for bankruptcy with plans to sell the business when a restructuring agreement couldn’t be worked out with second-lien debt holders. The company says it intends to close 12 stores and will shed another 40 unless landlords make concessions.

Other debt includes $37.6 million owing on a first-lien credit where General Electric Capital Corp. is agent. GECC has agreed to provide $40 million in secured financing for the Chapter 11 case.

There is a $36 million unsecured loan owing by the operating company and a $38.8 million unsecured loan at the holding company level. Revenue of $558 million in 2008 declined to $478 million in 2010. Rising food costs also contributed to the need for bankruptcy relief, a court filing says.

Real Mex will ask the bankruptcy court to approve auction and sale procedures where bids would be due in three months. The auction would take place five days after the submission of bids, if the bankruptcy judge goes along with the schedule. The company said there have been discussions with some of the second-lien lenders who may end up being the so-called stalking horse at auction. No buyer is yet under contract.

Revenue of $243.4 million in the first half of 2011 resulted in a $67.4 million operating loss and a $81.7 million net loss. The loss included a $71.3 million asset-impairment charge.

The second-lien bonds traded on July 26 at 90 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds traded on Sept. 6 at 82.5 cents on the dollar, Trace showed.

Other owners include KKR & Co., Canpartners Investors IV LLC, and Farallon Capital Management LLC, a court filing says.

The case is In re Real Mex Restaurants Inc., 11-13122, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Updates

NewPage Committee Aims to Keep Liens Off Free Assets

The official creditors’ committee for coated paper maker NewPage Corp. will appear in bankruptcy court this afternoon fighting to keep secured lenders’ liens from sopping up assets not already collateral for secured loans. The hearing today is for final approval of $600 million in secured financing.

The committee explained in its papers filed yesterday how New Page’s lien structure is different from a typical bankrupt company’s where lenders have first-lien and subordinate liens on everything. The lien structure was created following the 2005 acquisition by Cerberus Capital Management LP.

The revolving credit lenders, owed $131 million, will be paid in full by new secured financing for the Chapter 11 case. The revolver lenders have a first lien on accounts receivable and inventory. The $1.77 billion in second-lien notes are secured by a second-lien on receivables and inventory, the committee says.

The $1.03 billion owing on two issues of second-lien notes don’t have a lien on accounts receivable and inventory. Instead, they are secured by property, plant and equipment, the committee says.

The committee points out that the new secured lending won’t subordinate existing secured debt. The committee also notes how NewPage says it is “cash flow positive.” As a result, the committee argues that secured lenders currently don’t have and shouldn’t be given liens on lien-free assets because the new financing won’t present the possibility of diminishing collateral coverage.

Unlike many bankruptcy reorganizations, the committee contends that NewPage secured lenders “face no or very little risk of diminution in the value of their collateral.” Consequently, the committee warns the judge to prevent secured lenders from improving “their position at the expense of unsecured creditors.”

The committee identified several assets not subject to any liens. The free assets include lawsuits, a non-bankruptcy power- company subsidiary in Wisconsin, and a paper-making machine. The committee is asking the judge not to permit lenders to have liens on the unencumbered assets.

The committee says that the 60 days and $100,000 budget for investigating the validity of liens is inadequate.

Seven on the nine-member committee include 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.

Miamisburg, Ohio-based NewPage listed assets of $3.4 billion and debt totaling $4.2 billion. Listed liabilities included $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).

Dodgers Disagree with Judge on Discovery Limitations

The Los Angeles Dodgers baseball club wasted no time in politely telling U.S. Bankruptcy Judge Kevin Gross that he was wrong when he prohibited the team from investigating how the Commissioner of Major League Baseball treated other clubs.

In papers filed yesterday, the team said the judge was “unfairly” impairing the club’s ability to prove that the Commissioner hasn’t been acting in good faith.

Gross signed an order on Sept. 30 telling the Dodgers they couldn’t look into how Bud Selig, the commissioner, treated other clubs. Likewise, Gross prohibited the commissioner from giving evidence at the trial to begin Oct. 31 about limitations he put on transactions proposed by other clubs.

By 9:30 a.m. on the next business day, the Dodgers filed papers asking Gross to modify the restrictions he imposed on discovery and trial. Gross scheduled a hearing for tomorrow afternoon where he will consider whether to modify his Sept. 30 ruling.

The team contends it’s entitled to investigate how the commissioner treated other clubs to show a “course of dealing.” The team also says that decisions made regarding other teams will shed light on how the commissioner interpreted agreements governing major league teams.

The Dodgers want to know whether the “commissioner is using a different strike zone for the Los Angeles Dodgers than for other teams,” the club spokesperson Lindsey Estin said in an e-mailed statement.

While the team contends it’s not fair to limit discovery to how the commissioner treated the Dodgers, the club said it won’t demand documents or take testimony from other clubs. The team will be satisfied if the only information it receives about other clubs comes from the commissioner.

As an example, the team pointed to communications with the commissioner in June when he refused to approve an extension of the existing broadcasting agreement. The Dodgers quote from a letter where the commissioner said “no other owner has sacrificed so much of his team’s future for an immediate payoff.”

At the trial beginning Oct. 31, the judge will decide if it’s proper for the team to auction off telecasting rights beginning with the 2014 season and in the process override provisions in the existing agreement with Fox Entertainment Group Inc. For a rundown on the issues Gross will decide at the trial to run from through Nov. 4, click here for the Oct. 3 Bloomberg bankruptcy report.

Yesterday, Gross formally appointed recently retired U.S. District Judge Joseph J. Farnan Jr. to serve as mediator. Farnan had been mediating unofficially at Gross’s request since July.

Gross is giving Farnan a free hand and requiring that he only report eventually whether the warring factions settled. Farnan isn’t to say who was to blame for not settling.

Farnan is now in a small law firm including two sons.

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.

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

Lehman Taking Back 100 Million Euros from HSBC Bank

Lehman Brothers Holdings Inc. is taking back another 100 million euros ($131.7 million) that HSBC Bank Plc has been holding as collateral. The new funds coming to Lehman are in addition to 70 million euros received in August 2009.

Before bankruptcy, Lehman maintained several accounts at the bank to provide security for overdrafts or debit balances that Lehman affiliates might have in their customer accounts. In August 2009, HSBC gave back a 70 million-euro excess.

In an agreement approved yesterday by the bankruptcy judge, the bank is giving back another 100 million euros from the 162 million euros remaining in the account. Lehman admits HSBC has a right of setoff in the account.

The agreement by itself doesn’t decide which of the Lehman companies, including the former broker, is entitled to the funds.

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).

Viceroy Resort Creditors May Sue, Appoint Liquidator

Creditors of Viceroy Anguilla Resort & Residences on Anguilla in the British West Indies can sue the resort’s owner as the result of an order the bankruptcy judge in Delaware signed yesterday.

Creditors also can request that the court in Anguilla appoint a liquidator or receiver under local law.

Yesterday’s action resulted from a motion filed by an individual who made a deposit to buy a unit in the then- unfinished resort. Rather than dismiss the case entirely, U.S. Bankruptcy Judge Peter J. Walsh in effect terminated the so- called automatic bankruptcy stay and is allowing creditors to sue.

As a result, those who made deposits can use the court in Anguilla to enforce whatever rights they have against the property.

Purchasers ended up as unsecured creditors in the bankruptcy case because their deposits weren’t held in escrow. Previously, Walsh allowed the secured creditor Starwood Capital Group LLC to foreclose when he ruled that the resort’s proposed Chapter 11 plan improperly discriminated between different categories of purchasers who made deposits.

Starwood was the winner of a July auction to determine who would sponsor the reorganization plan. It called for Starwood to assume ownership on account of its $370 million secured claim. When the plan failed, Starwood took ownership through foreclosure. For details on the failed 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).

Cerberus Gives Reasons for Ending Innkeepers Contract

Cerberus Capital Management LP and Chatham Lodging Trust filed their pre-trial brief yesterday laying out the theory they will use at trial where Innkeepers USA Trust will ask the bankruptcy judge to compel Cerberus and Chatham to complete the $1.12 billion acquisition of 64 hotels.

The trial begins Oct. 10 in U.S. Bankruptcy Court in Manhattan. The erstwhile buyers contend they were entitled to cancel the contract under a material adverse change clause in the contract. They point to deteriorating conditions in the country’s economy and the lodging industry in particular as the basis for ending the purchase obligation.

Innkeepers argues that the contract only allowed termination for deterioration in the company’s business. Innkeepers says its business hasn’t suffered.

Cerberus and Chatham cited the 30 percent to 40 percent decline in the price of hotel stocks, the tightening of capital markets, and analysts’ downgrades of the lodging industry as permissible grounds for termination.

Even if they violated the contract, the two buyers say Innkeepers’ only remedy is to keep the $20 million contract deposit. Innkeepers and the creditors’ committee argue that whatever the contract says, the Chapter 11 plan, approved by the bankruptcy court, compels completion of the contract.

Cancellation of the contract by Cerberus and Chatham left Innkeepers unable to implement the reorganization plan the bankruptcy judge approved with a confirmation order in late June.

Apollo Investment Corp. acquired Palm Beach, Florida-based Innkeepers in July 2007 in a $1.35 billion transaction. It had 72 extended-stay and limited-service properties with 10,000 rooms in 20 states. The Chapter 11 petition filed in July 2010 listed assets of $1.5 billion against debt totaling $1.52 billion.

The lawsuit against Cerberus is Innkeepers USA Trust v. Cerberus Four Holdings LLC (In re Innkeepers USA Trust), 11- 02557, U.S. Bankruptcy Court, Southern District New York (Manhattan). The Chapter 11 case is In re Innkeepers USA Trust, 10-13800, in the same court.

Tavern on the Green Name Sold for Use Outside New York

A limited right to use the name Tavern on the Green outside the New York area was sold last week for $1.3 million. There was no competing bid, so the Chapter 7 bankruptcy trustee for Tavern on the Green LP canceled an auction.

The sale resulted from a settlement approved in April where the City of New York secured ownership of Tavern on the Green trademark rights throughout New York, New Jersey, Connecticut and parts of Pennsylvania. For detail on the settlement, click here for the April 18 Bloomberg bankruptcy report.

The name adorns the now-shuttered eatery in New York’s Central Park. The case was converted from Chapter 11 to a liquidation in Chapter 7 in March 2010 at the request of the creditors’ committee. There was insufficient money to pay expenses of the Chapter 11 case.

The case is In re Tavern on the Green LP, 09-15450, U.S. Bankruptcy Court, Southern District New York (Manhattan).

New Filings

North Carolina’s Sea Trail Golf Resort Files in Chapter 11

The Sea Trail Golf Resort and Conference Center in Sunset Beach, North Carolina, filed for Chapter 11 relief last week, blaming financial problems on the fewer golf rounds being played.

The resort has three courses and vacant land for future development.

The secured lender Waccamaw Bank is owed $15.4 million on two mortgages. Including unsecured debt of $6 million, total liabilities are $22.2 million, a court filing says.

The resort claims it’s solvent by pegging a value on the property of $32.2 million.

The case is In re Sea Trail Corp., 11-07370, U.S. Bankruptcy Court, Eastern District North Carolina (Wilson).

San Jose Office Building Files, Mortgage $38 Million

The owner of an office building at 111 North Market Street in San Jose, California, filed under Chapter 11 last week, owing $38.8 million on a matured mortgage held by CIBC Inc., a subsidiary of Canadian Imperial Bank of Commerce.

The current owner bought the property in mid-2006 for $41.5 million. They say they invested $17 million in the project.

The lender said in a court filing that the property may not be worth enough to cover the mortgage in full.

The project’s owners are John and Rosalie Feece. They guaranteed $6 million of the bank debt, the lender said.

The case is In re Community Towers I LLC, 11-58944, U.S. Bankruptcy Court, Northern District California (San Jose).

Bagel Makers in Minnesota, South Carolina File Chapter 11

Twin City Bagel Inc. and Lev Bakery Inc., bagel makers in Minnesota and South Carolina, filed Chapter 11 petitions last week in St. Paul, Minnesota.

Twin City says its assets are $8.1 million while debt is $4.7 million. Lev lists assets of $5.6 million against $9.3 million in debt. The companies say they intend to pay creditors in full.

Twin City said in a court filing that financial problems resulted from the recession and the Lev acquisition.

The secured lender Associated Bank is owed $8.6 million, a court filing says. Annual revenue is about $30 million.

The U.S. Trustee opposes allowing one law firm to represent both bankrupt companies, although they are both owned by Shimon Harosh and Michel Rouache. The $3.6 million that Lev owes Twin City is alleged to be “an impermissible conflict.”

The case is In re Twin City Bagel Inc., 11-36042, U.S. Bankruptcy Court, District of Minnesota (St. Paul).

Decorator Industries, Curtain Maker, Files Chapter 11

Decorator Industries Inc., a designer and manufacturer of drapes, curtains and bedspreads for the manufactured housing, hotel and health-care industries, filed for Chapter 11 protection yesterday in Fort Lauderdale, Florida.

The Cooper, Florida-based company said sales peaked at $52 million in 2006. This year, revenue is expected to be $15 million.

In a statement, the company said that being in bankruptcy will result in sufficient liquidity, so “costly” financing for the Chapter 11 case won’t be required.

Assets are more than $10 million while debt is less than $10 million, according to a court filing.

The case is In re Decorator Industries Inc., 11-37641, U.S. Bankruptcy Court, Southern District Florida (Fort Lauderdale).

Podcast

Graceway, Star Buffet, PJCOMN, Blockbuster: Bankruptcy Audio

The meager return that lenders to Graceway Pharmaceuticals LLC will realize from selling the business quickly in Chapter 11 is the first topic on the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. New restaurant filings by Star Buffet Inc. and a Papa John’s franchisee were both accompanied by statements that perhaps shouldn’t be taken at face value, for reasons Rochelle explains. The podcast wraps up by telling why investors were duped into buying shares of “old” Blockbuster Inc. as part of what may have been a pump-and-dump scheme. To listen, click here.

Advance Sheets

IRS, Like Everyone Else, Can’t Foreclose FCC License

Not even the federal government has the right to foreclose a broadcast license granted by the Federal Communications Commission, U.S. District Judge Sean McLaughlin of Erie, Pennsylvania, ruled on Sept. 30.

The case involved the Internal Revenue Service and a lien it held against a radio station for unpaid federal taxes. When the IRS sought to foreclose on the FCC license, the dispute was referred to a U.S. magistrate judge, who concluded that the government, not being the same as an ordinary lender, should be permitted to foreclose.

McLaughlin refused to adopt the magistrate’s recommended ruling. Instead, he precluded the IRS from foreclosing.

McLaughlin noted in his opinion how no federal court has ever held that a secured creditor can foreclose an FCC license. Accordingly, he ruled that the federal government can’t either.

Courts are split with regard to liens on FCC licenses. Some hold that the license itself can’t be a lender’s collateral while other courts say it’s permissible to have a lien on proceeds when the license is sold.

For a case last month where a district judge in Colorado held it was improper to have even a lien on proceeds, click here for the Sept. 6 Bloomberg bankruptcy report.

The new case is U.S. v. Corry Communications, 10-13, U.S. District Court, Western District of Pennsylvania (Erie).

Negligent Infliction of Distress Can Be Dischargeable

A state court judgment for negligent infliction of emotional distress does not automatically entitle the injured party to a ruling in bankruptcy court that the debt isn’t discharged in bankruptcy, according to a Sept. 30 opinion by U.S. District Judge Lawrence E. Kahn in Syracuse, New York.

For the debt to be non-dischargeable, it had to result from a “willful and malicious” injury. Kahn explained that under New York law, the plaintiff was only required to show that the action “unreasonably endangers the plaintiff’s physical safety or causes the plaintiff to fear for his or her physical safety.”

Since the plaintiff wasn’t required to show willfulness or maliciousness in state court, Kahn said that the pre-bankruptcy judgment was by itself insufficient to result in an automatic ruling of non-dischargeability.

Kahn sent the case back to the bankruptcy court for trial where the injured party had to show that the emotional distress was “willful and malicious.”

The case is In re Chaffee v. Chaffee, 10-1136, U.S. District Court, Northern District New York (Syracuse).

--With assistance from 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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