Bloomberg News

Lehman, Auto Loans, L.A. Dodgers, Madoff, Ambac: Bankruptcy

October 06, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Open Range and CDC Corp. in New Filings; Dodgers, Madoff, Ambac, Innkeepers, Real Mex, Philadelphia Orchestra and Bear Island in Updates; Hovnanian in Exchange Offer News; SuperMedia in Watch List; Dex One in Downgrade, and Daily Podcast section.)

Oct. 6 (Bloomberg) -- A so-called triangular setoff under a standard-form International Swaps & Derivatives Association agreement isn’t enforceable in bankruptcy, according to an Oct. 4 ruling by U.S. Bankruptcy Judge James M. Peck in the liquidation of the brokerage subsidiary of Lehman Brothers Holdings Inc.

Anyone hoping to avoid Peck’s ruling can’t succeed by fleeing to Delaware bankruptcy court, because bankruptcy and district courts in Wilmington already ruled that triangular setoffs don’t work in bankruptcy.

The $23 million dispute involved an ISDA swap agreement between the Lehman broker and UBS AG. The agreement provided that the Zurich-based bank could set off, or take, any property that the Lehman broker deposited in its account at UBS to recover on debt owing to any of the Swiss bank’s affiliates.

Peck agreed with a bankruptcy court decision from 2009 in Delaware called Chevron U.S.A. v. Semcrude LP, interpreting Section 553 of the Bankruptcy Code. The decision was upheld in April 2010 by a district court in Delaware. To read about the appellate decision, click here for the May 5, 2010 Bloomberg bankruptcy report.

Peck said that bankruptcy law requires mutuality, meaning that setoff only exists between the same two companies. A setoff to recover debt owing to an affiliate isn’t allowed by the language of the statute, Peck said.

Even though a triangular setoff may be permissible under state law, it doesn’t work in bankruptcy because “the Bankruptcy Code imposes its own strict requirements,” Peck said. Peck ruled parties cannot create mutuality by contract.

Peck rejected UBS’s argument under the so-called safe harbor for swap agreements under Section 561 of the Bankruptcy Code. He said that setting off under a swap agreement is permissible even after bankruptcy, although only if the right of setoff exists in the first place. Because there was no right of setoff in the first place, there was nothing for the safe harbor to protect.

Peck based his ruling on Section 561 in part on his prior decision in a Lehman dispute involving Swedbank BA. Peck’s Swedbank ruling was upheld in February by a U.S. district judge. To read about the Swedbank opinion, click here for the Feb. 28 Bloomberg bankruptcy report.

Outside of bankruptcy, Peck said that companies “are free to agree to pretty much anything.” After bankruptcy, though, the rights of other creditors come into play. If a triangular setoff were permitted, the Lehman broker’s other creditors would be $23 million worse off.

If UBS and ISDA don’t succeed on appeal, they could turn to Congress and lobby for a change in the Bankruptcy Code. Having bankruptcy law amended isn’t impossible given how Congress has often expanded safe harbor provisions to protect financial institutions.

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).

New Filings

Wireless Provider Open Range Files to Sell or Liquidate

Open Range Communications Inc., a provider of wireless broadband services to 26,000 rural customers in 12 states, filed a Chapter 11 petition today in Delaware, saying it would either sell the business or shut down and liquidate.

The company listed assets of $114 million and liabilities of $110 million. Secured debt includes $74 million owing to the U.S. Agriculture Department’s Rural Utilities Services. Unsecured claims are $36 million, a court filing says.

Revenue of $1.7 million in 2010 resulted in an operating loss of $50.4 million. The business has been funded partly with $41 million in equity contributions from One Equity Partners LLC.

Open Range, based in Greenwood Village, Colorado, blamed financial problems on substandard equipment provided by a vendor and difficulties in maintaining licenses for wireless spectrum required for the system.

The case is In re Open Range Communications Inc., 11-13188, U.S. Bankruptcy Court, District of Delaware (Wilmington).

CDC Corp. Files in Atlanta to Fend Off $65.4 Million Judgment

CDC Corp., a China-based enterprise-software developer also known as Chinadotcom, filed for Chapter 11 protection on Oct. 4 in Atlanta to fend off a $65.4 million judgment in favor of Evolution CDC SPV Ltd. and others.

The filing was a so-called bare-bones petition where little more was filed by yesterday evening aside from the printed form and a list of creditors and shareholders. Subsidiaries didn’t file.

The plaintiff in the suit won an order from the New York state trial court in September preventing CDC from transferring assets.

The petition and the last financial statements list assets at $377.4 million and debt at $250.2 million. For the first half of 2011, revenue of $158.9 million resulted in a $17.8 million operating loss and a $23.9 million net loss.

CDC fell 45 cents in Nasdaq Stock Market trading yesterday to close at 42 cents a share. The three-year closing high was $10.95 on July 27, 2009.

The case is In re CDC Corp., 11-79079, U.S. Bankruptcy Court, Northern District of Georgia (Atlanta).

Pure Beauty Salons Returns to Chapter 11 in Delaware

Pure Beauty Salons & Boutiques Inc. is back in Chapter 11 after having been sold out of Chapter 11 last year. The company has 436 mall-based locations operating beauty salons and retailing hair-care products.

The proposal is for former owner Regis Corp. and an affiliate of a Luborsky family trust to purchase the business in exchange for $32.5 million in debt held by Regis and the assumption of about $13 million in liabilities. The two buyers were also involved in the prior Chapter 11 sale.

Trade suppliers are owed about $15 million, a court paper says.

The petition says assets and debt are both less than $50 million.

The prior case was dismissed after the sale was completed.

The case is In re Pure Beauty Salons & Boutiques Inc., 11- 13159, U.S. Bankruptcy Court, District of Delaware (Wilmington). The previous case was In re Trade Secret Inc., 10-12153, in the same court.

Brooklyn Mixed-Use Building Files in Manhattan

The owner of a 13-story mixed-use building on Clinton Avenue in Brooklyn filed for Chapter 11 protection yesterday in Manhattan, claiming the property is worth about $17 million.

Mortgages are some $42.3 million. The primary secured creditor is TD Banknorth.

The bankrupt company also owns a two-story commercial building on Waverly Avenue in Brooklyn.

The case is In re Clinton Court Development LLC, 11-14673, U.S. Bankruptcy Court, Southern District New York.


U.S. Supreme Court Won’t Settle Split on Auto-Loan Case

Whether the so-called negative equity on a previously-owned auto must be paid in full as a condition to keeping the newer car after bankruptcy is an issue that won’t be decided this year by the U.S. Supreme Court.

The high court in Washington decided on Oct. 3 not to resolve a split among the circuit courts of appeal.

The U.S. Court of Appeals in San Francisco, departing from other eight circuits to consider the issue, ruled in July 2010 that negative equity on a previously owned auto is not part of a purchase money security interest and need not be paid to retain the newer auto.

Over a dissent by four circuit judges, the entire Court of Appeals for the 9th Circuit in San Francisco decided earlier this year not to rehear the case. The dissenters argued that the majority on the circuit court interpreted the Bankruptcy Code “to mean the exact opposite of what the plain language says.”

The lender, who lost in the court of appeals, filed a petition in May for review by the Supreme Court. For a discussion of the issue and the 9th Circuit’s July 2010 opinion, click here for the July 19, 2010 Bloomberg bankruptcy report.

The Supreme Court already accepted one bankruptcy case for the term that began this month. The case, called Hall v. U.S., involves the tax treatment of property sold after bankruptcy by so-called family farmers in Chapter 12. To read about the Chapter 12 case, click here for the June 14 Bloomberg bankruptcy report.

The auto-loan case in the Supreme Court is AmeriCredit Financial Services Inc. v. Penrod (In re Penrod), 10-1443, U.S. Supreme Court. The Circuit Court’s July 2010 opinion is AmeriCredit Financial Services Inc. v. Penrod (In re Penrod), 08-60037, 9th U.S. Circuit Court of Appeals (San Francisco). To read the dissent on the motion for rehearing, click here.

Dodgers May Not Have Evidence from Other Baseball Clubs

Although the Los Angeles Dodgers baseball club weren’t given a definitive answer, the bankruptcy judge said at a hearing yesterday that he isn’t inclined to revise his earlier ruling and allow the team to explore the Major League Baseball commissioner’s treatment of other clubs.

U.S. Bankruptcy Judge Kevin Gross said he will file a formal written opinion in a few days.

On Sept. 30, Gross said that the trial to begin Oct. 31 and investigations in advance will only deal with the Dodgers and not with other teams. The Dodgers responded by arranging yesterday’s hearing where they argued the restriction would preclude them from showing a course of dealing to demonstrate that the commissioner acted in bad faith by turning down an agreement to sell future television broadcasting rights.

For Bloomberg coverage of yesterday’s hearing, click here.

At the trial, Gross 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 through Nov. 4, click here for the Oct. 3 Bloomberg bankruptcy report.

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).

UniCredit Argues for Dismissal of $59 Billion Madoff Suit

UniCredit SpA and subsidiary UniCredit Bank Austria AG argued their motion yesterday before U.S. District Judge Jed Rakoff for dismissal of five counts from the $59 billion complaint by the trustee liquidating Bernard L. Madoff Investment Securities Inc.

The Madoff trustee was attempting to convince Rakoff that the reasons he dismissed the largest part of a separate $9 billion suit against HSBC Holdings Plc don’t apply to UniCredit. For Bloomberg coverage of yesterday’s hearing, click here.

The trustee’s suit contends that Bank Medici AG and Sonja Kohn, its founder, worked in tandem with Madoff going back to at least the mid-1980s. The trustee alleges that Kohn and her bank funneled more than $9 billion into Madoff through foreign investment funds.

For details on the issues argued at yesterday’s hearing, click here for the Sept. 14 Bloomberg bankruptcy report.

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 UniCredit case in district court is Picard v. Kohn, 11- 1181, U.S. District Court, Southern District of New York (Manhattan).

The liquidation in bankruptcy court in 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, Southern District of New York (Manhattan).

Ambac Plan Headed for Voting and Confirmation Hearing

Ambac Financial Group Inc. overcame opposition from stockholders and received approval of the disclosure statement from the bankruptcy judge at a hearing yesterday.

Creditors can begin voting on the reorganization plan now that they will be receiving the disclosure statement explaining how much they should receive and why.

The confirmation hearing for approval of the plan is set for Dec. 8. For Bloomberg coverage of the hearing, click here.

Bringing the plan to confirmation resulted from a settlement reached through mediation with the Wisconsin commissioner of insurance.

The revised plan offers new stock to holders of senior notes, to be shared with general unsecured creditors. If senior noteholders accept the plan, unsecured creditors also will receive warrants. If all classes accept, holders of subordinated debt will be given new shares and warrants.

The recovery on the senior notes will range between 11.4 percent and 17.6 percent, according to the disclosure statement. For unsecured creditors, the recovery should be 8.5 percent to 13.2 percent. Subordinated noteholders should see 0.5 percent to 0.8 percent, the disclosure statement predicts.

The official unsecured creditors’ committee supports the plan. For details on the prior version of the plan, click here for the July 11 Bloomberg bankruptcy report.

Ambac’s insurance subsidiary stopped paying dividends to the parent in 2007 and stopped writing new business entirely in mid-2008. The subsidiary is partially in rehabilitation in Wisconsin. Disagreements with the commission over the sharing of tax benefits held up a plan for the holding company.

The Ambac parent filed under Chapter 11 in November listing assets of $90.7 million and liabilities exceeding $1.6 billion, virtually all unsecured. Almost all the debt is made of up $1.62 billion owing on seven note issues. One issue for $400 million is subordinated.

The parent’s Chapter 11 case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The state insurance rehabilitation case is In re The Rehabilitation of Segregated Account of Ambac Assurance Corp., 2010cv001576, Dane County, Wisconsin, Circuit Court (Madison).

Innkeepers Panel Given Some Rights in Cerberus Trial

The creditors’ committee for Innkeepers USA Trust was given a limited right by the bankruptcy judge to participate in the trial beginning on Oct. 10 that will pit the hotel owner against Cerberus Capital Management LP and Chatham Lodging Trust.

In the trial, Innkeepers will try to prove that Cerberus and Chatham breached a contract and violated the confirmed Chapter 11 plan when they terminated an agreement to purchase 64 hotels for $1.12 billion. The judge is allowing the committee to take part in the trial, although the creditors don’t have the right to settle or bring claims.

Innkeepers wants the judge to force the two buyers to complete the acquisition. Cerberus and Chatham answer by saying they were entitled to terminate by the decline in the hospitality industry. Even if they shouldn’t have terminated, Innkeepers’ only recourse is to keep the $20 million deposit, the buyers say. For some of the issues to be decided by the judge, click here for the Oct. 4 Bloomberg bankruptcy report.

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.

Real Mex Wins $25 Million Interim-Loan Approval

Real Mex Restaurants Inc., the operator of a chain of Mexican-food restaurants, filed for Chapter 11 reorganization on Oct. 4 and was given interim authority yesterday to borrow $25 million.

At a final financing hearing Nov. 3, Real Mex will pursue approval of the entire $49 million loan. For Bloomberg coverage of yesterday’s hearing, click here.

Real Mex, based in Cypress, California, operates 178 stores under the names El Torito Restaurants, Acapulco Mexican Restaurants and Chevys Fresh Mex. It intends to close 12, plus 40 more unless landlords make concessions. Real Mex acquired Chevys Inc. for $90 million through confirmation of Chevy’s Chapter 11 plan in 2004.

Real Mex plans to auction the business in about three months. There have been discussions with some holders of the $130 million in second-lien notes, who may become the so-called stalking horse bidder at auction, the company said.

Real Mex is controlled by funds affiliated with Boca Raton, Florida-based Sun Capital Partners Inc. Assets are $272.2 million while debt totals $250 million, according to the petition.

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

Orchestra Pension Fund Out to Show No Valid Trust Fund

The union pension fund for Philadelphia Orchestra musicians is hot on the trail of documents from 15 patrons to prove that money in the endowment fund can be used to pay unsecured claims.

The pension fund recited in court papers how the orchestra has said all along that it intends to terminate the pension plan and that the resulting claim will be some $23 million. The pension plan says it will be the largest unsecured creditor.

The pension fund has already receive documents from the orchestra about gifts and whether they were restricted to particular uses so they can’t be used to pay claims. The pension fund is now after documents from donors to see how they intended for their gifts to be used.

Not-for-profit institutions that end up in bankruptcy court sometimes learn that money they thought was restricted isn’t in the eyes of the law because it wasn’t properly handled. In the bankruptcy reorganization of the Diocese of Wilmington, creditors won a ruling from the bankruptcy judge that about $75 million wasn’t properly held in trust and therefore was available to pay sexual-abuse claims.

The pension fund filed papers in bankruptcy court on Oct. 4 seeking authority from the judge to compel the donors to turn over documents about their gifts. For other Bloomberg coverage, click here.

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).

Bear Island Plan Goes to Creditors for Vote, Sale not Complete

Bear Island Paper Co., a subsidiary of Canada’s White Birch Paper Co., scheduled a Nov. 22 confirmation hearing for approval of the liquidating Chapter 11 plan when the U.S. Bankruptcy Judge in Richmond, Virginia, approved the disclosure statement.

First- and second-lien creditors with $424.9 million and $105 million in claims, respectively, are being told to expect a recovery of 0.5 percent to 4 percent. Unsecured creditors with $1.4 million in claims are to receive the same dividend.

Bear Island was authorized by the bankruptcy judge in November to sell the business to a group consisting of Black Diamond Capital Management LLC, Credit Suisse Group AG and Caspian Capital Advisors LLC. For details on the sale and a breakdown on the assets and liabilities, click here for the Feb. 3 Bloomberg bankruptcy report.

The sale is yet to be completed Negotiations continue with a union representing workers in Canada.

Based in Nova Scotia, White Birch and U.S. subsidiaries filed for reorganization simultaneously in the U.S. and Canada in February 2010. White Birch is the second-largest newsprint maker in North America.

The case is In re Bear Island Paper Co., 10-31202, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

Centaur Implements Plan Confirmed in February

Although Centaur LLC needed more than seven months to complete the process, the casino and racetrack operator implemented the bankruptcy reorganization plan on Oct. 1 that the U.S. Bankruptcy Court approved in a Feb. 18 confirmation order.

The creditors’ committee settled with secured lenders in December, allowing the plan to go through. For details on the plan, click here for the Feb. 22 Bloomberg bankruptcy report.

Before confirmation, the bankruptcy judge approved sale of the new equity to American Harness Tracks LLC. The acquisition couldn’t officially go into effect until the plan was implemented. For more on the revised plan, click here for the Dec. 14 Bloomberg bankruptcy report.

Centaur LLC and 12 affiliates filed Chapter 11 petitions in March 2010. Affiliates Centaur PA Land LP and Valley View Downs LP had filed for bankruptcy reorganization in October 2009 to keep a project alive in Pennsylvania. All the companies are subsidiaries of privately-owned Centaur Inc., which is not in bankruptcy.

They entered Chapter 11 owning Hoosier Park, a casino and horse racetrack, in Anderson, Indiana, along with three off- track betting parlors in Indiana. Fortune Valley Hotel & Casino in Central City, Colorado, was sold. The companies generated revenue of $277.5 million in 2009.

The newer case is Centaur LLC, 10-10799, and the first case was In re Centaur PA Land LP, 09-13760, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Townsends Chapter 11 Switched on Consent to Chapter 7

Townsends Inc., the name the chicken producer used before selling the business, was granted its wish when the bankruptcy judge in Delaware signed an order on Oct. 4 converting the Chapter 11 case to a liquidation in Chapter 7 where a trustee will be appointed automatically.

The conversion is to take effect Oct. 13.

The asset sale was completed in February for $76.4 million, not leaving enough behind to warrant even an attempt at confirming a liquidating Chapter 11 plan, the company said.

Based in Georgetown, Delaware, family-owned Townsends had capacity to produce 700 million pounds of poultry a year and 1.3 million eggs a week. The four production facilities were in Arkansas and North Carolina.

Townsends listed assets of $131 million and liabilities of $127 million. Liabilities included $20.7 million owing to secured lenders on a term loan and $40 million on a revolving credit. Twelve-month revenue was $504 million. Townsends contracted with over 300 growers who operated 1,200 chicken houses.

The case is In re TW Liquidation Corp., 10-14092, U.S. Bankruptcy Court, District of Delaware.

Oregon Newspaper Has Final Approval for Cash Collateral Use

Western Communications Inc., the publisher of the Bend Bulletin and five other newspapers in Oregon, received final authorization from the bankruptcy judge yesterday to use cash through May, unless there’s a default in the meantime.

The cash represents collateral for the secured lender Bank of America NA.

Western filed for Chapter 11 protection in August in Portland, Oregon, saying assets and debt both exceed $10 million. The bank called the loan in default for violation of covenants in early 2009.

The newspapers blamed the filing on the “poor real estate market.”

The case is In re Western Communications Inc., 11-37319, U.S. Bankruptcy Court, District of Oregon (Portland).

Exchange Offer News

Hovnanian Has Exchange Offer S&P Calls Distressed

Homebuilder Hovnanian Enterprises Inc. announced a private exchange offer at the end of September to some holders of $814 million in seven series of senior unsecured notes. Standard & Poor’s characterizes the exchange as distressed.

Holders can swap existing notes, bearing interest between 6.25 percent and 11.875 percent, for a like amount of 2 percent secured notes to mature in 2021. The existing notes mature between 2014 and 2017.

S&P reduced the corporate rating to CC, on top of a downgrade in June when the grade went to CCC. Liquidity is “less than adequate,” S&P said. Previously, S&P said that profitability is “unlikely” through 2012.

The Red Bank, New Jersey-based company reported a $187.7 million net loss for the nine months ended July 31 on revenue of $793.3 million. For the fiscal year ended in October 2010, revenue of $1.37 billion translated into a $295 million loss before tax benefits and $2.6 million of net income.

The $137.6 million in 11.875 percent senior unsecured bonds maturing in October 2015 traded on Oct. 4 at 42.5 cents on the dollar. On Sept. 8, the same bonds fetched 58.7 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Hovnanian closed yesterday at $1.10, down 1 cent a share in New York Stock Exchange Trading. The three-year high was $7.99 on May 3, 2010. The low in the period was 58 cents on March 6, 2009.

Watch List

Reorganized SuperMedia Sales Declining by Double Digits

Recently reorganized SuperMedia Inc. has revenue that “will continue to decline at a double digit rate for the foreseeable future,” Moody’s Investors Service said yesterday while lowering the corporate grade by one notch to Caa1.

Moody’s is concerned that SuperMedia, the second-largest yellow pages publisher in the U.S., won’t be able to transition to online advertising from print “quickly enough to stabilize the revenue base over the intermediate term.”

For now, liquidity is “good,” Moody’s says.

For the six months ended in June, SuperMedia, based near Dallas/Fort Worth International Airport, reported net income of $59 million on revenue of $859 million.

Then named Idearc Inc., the company was a subsidiary of Verizon Communications Inc. until it was spun off in 2006. The reorganization plan was mostly worked out before the Chapter 11 filing in March 2009.

The plan, which reduced debt to $2.75 billion from $9 billion, was implemented in January 2010. Creditors from the Chapter 11 case are now suing Verizon.

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).


Dex One, Reorganized Yellow-Page Publisher, Down to B3

Yellow-page publisher Dex One Corp., known as R.H. Donnelley Corp. before emerging from bankruptcy reorganization in early 2010, was downgraded yesterday by Moody’s Investors Service after revenue declined 15 percent in the second quarter from the year before.

Moody’s moved the corporate grade two notches lower to B3. Moody’s said it has “doubts” about whether Dex can transition to online advertising from print “quickly enough to stabilize its revenues and earnings.”

Liquidity for now is “good,” Moody’s said.

The 12 percent senior unsecured notes due 2017 traded yesterday at 21 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The shares rose 12 cents yesterday to close at 48 cents in New York Exchange composite trading.

The Chapter 11 plan, negotiated before the bankruptcy filing in May 2009, reduced debt by $6.4 million. The plan gave all the new stock and $300 million in unsecured notes to holders of $6.33 billion on 11 issues of unsecured notes.

For the six months ended June 30, Dex reported a $769.9 million net loss after a $801.1 million asset-impairment charge. Revenue in the period was $768.5 million.

The Chapter 11 case was In re R.H. Donnelley Corp., 09- 11833, U.S. Bankruptcy Court, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Daily Podcast

L.A. Dodgers, Real Mex, Innkeepers, Bagels: Bankruptcy Audio

The Los Angeles Dodgers baseball club may be giving a signal to the bankruptcy judge that he will commit reversible error if he limits the team’s ability to prove that the commissioner of Major League Baseball acted in bad faith, as explained in the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. Real Mex Restaurants Inc. is the latest addition to the growing list of restaurant chains to need bankruptcy reorganization. Rochelle gives odds on who comes out in top in the trial to begin Oct. 10 pitting Innkeepers USA Trust against Cerberus Capital Management LP and Chatham Lodging Trust. In reporting filings by Twin City Bagel Inc. and Lev Bakery Inc., the podcast closes by asking where good bagels can be found outside New York. To listen, click here.

Advance Sheets

Homestead Limit Doesn’t Make Judgment Enforceable

A creditor with a pre-bankruptcy judgment lien doesn’t automatically have a secured claim in proceeds from the sale of a homestead in excess of the homestead exemption, the U.S. Court of Appeals in New Orleans ruled on Oct. 4.

The case involved an individual saddled with a pre- bankruptcy judgment for $538,000. The judgment was recorded before bankruptcy and became a lien on the home. After bankruptcy, the owner sold the homestead with approval from the court and the Chapter 7 trustee, generating over $500,000 in proceeds in excess of the mortgage.

The judgment creditor claimed to have a valid lien in the net proceeds in excess of the $125,000 limitation on the homestead exemption in Section 522(p) of the Bankruptcy Code.

Circuit Judge Priscilla R. Owen rejected the argument. She read from Texas law where a judgment lien creditor cannot enforce a lien against a homestead. Therefore, Owen said that the lien likewise was unenforceable against the property after bankruptcy.

She explained that Section 522(p) limits the amount of a bankrupt’s exempt interest in property. The section “does not speak” to the judgment creditor’s interest in the property.

Owen ruled that the lienholder “does not have a right specifically enforceable in the excess proceeds.” Nonetheless, Owen said that the appeals court was not ruling on whether the creditor “has an otherwise enforceable interest in the estate.”

The case was returned to the bankruptcy court for further proceedings.

The case is Smith v. HD Smith Wholesale Drug Co. (In re McCombs), 08-20171, U.S. 5th Circuit Court of Appeals (New Orleans).

False Invoice Not Equivalent to False Financials

An arbitrator made award against a contractor for issuing false invoices. The arbitrator found that the contractor’s conduct amounted to “fraud and deceptive practices.”

Nonetheless, the arbitration award didn’t make the underlying debt automatically non-dischargeable under Section 522(a)(2)(B) of the Bankruptcy Code, according to a Sept. 30 opinion by U.S. District Judge Martin Reidinger from Asheville, North Carolina.

The district judge ruled that the debt was dischargeable because it was based on the issuance of false invoices. Reidinger said that false invoices don’t qualify as a false statement about the contractor’s financial condition as required by subsection (2)(B).

On remand, Reidinger instructed the bankruptcy judge to decide whether the creditor had waived the right to allege the debt was non-dischargeable under subsection (2)(A) as money obtained by actual fraud or false pretenses.

The case is Green v. Bashor (In re Bashor), 10-195, U.S. District Court, Western District North Carolina (Asheville).

--With assistance from Tiffany Kary and Bob Van Voris in New York and Dawn McCarty, Steven Church and Michael Bathon in Wilmington, Delaware. Editors: John Pickering, Mary Romano

To contact the reporter on this story: Bill Rochelle in New York at

To contact the editor responsible for this story: John Pickering at

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