Bloomberg News

MSR Resorts, Madoff, Innkeepers Trust, Solyndra: Bankruptcy

October 11, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Specialty Products and November 2005 in Updates and JK Harris in New Filings.)

Oct. 11 (Bloomberg) -- The five resorts foreclosed in January by Paulson & Co. and Winthrop Realty Trust reached agreement with a mezzanine lender affiliated with MetLife Inc. that would permit the Chapter 11 reorganization to continue into September 2012.

Last month the resorts reached an interim agreement with Government of Singapore Investment Corp., the holder of $360 million in mezzanine debt. The Singapore investment fund had been demanding a quick conclusion to the Chapter 11 process begun early this year. The resorts wanted a lengthy reorganization to restructure the business, not a short Chapter 11 case simply adjust the balance sheet.

Along the lines of the Singapore settlement, the resorts agreed to pay MetLife accrued interest on Dec. 15 and to keep interest payment current thereafter. Interest will accrue at the non-default rate until September 2012 and at the higher default rate later. When the Chapter 11 case is concluded, the resorts will pay MetLife’s expenses in connection with the bankruptcy.

In return, MetLife won’t object to an extension of the resort’s exclusive right to propose a Chapter 11 plan until September 2012. The resorts’ motion for longer exclusivity is scheduled for hearing today.

For details on the Singapore settlement, click here for the Sept. 22 Bloomberg bankruptcy report.

The resorts have a letter of intent to sell the Doral Golf Resort and Spa in Miami for $170 million. There will be an auction in search of higher offers. The owners believe that the offer implies a value for all the resorts “significantly” exceeding the $1.5 billion in debt.

Paulson and Winthrop foreclosed mezzanine loans on five resorts in January and put them into Chapter 11 in February. The filing forestalled maturity of $1 billion in mortgages and $525 million in mezzanine debt.

After the Doral sale, the remaining resorts would be the Grand Wailea Resort Hotel and Spa in Hawaii; the La Quinta Resort and Club and the PGA West golf course in La Quinta, California; the Arizona Biltmore Resort and Spa in Phoenix; and the Claremont Resort & Spa in Berkeley, California. Including Doral, the resorts have 14 golf courses.

Morgan Stanley’s CNL Hotels & Resorts Inc. owned the resorts before the Jan. 28 foreclosure.

The properties listed assets of $2.2 billion and liabilities of $1.9 billion. New York-based Morgan Stanley purchased the five resorts in 2007 for $4 billion. Revenue in 2010 was $465 million.

The case is In re MSR Resort Golf Course LLC, 11-10372, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Updates

Madoff Trustee Seeks Quick Appeal on Wilpon Ruling

The trustee liquidating Bernard L. Madoff Investment Securities Inc. took the first step necessary for appealing a ruling on Sept. 27 by U.S. District Judge Jed Rakoff that had the effect of limiting recoveries in 900 lawsuits where the trustee is attempting to take back fictitious profits received by Madoff customers.

In last month’s opinion, Rakoff ruled that Irving Picard, the Madoff trustee, is only permitted to sue for recovery of fictitious profits taken out within two years before bankruptcy. He dismissed the trustee’s claims going back six years. Rakoff also dismissed the trustee’s preference claims.

Rakoff’s ruling was made in the trustee’s $1 billion lawsuit against Mets owner Fred Wilpon along with Wilpon’s friends, family and associates. The trustee said Rakoff’s opinion has the effect of reducing his recovery to a maximum of about $400 million.

The trustee doesn’t have the right to an immediate appeal to the U.S. Court of Appeals because the Sept. 27 ruling didn’t wrap up the entire Wilpon lawsuit. To take the issues up on appeal without delay, Picard filed papers on Oct. 7 asking Rakoff to grant permission for an immediate appeal and not require waiting until the entire lawsuit is completed.

The trustee contends that an immediate appeal is justified because the case involves controlling issues of law that affect 900 suits against customers.

Picard says Rakoff erred by ignoring mandates from the U.S. Court of Appeal which ruled in the Madoff case that fictitious entries in account statement were to be ignored when calculating claims. The trustee says that Rakoff’s opinion in September gave “legal effect” to Madoff’s “machination” by dismissing claims beyond two years under the so-called safe harbor in bankruptcy law.

The trustee argues that the safe harbor doesn’t apply because the account statement didn’t reflect bona fide transactions in securities. Picard contends that “every other court to consider the issue” didn’t invoke the safe harbor “to shield transfers made in furtherance of a pure fiction.” In support of his argument, the trustee points to decisions from the U.S. Courts of Appeal in San Francisco and New Orleans.

The Madoff trustee also contends that Rakoff applied an unjustifiably high standard he must meet before defeating customers’ contentions that they were in good faith and not required to disgorge payments.

Picard and the Securities Investor Protection Corp. point to an opinion in another Madoff case by Kimba M. Wood, another district judge in New York, who would permit suits going back six years and use a lower standard for defeating the good faith defense. For a summary of Wood’s opinion, click here for the Sept. 7 Bloomberg bankruptcy report.

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

For a rundown on Rakoff’s Sept, 27 opinion, click here for the Sept. 28 Bloomberg bankruptcy report. For other Bloomberg coverage of the trustee’s request for an immediate appeal, click here.

Several investors in so-called feeder funds appealed a ruling by the bankruptcy court that they don’t have claims against the Madoff firm. For Bloomberg coverage, click here.

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).

Innkeepers, Cerberus, Chatham Near Settlement on Acquisition

Innkeepers USA Trust had been scheduled to begin a trial today alleging that Cerberus Capital Management LP and Chatham Lodging Trust breached a contract to buy 64 hotels for $1.12 billion. Instead, the parties negotiated over the weekend and reached tentative settlement where the hotels will be sold for a lesser amount, according to two people with knowledge of the discussions.

Commencement of the trial was pushed back one day and theoretically will begin today absent settlement. Details on the settlement weren’t provided. For Bloomberg coverage, click here.

Cerberus and Chatham argue they were entitled to terminate the contract given a material adverse change in the lodging industry. Innkeepers responded by saying that the contract only permits termination for deterioration in its business, not in the industry as a whole. The buyers also contend their liability for breach is capped at $20 million.

Cancellation of the contract by Cerberus and Chatham precluded Innkeepers from implementing 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.

Solyndra No Longer Threatened with Quick Liquidation

Solyndra LLC, the bankrupt solar panel maker, is no longer faced with having its bankruptcy reorganization converted to a liquidation under the aegis of a trustee appointed in Chapter 7.

The U.S. Trustee, who initially sought either the appointment of a Chapter 11 trustee or conversion of the case to Chapter 7, dropped the idea of having the case converted immediately to liquidation to Chapter 7, according to an Oct. 7 filing in U.S. Bankruptcy Court in Delaware.

The U.S. Trustee will go ahead at the Oct. 17 hearing with her request for a trustee in Chapter 11 who would oust management while the quest for reorganization continues. The Justice Department’s bankruptcy watchdog sought a Chapter 11 trustee a week after top company executives invoked their Fifth Amendment rights and refused to answer questions posed by a Congressional committee. For details on the U.S. Trustee’s motion, click here for the Oct. 3 Bloomberg bankruptcy report.

If the bankruptcy judge concludes that a Chapter 11 trustee isn’t necessary, she is required by bankruptcy law to appoint an examiner. A bankruptcy judge can control the scope of an investigation by an examiner by imposing a small budget or requiring a report to be filed quickly.

Opposing papers on the motion for a trustee are due today.

Solyndra filed for Chapter 11 reorganization on Sept. 6 and was raided two days later by the FBI. Operations halted in late August. The startup business was financed in part with a $535 million loan guaranteed by the U.S. government.

Based in Fremont, California, Solyndra 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 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, halting 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.)

Specialty Products Denied Information from Law Firms

Specialty Products Holding Corp. and Bondex International Inc., fending off asbestos claims in bankruptcy court, once again came up short in an effort at obtaining information about payments on asbestos claims in other bankruptcies. The companies are subsidiaries of RPM International Inc.

Yesterday, U.S. Bankruptcy Judge Judith K. Fitzgerald denied the companies’ request to obtain information from law firms about recoveries their clients made against other companies. Fitzgerald previously rebuffed the companies when they sought information from asbestos trusts created in other Chapter 11 cases.

The companies wanted the information in part to prove they settled claims before bankruptcy at inflated prices. Fitzgerald said the sought-after information wouldn’t be available in ordinary lawsuits.

Fitzgerald also cited the asbestos case of Garlock Sealing Technologies LLC where the bankruptcy judge in Charlotte, North Carolina, denied a similar request.

Fitzgerald refused to allow the companies to take an appeal from the denial of other information requests. She did permit the companies to obtain information about their diseases from individuals who filed claims in the Chapter 11 case.

The companies for a third time are requesting an expansion of the exclusive right to propose a Chapter 11 plan. If granted at a Nov. 21 hearing, the new deadline would be Nov. 30. The companies can’t have exclusive plan-filing rights beyond Nov. 30 because they will by then have been in Chapter 11 for 18 months, the longest exclusivity Congress allows.

The companies filed under Chapter 11 in May 2010 to create a trust taking over liability for 10,000 asbestos claims. Affiliates not in bankruptcy also would be relieved of liability if the proposed reorganization succeeds. A provision in bankruptcy law just for asbestos cases allows companies not in bankruptcy to make contributions to a claimants’ trust and thereby receive releases from claims.

Non-bankrupt subsidiaries of Specialty Products generate approximately $330 million in annual revenue, the companies said at the outset. Bondex, which is no longer operating, is a Specialty Products subsidiary that is chiefly responsible for the asbestos claims from a company acquired in 1966 named Reardon Co. Medina, Ohio-based RPM previously listed consolidated assets of $3.12 billion and $1.834 billion in liabilities. The Specialty Products and Bondex Chapter 11 petitions both said assets and debt exceed $100 million.

The case is In re Specialty Products Holding Corp., 10- 11780, U.S. Bankruptcy Court, District of Delaware (Wilmington).

North Las Vegas Project Set for Dec. 12 Auction

A part owner in the Park Highlands master-planned community in North Las Vegas was authorized last week by the bankruptcy judge to sell the assets at auction on Dec. 12. Bids are initially due Dec. 8. A hearing to approve the sale is set for Dec. 13.

The company filed under Chapter 11 in July, less than two years after confirming a Chapter 11 plan.

The 2,675-acre project was purchased from the U.S. Bureau of Land Management in 2005.

The new petition says assets are less than $50 million while debt exceeds $100 million.

The new case is In re November 2005 Land Investors LLC, 11- 20704, U.S. Bankruptcy Court, District of Nevada (Las Vegas). The prior case, with the same name in the same court, was 09- 17474.

New Filings

JK Harris, IRS Problem Solver, Files in Chapter 11

JK Harris & Co. LLC, a provider of services to help individuals with Internal Revenue Service problems, filed for Chapter 11 protection yesterday in Charleston, South Carolina, listing assets of $4.9 million against debt totaling $30.9 million.

The Goose Creek, South Carolina-based company on its Web site says it provides services to consumers through 325 locations in 43 states. There are 186 employees, a court filing says.

The company filed in Chapter 11 to halt a court hearing in Texas where the state attorney general was seeking appointment of a receiver to take over operations in that state on account of the company’s failure to pay $1.1 million in settlement of consumer claims, according to a story in the Post and Courier from Charleston, South Carolina.

The case is In re JK Harris & Co. LLC, 11-06254, U.S. Bankruptcy Court, District of South Carolina (Charleston).

Barnwell County Hospital Files in South Carolina

Barnwell County Hospital in South Carolina filed for municipal reorganization under Chapter 9 on Oct. 5 in Columbia, South Carolina.

The hospital is licensed for 53 beds, although only 31 are currently operating. It also operates three rural health clinics in southwestern South Carolina.

The hospital said it filed because the county said it’s no longer willing or able to fund losses.

Revenue of $11.8 million over the first seven months of 2011 resulted in a $1 million loss, a court filing says.

The hospital has no bonded debt, a court paper says.

Assets and debt are both less than $10 million, the petition says.

The case is In re Barnwell County Hospital, 11-06207, U.S. Bankruptcy Court, District of South Carolina (Columbia).

Daily Podcast

Madoff, Washington Mutual, Ending a Business: Bankruptcy Audio

Bernard L. Madoff Investment Securities LLC wasn’t really a Ponzi scheme, according to a customer’s lawyer whose strategy is discussed on the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. Who won and who lost at last week’s Washington Mutual Inc. hearing is analyzed. The podcast ends explaining how owners of a small business made matters worse for themselves by dissolving the corporation without notice to creditors. To listen, click here.

Advance Sheets

Insured’s Bankruptcy Doesn’t Let Insurer Off the Hook

Rhode Island public policy doesn’t permit an insurance company to escape liability as the consequence of the bankruptcy of an insured, the U.S. Court of Appeals in Boston ruled on Oct. 7.

The case involved a personal injury lawsuit brought by owners of a mobile home where the manufacturer went bankrupt. The manufacturer was self-insured for the first $500,000 in damages. The insurance company covered claims above $500,000 for each occurrence.

The owners sued the insurance company in federal court under diversity of jurisdiction. The district court dismissed the suit, saying that the insurance company had no liability because the bankrupt company hadn’t paid $500,000. The owners contended that their damages would be an unspecified amount exceeding $500,000.

The 1st Circuit in Boston reversed, although they found no cases on point from Rhode Island courts interpreting state law.

The Circuit Court analyzed analogous Rhode Island law and concluded it would violate state public policy to allow the insurance company to escape liability because the bankrupt manufacturer wasn’t in a position to pay $500,000.

The appeals court ruled that the lawsuit should survive, with the insurance company liable for damages exceeding $500,000.

The case is Rosciti v. Insurance Co. of the State of Pennsylvania, 10-2087, U.S. 1st Circuit Court of Appeals (Boston).

--With assistance from Linda Sandler, Cristina Alesci and Tiffany Kary in New York; and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: John Pickering, Fred Strasser.

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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