Bloomberg News

Harrisburg, Madoff, Ambac, Old GM, Friendly: Bankruptcy

October 14, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Friendly Ice Cream and adds Harrisburg as first item, Madoff item on Lautenberg appeal, Ambac and Old GM in Updates and sections on Daily Podcast and Advance Sheets.)

Oct. 14 (Bloomberg) -- Harrisburg could be tossed out of bankruptcy in just a few days. Mayor Linda D. Thompson filed papers in bankruptcy court just before midnight last night requesting an emergency hearing to dismiss the case as an unauthorized filing.

A lawyer, purporting to represent Pennsylvania’s capital, sent the bankruptcy petition by fax to the bankruptcy court at about 10:30 p.m. on Oct. 11. With the city in bankruptcy two days, Thompson submitted her papers to the bankruptcy judge saying the petition was “filed without requisite authority” and “must be dismissed.”

Thompson said her lawyers will file a formal dismissal motion “shortly.” In the meantime, she wants the judge to set up a conference quickly to schedule an emergency motion for dismissal of the bankruptcy.

The city council voted 4-3 on Oct. 11 to authorize the Chapter 9 municipal bankruptcy filing. The city claims to be insolvent, unable to pay its debt and in imminent danger of having tax revenue seized by holders of defaulted bonds.

Court papers says the city is $65 million in default on $242 million owing on bonds sold to finance an incinerator that converts trash to energy. The bonds are insured by Assured Guaranty Municipal Corp.

Federal law gives states the right to place restrictions on bankruptcy filings by municipalities. As a result, procedures require the bankruptcy judge to hold a hearing and entertain objections to a filing.

For some of the grounds on which U.S. Bankruptcy Judge Mary D. France in Harrisburg could dismiss the case, click here for the Oct. 13 Bloomberg bankruptcy report.

Bridgeport, Connecticut, is an example of a city that filed in Chapter 9, only to have the petition dismissed as not authorized under state law.

Harrisburg’s petition says assets and debt are both less than $500 million, although debt is more than $100 million.

For Bloomberg coverage of the filing, click here.

The case is In re City of Harrisburg, Pennsylvania, 11-06938, U.S. Bankruptcy Court, Middle District of Pennsylvania (Harrisburg).

Updates

Maxam Suit in Caymans Found to Violate Madoff Stay

Maxam Absolute Return Fund Ltd. was found in violation of the so-called automatic bankruptcy stay for commencing a lawsuit in the Cayman Islands to declare that the fund has no obligation to return $25 million to the trustee for Bernard L. Madoff Investment Securities LLC.

U.S. Bankruptcy Judge Burton R. Lifland ruled in a 21- page opinion on Oct. 12 that the Cayman Islands lawsuit was a “blatant attempt to hijack the key issues to another court for determination.”

The dispute traces its roots to December, when the Madoff trustee sued the Maxam fund as the subsequent recipient of $25 million taken out of the Madoff firm within 90 days of bankruptcy. In July, on almost the same day it answered the complaint in bankruptcy court, Maxam filed suit in the Cayman Islands seeking a declaration that there is no liability to return the $25 million, Lifland said in his opinion.

Lifland ruled that the suit in the Cayman Islands was “void ab initio,” meaning it was a nullity from the very beginning and nothing that happened in the case gave the Maxam fund any rights that could be enforced in the U.S. The bankruptcy judge directed Maxam to withdraw and dismiss the suit in the Cayman Islands by today.

If Maxam obeys and stops the Cayman Islands suit, Lifland said he won’t assess sanctions or damages against Maxam for violating the automatic stay.

The automatic stay is part of U.S. Bankruptcy Law that halts all court or other proceedings against a bankrupt party or its property outside of bankruptcy court.

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 Maxam lawsuit in bankruptcy court is Picard v. Maxam Absolute Return Fund LP, 10-05342, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 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).

Ambac Needs Tax Fix to Avoid Liquidation, Filing Says

Ambac Financial Group Inc. warned the bankruptcy judge in an Oct. 12 court filing that it will run out of money and the almost-completed Chapter 11 case will convert to a liquidation in Chapter 7 without a quick estimation of claims by the Internal Revenue Service.

Ambac also wants the judge to determine the amount of net operating loss carryforwards that remain.

At a hearing currently scheduled for Oct. 26, Ambac, the owner of a bond insurer partially in rehabilitation, will explain how $7 billion in so-called NOLs were created from asset-impairment losses taken on credit-default swaps issued by subsidiaries after 2004. After deducting NOLs already used in prior years’ tax returns, the company estimates $4.7 billion of NOLs remain.

Ambac describes the NOLs as the company’s “most valuable asset.” Until the bankruptcy court estimates the amount of NOLs, the IRS claim can’t be fixed and the ability of the company to generate after-tax income in the future can’t be estimated.

Creditors currently are voting on the reorganization plan following approval of the disclosure statement earlier this month. The confirmation hearing for approval of the plan is set for Dec. 8.

If fixing the NOLs were done through usual procedures, Ambac said the delay “will certainly trigger conversion of the debtor’s Chapter 11 reorganization effort to liquidation under Chapter 7, because the debtor will run out of money.”

Bankruptcy law has special provisions allowing bankruptcy judges to estimate tax liabilities.

For details on the plan, click here for the Oct. 6 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 Wisconsin insurance commissioner 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 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).

RCS Capital Files Before Automatic Stay Contempt Ruling

The disputes between RCS Capital Development LLC and A.B.C. Learning Centres Ltd., an Australia-based operator of childcare centers, now involve two U.S. bankruptcy courts.

Liquidators for A.B.C. filed for Chapter 15 relief in May 2010 in Delaware. In November and January, U.S. Bankruptcy Judge Kevin Gross ruled that the liquidators are entitled to use Chapter 15 and gave an expansive reading to the injunction against creditor actions in the U.S.

In part, Gross was halting collection actions taken in the U.S. by Phoenix-based RCS, which won a $47 million jury verdict against A.B.C. in a lawsuit over the breach of development contracts for locations in the U.S.

The A.B.C. liquidators contended in papers filed in Delaware that RCS violated the Chapter 15 order by continuing actions in Nevada to seize property in which the liquidators claimed an interest. At a hearing in U.S. Bankruptcy Court in Delaware on Oct. 4, the liquidators asked Gross to rule that RCS violated the so-called automatic stay. The liquidators also wanted RCS to be held in contempt, directed to return property and assessed with punitive damages.

Gross concluded the Oct. 4 hearing and said he would rule later, court records show. Perhaps hoping to preclude Gross from handing down an unfavorable ruling, RCS filed its own Chapter 11 petition on Oct. 12 in Phoenix. RCS said assets of $57 million are composed mostly of the judgment against A.B.C. RCS listed $50.5 million in claims, almost all unsecured.

Courts sometimes take the position that the automatic stay, such as the one resulting from RCS’s Chapter 11 filing, doesn’t prevent a court from ruling on a dispute where all proceedings were finished other than handing down the decision. The theory goes that the automatic stay doesn’t enjoin courts, only parties.

For details on Gross’s rulings in the A.B.C. case, click here for the March 25 Bloomberg bankruptcy report.

A.B.C. had 1,045 childcare centers in Australia when it began administration proceedings in the country in November 2008. The company had operations in the U.K., U.S. and New Zealand.

The new RCS case is In re RCS Capital Development LLC, 11-28746, U.S. Bankruptcy Court, District of Arizona (Phoenix). The A.B.C. case is In re A.B.C. Learning Centres Ltd., 10-11711, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Ruling Soon on Allowing Customers to Sue Madoff Kin

Whether customers of Bernard L. Madoff Investment Securities LLC have the right to sue Madoff’s family members is a question to be decided on appeal in a few days or weeks by U.S. District Judge Alvin K. Hellerstein in Manhattan.

In February, U.S. Bankruptcy Judge Burton R. Lifland halted the customers’ suits against Madoff’s friends and family, saying they parroted a complaint by the Madoff trustee. Lifland ruled that the customers were “usurping causes of action belonging to” to the trustee.

Customers, including the Lautenberg Foundation, took an appeal to Hellerstein. Final papers on the appeal were filed in mid-September. Hellerstein gave the parties the right to submit supplemental briefs this week discussing other Madoff cases decided since the original briefs were filed.

The additional issues deal with whether a Supreme Court decision from June called Stern v. Marshall took power away from the bankruptcy court so individual customers could pursue lawsuits on their own.

The Madoff trustee and customers also discuss the applicability of a ruling by U.S. District Judge Jed Rakoff dismissing most of the trustee claims against HSBC Holdings Plc. The HSBC case concluded that the trustee doesn’t have the right to bring common-law claims against third parties.

The Madoff trustee argues that the HSBC decision is inapplicable because he’s suing consummate insiders, not a third party like a bank.

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 injunction on appeal is Lautenberg Foundation v. Picard (In re Bernard L. Madoff), 11-02135, U.S. District Court, Southern District of New York (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 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).

Coca-Cola, PBGC, BNY Mellon on Friendly Committee

Friendly Ice Cream Corp., the owner and franchiser of about 490 restaurants, filed for Chapter 11 reorganization on Oct. 5 and was given an official creditors’ committee this week with seven members.

The U.S. Trustee selects creditors to serve on official committees. The committee includes Coca-Cola Co., which also serves on the official committee for restaurant operator Perkins & Marie Callender’s Inc. Other members include the Pension Benefit Guaranty Corp. and an affiliate of Bank of New York Mellon Corp. as indenture trustee.

Friendly is asking the bankruptcy court in Delaware to approve auction procedures on Oct. 24. Absent better offers, an affiliate of existing owner Sun Capital Partners Inc. will buy the operation in exchange for debt. In the meantime, Friendly is closing 63 stores.

Affiliates of Boca Raton, Florida-based Sun Capital also hold second-lien debt. For details on the sale, click here for the Oct. Bloomberg bankruptcy report.

The PBGC issued a statement yesterday saying that Sun Capital is attempting to keep ownership while abandoning the pension plan. The PBGC described Friendly and Sun Capital as “trying to make their employees and retirees bear the brunt of the company’s restructuring.”

While warning that retirees may receive “reduced pension,” the PBGC didn’t say whether it would try to block termination of the pension plan.

Included among the 424 stores to remain in operation are 230 that are franchised by Wilbraham, Massachusetts- based Friendly. Debt totals $297 million, with the PBGC being the creditor with the largest unsecured claim, Friendly said.

Wells Fargo Capital Finance Inc. is the first-lien revolving credit lender owed $21.5 million.

The case is In re Friendly Ice Cream Corp., 11-13167, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Fees Approved for Remnants of Old GM Liquidation

Even though old General Motors Corp. implemented its liquidating Chapter 11 plan in March, expenses remain from wrapping up the remnants of what was once the largest U.S. automaker.

Old GM’s lead bankruptcy lawyers from Weil Gotshal & Manges LLP received final approval this week for $9.1 million in fees for the six months ended March 29, covering the period when the plan was being confirmed and implemented.

The bankruptcy judge granted the firm about 99 percent of requested fees. The judge told the firm it might have to give back $2.4 million depending on the outcome of an unresolved objection by the fee examiner to increases in lawyers’ hourly rates implemented during the reorganization effort.

From the beginning of the old GM Chapter 11 case in June, 2009 through the end of March, Weil Gotshal’s approved fees total $44.6 million.

Now formally named Motors Liquidation Co., old GM implemented its Chapter 11 plan in March, distributing stock and warrants received from new GM, formally named General Motors Co.

The plan created four trusts. One distributes the stock and warrants issued by new GM as consideration for the sale of the assets. Creditors of old GM split up 10 percent of the stock of new GM plus warrants for 15 percent. For details on the plan, click here for the Sept. 1 Bloomberg bankruptcy report.

Old GM filed for reorganization under Chapter 11 on June 1, 2009. The sale to new GM was completed on July 10, 2009. Old GM listed assets of $82.3 billion against debt totaling $172.8 billion.

The case is In re Motors Liquidation Co., 09-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Open Range Has Interim Approval for $4 Million Loan

Open Range Communications Inc., a provider of wireless broadband services to 26,000 rural customers in 12 states, received interim authority from the bankruptcy judge on Oct. 11 to take down a $4 million secured loan.

A final hearing to approve financing is scheduled for Oct. 31. The company, which filed for Chapter 11 protection in Delaware on Oct. 6, intends to shut down and liquidate the network if a buyer can’t be found.

The petition listed assets of $114 million and liabilities of $110 million, including $74 million in secured debt owing to the U.S. Agriculture Department’s Rural Utilities Services. Unsecured claims are $36 million, according to a court filing.

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

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

Lowenstein Firm Lands Chef Solutions Creditors’ Job

Lowenstein Sandler PC, a law firm from Roseland, New Jersey, is on a roll. For the third time in a week, the firm was selected to represent a creditors’ committee in a corporate reorganization filed in Delaware.

The new client for the Lowenstein firm is the creditors’ committee for Chef Solutions Inc., the second- largest North American producer of fresh prepared food. The company filed under Chapter 11 on Oct. 4, intending to sell the business to a joint venture between Mistral Capital Management LLC and Reser’s Fine Foods Inc.

The Chef Solutions committee has five members, chaired by Berry Plastics Group Inc.

Lowenstein Sandler previously was elected to represent the creditors’ panels for Graceway Pharmaceuticals LLC and Hussey Copper Corp.

The Chef Solutions buyers are under contract to buy the business for $36.4 million in cash and $25.3 million in secured debt. Based in Birmingham, Michigan, the company has plants in Kansas, Ohio and California. Brands include Orval Kent. Among the customers are Wal-Mart Stores Inc., Safeway Inc. and Costco Wholesale Corp.

Chef Solutions was a 2004 acquisition from Deutsche Lufthansa AG by Questor Management Co., which recently surrendered control to Mistral. Liabilities include $23 million owing to Wells Fargo Capital Finance Inc. as agent for first-lien lenders. Mistral has $24.3 million in second-lien debt.

Assets and debt both exceed $100 million, according to the petition.

The case is In re Chef Solutions Holdings LLC, 11- 13139, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Point Blank Selling Zylon Now, Entire Business Next

Point Blank Solutions Inc., a manufacturer of soft body armor for police and military, was authorized by the bankruptcy court to find buyers for 155,000 pounds of Zylon, a fiber used to make bullet-proof vests that was found to be deficient in stopping bullets.

The bankruptcy judge in Delaware authorized the company this week to sell the fabric, so long as the creditors’ committee doesn’t object. The fabric is being sold “without representations or warranties of any kind.”

For the company as a whole, the judge approved sale procedures last week. Bids are due Oct. 26, followed by an auction the next day and a hearing to approve the sale on Oct. 28.

A Gores Group LLC affiliate named Barrier Acquisition LLC is under contract to pay $20 million. Secured lenders can bid their debt in lieu of cash, although they also must provide $750,000 in cash.

Point Blank is selling the business for lack of any other means to exit Chapter 11 given opposition from the official equity committee to confirmation of a reorganization plan.

Point Blank filed under Chapter 11 in April 2010. The company, based in Pompano Beach, Florida, 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).

New Filings

Trans National, Telecom Reseller, Files in Boston

Trans National Communications International Inc., a Boston-based reseller of telecommunications services, filed under Chapter 11 in its hometown on Oct. 9 after running up a $4.9 million loss last year and a $2.1 million loss in eight months of 2011.

In business for 16 years, the company blamed its financial problems on “unresolved billing disputes” with “a few financially powerful underlying carriers.” Revenue in 2010 was $84.3 million. In eight months of 2011, it was $51.7 million, according to a court filing.

Assets are less than $10 million while debt exceeds $10 million, Trans National said in its petition. Liabilities include $4.3 million on a $10 million revolving credit with RBS Citizens NA. In addition, there is $5.5 million outstanding on three subordinated loans, plus $14.2 million in unsecured debt, according to court papers.

The case is In re Trans National Communications International Inc., 11-19595, U.S. Bankruptcy Court, District of Massachusetts (Boston).

HMC/CAH, Rural Hospital Operator, Files in Kansas City

HMC/CAH Consolidated Inc., the owner and operator of 12 critical-access hospitals in rural areas of five states, filed for Chapter 11 protection on Oct. 10 in Kansas City, Missouri, where it is based.

A mezzanine lender, HPCG Hospital Investment LLC, failed to advance the entire $25 million called for in a loan agreement, the company said. When the bankruptcy petition was filed, HPCG was owed $14 million, according to a court filing.

The company has a $6 million revolving credit facility with Gemino Healthcare Finance LLC. At the time of filing, $4.6 million was owed on the facility, HMC/CAH said.

Another $20.9 million is owed to four secured lenders. Assets and liabilities both exceed $10 million, according to the petition.

The hospitals are in Kansas, Oklahoma, Missouri, Tennessee and North Carolina.

The case is In re HMC/CAH Consolidated Inc., 11-44738, U.S. Bankruptcy Court, Western District of Missouri (Kansas City).

Daily Podcast

Solyndra, Dodgers, Evergreen: Bankruptcy Audio

Solyndra LLC, the bankrupt solar-panel maker, is attempting to dodge the appointment of a Chapter 11 trustee by replacing the chief executive officer with an outsider, as discussed on the Bloomberg bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. Rochelle explains how the case thrusts the Delaware bankruptcy judge into the vortex of a partisan political issue that might affect whether Congress ends Delaware’s reign over the country’s major Chapter 11 cases. The podcast revisits the battle between the owner of the Los Angeles Dodgers baseball club and the commissioner of Major League Baseball. Rochelle discusses why Evergreen Solar Inc. could become a test case determining whether companies that received federal government assistance may encounter problems when selling patents and technology. The podcast closes with yet another case where a mortgage lender couldn’t foreclose given the inability to find the original mortgage note. To listen, click here.

Advance Sheets

Social Security Omitted in Chapter 13 Calculation

Social Security benefits are not to be included in the calculation of “projected disposable income” available to pay an individual’s creditors under a Chapter 13 plan, according to an opinion on Oct. 11 by U.S. District Judge John Steele in Fort Myers, Florida.

Steele’s conclusion is in accord with most courts deciding the issue. The opinion is notable because the judge overruled a 2010 decision from a bankruptcy judge in the Middle District of Florida requiring Social Security benefits be used in paying creditors in a Chapter 13 plan.

Steele’s opinion has the effect of allowing Chapter 13 bankrupts to keep more while still discharging debts under a plan.

The earlier case overruled is called In re Rodgers.

The case is In re Vandenbosch v. Waage (In re Vandenbosch), 11-139, U.S. District Court, Middle District Florida (Fort Myers).

--With assistance from Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Stephen Farr, 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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