Bloomberg News

Lehman, Harrisburg, Madoff, Hussey, Graceway: Bankruptcy

October 17, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Lehman as first item, Madoff-Wilpon and Quincy Medical in Updates, Spanish Peaks and Security National in New Filings, sections on Bank Failures and Podcast and discrimination suit in Advance Sheets.)

Oct. 17 (Bloomberg) -- Lehman Brothers Holdings Inc. has used up more than $200 million of the $250 million directors’ and officers’ insurance policy for policy year 2007-2008 covering claims over the investment bank’s collapse, according to court papers.

GameTech International Inc., with a claim related to auction-rate securities, won a $500,000 award against Lehman officers through arbitration conducted by the Financial Industry Regulatory Authority, Lehman said an Oct. 14 filing in U.S. Bankruptcy Court in Manhattan. To pay the award, Lehman filed papers asking the bankruptcy court to allow use of the so-called D&O policy.

For the policy year 2007-2008, there was $250 million in coverage through primary and excess layers of insurance. To cover the GameTech award, Lehman says it needs to use the level of excess insurance that kicks in for claims between $200 million and $210 million.

The new request is Lehman’s 11th application to raise the amount of insurance to be used up. A court hearing on the request is scheduled for Nov. 16.

Lehman creditors are voting on the Chapter 11 plan in preparation for 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).

Updates

Pennsylvania Seeks Immediate Dismissal of Harrisburg Filing

The State of Pennsylvania, saying the municipal bankruptcy filing by Harrisburg violated a state statute “expressly forbidding it,” asked a bankruptcy court to dismiss the case “immediately.”

The state said in court papers filed Oct. 14 that Harrisburg’s petition “brazenly disregarded” a law adopted this year forbidding a city of Harrisburg’s size from filing for municipal debt adjustment in Chapter 9 any time before July 1, 2012. The law also says the state “shall” suspend funding to a city violating the statute.

At the request of city Mayor Linda D. Thompson, U.S. Bankruptcy Judge Mary D. France set up a status conference this morning to schedule a hearing to consider dismissing the case.

Separately, France told the city to publish notice of the bankruptcy filing in the local newspaper and in the Wall Street Journal telling interested parties of their right to object to the bankruptcy. If objections are filed, France said there would be a “preliminary hearing” on Nov. 22.

The city council voted 4/3 vote 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. Bridgeport, Connecticut was a city whose Chapter 9 petition was dismissed for non- compliance with state law.

For Bloomberg coverage, click here.

The petition says assets and debt are both less than $500 million although debt is more than $100 million.

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

Madoff Trustee Says Jury Trial Based on Supreme Court

The trustee liquidating Bernard L. Madoff Investment Securities Inc. and New York Mets owner Fred Wilpon filed papers last week on the question of whether the Madoff trustee is entitled to have a jury trial in the lawsuit against Wilpon, his friends, family and associates. The question will be decided by U.S. District Judge Jed Rakoff, who took the suit away from the bankruptcy judge.

Irving Picard, the trustee, claims he has the right to a jury trial under the U.S. Constitution. He contends that the Wilpon groups wants the facts decided by Rakoff alone as the result of “trepidation to submit to a jury’s judgment.”

The trustee largely rested his argument on a 1989 decision named Granfinanciery v. Nordberg where the U.S. Supreme Court ruled that a fraudulent-transfer suit, like that against the Wilpon group, brings an entitlement to a jury trial. Because he seeks only a money judgment, Picard says the lawsuit is legal in nature only and lacks any equitable element where the jury can’t determine the facts.

Picard also relies on a case called Germain where the U.S. Court of Appeals in Manhattan ruled that the right to a jury trial wasn’t lost by filing suit in bankruptcy court. In addition, the trustee relies on Germain to say that filing in bankruptcy by itself isn’t a waiver of jury trial rights.

The Wilpon group contends there is no right to a jury trial because the only remaining claim is for a fraudulent transfer under federal bankruptcy law. Wilpon relies in part on a 1966 case called Katchan v. Landy where the U.S. Supreme Court said that a creditor waived the right to a jury trial on a preference claim by having filed a proof of claim in the bankruptcy.

The trustee sued the Wilpon group in December to recover $1 billion in fictitious profits and principal taken out of the Madoff firm within six years of bankruptcy. Last month, Rakoff ruled that Picard could only sue to recover fraudulent transfers occurring within two years of bankruptcy. The trustee previously said that Rakoff’s opinion has the effect of reducing his recovery to a maximum of about $400 million.

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 of 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, Southern District of New York (Manhattan).

Madoff Trustee Keeping Hopes for Six-Year Suits Alive

The trustee liquidating Bernard L. Madoff Investment Securities LLC is keeping his options open in case he succeeds in overturning a ruling that he can only sue the owners of the New York Mets for fictitious profits taken out within two years before bankruptcy.

In a September opinion, U.S. District Judge Jed Rakoff concluded that the so-called safe harbor in federal bankruptcy law doesn’t permit Irving Picard, the trustee, from suing for six years of false profit under New York State law. Rakoff limited the trustee to suing for two years of profits under federal law.

In a complaint filed last week, Picard sued Jewish Association for Services for the Aged seeking to recover $5.2 million in false profit taken from the Madoff firm within six years.

District judges in New York disagree on the two year-six year question. U.S. District Judge Kimba M. Wood didn’t allow an appeal from a determination by the bankruptcy judge that six- year suit can go ahead.

To resolve the question, Picard filed papers this month looking for an accelerated appeal to the U.S. Court of Appeals to decide if suits can go back six years or only two.

If the trustee were to sue the Jewish Association only going back two years, and if appeals courts years later rule he could have sued for six years, the longer-term claim would have been time-barred. To keep his options open in case the appeals court rules in his favor, Picard is suing for six years of recoveries.

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 new lawsuit is Picard v. Jewish Association for Services for the Aged, 11-02773, U.S. Bankruptcy Court, Southern District 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).

Hussey Committee Objects to Quick Sale and Loan

The newly formed Hussey Copper Corp. creditors’ committee came out in opposition to proposed procedures for selling the business at auction. The committee also believes a $50 million secured loan from existing lenders is unnecessary.

At the hearing tomorrow in U.S. Bankruptcy Court in Delaware, the committee is scheduled to argue that sale procedures will “chill competitive bidding” and benefit no one other than the secured lenders.

The committee also contends that the contract with Kataman Metals LLC is illusory because it would allow the buyer to cancel up until the closing. In addition, the committee sees the $84.7 million cash purchase price as ephemeral on account of a working capital adjustment for the price of copper that “could reduce that price by double digits.”

Like prospective bidder Revere Copper Products Inc., the committee opposes giving Kataman a $3 million breakup fee that would represent more than twice the usual 3 percent of the cash purchase price typically permitted in Delaware.

As for the $50 million loan, the committee says it isn’t needed. The committee points to Hussey’s own projections showing the need for $218,000 at most through Dec. 2. Despite the lack of need, the loan would require paying $1.25 million in fees to the lenders.

The committee says the loan has only one purpose, to pay off the $38.2 million owing to the banks when the bankruptcy began and in the process spread the lenders’ liens to property not subject to pre-bankruptcy security interests, such as lawsuits.

The committee objects to the lenders’ control over the bankruptcy case, pointing to the requirements that all assets be sold within 45 days of the Chapter 11 filing. Closer to home, the committee objects to how its professionals’ fees would be paid at the discretion of the lender group.

In business since 1848, family-owned Hussey makes a variety of copper products from plants in Leetsdale, Pennsylvania and Eminence, Kentucky. Revenue of $454 million in 2008 shrank to $382 million in 2010. Last year, the net loss was $3 million, according to court papers.

Debt includes $38.2 million owing on a matured revolving credit. There is also a $2.4 million subordinated loan. In addition, the company owes $29 million to trade suppliers, the papers say.

The Leetsdale plant is near Pittsburgh.

The case is In re Hussey Copper Corp., 11-13010, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Graceway Committee Finds Flaws in Sale Procedures

While the Graceway Pharmaceuticals LLC creditors’ committee doesn’t object to the notion of a sale, it does take issue with some proposed auction procedures. The topic will be discussed at a hearing today in U.S. Bankruptcy Court in Delaware.

Primarily, unsecured creditors don’t want sale proceeds paid to the lenders when the sale is completed. Rather, the committee is asking for the proceeds to be held in escrow until the committee completes its investigation into the validity of the secured creditors’ liens.

The proposed financing agreement would give the committee 60 days to investigate the liens. The period begins to run if the loan receives final approval at an Oct. 21 hearing.

With regard to the sale, the committee wants to be consulted over whether a bidder is qualified, a bid meets threshold requirements, and a buyer has financial strength to complete a transaction.

Switzerland’s Galderma SA is under contract to pay $275 million cash. The company told the judge previously there should be more than one bidder.

Debt of the Bristol, Tennessee-based company includes $430.7 million owing on a first lien revolving credit and term loan. Second-lien debt is $330 million, with mezzanine debt totaling another $81.4 million. Trade suppliers are owed $30 million. Sales in 2007 of $314 million dropped to $220 million in 2010. In the first half of 2011, net sales were $65.5 million. The decline largely resulted from the expiration of the patent for the drug Aldera in February 2010.

The case is In re Graceway Pharmaceuticals LLC, 11-13036, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Quincy Medical Sells Hospital, Schedules Confirmation

Quincy Medical Center Inc., the operator of a 196-bed acute-care hospital in Quincy, Massachusetts, filed under Chapter 11 in July, sold the facility this month to Steward Health Care System LLC, and arranged a Nov. 8 confirmation hearing for approval of the liquidating plan when the bankruptcy court approved the explanatory disclosure statement.

The sale generated $52.4 million, not enough for full payment to secured bondholders owed $56.5 million, according to the disclosure statement. The bonds were issued through a state health-care finance agency.

Nonetheless, $562,500, not subject to bondholders’ deficiency claims, was set aside for unsecured creditors with claims estimated to total between $6 million and $7 million. The disclosure statement estimated unsecured creditors would recover about 8.4 percent.

Quincy initially listed assets of $73 million and liabilities of $79.4 million.

The case is In re Quincy Medical Center Inc., 11-16394, U.S. Bankruptcy Court, District of Massachusetts (Boston).

Alabama Aircraft Gives Up, Seeks Chapter 7 Conversion

Alabama Aircraft Industries Inc. gave up hope of pushing through even a liquidating Chapter 11 plan. Last week the company filed a motion, coming to bankruptcy court for hearing on Nov. 3, for conversion of the case to a liquidation in Chapter 7 where a trustee is appointed automatically.

The papers say there is $300,000 owing unsecured creditors for goods and services provided during the Chapter 11 case. In addition, professionals are owed about $750,000. The Pension Benefit Guaranty Corp. claims it’s owed another $327,000 that should be paid in full as an expense of the Chapter 11 case.

When the business was sold in September, the company lost the right to use cash and thus can’t pay bills.

The trustee in Chapter 7 would inherit an interest in a lawsuit filed last month in an Alabama state court alleging that Boeing Co. deprived the company of one half of a $1.3 billion government contract. The suit also claims that Boeing forced AAI to work on another contract at “minimal prices under false pretenses.”

Boeing is appealing approval given by the bankruptcy court for creation of a trust to file the suit and sell the business for $500,000 to Kaiser Aircraft Industries Inc. Previously, Boeing called the lawsuit “unfounded” and “baseless.”

Once known as Pemco Aeroplex Inc., AAI had a long-term lease at the Birmingham International Airport in Alabama. It chiefly maintained and repaired military transport, tanker, and patrol aircraft.

The Pension Benefit Guaranty Corp. was listed as having the largest unsecured claim at $68.5 million. A court paper said assets were on the books for more than $32 million in September 2010.

The case is In re Alabama Aircraft Industries Inc., 11-10452, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filings

Miami Beach Building Files to Protect Loan Guarantors

The owner of a six-story office building on Arthur Godfrey Road in Miami Beach, Florida, filed for Chapter 11 protection on Oct. 7 in Miami, owing $15.1 million to a subsidiary of Bank of New York Mellon Corp.

Four days after the Chapter 11 filing, the owner, Cabi 301 Commercial LLLP, filed a lawsuit in bankruptcy court to stop the bank from suing principals on their personal guarantees of the mortgage.

Court papers say unsecured debt is $425,000 while $320,000 is owed on property taxes.

The case is Cabi 301 Commercial LLLP, 11-38064, U.S. Bankruptcy Court, Southern District Florida (Miami).

Montana’s Spanish Peaks Resort Files in Delaware to Liquidate

The owner of the The Club at Spanish Peaks in Big Sky, Montana, didn’t even attempt to reorganize. Instead, the company and affiliates filed petitions for liquidation in Chapter 7 on Oct. 14 in U.S. Bankruptcy Court in Delaware.

The project has 5,700 acres, according to the website.

Liabilities exceed $100 million while assets are less than $50 million, according to the petition. For Bloomberg coverage, click here.

The case is In re Spanish Peaks Holdings II LLC, 11-13300, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Security National Puts 13 Affiliates into Chapter 11

Security National Master Holding Co. of Eureka, California, put 13 affiliates into Chapter 11 in Delaware on Oct. 13 and Oct. 14. The companies own about 10 shopping centers and 21 office buildings, according to an e-mailed statement.

All of the filings were so-called bare-bones petitions where little was submitted to court aside from the printed form, a three-page petition, a list of creditors, and a resolution authorizing bankruptcy.

Security National raised $2.39 billion through 19 securitizations and three trusts, according to the company’s website.

One of the companies said it has more than $100 million in debt and less than $50 million in assets. All of the bankrupt companies list Baton Rouge, Louisiana, for their head office. For Bloomberg coverage, click here.

The first-filed case is Security National Properties-Alaska LLC, 11-13276, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Bank Failures

Failures in Four States Bring Year’s Total to 80

Banks in New Jersey, North Carolina, Georgia and Illinois were taken over on Oct. 14 by regulators, bringing the year’s total to 80.

The failures will cost the Federal Deposit Insurance Corp. $221.7 million. For Bloomberg coverage, click here.

Last year, there were 157 bank failures. The failures in 2010 were the most since 1992, when 179 institutions were taken over by regulators.

Downgrades

Clearwire Downgraded to Caa2 on Looming Sprint Split

Clearwire Communications Corp., the builder of what it called the “first nationwide 4G mobile broadband network,” was downgraded by one notch by Moody’s Investors Service on Oct. 14 to a Caa2 corporate grade.

Moody’s said that Sprint Nextel Corp. is unlikely to “extend their existing wholesale agreement beyond 2013,” thus requiring Clearwire to “find alternative wholesale partners or sell spectrum in order to make interest payments after 2012.”

Moody’s projects that a “conservative valuation to Clearwire’s spectrum provides greater than 100 percent coverage of current debt.”

Kirkland, Washington-based Clearwire calls its system WiMax. It reported a $1.56 billion operating loss for six months ended June 30. Revenue for the period was $559.4 million.

The stock closed on Oct. 14 at $1.59, down 6 cents a share on the Nasdaq Stock Market.

Sprint Nextel Downgraded on Need for Heavy Investment

Sprint Nextel Corp., the third-largest wireless carrier in the U.S., received its second downgrade in six months from Moody’s Investors Service when the corporate grade slipped another notch yesterday to B1.

Moody’s acted after concluding that Sprint will be required to “invest heavily in its own 4G network assets and likely phase out its failed partnership with Clearwire.” The additional capital investment will increase debt, Moody’s said.

In the downgrade six months ago Moody’s reacted to what it called the “disastrous structure of the Clearwire partnership” and heavy spending to upgrade the networks.

The stock of the Overland Park, Kansas-based company closed on Oct. 14 at $2.79, up 1 cent a share in New York Stock Exchange Trading. The three year high was $5.93 on June 2, 2011. The low in the period was $1.37 on Nov. 20, 2008.

Bankruptcy Podcast & Video

Conflicts, Hussey, ‘No Harm, No Foul’: Bankruptcy Audio

The nightmare facing a lawyer who failed to spot a conflict of interest in the bankruptcy of the Inspirada residential development in Henderson, Nevada, is the first item covered on the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. The intended quick sale of Hussey Copper Corp. through the bankruptcy court in Delaware is used as an example of a perennial problem in bankruptcy, where allegations are made that sales happen too fast. The podcast ends with an analysis of when the “no harm, no foul” rule from basketball is a valid defense to a fraudulent transfer. To listen, click here.

For Rochelle and Pacchia’s new video on the Harrisburg municipal bankruptcy, Washington Mutual Inc., and the political thicket surrounding Solyndra LLC, click here.

Advance Sheets

Benefit Plan Assumed While Health Contract Rejected

The U.S. Court of Appeals in New Orleans waded through a thicket of ERISA and bankruptcy cases to conclude that retiree benefits survived confirmation of a Chapter 11 plan even though a contract was rejected during bankruptcy permitting modification of retirees’ rights.

The 23-page opinion by Circuit Judge Harold R. DeMoss Jr. on Oct. 13 is mostly an interpretation of a 2006 opinion by the appeals court called Halliburton v. Graves, a case dealing with the Employee Retirement Income Security Act, commonly known as ERISA.

The case involved a Chapter 11 reorganization where a corporate agreement regarding employee benefits was rejected during bankruptcy. The order confirming the plan, by contrast, said that retiree benefits were assumed. The company also told retirees that their benefits wouldn’t be modified by the bankruptcy.

Drawing in part on Halliburton, DeMoss said that a corporate agreement could simultaneously be part of a contractual obligation and an ERISA plan amendment. Consequently, DeMoss concluded that rejection of the contract didn’t affect the benefit plan which was assumed as part of confirmation.

The case is Evans v. Sterling Chemicals Inc., 10-20493, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

Discrimination Suit Required No Administrative Claim

Even though an employee had a claim for wrongful denial of a promotion before Northwest Airlines Inc. confirmed its Chapter 11 plan, the employee’s discrimination claim wasn’t discharged, the U.S. Court of Appeals in St. Louis ruled on Oct. 14.

The opinion by Circuit Judge Kermit E. Bye determined that the employee grievance matured into a claim before confirmation, even though the worker hadn’t exhausted all his administrative remedies.

Given that the claim arose during the Chapter 11 case, the district court dismissed the worker’s suit because a proof of claim wasn’t filed before the administrative-claim bar date following confirmation.

Bye reversed, in substance on two grounds.

The notice of the administrative bar date, which was sent to the worker, explicitly said that debts arising in the ordinary course of business didn’t require a claim. Bye said that a discrimination claim is one arising in the ordinary course of business.

Bye also analyzed a line of cases saying that ordinary, day-to-day expenses aren’t administrative expenses requiring the filing of a claim.

The case is Sanchez v. Northwest Airlines Inc., 10-2393, U.S. 8th Circuit Court of Appeals (St. Louis).

--With assistance from Dakin Campbell in San Francisco; and Dawn McCarty, Steve Church, and Michael Bathon in Wilmington, Delaware. Editors: Mary Romano, Michael Hytha

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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