Bloomberg News

Lehman, Harrisburg, Graceway, Stars, Borders: Bankruptcy

October 19, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Harrisburg and Sawgrass Marriott in Updates and Hovnanian in Exchange Offer News.)

Oct. 19 (Bloomberg) -- Lehman Brothers Holdings Inc. continues to dominate trading in claims of bankrupt companies.

The $4.4 billion of Lehman claims traded in September represented 97 percent of the value of all claims swapped in the month, according to data compiled from court records by SecondMarket Inc. With 941 trades, Lehman and its brokerage subsidiary accounted for 74 percent of the number of claim trades, SecondMarket reported.

No other bankrupt company comes even close to Lehman. Excluding a bankrupt company where one large claim was traded, Great Atlantic & Pacific Tea Co. had the second-most trading activity, generating $23.4 million in trades, or 0.5 percent of the amount of Lehman transfers.

Claims trading is trailing 2010’s record pace. Through the third quarter last year, total trades were $7 billion more than the comparable period in 2011, the SecondMarket report says.

Trading in Lehman claims isn’t flagging even though the former investment bank’s reorganization plan is set for approval by the bankruptcy judge at a Dec. 6 confirmation hearing.

Lehman has dominated claims trading since May 2009, SecondMarket said.

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.

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).


Harrisburg Moving Toward State Receivership to End Bankruptcy

Harrisburg, Pennsylvania’s capital, moved a step closer to having the state take over its municipal reorganization yesterday as the state Senate voted 37-13 in favor of a bill that would allow the governor to appoint a receiver.

The legislation goes to the House of Representatives, which passed a previous version in September. The governor said he will sign the bill.

The law would give the city 30 days before a receiver takes over. If the bill is adopted and implemented quickly, the receiver could be in place in time for the Nov. 23 hearing when the U.S. Bankruptcy Judge in Harrisburg will hear arguments on a motion to dismiss the Chapter 9 bankruptcy filing.

On Oct. 13, two days after the Chapter 9 filing, the state filed a motion to dismiss the case, saying it violated a state law prohibiting cities of Harrisburg’s size from seeking bankruptcy protection before July 2012. Harrisburg’s Mayor Linda D. Thompson filed papers saying she likewise will seek dismissal.

For Bloomberg coverage of the state legislative action, click here. For a summary of additional grounds for dismissing the municipal bankruptcy, click here for the Oct. 13 Bloomberg bankruptcy report.

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 allows states to restrict the ability of municipalities to file bankruptcy.

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).

Graceway Pharmaceuticals Auction Set for November 17

Graceway Pharmaceuticals LLC has authority to auction the business, although on a schedule two weeks later than the company initially requested.

According to the sale-approved order signed Oct. 17 by the U.S. Bankruptcy Judge in Delaware, bids are due Nov. 14, in advance of a Nov. 17 auction and a hearing on Nov. 22 for approval of the sale.

Switzerland’s Galderma SA is already under contract to pay $275 million in cash. Graceway previously said there should be competitive bidding.

Debt of Bristol, Tennessee-based Graceway 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 of $314 million in 2007 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 Aldara in February 2010.

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

Dallas Stars Have Cash-Use Authority to Finish Plan

The Dallas Stars of the National Hockey League have final approval to use cash thanks to an agreement requiring implementation of a Chapter 11 plan and sale of the team by the year’s end.

A U.S. bankruptcy judge in Delaware signed the cash order on Oct. 17. Four days after the Chapter 11 filing on Sept. 15, the team won interim authority to use cash representing collateral for secured lenders’ claims.

The team is currently on schedule to exit bankruptcy a month ahead of the deadline in this week’s cash-collateral order. The combined hearing to approve a sale of the team and confirm the prepackaged reorganization plan is on the court’s calendar for Nov. 23.

Before bankruptcy, the team sought creditors’ acceptance of the plan and signed Vancouver businessman Tom Gaglardi to a contract to purchase the hockey club. Other bids are due initially by Oct. 22. An auction is set for Nov. 21.

The contract calls for Gaglardi to pay off the $51.4 million loan from the NHL and give a $100 million term loan payable to holders of the $250.9 million in first-lien debt.

The reorganization plan provides for holders of $146.2 million in second-lien debt to share $500,000 in cash. Before the bankruptcy filing, the plan was accepted by all holders of the first-lien debt and holders of about 90 percent of the second-lien obligation.

Thomas O. Hicks, the Stars’ owner, also owned the Texas Rangers baseball club.

The case is In re Dallas Stars LP, 11-12935, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Inspirada Development Confirmation to End October 26

The confirmation hearing to approve the Chapter 11 plan for the 2,000-acre Inspirada residential development in Henderson, Nevada, began this week in U.S. Bankruptcy Court in Las Vegas.

The confirmation trial continues today and will conclude with closing arguments on Oct. 26.

The bankruptcy judge approved a settlement with Focus Group South LLC on Oct. 17. Focus was claiming a lien on about $26 million cash and opposed approval of the reorganization plan. For details on the settlement, click here for the Oct. 7 Bloomberg bankruptcy report.

The reorganization plan for the project’s owner, South Edge LLC, will implement a larger settlement negotiated in May by secured lenders with South Edge’s Chapter 11 trustee, KB Home and other homebuilders who represented 92 percent of the ownership interests in the project. For details on the settlement to be carried out through the Chapter 11 plan, click here for the June 17 Bloomberg bankruptcy report.

KB has 49 percent of the project. Other owners joining in the settlement include Coleman Toll LP with 10.5 percent, Pardee Homes Nevada Inc. with 4.9 percent, and Beazer Homes USA Inc. with 2.6 percent, a KB regulatory filing said.

Bankruptcy began with an involuntary petition filed by secured lenders. A U.S. district court in April upheld a decision from February by the bankruptcy judge to put South Edge into bankruptcy involuntarily and simultaneously appoint a trustee.

The project ultimately was to cost $1.25 billion and have 8,500 homes. The lenders were to provide $595 million in financing. Other financing includes $102 million in public bonds for improvements.

The Chapter 11 case is In re South Edge LLC, 10-32968, U.S. Bankruptcy Court, District of Nevada (Las Vegas).

Goldman Sachs Acquiring Sawgrass Marriott in Confirmed Plan

The Sawgrass Marriott Resort in Ponte Vedra Beach, Florida, will be taken over by secured lender Goldman Sachs Mortgage Co. after the bankruptcy judge yesterday signed an order confirming the Chapter 11 reorganization plan.

Following the resort’s Chapter 11 filing in March 2010, disputes between the resort and Goldman Sachs culminated in January, when the bankruptcy judge ruled in favor of New York- based Goldman Sachs by accepting the lender’s valuation that the property was worth $132 million. Goldman Sachs was owed $193 million balance on a mortgage.

Goldman Sachs filed the plan that gave it ownership, together with an unsecured deficiency claim for almost $64 million. Trade suppliers with $190,000 in claims are to receive about half their debt. All creditor classes voted in favor of the plan.

Equity holders, who received nothing, weren’t entitled to vote, although Goldman Sachs agreed to give releases to the resort’s principals.

The plan ends the management agreement with Interstate Hotels & Resorts LLC. Interstate’s claim is in a separate class with the Goldman Sachs deficiency claim. Together, they will recover about 3 percent from splitting up about $2.3 million cash, according to the disclosure statement.

The franchise agreement with Marriott International Inc. continues under Goldman Sachs’s ownership.

The case is In re RQB Resort LP, 10-01596, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).

Borders Has Longer Exclusivity to Permit Confirmation

Borders Group Inc., the former bookseller, won an extension of the exclusive right to propose modifications to the liquidating plan filed early this month.

The bankruptcy judge in New York signed an order yesterday extending exclusive plan-filing rights by three months until Jan. 12.

Borders began liquidating the remaining stores in July. The going-out-of-business sales wrapped up on Sept. 20. Separately, Borders sold store leases and intellectual property.

The disclosure statement explaining the plan is currently set for an approval hearing on Nov. 10. The plan in substance pays creditors in the order of priority laid out in bankruptcy law. Remaining secured claims will be paid in full, according to the disclosure statement.

Borders previously projected holding a confirmation hearing around Dec. 20 for approval of the liquidating plan.

The Ann Arbor, Michigan-based company had 642 stores on entering bankruptcy in February and was operating 399 when the liquidation began. It listed assets of $1.28 billion and liabilities totaling $1.29 billion.

Debt included $196 million on a revolving credit and $48.6 million on a term loan. Trade suppliers were owed $302 million for inventory.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Dallas Logistics Hub’s Chapter 11 Plan Confirmed

The developers of Dallas Logistics Hub were the beneficiaries of orders signed last week by the U.S. Bankruptcy Court in Dallas approving the Chapter 11 reorganization plan.

The developers, Allen Capital Partners LLC and subsidiary DLH Master Land Holding LLC, recognized that the contemplated project was too large for the “current financing and development environment,” according to the court-approved disclosure statement. Consequently, they decided to sell off or give about 3,000 acres back to lenders, in the process reducing debt by about $60 million.

In addition, another parcel was to be sold for about $50 million.

The bankruptcy judge was able to sign a confirmation order when the final objection was resolved.

The plan calls for paying unsecured creditors in full with interest over time. Alternatively, unsecured creditors can elect to take partial payment during a shorter time span.

The developers of the 6,000-acre multimodal logistics park 12 miles (19 kilometers)from downtown Dallas filed for reorganization in January 2010.

ACP’s $137 million in listed unsecured debt included $73.8 million on guarantees of DLH’s secured debt owing to three banks. DLH owed another $49 million on guarantees of affiliates’ debt.

The Chapter 11 filings were intended to stop one of the lenders from taking over the equity interest of ACP.

The case is In re DLH Master Land Holding LLC, 10-30561, U.S. Bankruptcy Court, Northern District of Texas (Dallas).

Exchange Offer News

Hovnanian Sweetens Rejected Tender Offer for Bonds

After Hovnanian Enterprises Inc. received acceptances from holders of less than 1 percent of the $256 million in bonds due 2014 and 2015, the homebuilder sweetened the offer and extended the deadline to Oct. 29.

In September, Hovnanian announced a private exchange offer to some holders of $814 million in seven series of senior unsecured notes. Standard & Poor’s characterized the exchange as distressed.

Originally, holders could 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.

Under the new proposal, holders of notes due in 2014 and 2015 will receive a like amount of new 5 percent secured notes, plus $100 cash along with accrued interest.

Holders of three issues due in 2016 and 2017 are being offered the new 5 percent secured notes and accrued interest, although no cash.

The new secured notes will mature in 2021.

Holders of about 10 percent of the $542 million in bonds maturing in 2016 and 2017 accepted the original offer.

The $137.6 million in 11.875 percent senior unsecured bonds maturing October 2015 traded yesterday at 50.7 cents on the dollar, compared with 42.5 cents on the dollar on Oct. 4, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. On Sept. 8, the same bonds fetched 58.7 cents on the dollar.

Hovnanian, based in Red Bank, New Jersey, 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 resulted in a $295 million loss before tax benefits and $2.6 million of net income.

Hovnanian closed yesterday at $1.34, up 15 cents in New York Stock Exchange composite trading. The three-year closing high was $7.99 on May 3, 2010. The low in the period was 58 cents on March 6, 2009.

Daily Podcast

Lehman, Madoff, Northwest Airlines: Bankruptcy Audio

With Lehman Brothers Holdings Inc. close to exhausting $250 million in directors’ and officers’ liability insurance, it’s time to examine how D&O insurance is handled in Chapter 11 cases, according to the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. Who is and isn’t entitled to a jury trial in bankruptcy cases is discussed in the context of Bernard L. Madoff Investment Securities Inc. along with favored treatment given to an employment-discrimination claim against Northwest Airlines Inc. To listen, click here.

Advance Sheets

Fifth Circuit Dismisses Confirmation Appeal as Moot

An appeal of an implemented Chapter 11 plan was dismissed by the U.S. Court of Appeals in New Orleans under the doctrine of equitable mootness.

The unsigned opinion was notable for lacking a reference to a revised mootness decision from the same court in August in a case involving Scotia Pacific Co. and affiliate Pacific Lumber.

In the Oct. 17 opinion, the judges analyzed whether it was possible to undertake an appeal of an order confirming a Chapter 11 plan when there was no stay pending appeal and the plan had been substantially consummated.

Without referring to the Scotia/Palco case, the three-judge panel said the case was governed by a 1994 Fifth Circuit case called Manges v. Seattle First National Bank.

Under the Fifth Circuit’s Manges standard, which the panel said was taken from rulings by other appeals courts, the judges said the appeal had to be dismissed on the equitable mootness doctrine. The “disturbance” to the rights of third parties that attached following implementation of the plan would “outweigh” relief that could be granted by upsetting confirmation, the court said.

In the Scotia/Palco case, a panel including Chief Judge Edith H. Jones in October 2010 reversed a confirmed and consummated Chapter 11 plan, while appearing to say that buyers of the business must pay an additional $29.7 million. The losing side asked for a rehearing by all Fifth Circuit judges.

In August, the judges who originally decided the Scotia/Palco case revised their original opinion, saying that an appeal couldn’t “undermine the plan” or “jeopardize the reorganized debtor’s financial health.”

To read about the August Scotia/Palco opinion, click here for the Aug. 5 Bloomberg bankruptcy report.

The circuit judges on the panel deciding the case this week were Jerry E. Smith, Leslie H. Southwick and James E. Graves Jr.

The case is Spencer Ad Hoc Equity Committee v. Idearc Inc. (In re Idearc Inc.), 10-10858, U.S. 5th Circuit Court of Appeals (New Orleans).

’And’ Means ‘Either’ in Home Mortgage-Loan Dispute

The U.S. Court of Appeals in New Orleans penned an opinion on Oct. 17 interpreting the meaning of the word “and.”

The court concluded that “and” means “either or both.” As a result, individual bankrupts are liable to pay more toward home mortgage lenders’ attorney’s fees.

According to the governing mortgage in the case, the borrower was liable for attorney fees spent by the lender to protect its interest in the property “and” in the mortgage itself.

The borrower in Chapter 13 objected to $200 in bank attorney’s fees, contending that bankruptcy law precluded the bankruptcy from affecting the interest in the property. Consequently, the borrower argued that both prongs of the test weren’t met.

In an unsigned opinion, the Fifth Circuit in New Orleans examined the mortgage as a whole and surveyed law interpreting the word “and.” In the context of the mortgage, the court concluded that the proper meaning was “either or both.”

The circuit court reversed the bankruptcy court and district court, making the borrower liable to pay attorney’s fees. The case was decided by a panel with Circuit Judges Carolyn D. King, W. Eugene Davis and Emilio M. Garza.

The case is In re Countrywide Home Loans Servicing LP v. Velazquez (In re Velazquez), 10-20609, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

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