Bloomberg News

Lehman, Innkeepers, Madoff, Tribune, Xanadoo: Bankruptcy

October 24, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Lehman, Innkeepers and Madoff, and adds sections on Bank Failures and Daily Podcast.)

Oct. 24 (Bloomberg) -- Lehman Brothers Holdings Inc. generated $4.4 billion in traded claims during September, partly because “people are now trading on the time value of money,” according to Andrew Gottesman, head of claims trading at SecondMarket Inc.

Dominating the claims-trading business since May 2009, trading in Lehman claims more than doubled from the month before, even though the former investment bank is scheduled for a confirmation hearing on Dec. 6 to wrap up the Chapter 11 case begun in September 2008.

Claims traders have had months to analyze Lehman’s disclosure statement while projecting how much creditors will receive and when. Even late in a case where the facts are out on the table for all to see, it’s still possible to buy a claim while having a “reasonable degree of certainty” about making a profit, Gottesman said in an interview.

Much of the selling came from banks and financial institutions that purchased claims earlier in the case, Gottesman said. Given the weak third-quarter earnings reported by some financial companies, banks may have been selling to lock in profits and bolster earnings.

Prices fetched by the main Lehman companies were within a “three-point range” from June through early October, Gottesman said. A dip in August and early September was corrected in October, he said.

In September, Lehman by itself was responsible for 97 percent of all claim trades reported to bankruptcy courts.

Lehman arranged a Nov. 16 hearing to approve the hiring of Korn/Ferry International to help the selection committee identify directors to serve on the board when Lehman emerges from Chapter 11.

Lehman filed papers last week to settle some disputes between the holding company and the trustee liquidating the remnants of the Lehman broker arising from a $125 million payment the holding company made to the broker a few days before bankruptcy. From the total, $95 million was used to establish a trust to fund health benefits for workers and retirees.

The settlement calls for Lehman to receive the $37 million remaining in the trust after benefits were paid following bankruptcy. From the total, Lehman will take $25 million in reimbursement for benefits the holding company paid. The remainder will be used to fund benefits until the funds are exhausted. Benefits currently are costing $6.5 million a year, according to court papers.

The settlement is set for an approval hearing in bankruptcy court on Nov. 16. The Lehman holding company and the brokerage’s trustee haven’t resolved their disputes over the $30 million not earmarked for benefits.

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

Judge Approves, ‘Directs’ Innkeepers Sale Completion

Hotel owner Innkeepers USA Trust received approval from the bankruptcy judge in New York on Oct. 21 to sell 64 hotels for $1.02 billion to Cerberus Capital Management LP and Chatham Lodging Trust.

The sale represents a 9 percent price reduction from the contract the bankruptcy judge approved when she confirmed Innkeepers’ Chapter 11 plan in June.

The reduced price resulted from negotiation conducted in the face of a lawsuit scheduled for trial earlier this month where Innkeepers was asking the court to compel the buyers to carry out the original contract. Cerberus and Chatham argued in response that they were entitled to cancel the original deal in view of a material adverse change in the hospitality industry.

Approval of the new contract also made changes in the previously confirmed plan. No voting was required because the only affected parties consented to the price reduction.

To ensure that the new contract goes through on schedule, the court’s approval order “directed” each of the parties “to use its best efforts to consummate the transactions” in a “timely manner.”

Innkeepers expects the sale to be completed late this week, Chief Restructuring Officer Marc A. Beilinson said in an e- mailed statement.

For a rundown on the revised sale and its effect on the principal creditors, click here for the Oct. 20 Bloomberg bankruptcy report. The affected creditors were Midland Loan Services, the servicer for $825 million of fixed-rate mortgages on 45 hotels, and Lehman Ali Inc., a non-bankrupt subsidiary of Lehman Brothers Holdings Inc. with $238 million in floating-rate mortgages on 20 of the Innkeepers properties.

For details on the original plan, click here for the June 24 Bloomberg bankruptcy report.

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 of New York (Manhattan). The Chapter 11 case is In re Innkeepers USA Trust, 10-13800, in the same court.

Trustee Opposes Appeal Now by Madoff Family Members

The trustee for Bernard L. Madoff Investment Securities Inc. filed papers last week opposing the effort by Andrew Madoff, a son of the jailed fraudster, to appeal a ruling by the bankruptcy judge on Sept. 22 refusing to dismiss the $198 million lawsuit against Madoff family members.

Rules in federal courts don’t permit an automatic appeal from a decision upholding a complaint before trial. Andrew, for himself and as executor of his deceased brother’s estate, filed a motion earlier this month for permission to appeal.

Andrew contended the opinion by U.S. Bankruptcy Judge Burton R. Lifland expanded liability for officers of brokerage firms.

In Oct. 20 opposition papers, the Madoff trustee said Andrew and other family members weren’t just employees of any Wall Street firm. Instead, the trustee said, they were “ultimate” insiders of the largest Ponzi scheme in history.

Irving Picard, the trustee, also debunked the argument that the suit should have been dismissed under the in pari delicto rule. Taken from Latin, the name describes a defense where a company that commits fraud can’t sue outsiders for participation in the fraud. Picard argued that the defense doesn’t bar a company that commits fraud from suing officers who violated their fiduciary duties.

For details on the ruling where Lifland largely let the complaint stand, click here for the Sept. 23 Bloomberg bankruptcy report.

The bankruptcy judge authorized $44.7 million in compensation for Baker & Hostetler LLP, the trustee’s lawyer, to cover the period Feb. 1 through May 31, 2011. Picard himself was awarded $599,000. From the total, only 90 percent is now being paid. The remainder was reserved for payment later in the case.

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 lawsuit against Madoff family members is Picard v. Madoff, 09-1503, 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, Southern District of New York (Manhattan).

Tribune Settles $250 Million ESOP Class-Action Suit

Tribune Co. was given authority last week to settle a lawsuit with $250 million in potential liability arising from alleged defects in the 2007 leveraged buyout that utilized a employee stock-ownership plan trust.

The settlement, approved by the bankruptcy judge, will result in a $32 million payment ending a class-action lawsuit on behalf of company workers begun before bankruptcy. The U.S. District Court judge handling the class action at one time said the plaintiffs might claim damages up to $250 million.

The settlement resulted from mediation conducted by U.S. Bankruptcy Judge Kevin Gross, not the judge presiding over the Tribune Chapter 11 case. The settlement has providers of liability insurance paying $26.55 million. The financial institution serving as trustee for the ESOP is paying $1 million, while Tribune’s share is $4.45 million.

Tribune is waiting for U.S. Bankruptcy Judge Kevin J. Carey to issue an opinion saying whether he will confirm the company’s reorganization plan or the rival plan from a noteholder group led by Aurelius Capital Management LP. The judge said during the trial that he might not approve either plan. Carey heard final arguments on June 27.

To confirm either plan, the judge must use the so-called cramdown process because neither plan received requisite acceptances from all voting creditor classes. For a rundown on the company’s plan as modified in April, click here for the April 7 Bloomberg bankruptcy report.

Tribune is the second-largest newspaper publisher in the U.S. It listed $13 billion in debt for borrowed money and assets of $7.6 billion in the Chapter 11 reorganization begun in December 2008. It owns the Chicago Tribune, Los Angeles Times, six other newspapers and 23 television stations.

The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Xanadoo Avoids Trustee or Dismissal, for Now at Least

Subsidiaries of Xanadoo Co. won’t have their Chapter 11 cases dismissed or a trustee appointed, at least not now. Tomorrow, the bankruptcy judge in Delaware will decide if the 4G wireless Internet providers can have an extension of the exclusive right to propose a reorganization plan until Feb. 7.

Soon after the Chapter 11 filing in June, the agent for secured noteholders sought the appointment of a trustee or dismissal of the case. Last week, the bankruptcy judge denied the motion, while giving the lenders an ability to return to court if circumstances change.

The lenders are opposing an extension of so-called exclusivity.

As part of an agreement for the use of cash, the companies must report to the lenders by Dec. 2 about indications of interest in buying the business. Court papers said that initial proposals aren’t expected before mid-November.

The Chapter 11 filing followed the maturity in May of almost $60 million in secured notes owing to Beach Point Capital Management LP. On the eve of bankruptcy, the agent contended that Xanadoo created a new intermediate holding company to hinder and delay creditors by taking over ownership of the operating companies.

The Bala Cynwyd, Pennsylvania-based companies provide service to 10,000 customers in smaller markets in parts of Texas, Oklahoma and Illinois. They contend their licenses are worth more than $200 million. The companies say their total current liabilities are $66.3 million. The parent is not in Chapter 11.

One of the petitions says assets and debt both exceed $100 million.

The case is In re Pegasus Rural Broadband LLC, 11-11772, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Miami Heat, Panthers Sued for Rothstein Preferences

The owners of the New York Mets aren’t the only owners of professional sports teams being sued by the trustee for a Ponzi scheme.

This month the owners of the Miami Heat professional basketball team and the Florida Panthers hockey club were sued by the trustee liquidating the law firm once run by Scott Rothstein, a confessed Ponzi scheme operator.

Where the Mets owners were originally sued for $1 billion coupled with allegations they had reason to believe Bernard L. Madoff Investment Securities Inc. was Ponzi scheme, the suits against the Heat and Panthers owners are more benign.

The Rothstein trustee is suing for recovery of a $156,000 preference from the Heat owner and $31,250 from a preference paid to the Panthers’ owner. The suits don’t even require an allegation that the owners knew Rothstein was running a Ponzi scheme.

A preference is a payment within 90 days of bankruptcy that was made on account of a stale debt.

The Rothstein trustee has bigger fish to fry. In July he filed a $1.2 billion lawsuit against TD Bank NA, alleging the bank allowed Rothstein to use its name and facilities to deceive investors.

Rothstein was a co-founder of the law firm Rothstein Rosenfeldt Adler PA. Creditors filed an involuntary Chapter 11 petition against the firm in Fort Lauderdale, Florida, in November 2009. When the firm was formally inducted into Chapter 11 later that month, the previously appointed state court receiver became the bankruptcy trustee.

Rothstein pleaded guilty in January 2010 and is serving a 50-year sentence.

The Chapter 11 case is In re Rothstein Rosenfeldt Adler PA, 09-34791, U.S. Bankruptcy Court, Southern District Florida (Fort Lauderdale).

Hussey Copper Lands Final Approval for $50 Million Loan

Hussey Copper Corp. was given final authorization last week by the bankruptcy court for a $50 million secured loan from existing lenders, overcoming opposition from the creditors’ committee. The committee saw the loan as unnecessary since Hussey’s own projections only showed a need for $218,000 through Dec. 2.

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 fell 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).

UBI Liquidating, formerly Urban Brands, Confirms Plan

UBI Liquidating Corp., known as Urban Brands Inc. before it sold the Ashley Stewart brand of women’s clothing to an affiliate of Gordon Brothers Group LLC, secured the signature of the bankruptcy judge on a confirmation order last week confirming the liquidating Chapter 11 plan.

Urban Brands filed under Chapter 11 in September 2010 and sold the business the next month for about $17 million cash following a 21-hour auction. Urban Brands is a retailer targeting what it called “plus-sized urban women.”

Although known as a liquidator, Gordon Brothers committed to operate at least 175 of the 210 stores. Gordon Brothers served as Urban Brands’ agent to run going-out-of-business sales at the locations it didn’t buy.

The plan pays off the remaining $2.2 million in secured debt owing to Bank of America NA while unsecured creditors with some $33.3 million in debt are estimated to have a 3 percent to 7 percent recovery, according to the disclosure statement.

Based in Secaucus, New Jersey, the company had 210 stores in 26 states, including the flagship store on 125th Street in the Harlem neighborhood of Manhattan. Sales declined from $179.6 million to $174.6 million between 2008 and 2009.

Funds affiliated with Trimaran Capital Partners are the largest shareholders, court papers say. Trimaran was owed $81.2 million on senior unsecured notes. Gordon Brothers purchased Trimaran’s claim. The other principal shareholder was UBI Holding Corp.

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

The case is In re UBI Liquidating Corp., 10-13005, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Big Whale Real Estate Rollup Confirms Chapter 11 Plan

Real estate owner Big Whale LLC filed under Chapter 11 in March in Milwaukee and won a commitment from the bankruptcy judge last week to sign a confirmation order approving the reorganization plan, court records show.

The company was formed just before bankruptcy to take title to 49 residential and commercial properties in Milwaukee. The properties together had 138 units and a combined $12.4 million in mortgage debt, court papers said.

The reorganization plan gives secured lenders new 4 percent mortgages with principal amortization on a 30-year schedule. Any deficiency claims will be treated as general unsecured claims.

Unsecured creditors with about $1 million in claims are to receive a 20 percent recovery spread over five years.

The petition said the properties were worth $12.1 million. Before bankruptcy, the properties were owned by several companies owed by brother and sister Steve and Debra Linder.

The mortgages are owed to five different lenders, with the largest owing to M&I Marshall & Ilsley Bank and Waterstone Bank.

The Big Whale petition said assets totaled $12.3 million, with debt aggregating $13.6 million.

The case is In re The Big Whale LLC, 11-23756, U.S. Bankruptcy Court, Eastern District Wisconsin (Milwaukee).

Bank Failures

Bank Failures in Three States Bring Year’s Total to 84

Four banks in Georgia, Florida and Colorado were taken over on Oct. 21 by regulators, bringing the year’s total to 84.

The failures will cost the Federal Deposit Insurance Corp. $359 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.

Daily Podcast

Increasing Bankruptcies, Doral, Innkeepers: Bankruptcy Audio

The probability of more corporate bankruptcy filings has increased as the junk-bond market dries up and the liquidity squeeze tightens on low-rated companies, as reported on the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. Three new bankruptcy filings prompt a look by Rochelle at hotels and chicken producers, two industries with multiple bankruptcies already. The podcast concludes by explaining how Donald Trump’s pending acquisition of Doral Golf Resort and Spa in Miami is structured to avoid the chance of last-minute problems such as those that occurred when Cerberus Capital Management LP and Chatham Lodging Trust terminated a $1.1 billion purchase from Innkeepers USA Trust. To listen, click here.

Advance Sheets

Indemnification No Basis for ‘Related To’ Jurisdiction

An indemnification claim against a company in Chapter 11 didn’t give rise to “related to” jurisdiction when the time for filing a claim has elapsed, U.S. District Judge Naomi Reice Buchwald in New York ruled on Oct. 19.

The case involved a lawsuit originally filed in state court by Allstate Insurance Co. against affiliates of Credit Suisse Group AG. Allstate sued for common law fraud arising from the purchase of $231 million in residential mortgage-backed securities that allegedly weren’t as sound as advertised.

Credit Suisse removed the suit to federal court, contending it was “related to” the Chapter 11 cases filed by three mortgage originators who issued some of underlying mortgages. Credit Suisse said the suit was “related to” given a right of indemnification against the bankrupt companies.

Buchwald held that the suit wasn’t “related to.” She remanded the case to state court.

For Buchwald, the pivotal fact was Credit Suisse’s failure to file claims for indemnification in the mortgage originators’ bankruptcies prior to the so-called bar date, or the last date for filing claims.

Buchwald acknowledged that an indemnification claim has been found to give rise to “related to” jurisdiction. Nonetheless, she said the required “conceivable effect” on the bankruptcies was missing because Credit Suisse had missed the bar date. She also said it was too late for Credit Suisse to amend the claims it had filed in the bankruptcies.

Had she not found a lack of “related to” jurisdiction, Buchwald also concluded it was a proper case for mandatory abstention.

Buchwald declined to impose costs and expenses on Credit Suisse, ruling that removal was not “so objectively unreasonable as to support an award of attorney’s fees.”

The case is Allstate Insurance Co. v. Credit Suisse Securities (USA) LLC, 11-2232, U.S. District Court, Southern District New York (Manhattan).

--With assistance from Dan Reichl in San Francisco and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Glenn Holdcraft, 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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