Bloomberg News

TerreStar, Lehman, MSR Resorts, Madoff, A&P: Bankruptcy

October 25, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Madoff; adds Dodgers, Washington Mutual, Lehman, Harrisburg, Ambac and Capmark in Updates; and section on Daily Podcast.)

Oct. 25 (Bloomberg) -- TerreStar Networks Inc., having sold the business to Dish Network Corp. for $1.375 billion, said in a court paper that $33 million should be left over for eventual distribution to unsecured creditors, assuming the company is correct with regard to interest owing to secured noteholders.

The disclosure was made in an Oct. 19 motion for an extension of the exclusive right to propose a Chapter 11 plan until Dec. 20. The hearing to consider the exclusivity motion is set for Nov. 16.

TerreStar explains how it received $1.345 billion at completion of the sale to Dish in August. From two court- authorized distributions, financing for the Chapter 11 case was paid off in full. In addition, TerreStar believes it paid all the principal owing to secured noteholders.

TerreStar calculates that from the $155 million remaining from the Dish sale, noteholders are owed $120 million in interest. The papers cite how the noteholders contend they are owed additional amounts for compounded interest and interest at the default rate. Assuming no additional interest is found owing by the court, TerreStar believes $33 million is left, after paying expenses of the Chapter 11 effort through the end of 2011. For details on the sale to Dish, click here for the June 16 Bloomberg bankruptcy report.

TerreStar said it’s “optimistic” there will be a settlement, opening the door to a consensual plan allowing distribution to unsecured creditors.

The creditors’ committee initiated lawsuits in July to enhance the recovery by unsecured creditors. For a rundown, click here for the July 14 Bloomberg bankruptcy report.

TerreStar Networks, based in Reston, Virginia, offered mobile satellite coverage throughout the U.S. and Canada where traditional mobile networks are unavailable. It listed assets of $1.4 billion and debt totaling $1.64 billion. In addition to $944 million in 15 percent senior secured pay-in-kind notes and $179 million in 6.5 percent exchangeable pay-in-kind notes, debt included $86 million on a purchase money credit agreement.

The operating company’s case is In re TerreStar Networks Inc., 10-15446, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The holding company case is In re TerreStar Corp., 11-10612, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Updates

MLB Says McCourt ‘Looted’ Dodgers of $190 Million

Frank McCourt, the owner of the Los Angeles Dodgers baseball club, “looted” almost $190 million from the team, according to a court filing yesterday by the Commissioner of Major League Baseball.

The papers were filed in advance of the trial to begin Oct. 31 where the bankruptcy judge in Delaware will decide pivotal issues in the case. The commissioner characterized McCourt as a “badly conflicted owner in a severe liquidity crisis.”

The commissioner argues that McCourt’s “liquidity crisis has substantially worsened” as a result of a $130 million divorce settlement with his former wife. Bud Selig, the commissioner, contends that McCourt would use a sale of television rights through bankruptcy to “pay his personal debts.”

Details on how McCourt allegedly took $190 million from the team can’t be discerned from the commissioner’s papers on account of redactions.

At the trial next week, the bankruptcy judge will decide if bankruptcy law permits overriding provisions in the existing television contract with Fox Entertainment Group Inc. He will also rule on whether to strip McCourt of the exclusive right to propose a Chapter 11 plan. For a discussion of the issues to be decide at the trial to run through Nov. 4, click here for the Oct. 3 Bloomberg bankruptcy report.

If given authority, Major League Baseball has said it will file a plan to sell the entire organization and pay all debts in full. The team’s plan also would have full payment for everyone.

Faced with missing payroll, the team filed for bankruptcy protection in late June when the commissioner refused to approve a sale of television broadcasting rights beginning with the 2014 season. The team’s proposal calls for holding an auction, which Fox says violates the existing broadcasting license.

The case is In re Los Angeles Dodgers LLC, 11-12010, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Lehman Settles with SunCal, Lehman Broker has $20 Billion

Lehman Brothers Holdings Inc. and some of the SunCal Cos., real estate developers in their own Chapter 11 reorganizations, reached settlement and avoided a contested confirmation hearing complete with competing plans. The confirmation fight would have been carried out in the SunCal’s Chapter 11 cases in California.

The SunCal companies agreed to support Lehman’s plan. In return, a SunCal affiliate receives an option to buy two projects for $57.5 million and will be paid $3 million under the proposed settlement.

Before both were in bankruptcy reorganization, a Lehman company to be in bankruptcy later and one of its affiliates still not bankrupt loaned SunCal more than $1.7 billion. In SunCal’s bankruptcy, the bankrupt and non-bankrupt Lehman companies filed 13 claims, most in the range of $343 million to $354 million each.

For Bloomberg coverage of the settlement, click here.

Separately, the trustee for the remnants of Lehman’s brokerage subsidiary filed an interim report showing $20 million has been collected for distribution. Funds on hand increased by $1.45 billion in the last six months, the report said. The trustee says there is the “prospect of some further recoveries from litigations or other efforts.”

The brokerage’s trustee intends to outline his proposal for a proper distribution of the $20 billion “before the end of the year,” the filing said. The largest variable in what the trustee can distribute arises from the unresolved $17 billion claim by the European affiliate, Lehman Brothers International (Europe). The Lehman parent and affiliates also have about $7.9 billion in unresolved claims.

So far, the liquidation of the brokerage has cost $642 million. The largest amount, $328 million, was for accounting fees. The trustee’s chief lawyers have cost $169 million.

The Lehman holding company reported yesterday that cash grew $250 million in September, ending the month at $25.74 billion, including $2.74 billion of restricted cash. Cash inflows, according to the monthly operating report filed with the bankruptcy court, were $906 million.

Lehman paid $35.2 million in professional fees during September, bringing the total since the beginning of the bankruptcy in September 2008 to $1.443 billion, the operating report said.

Lehman Brothers Special Financing Inc. remains in the lead among Lehman companies with $9.02 billion unrestricted cash. In second place is Lehman Commercial Paper Inc. with $3.97 billion, followed by the holding company with $2.25 billion.

Fees for Alvarez & Marsal LLC, Lehman’s financial advisers, now total $478.2 million, including $8.57 million in September. Fees for Weil Gotshal & Manges LLP, Lehman’s principal bankruptcy lawyers, total $343.3 million, including $8.55 million in September. Attorneys for the official creditors’ committee from Milbank Tweed Hadley & McCloy LLP have been paid $114.7 million since the case began, including $6.6 million in September.

Lehman creditors are voting on the Chapter 11 plan in preparation for the Dec. 6 confirmation hearing. The trustee for the brokerage subsidiary makes distributions to creditors and customers without going through the process of proposing and confirming a plan. 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).

WaMu Suit in Seattle Certified as Class Action

Purchasers of mortgage-backed securities originated by affiliates of Washington Mutual Inc. were authorized by a U.S. District Judge in Seattle to represent everyone who purchased 13 tranches of the securities. In the same ruling, parts of the suit alleging fraud on 110 other tranches were dismissed because the plaintiffs had purchased none of them.

The suit, now proceeding as a class-action as to the 13 tranches, began in January 2009. It is proceeding against non- bankruptcy subsidiaries of WaMu as well as officers and directors. For Bloomberg coverage of the ruling, click here.

Last month, the bankruptcy judge in Delaware refused to sign a confirmation order approving WaMu’s Chapter 11 plan. Rather than attempt to confirm a modified plan immediately, the bankruptcy judge directed the parties into mediation. For details on the opinion rejecting the plan a second time, click here for the Sept. 14 Bloomberg bankruptcy report. For details on earlier opinion rejecting the prior version of the plan, click here for the Jan. 10 Bloomberg bankruptcy report. For details on the plan as revised after the January ruling, click here for the Feb. 14 Bloomberg bankruptcy report. For details on later changes, click here for the March 21 Bloomberg bankruptcy report.

The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank, once the sixth-largest depository and credit- card issuer in the U.S., was the largest bank failure in the country’s history. The holding company filed formal lists of assets and debt showing property with a total value of $4.49 billion against liabilities of $7.83 billion.

The lawsuit is Boilermakers National Annuity Trust Fund v. Washington Mutual Asset Acceptance Corp., 09-37, U.S. District Court, Western District of Washington (Seattle).

The holding company Chapter 11 case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Midland Objects to MetLife, MSR Resorts Settlement

Midland Loan Services, the servicer for a $1 billion secured claim against the five resorts foreclosed in January by Paulson & Co. and Winthrop Realty Trust, came out in opposition to a settlement with MetLife Inc., the holder of a $115 million first mezzanine loan.

Midland contends that the settlement violates an intercreditor agreement and a rule in bankruptcy prohibiting lower-ranked creditors from being paid ahead of those with higher priority. The MetLife settlement, together with a companion settlement with Government of Singapore Investment Corp., would permit Paulson and Winthrop to continue the resorts’ bankruptcy reorganization into September 2012.

Midland takes issue with provisions in the settlement where MetLife, a lower-ranked creditor, will be paid interest and fees before Midland is paid in full. Midland contends the provision conflicts with an intercreditor agreement among the lenders.

Midland also argues that lower-ranked creditors shouldn’t be paid interest until it’s determined that the five resorts are worth more than combined secured debt. Paulson and Winthrop previously said that the price offered by Trump implies a value for all the resorts “significantly” exceeding the $1.5 billion in debt.

The settlements are up for an approval hearing on Oct. 31 in U.S. Bankruptcy Court in Manhattan. For summaries of the settlements, click here and here for the Oct. 11 and Sept. 22 Bloomberg bankruptcy reports.

Donald Trump has a contract to buy the Doral Golf Resort and Spa in Miami for $170 million. There will be an auction to learn if there is a better bid.

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 they were foreclosed in January by Paulson and Winthrop.

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).

Wilpon, Madoff Trustee Spar over Details in Lawsuit

The trustee liquidating Bernard L. Madoff Investment Securities Inc. is entitled to sue Mets owner Fred Wilpon for fictitious profit taken out within two years of bankruptcy by calculating all cash invested less cash taken out since the inception of the accounts, the trustee and the Securities Investor Protection Corp. contended in papers filed yesterday in U.S. District Court.

The Wilpon group takes a different approach. They believe securities law compels the trustee to credit them with the balance shown on the account statements at the beginning of the two-year lookback period. The original balance, plus any later investments, offset withdrawals during the two years, the Wilpons argue.

When U.S. District Judge Jed Rakoff ruled Sept. 27 that the Madoff trustee can only sue for two years of profits, not six, he left open the question of how to calculate the amount still subject to attack.

In papers filed with Rakoff yesterday, SIPC and Irving Picard, the trustee, said that traditional fraudulent transfer law looks beyond the two-year period to decide how much outstanding debt can be used to offset a fraudulent transfer claim. SIPC says that an infinite lookback is sanctioned in determining whether a debt that one time existed was paid off before the two-year period prior to bankruptcy.

Picard and SIPC also argue that the Madoff decision in August by the U.S. Court of Appeals requires a lookback beyond two years. In the August ruling, the appeals court approved the trustee’s procedure that calculates customers’ claims by subtracting cash taken out since the inception of the account from the amount invested after the account was opened.

The Wilpon group reads the appeals court’s August opinion and reaches the opposite result.

The Wilpon group filed papers on Oct. 21 opposing the trustee’s request that Rakoff authorize taking an immediate appeal from the September ruling cutting the clawback period to two years from six. Wilpon argues that an appeal won’t “materially advance the termination” of the lawsuit. The September ruling’s effect on other lawsuits isn’t reason for allowing an appeal in the suit against the Mets’ owners, the papers argue.

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.

Rakoff is also deciding whether the Madoff trustee is entitled to a jury trial.

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 (Manhattan). 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).

Governor Declares Harrisburg in Financial Emergency

Harrisburg, Pennsylvania’s capital, was declared by the governor to be in a financial emergency. The governor, Tom Corbett, was acting under power given him in legislation he signed into law Oct. 20.

If the city doesn’t implement a recovery plan acceptable to the state within 30 days, the governor has the right to appoint a receiver. The appointment presumably may occur in time for the receiver to seek dismissal of Harrisburg’s Chapter 9 municipal reorganization at a Nov. 23 hearing in U.S. Bankruptcy Court. For Bloomberg coverage, click here.

The state filed a motion to dismiss the bankruptcy two days after the Oct. 11 bankruptcy filing. Bankruptcy was purportedly authorized by a 4-3 vote of the city council, without signature of the mayor.

Court papers say 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.

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

Ambac Now Says Cash Flow Sufficient for Five Years

Ambac Financial Group Inc. filed papers yesterday for an extension of the exclusive right to propose a Chapter 11 plan. In the process, Ambac said it has sufficient cash to operate for five years.

Earlier this month, Ambac said in a court filing that it would run out of money and the almost completed Chapter 11 case would convert to liquidation in Chapter 7 absent quick estimation of claims by the Internal Revenue Service. Ambac made the statements while imploring the bankruptcy judge to determine the amount of net operating loss carryforwards that remain.

Ambac’s exclusivity motion is scheduled for a Nov. 7 hearing. Click here for Bloomberg coverage.

Ambac’s creditors are voting on a reorganization plan following approval of the disclosure statement. The confirmation hearing for approval of the plan is set for Dec. 8. 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 had been holding up a plan for the holding company.

The Ambac parent filed under Chapter 11 in November. The Ambac parent listed assets of $90.7 million and liabilities totaling $1.624 billion, virtually all unsecured. Almost all the debt is made of up $1.622 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 of 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).

Reorganized Capmark Sues Goldman Sachs for $147 Million

Capmark Financial Group Inc., a bank holding company, implemented its Chapter 11 plan on Sept. 30 and filed a lawsuit to recover $147 million from Goldman Sachs Group Inc. arising from a refinancing five months before bankruptcy.

For Bloomberg coverage of the suit, click here.

The plan was confirmed in August. Capmark reorganized around its non-bankrupt bank subsidiary. For details on the settlement that underlies the plan, click here for the Nov. 2 Bloomberg bankruptcy report.

Based in Horsham, Pennsylvania, Capmark was called GMAC Commercial Holding Corp. before control was sold in 2006. It had been GMAC’s servicing and mortgage banking business.

Originally, Capmark’s debt included a $1.5 billion term loan secured by all assets except Capmark’s bank’s assets, $234 million under a bridge loan, a $4.6 billion senior credit, $2.34 billion in notes, and a $250 million junior subordinated debt. The bank had assets of $11.12 billion and deposits of $8.39 billion, according to a court filing.

The case is In re Capmark Financial Group Inc., 09-13684, U.S. Bankruptcy Court, District of Delaware (Wilmington).

A&P Given Authorization for Personal Injury Settlement Process

Great Atlantic & Pacific Tea Co., the supermarket operator, received authorization yesterday from the bankruptcy court in White Plains, New York, to adopt mediation and arbitration procedures designed to deal with more than 2,600 personal injury claims seeking not less than $1.3 billion. Employees with workers’ compensation claims and claims arising from auto accidents aren’t covered by the process.

A&P’s insurance policy has $750,000 in so-called self- insured retention, requiring the company to pay the first $750,000 before insurance kicks in.

The approved procedures require claimants and the company to exchange settlement offers. Absent settlement, there will be a 60-day mediation, unless the parties agree to binding arbitration.

The insurance company won’t be bound by mediation or arbitration unless it consents.

A&P has the right to send the dispute to a state or federal court if mediation fails. A&P said it will allow a suit to proceed if the claimant agrees only to receive payment from whatever insurance may be available.

To the extent claimants end up with settlements or judgments not covered by insurance, the resulting claims will be paid like unsecured creditors under a Chapter 11 plan.

Montvale, New Jersey-based A&P filed for reorganization in December with 395 supermarkets. There are now 330 locations, the company said in a court filing. The stores are mostly in New York, New Jersey and Pennsylvania. A&P listed assets of $2.531 billion and debt totaling $3.211 billion. Along with A&P, store brands include Pathmark, Food Emporium and Waldbaum’s.

The case is In re The Great Atlantic & Pacific Tea Co. Inc., 10-24549, U.S. Bankruptcy Court, Southern District of New York (White Plains).

New Filing

Southern Montana Power Co-Op Files Chapter 11 in Butte

Southern Montana Electric Generation & Transmission Cooperative Inc. filed a bare-bones Chapter 11 petition on Oct. 21 in Butte, Montana, saying assets and debt both exceed $100 million.

Based in Billings, Montana, the co-op was formed to serve five other electric cooperatives. The city of Great Falls later joined as the sixth member. Including the city, the co-op serves a population of 122,000, the website says. In addition to Great Falls, the service area includes suburbs of Billings, Montana.

PPL Energy Plus LLC, with a $7.6 million disputed claim under a power-purchase agreement, is listed the unsecured creditor with the largest claim.

There were no papers initially filed in bankruptcy court other than the three-page printed form petition, a list of creditors and the resolution authorizing the filing.

The case is In re Southern Montana Electric Generation & Transmission Cooperative Inc., 11-62031, U.S. Bankruptcy Court, District of Montana (Butte).

Watch List

Insurer PMI Group Hires Restructuring Advisors

PMI Group Inc. hired advisers to help with a possible restructuring after its mortgage insurance subsidiary PMI Mortgage Insurance Co. was taken over last week by regulators in Arizona. The subsidiary was already barred from writing new policies.

For legal counsel, PMI Group hired Sullivan & Cromwell LLP and Young Conaway Stargatt & Taylor LLP. Evercore Partners Inc. was tapped to serve as financial adviser. For Bloomberg coverage, click here.

The holding company reported a net operating loss of $412.1 million for six months ended June 30.

The holding company’s $250 million in 6 percent notes due 2106 traded yesterday at 25 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The stock of the Walnut Creek, California-based holding company fell 5 cents yesterday to 31 cents in trading on the New York Stock Exchange. The three-year high was $7.20 on April 15, 2010.

Koosharem in Active Talks on Restructuring, S&P Says

Koosharem Corp., a staffing services provider also known as SelectRemedy, is in “active talks” with investment banks to “restructure its debt facilities,” Standard & Poor’s said in an Oct. 21 report. The result would be a “distressed exchange,” S&P said.

Koosharem’s problems are to a large extent the result of $51 million judgment in favor of the California State Fund. Although the company is appealing, the auditors say there is substantial doubt about the ability to continue as a going concern.

In addition, lenders won’t grant access to the revolving credit, S&P said.

The development prompted S&P to lower the corporate credit rating by another notch to CC.

Santa Barbara, California-based Koosharem is one of the 10 largest temporary staffing providers in the U.S. It is controlled by Atlas Acquisition Holdings Corp.

Downgrade

Logan’s Roadhouse Restaurants Demoted to Moody’s B3

Logan’s Roadhouse Inc., an operator or franchiser of 227 steakhouse restaurants in 23 states, was demoted yesterday by one notch to a B3 corporate rating from Moody’s Investors Service.

Moody’s based its action on rising costs, including beef, that will “likely result in margin deterioration in the medium term.” Raising prices isn’t an attractive strategy given how the number of customer visits has been declining, Moody’s said.

The $355 million in second-lien notes also now have a B3 rating from Moody’s.

Revenue for a year ended in July was $539 million for the Nashville-based company, Moody’s said. Among stores, 201 are company owned, Moody’s said.

Daily Podcast

Lehman Claim Trading, Municipal Bankruptcies: Bankruptcy Audio

Reasons why trading in claims against Lehman Brothers Holdings Inc. spiked to $4.4 billion in September are explained in the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. The podcast also looks at the increasing probability that Harrisburg, Pennsylvania, will leave bankruptcy about the time Jefferson County, Alabama, commences a municipal reorganization. To listen, click here.

--With assistance from Romy Varghese in Harrisburg, Pennsylvania; Noah Buhayar, Tiffany Kary and Patricia Hurtado in New York; and Dawn McCarty, Steven Church and Michael Bathon in Wilmington, Delaware. Editors: Mary Romano, Glenn Holdcraft.

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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