Bloomberg News

Commonwealth, Innkeepers USA, Lehman, Madoff: Bankruptcy

October 28, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Hawaii Medical in Updates, Netflix in Downgrade and sections on Daily Podcast and Advance Sheets.)

Oct. 28 (Bloomberg) -- Nine funds advised by Commonwealth Advisors Inc. of Baton Rouge, Louisiana, sought Chapter 11 protection on Oct. 25 after failing to work out a reorganization plan acceptable to all investors.

The funds were formed from 2005 to 2007 under Walter Morales, president and chief investment manager, and attracted 456 investors, according to filings in U.S. Bankruptcy Court in Wilmington, Delaware. Last year, investors filed class-action and derivative suits alleging mismanagement, misrepresentation, and breach of fiduciary duty.

The U.S. Securities and Exchange Commission initiated a formal investigation in July 2009, court papers show. The funds were unable or unwilling to satisfy investors’ redemption demands, which would have required liquidation of “their holdings in an illiquid market and at depressed prices,” according to a court filing.

The funds, Commonwealth and Morales negotiated a prepackaged Chapter 11 plan, which was accepted by all classes of creditors except one. Because third-party contributions required unanimous approval, the funds said they filed in Chapter 11 so they could have “further discussions with their investors with the oversight of this court.”

The case is In re Sand Spring Capital III LLC, 11-13393, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Updates

Innkeepers Sale Completed at 9% Lower Purchase Price

Innkeepers USA Trust formally emerged from Chapter 11 reorganization yesterday with completion of the $1.02 billion sale of 64 hotels to Cerberus Capital Management LP and Chatham Lodging Trust.

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

The buyers terminated the contract in August, blaming a slowdown in the hospitality industry. After being sued, the buyers settled with Innkeepers by signing a new contract with a lower price. The bankruptcy judge in New York approved the new contract and modifications in the plan on Oct 21.

The only creditors taking a haircut from the price reduction 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 a description of how the revised sale affected them, click here for the Oct. 20 Bloomberg bankruptcy report. 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 Chapter 11 case is In re Innkeepers USA Trust, 10-13800, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Lehman Wins in District Court, Tries to Avoid District Court

Lehman Brothers Holdings Inc. won dismissal of an appeal of a bankruptcy court’s order mandating non-bonding mediation for some types of derivatives claims.

Separately, Lehman filed papers seeking to keep a multibillion-dollar lawsuit against JPMorgan Chase Bank NA in bankruptcy court.

The appeal was filed by a group of 10 holders of so-called minibonds sold in Hong Kong. Lehman successfully argued to U.S. District Judge Naomi Reice Buchwald that the order wasn’t appealable under federal procedural rules. Lehman also argued that the underlying dispute was settled.

Buchwald ruled that an order requiring mediation isn’t a so-called final order. It is merely procedural, she said. As a result, it can’t be appealed in the federal courts.

Buchwald didn’t reach the question of whether the appeal was also dead because the underlying disputes had been settled by a super-majority vote of holders of the minibonds.

In a settlement, the trustee for the bondholders agreed, in return for a release of claims, to take payments on the bonds of between 70 percent and 96.5 percent. About 99 percent of minibond holders vote in favor, far more than required for the settlement to be binding on everyone.

In other developments, Lehman filed papers in U.S. District Court on Oct. 26 opposing an effort by JPMorgan to remove a lawsuit from the grasp of the bankruptcy judge.

The suit, begun in May 2010, alleges that the New York- based bank “stripped a faltering Lehman Brothers of desperately needed cash” in the days and weeks before the commencement of Lehman’s bankruptcy in September 2008.

The complaint goes on to allege that JPMorgan used its position as Lehman’s clearing bank and the inside information it gained in the course of business to “leapfrog” over other creditors, “not just for clearing obligations, but for any and all possible obligations” owing by Lehman and its subsidiaries.

The bank filed a motion to remove the suit from bankruptcy court, contending the lower court doesn’t have authority to hear a suit of the type in view of the June decision from the U.S. Supreme Court in a case called Stern v. Marshall. In Stern, the high court said that a bankruptcy court can’t render a final judgment on a state-law counterclaim against a creditor.

Lehman countered by saying its claims are pure bankruptcy law, not state law. Also unlike Stern, Lehman argued that the claims against JPMorgan can be fully decided in the process of ruling on JPMorgan’s claims against Lehman.

The question of which court entertains the JPMorgan suit will be decided by U.S. District Judge Richard J. Sullivan.

Creditors are voting on Lehman’s Chapter 11 plan in advance of 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 mini-bond appeal in district court is Ka Kin Wong v. HSBC Bank USA (In re Lehman Brothers Holdings Inc.), 11-2721, U.S. District Court, Southern District of New York (Manhattan). The suit with JPMorgan in district court is Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank NA, 11-06760, in the same court.

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).

Madoff Trustee Sues HSBC Affiliate for $86.4 Million

The trustee for Bernard L. Madoff Investment Securities LLC filed an $86.4 million lawsuit in bankruptcy court against Somers Dublin Ltd., an Irish affiliate of HSBC Holdings Plc. The suit aims to recover money taken out of the Fairfield Sentry Ltd. feeder fund.

The new suit, like others previously, was made possible by a settlement in June between the Madoff trustee and Fairfield’s liquidators from the British Virgin Islands. In the settlement, the liquidators and the Madoff trustee agreed how to split up recoveries against investors in the Fairfield funds.

In addition, the Madoff trustee received a $3.05 billion judgment against the Fairfield funds. For Bloomberg coverage of the new suit, click here.

Separately, Irving Picard, the Madoff trustee, argued to U.S. District Judge Jed Rakoff that his Sept. 27 ruling in a lawsuit against Fred Wilpon and the owners of the New York Mets, if applied universally, would enable Madoff’s family to retain $82 million stolen from customers. For Bloomberg coverage, click here.

The contentions were made in Picard’s papers arguing against dismissal of his lawsuit against a customer named James Greiff.

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.

Greiff case in district court is Picard v. Greiff, 11-03775, U.S. District Court, Southern District of New York (Manhattan). The Wilpon suit in district court is Picard v. Katz, 11-03605. The liquidation in bankruptcy court in 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).

Chef Solutions Has Final Approval for $38 Million in Loans

Chef Solutions Inc., the second-largest North American producer of fresh prepared food, received final approval on Oct. 26 for $38 million in secured financing to carry the company until the assets are sold.

As authorized by the bankruptcy court in Delaware following the Chapter 11 filing on Oct. 4, there will be an auction on Nov. 9 test the bid from a joint venture between Mistral Capital Management LLC and Reser’s Fine Foods Inc. A hearing to approve the sale is scheduled to take place Nov. 15.

Reser’s is providing $10 million of the financing on terms making the loan secured although junior to the $28 million in financing from existing secured lenders.

The contract, worked out before bankruptcy, calls for Reser’s to buy the business in exchange for $36.4 million in cash and $25.3 million in secured debt. The buyers will also assume specified debt, including as much as $7.5 million in priority claims.

Chef Solutions, based in Birmingham, Michigan, has plants in Kansas, Ohio and California. Brands include Orval Kent. Customers include Wal-Mart Stores Inc., Safeway Inc. and Costco Wholesale Corp.

Chef Solutions was a 2004 acquisition from Deutsche Lufthansa AG by Questor Management Co., which recently surrendered control to Mistral.

Liabilities include $23 million owing to Wells Fargo Capital Finance Inc. as agent for first-lien lenders. Mistral has $24.3 million in second-lien debt.

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

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

Failed Viceroy Resort Case May Be Dismissed Nov. 17

The attempted Chapter 11 reorganization of the Viceroy Anguilla Resort and Residences on Anguilla in the British West Indies may end at a Nov. 17 hearing when the U.S. Trustee will request either dismissal of the case or conversion to liquidation in Chapter 7.

In September, the bankruptcy court in Delaware refused to confirm a reorganization plan on account of improper discrimination between similarly situated creditors. Purchasers of units at the development responded with a motion to dismiss. Instead, the bankruptcy court gave them authority to pursue remedies in courts in Anguilla and seek appointment of a receiver under local law.

The U.S. Trustee recited in her motion that the company is $20,000 behind in payment of fees to the U.S. Trustee system and is “administratively insolvent,” meaning it lacks cash to pay bills accrued during Chapter 11.

Purchasers ended up as unsecured creditors in the bankruptcy case because their deposits weren’t held in escrow. Previously, the Delaware judge allowed secured creditor Starwood Capital Group LLC to foreclose after he declined to confirm the plan.

The aborted plan called for Starwood to assume ownership on account of its $370 million secured claim. When the plan failed, Starwood took ownership through foreclosure. For details on the failed plan, click here for the June 15 Bloomberg bankruptcy report.

Over budget, the resort didn’t open officially until October 2010. Construction began in 2005.

Assets were $531 million and debt totaled $462 million, according to the petition. The 35-acre project has 166 residences with prices ranging from $600,000 to $6.5 million.

The case is In re Barnes Bay Development Ltd., 11-10792, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Hussey Proposes Bonuses Based on Net Sale Proceeds

Hussey Copper Corp. is proposing a bonus program that may cost as much as $2.7 million, with 90 percent to go to the top five officers.

The remaining 10 percent will be earmarked for 15 middle- management workers if the bankruptcy court approves at a hearing Nov. 9.

Eligibility for bonuses will be determined by the net proceeds from a sale of the business after deducting expenses and secured debt. If net proceeds are more than $5 million, the bonus pool will be $500,000. The pool will grow until it reaches $2.7 million if net proceeds exceed $45 million.

The size of the bonuses will be determined at a Nov. 14 auction to learn whether there is a better bid than the $88.7 million contract with Kataman Metals LLC.

Other bids are due Nov. 11. The hearing for approval of the sale will take place Nov. 16.

In business since 1848, family-owned Hussey makes a variety of copper products from plants near Pittsburgh and Eminence, Kentucky.

Revenue shrank to $382 million in 2010 from $454 million in 2008, leading to a net loss of $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, court papers show.

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

Broadstripe Sets December 8 Plan Confirmation Hearing

Broadstripe LLC, a broadband-cable operator based in Dallas, received approval of the disclosure statement this week, allowing the bankruptcy court to schedule a Dec. 8 confirmation hearing for approval of the plan to sell the business to four buyers for about $95 million.

The disclosure statement tells second-lien and general unsecured creditors that they should have about a 5 percent recovery if they agree to releases. If not, the recovery would be 0.4 percent, the disclosure statement says.

The plan is based partly on a settlement approved in December that is to be implemented as part of the reorganization. For details on the settlement, the $3.3 million trust that it created, and what it means for unsecured creditors, click here for the Dec. 30 Bloomberg bankruptcy report.

First-lien secured lenders consented to the sale even though it pays less than half their debt and financing for the Chapter 11 case, according to a court filing.

The first-lien debt is $181 million while second-lien debt now owed to Highland Capital Management LP is $91.9 million. Another $10.3 million of second-lien debt is owed to other creditors.

Highland is to receive nothing on its portion of the second-lien debt. General unsecured claims amount to about $54.4 million.

At the beginning of the reorganization in January 2009, Broadstripe had 93,000 customers in Maryland, Michigan, Washington State and Oregon. It was created through four acquisitions in 1998 and 1999 and filed for Chapter 11 reorganization in January 2009.

The case is In re Broadstripe LLC, 09-10006, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Harrisburg Wants Comfort Order to Pay Pre-Bankruptcy Debt

Harrisburg, Pennsylvania, discovered that some vendors and suppliers won’t do business with the city, while others are concerned about receiving payments without a blessing from the bankruptcy judge.

To ensure goods and services aren’t cut off, the bankruptcy court in Harrisburg scheduled an emergency hearing on Nov. 1 to give comfort that bills the city pays now won’t be clawed back in the future for having been unauthorized.

The city says it will require vendors to provide the same credit terms as before the Chapter 9 municipal bankruptcy filing on Oct. 11 to qualify for payment of pre-bankruptcy debt. For Bloomberg coverage click here.

Two days after the Chapter 9 filing, the state of Pennsylvania filed a motion to dismiss the case as being unauthorized. Later, the state adopted a new law allowing the governor to appoint a receiver who may join those seeking dismissal.

The bankruptcy judge is scheduled to decide at a Nov. 23 hearing whether dismissal is required.

The city is $65 million in default on $242 million owing on bonds sold to finance an incinerator that converts trash to energy, according to court papers. 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).

Point Blank Reports $70,600 Operating Income in September

Point Blank Solutions Inc., a manufacturer of soft body armor for police and military, reported $70,600 in operating income for September on sales of $7.17 million.

The net loss for the month was $1.16 million, thanks in large part to $1.73 million in reorganization expenses, according to an operating report filed with the bankruptcy court in Delaware. Interest expense in the month was $302,500. The pretax loss was $1.65 million.

At a hearing today, Point Blank will request authority to sell the business. When auction and sale procedures were approved, an affiliate of Gores Group LLC named Barrier Acquisition LLC was under contract buy the business for $20 million. Point Blank was forced to sell because the official equity committee blocked confirmation of a reorganization plan.

Point Blank filed under Chapter 11 in April 2010. Based in Pompano Beach, Florida, Point Blank has two plants. Revenue in 2009 exceeded $153 million.

The Chapter 11 petition listed assets of $64 million against debt totaling $68.5 million. Debt included a $10.5 million secured loan paid off by financing for the Chapter 11 case. Point Blank said it also owes $28.2 million to trade suppliers.

The case is In re Point Blank Solutions Inc., 10-11255, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Xanadoo Wireless Providers Have Longer Exclusivity

Xanadoo Co. units that provide 4G wireless Internet won an extension of the exclusive right to propose a Chapter 11 plan until the requested date of Feb. 7.

Last week, the U.S. Bankruptcy Court in Delaware turned back an effort by the agent for secured noteholders to have the case dismissed or a trustee appointed.

As part of an agreement for the use of cash, the companies must report to the lenders by Dec. 2 on indications of interest in buying the business. Initial proposals aren’t expected before mid-November, according to court papers.

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 valued at more than $200 million.

The companies say their total current liabilities are $66.3 million. The parent isn’t in Chapter 11.

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

Poultry Producer Cagle’s Panel Hires Lowenstein Firm

Cagle’s Inc., an integrated poultry producer based in Atlanta, filed for Chapter 11 protection on Oct. 19 in its hometown and has an official unsecured creditors’ committee with seven members.

Co-chairs of the committee are Archer Daniels Midland Co. and International Paper Co. For legal counsel, the committee selected Lowenstein Sandler PC of Roseland, New Jersey.

Cagle’s produces 1.7 million birds a week from two company- owned facilities. Liabilities include $33.5 million owing on a revolving credit with AgSouth Farm Credit ACA. The lender is providing $6.5 million in credit for the Chapter 11 case.

Metropolitan Life Insurance Co. is owed $7.7 million on mortgages on specified facilities. The assets are worth more than $50 million while debt is less than $50 million, according to the petition.

The case is In re Cagle’s Inc., 11-80202, U.S. Bankruptcy Court, Northern District Georgia (Atlanta).

Hawaii Medical’s Sale to St. Francis Falls Through

The agreement for St. Francis Healthcare System of Hawaii to acquire the 342-bed Hawaii Medical Center LLC fell apart, court records show.

Hawaii Medical filed under Chapter 11 for a second time in June, the agreement with St. Francis already having been negotiated. The hospital emerged from a previous bankruptcy reorganization in May 2010.

St. Francis was to have purchased the facility in return for a $39.2 million secured claim. In the previous bankruptcy, St. Francis attempted unsuccessfully to acquire Hawaii Medical. The defaulted debt owing to St. Francis under the prior plan was one of the reasons for the new filing.

The new petition says assets are less than $50 million while debt exceeds $50 million. In addition to the St. Francis secured debt, $7.7 million is owing to MidCap Financial LLC on a secured revolving credit.

Hawaii Medical’s two facilities were acquired from St. Francis in January 2007.

Hawaii Medical originally filed for Chapter 11 reorganization in Delaware in August 2008. The case was moved to Hawaii in September 2008. The hospital became a not-for-profit organization after the first bankruptcy.

The new case is In re Hawaii Medical Center, 11-01746, U.S. Bankruptcy Court, District of Hawaii (Honolulu). The prior case was CHA Hawaii LLC, 08-01369, in the same court.

Downgrade

Netflix Downgraded to BB after Price, Spinoff Gaffes

Netflix Inc. was dealt a one-notch downgrade by Standard & Poor’s yesterday to a BB corporate rating after a decline in the subscriber base resulting from what S&P said was a “recent price hike and negative publicity.”

“Increased investments for the company’s international expansion, likely subscriber declines in the third and fourth quarter of 2011, and escalating content commitments will lower profitability over the near term,” S&P predicted

S&P said cash for the online and mail-order video provider is “adequate” given the Los Gatos, California-based company’s cash of $159.2 million and “$206.6 million of short-term investments in corporate debt, government, and mortgage-backed securities.”

Netflix closed yesterday at $80.86, up $1.46 a share in Nasdaq Stock Market trading.

Daily Podcast

Lehman, L.A. Dodgers, Seaarland Shipping: Bankruptcy Audio

The $160 billion in support that Lehman Brothers Holdings Inc. garnered for its Chapter 11 plan provides a springboard for discussion on the Bloomberg bankruptcy podcast about plan- support agreements and how they were at one time viewed as possibly violating a prohibition against solicitation of votes before approval of a disclosure statement. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle continue the podcast by explaining why the Los Angeles Dodgers baseball club was wise to compromise with fans by giving season ticket holders two seats on the official creditors’ committee. The podcast concludes by using Dutch ship owner Seaarland Shipping Management as an example for how minimal contacts with the U.S. are sufficient foundation for filing a Chapter 11 petition. To listen, click here.

Advance Sheets

11th Circuit Writes Ponzi Opinion Helpful for Madoff Trustee

The U.S. Court of Appeals in Atlanta handed down a decision yesterday that the trustee for Bernard L. Madoff Investment Securities LLC will find useful in trying to overturn a September decision by U.S. District Judge Jed Rakoff applying the so-called safe harbor in Section 546(e) of the Bankruptcy Code to Ponzi schemes.

The Eleventh Circuit case in Atlanta involved an interlocutory appeal of a bankruptcy court’s order that refused to grant a trustee summary judgment for the return of fictitious profits and principal paid out in a Ponzi scheme.

The case involved a hedge fund that in reality was a Ponzi scheme. The investors believed they were buying equity in the funds.

The trustee contended that as equity investors, even the principal they took from the Ponzi scheme didn’t represent “value.” The circuit court in Atlanta disagreed, taking sides with the U.S. Court of Appeals in San Francisco.

If the Ponzi scheme was already operating when the supposed equity investments were made, the courts of appeal say the investor immediately had a fraud claim that could offset later lawsuits to recover principal, although not fictitious profits.

The language useful for the Madoff trustee appears late in the opinion, where the circuit court describes how the trustee wanted the court to “focus solely on the form” of the equity investment and “ignore the reality of how Ponzi schemes operate.”

The Eleventh Circuit said, “no court to date has applied this form over substance rule in fraudulent transfer actions involving Ponzi schemes.”

The statements are useful for the Madoff trustee because Rakoff ruled in a lawsuit with New York Mets owner Fred Wilpon that the safe harbor for brokers applied even though it was a Ponzi scheme. Rakoff applied the safe harbor applicable to stockbrokers without analyzing whether the Madoff firm was a broker in form only.

The Eleventh Circuit decision was written by U.S. District Judge William T. Hodges, sitting by designation.

The case is Perkins v. Haines, 10-10683, U.S. Court of Appeals for the Eleventh Circuit (Atlanta).

--With assistance from Linda Sandler in New York and Dawn McCarty, Steven Church and Michael Bathon in Wilmington, Delaware. Editors: Stephen Farr, Mary Romano

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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