Bloomberg News

Houghton Mifflin Chapter 11 Sent to Boston: Bankruptcy

June 29, 2012

What remains of the Houghton Mifflin Harcourt Publishing Co. reorganization was sent yesterday to the U.S. Bankruptcy Court in Boston.

The bankruptcy judge in New York, where the prepackaged Chapter 11 petition was filed on May 21, ruled on June 22, the day after he signed a confirmation order, that the case was improperly filed in New York. The judge said he would send the case away officially when the reorganization plan was implemented.

There will be no further proceedings in New York. As a result, the bankruptcy judge in Boston, where the company is based, will rule on professionals’ fee requests.

The New York judge decided he was required to send the case away because none of the Houghton companies was incorporated in New York and none had principal assets or a principal place of business in Manhattan.

For details on the change of venue, click here for the June 25 Bloomberg bankruptcy report. For details on the plan and the company’s financial condition, click here for the May 22 Bloomberg bankruptcy report. For more on the plan and confirmation, click here for the June 22 Bloomberg bankruptcy report.

Revenue in 2011 was about $1.3 billion. The petition listed assets of $2.68 billion and debt totaling $3.54 billion.

The case is In re Houghton Mifflin Harcourt Publishing Co., 12-12171, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

New Filings

Stockton, California, Files in Chapter 9 in Sacramento

Stockton, California, filed a petition for Chapter 9 municipal bankruptcy yesterday in Sacramento, California. It is the largest U.S. city ever to seek bankruptcy protection.

The city, with a population of about 300,000, listed the California Public Employees Retirement System as the largest creditor with a claim of $147.5 million. In second place is Wells Fargo Bank NA as trustee for $124.3 million in pension obligation bonds.

The list of largest creditors includes $119.2 million owing on four other series of bonds.

Before bankruptcy, the city council adopted a budget calling for defaulting on $10.2 million in debt payments and cutting $11.2 million in employee pay and benefits under union contracts.

To qualify for Chapter 9, the city said in a court filing that it’s insolvent and intends to implement a plan to “adjust its debts.” The city also stated that it conducted negotiations mandated by state law with holders of more than half of the debt in each class it intends to affect in bankruptcy.

The city is being represented in bankruptcy court by Orrick, Herrington & Sutcliffe LLP, a San Francisco-based law firm with five offices in California, including Sacramento.

The petition stated that assets are worth more than $1 billion while debt exceeds $500 million.

For Bloomberg coverage of the filing, click here.

The case is In re City of Stockton, California, 12-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

Five Shamrock Hotels File in Chicago Owing GECC

Five hotels affiliated with Shamrock Holdings Inc. from Los Angeles filed for Chapter 11 protection on June 26 in Chicago. The properties all have mortgages with General Electric Capital Corp. that matured on May 31.

The largest property is the DoubleTree by Hilton Hotel Tampa Airport in Tampa, Florida, with 489 rooms. The mortgage had an original principal amount of $37 million.

The other properties are the Wyndham Boston Andover hotel in Andover, Massachusetts, with an original mortgage of $17.5 million; the Embassy Suites Palm Desert in Palm Desert, California, with an original mortgage of $16.9 million; the Crowne Plaza San Antonio Airport hotel in San Antonio, with an original mortgage of $13 million; and the DoubleTree by Hilton Hotel Princeton in Princeton, New Jersey, with an original mortgage of $15.8 million.

The properties were purchased in 2006 or 2007.

Until his death in late 2009, Shamrock was controlled by Roy Disney, nephew of Walt Disney.

The first-filed case is Shamrock-Hostmark Princeton Hotel LLC, 12-25860, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

Gypstack Owner in Florida Files Chapter 11 in Tampa

HRK Holdings LLC, the owner of a 675-acre tract adjacent to Port Manatee, Florida, filed for Chapter 11 protection yesterday in Tampa, Florida, saying assets and debt both exceed $10 million.

The property contains what’s technically known as a phosphogypsum stack holding byproducts from the manufacture of phosphate fertilizer. The site was owned by Piney Point Phosphates Inc. until its bankruptcy in 2001.

The site was converted for use in storing material dredged from a Port Manatee construction project, according to a report in the Bradenton Herald.

The case is In re HRK Holdings LLC, 12-09868, U.S. Bankruptcy Court, Middle District of Florida (Tampa).

Luxembourg Life-Settlement Investor Files Chapter 15

The Luxembourg liquidators for SLS Capital SA filed a petition in New York under Chapter 15 this week seeking the U.S. court’s assistance in investigating the “disappearance of SLS’s assets, including assets held in custodial accounts” in the U.S.

SLS purchased life insurance policies in the so-called life-settlement market, where insured individuals sell their policies for less than the death benefit. The buyer pays the premiums until the insured’s death.

SLS financed its business by selling bonds to non-U.S. investors, according to a court filing. Purchased policies had face values totaling as much as $500 million by 2008, according to a filing.

SLS was controlled by David Elias, an English businessman who is “purportedly deceased,” according to a court paper.

The liquidators say they haven’t been able to locate all of the policies or their proceeds. They intend to enlist assistance from the U.S. court in locating assets.

Chapter 15 isn’t a full-fledged reorganization like Chapter 11. It allows the U.S. court to assist a bankruptcy primarily pending in another country.

The case is In re SLS Capital SA, 12-12707, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Updates

Appeals Court Stops Vitro Bondholders from Seizing Assets

Creditors of Vitro SAB can’t begin this week to attach assets of the Mexican glassmaker and its subsidiaries. Whether bondholders will be free to seize assets after next week is undecided.

The U.S. Court of Appeals in New Orleans temporarily extended a stay pending appeal that the bankruptcy judge in Dallas imposed earlier this month when he refused to enforce Vitro’s Mexican reorganization plan in the U.S. The bankruptcy judge left it up to an appellate court to decide whether the prohibition against seizing asset would extend beyond today.

The Fifth Circuit in New Orleans granted a direct appeal from the ruling by the bankruptcy judge and told the bondholders yesterday to submit papers on July 2 opposing an extension of the stay halting asset seizures. The appeals court said the temporary stay it imposed yesterday will remain in effect “pending further order of this court.”

The bankruptcy judge refused to enforce the Vitro reorganization in the U.S., finding it was “manifestly contrary” to U.S. law and public policy. He said the Mexican plan improperly allowed Vitro subsidiaries to reduce their guarantees on $1.2 billion in defaulted bonds even though they weren’t in bankruptcy themselves.

Vitro argues that no other Mexican reorganization plan has ever been denied enforcement in the U.S. The company called the bankruptcy court’s opinion “unprecedented and erroneous.” The bondholders have been fighting the Mexican plan because it gives them only a 40 percent recovery while Vitro’s owners retain stock worth $500 million.

For a summary of the bankruptcy court’s June 13 opinion, click here for the June 14 Bloomberg bankruptcy report.

Defeated in courts in Mexico, the bondholders notched their victory in the Vitro parent’s Chapter 15 case in Dallas. Chapter 15 isn’t a full-blown reorganization like Chapter 11. It permits a foreign company in bankruptcy abroad to enlist assistance from the U.S. court to enforce rulings from the home country.

The appeal in the Circuit Court is Vitro SAB de CV (VITROA) v. Ad Hoc Group of Vitro Noteholders (In re Vitro SAB de CV), 12-10689, U.S. Court of Appeals for the Fifth Circuit (New Orleans). The suit in bankruptcy court where the judge decided not to enforce the Mexican reorganization in the U.S. is Vitro SAB de CV v. ACP Master Ltd. (In re Vitro SAB de CV), 12-03027, U.S. Bankruptcy Court, Northern District of Texas (Dallas). The bondholders’ previous appeal in the circuit court is Ad Hoc Group of Vitro Noteholders v. Vitro SAB de CV (In re Vitro SAB de CV), 11-11239, Court of Appeals for the Fifth Circuit (New Orleans). The bondholders’ appeal of Chapter 15 recognition in district court is Ad Hoc Group of Vitro Noteholders v. Vitro SAB de CV (In re Vitro SAB de CV), 11-02888, U.S. District Court, Northern District of Texas (Dallas). The Chapter 11 case for U.S. subsidiaries is In re Vitro Asset Corp., 11-32600, U.S. Bankruptcy Court, Northern District of Texas (Dallas). The Chapter 15 case for the parent is Vitro SAB de CV, 11-33335, in the same court.

AMR Seeking Approval to Purchase 14 Aircraft in 2013

AMR Corp., the parent of American Airlines Inc., filed papers yesterday seeking bankruptcy court approval for simplified procedures allowing the purchase of 14 previously ordered Boeing 777 aircraft during 2013.

If AMR doesn’t exercise purchase options on time, the right to buy the aircraft lapses.

AMR already received approval for procedures to purchase 32 aircraft from Boeing Co. (BA:US) in 2012. The hearing for approval of the 2013 aircraft purchases will be held on July 19.

Yesterday, the bankruptcy judge in New York gave approval for new contracts with five worker groups represented by the Transport Workers Union. The groups that came to terms include baggage handlers, ground workers, dispatchers and instructors. There is still no agreement with mechanics represented by the TWU. For Bloomberg coverage, click here.

This week, leaders of the pilots’ union agreed to send the company’s revised offer to the membership for a vote. As a result, the bankruptcy judge agreed not to issue a ruling until Aug. 8 on whether the airline can modify union contracts with pilots, flight attendants and mechanics.

AMR, based at the airport midway between Dallas and Fort Worth, Texas, listed assets of $24.7 billion and debt totaling $29.6 billion in the Chapter 11 reorganization begun in November. American Airlines entered bankruptcy with 600 aircraft in the mainline fleet and another 300 with American Eagle, the feeder airline.

The case is In re AMR Corp. (AAMRQ:US), 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Latest Solyndra Auction Brings in $1.79 Million

Solar-panel maker Solyndra LLC held another auction last week that generated $1.79 million from the sale of 7,200 lots of equipment at the plant that no one would purchase to operate as a going concern.

Previous Solyndra auctions were disappointing, compared with the amount of investment. Two auctions late last year brought in a total of $8 million. A three-day auction in February generated another $3.8 million. The auctions were arranged when there was no buyer to restart operations.

The auction last week was planned in January to follow sometime after the February auction. Buyers could participate in last week’s auction through the Internet.

Solyndra halted manufacturing in August and filed under Chapter 11 in September.

The Fremont, California-based company filed definitive lists showing property with a claimed value of $854.1 million against $867.1 million in debt.

Liabilities include $783.8 million in secured claims and $74.1 million of unsecured debt. In addition to a $535 million government-guaranteed loan, financing came from $709 million in eight issues of preferred stock, plus $179 million in convertible notes.

The case is In re Solyndra LLC, 11-12799, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Restaurant Operator Buffets Confirms Second Plan

Buffets Inc., an operator of family restaurants, won approval of a Chapter 11 reorganization plan for a second time.

The bankruptcy judge in Delaware signed a confirmation order on June 27. All voting classes were in favor of the plan.

Before the vote, the plan was amended to gain support from the unsecured creditors’ committee by giving the panel’s constituency a recovery of 6 percent to 9 percent on $44.6 million in claims. Previously, unsecured creditors were to receive nothing.

The plan was also modified to create a trust for unsecured creditors that will pursue lawsuits and be funded with at least $4 million.

Otherwise, the plan was negotiated before the new Chapter 11 filing in January. First-lien lenders are receiving the new stock in return for $251.8 million owing on the existing first- lien facility and $34.8 million in outstanding letters of credit.

Buffets emerged from a prior Chapter 11 reorganization in April 2009. It filed again with 494 locations and plans to close 81. For details on Buffets’ reorganization plan in 2009, click here for the April 29, 2009, Bloomberg bankruptcy report.

Buffets, based in Eagan, Minnesota, operates under names including Old Country Buffet, HomeTown Buffet, Ryan’s and Fire Mountain.

The new case is Buffets Restaurants Holdings Inc., 12-10237, U.S. Bankruptcy Court, District of Delaware (Wilmington).

The prior bankruptcy reorganization was In re Buffets Holdings Inc., 08-10141, in the same court.

RoomStore Liquidators Guarantee 59% of Inventory Cost

RoomStore Inc., a 63-store furniture retailer when it sought Chapter 11 protection in December, was given authority by the bankruptcy judge yesterday to hire liquidators to run going- out-of-business sales at the remaining 29 stores.

The liquidators will pay expenses of the sales while guaranteeing RoomStore a recovery of 59 percent of the cost of merchandises. In addition, the liquidators will pay $275,000 in cash.

The GOB sales will be conducted by a joint venture between Hilco Merchant Resources LLC and three other liquidators.

RoomStore previously said that the final liquidation should generate enough cash to pay secured and unsecured creditors in full. The company filed a reorganization plan to preserve the company’s corporate existence and stockholders’ interests along with the ability to utilize tax losses and thus offset gains from the sale of assets.

Immediately after bankruptcy, RoomStore hired liquidators and conducted going-out-of-business sales at 18 locations. Later, 10 stores in Texas were liquidated. The company itself closed seven others.

Assets were shown for about $56 million, with debt totaling $52.5 million, according to RoomStore’s petition in U.S. Bankruptcy Court in Richmond, Virginia. The company was in Chapter 11 before.

RoomStore came into Chapter 11 owning 65 percent of Mattress Discounters Group LLC, which it purchased out of bankruptcy in late 2008. Mattress Discounters, a bedding retailer, has 79 stores in five states. It isn’t in bankruptcy. RoomStore is looking for a buyer.

The case is In re RoomStore Inc., 11-37790, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

Philadelphia Orchestra to Exit Chapter 11 in July

The Philadelphia Orchestra said it expects to emerge from reorganization by the end of July following the signature of the bankruptcy judge yesterday on a confirmation order approving the Chapter 11 plan.

The ensemble said it was “gratifying” how the ultimately consensual plan was achieved “without litigation or work stoppage.” Not a single creditor voted against the plan, which was the end result of a bankruptcy begun in April 2011.

The plan incorporates settlements with the musicians’ union, the musicians’ pension plan, the Pension Benefit Guaranty Corp. and the Kimmel Center, where the orchestra performs.

The orchestra’s board made gifts to cover the $5.49 million cost of the plan that extinguishes $100 million in debt. The orchestra incurred $8.9 million in professional fees and other costs while in Chapter 11.

Although there was no long-term debt, the orchestra said it was facing a $14.5 million structural deficit.

The orchestra had almost no secured debt. For the $35.5 million claim resulting from termination of the existing musicians’ pension plan, the pension fund receives a $1.75 million cash payment under a settlement agreement. The PBGC receives $1.3 million in installments.

General unsecured creditors are being paid 50 percent in cash on claims totaling about $555,000. For other Bloomberg coverage, click here.

The orchestra’s Chapter 11 petition stated that assets and debt were both less than $50 million.

The case is In re The Philadelphia Orchestra Association, 11-13098, U.S. Bankruptcy Court, Eastern District of Pennsylvania (Philadelphia).

Northstar Aerospace Auction Formally Set for July 17

Northstar Aerospace (USA) Inc., a manufacturer of gears and gearboxes for military helicopters, will appear in bankruptcy court on July 24 for authority to sell the business for $70 million in cash to private-equity investor Wynnchurch Capital Ltd., unless a higher offer shows up at an auction July 17.

The bankruptcy judge in Delaware approved auction and sale procedures on June 27. Any competing bids are due July 13 under a schedule the company was recommending.

Northstar filed for Chapter 11 reorganization on June 14, with the sale to Wynnchurch already negotiated. The principal lender is Fifth Third Bank (FITB:US), owed $39.5 million on a revolving credit and $18.9 million on a term loan.

With U.S. operations based in Bedford Park, Illinois, Northstar makes components and assemblies for Chinook, Apache and Blackhawk helicopters as well as the F-22 Raptor fighter. The company has six facilities in the U.S. and Canada. Revenue in 2011 was $189.6 million. The two largest customers are the U.S. military and Boeing Co.

Northstar’s books show assets of $165.1 million, with liabilities totaling $147.5 million. Trade suppliers are owed $21.7 million. Canadian affiliates filed for reorganization in Canada under the Companies’ Creditors Arrangement Act.

The case is In re Northstar Aerospace (USA) Inc., 12-11817, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Prince Sports Creditors Voting on Chapter 11 Plan

Creditors of Prince Sports Inc. have begun voting on the reorganization plan proposed by the designer and distributor of racquet sports equipment. The confirmation hearing for approval of the plan is scheduled to take place July 27 in U.S. Bankruptcy Court in Wilmington, Delaware.

The plan calls for an affiliate of Authentic Brands Group LLC to take ownership in exchange for $67.2 million in secured debt it purchased.

The plan proposes to give cash and lawsuit recoveries to unsecured creditors, for an expected recovery of 29 percent on $13.8 million in claims.

Prince, based in Bordentown, New Jersey, said assets are on the books for $54.2 million. In addition to the $65 million secured claim owing to Authentic affiliate ABG-Prince LLC, $10.2 million is owing to trade suppliers, according to a court filing.

Prince was acquired in 2007 by Nautic Partners LLC. Authentic is providing a $2.5 million credit to finance the Chapter 11 effort.

The case is In re Prince Sports Inc., 12-11439, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Pinnacle Airlines’ May Operating Income $3.8 Million

Pinnacle Airlines Corp. (PNCLQ:US), a feeder airline, reported a $249,000 net loss in May on operating revenue of $83 million.

May generated $3.8 million in operating income, according to the operating report filed with the U.S. Bankruptcy Court in Manhattan. The net loss was the result of $3.8 million in reorganization costs.

Cash increased by $14 million in May, to end the month at $56.8 million, according to the operating report.

Pinnacle, based in Memphis, Tennessee, began reorganizing in Chapter 11 on April 1 in Manhattan, listing assets of $1.54 billion against debt totaling $1.43 billion. At the time, Pinnacle was providing service as Delta Connection, United Express, and US Airways Express.

In addition to $74.3 million in financing for the bankruptcy provided by Delta Air Lines Inc. (DAL:US), secured debt includes $690 million owing to Export Development Canada and $34 million on a revised loan with an affiliate of CIT Group Inc. (CIT:US)

For the nine months ended Sept. 30, there was an $8.8 million net loss on $938.1 million in operating revenue. Operating income in the period was $23.1 million. Net income was $12.8 million in 2010 on operating revenue of $1.02 billion.

The case is In re Pinnacle Airlines Corp., 12-11343, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Fuller Brush Reports Net Loss, Has Longer Exclusivity

Fuller Brush Co. reported a net loss of $37,000 in May on revenue of $3.1 million, according to an operating report filed with the U.S. Bankruptcy Court in Manhattan.

The net loss resulted from $110,000 in interest expense and reorganization costs of $162,000.

Fuller prevailed on the bankruptcy judge to grant a so- called exclusivity motion and extend the exclusive right to propose a reorganization plan until Sept. 19.

Fuller Brush previously said Victory Park Capital Advisors LLC intends to buy the business in exchange for debt. The reorganization is being financed with a $5 million loan from an affiliate of Victory Park, the secured lender owed $22.7 million.

Fuller filed under Chapter 11 to stop the landlord from terminating the lease for the principal facility in Great Bend, Kansas. Part of the reorganization includes eliminating about half the current catalog of 2,000 personal-care, commercial and household cleaning products.

Founded in 1906, Fuller Brush listed assets of $22.9 million and debt totaling $50.9 million. The company was acquired in 2007 by Buckingham CPAC Inc., according to a court paper.

The case is In re Fuller Brush Co., 12-10714, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Health Clinic WJO Taken Over by Chapter 11 Trustee

WJO Inc., the operator of six medical clinics in Pennsylvania, is being taken over by a Chapter 11 trustee at the behest of Tristate Capital Bank, the secured lender owed $4 million.

The U.S. Bankruptcy Court in Philadelphia called for a trustee on June 27 after the bank said the collateral was worth less than the debt.

The company filed two reorganization plans, and the creditors’ committee submitted one. The bank said none of the plans moved forward, nor was any disclosure statement approved.

Based in Bristol, Pennsylvania, the clinics are owned by William J. O’Brien III. They use hyperbaric chambers to treat patients with pure oxygen for maladies such as diabetic wounds and crush injuries.

Assets and debt both exceed $10 million, according to the petition.

The case is In re WJO Inc., 10-19894, U.S. Bankruptcy Court, Eastern District of Pennsylvania (Philadelphia).

Watch List

Colorado’s Abound Solar to File Chapter 11 in Delaware

Abound Solar Inc., a manufacturer of solar panels from Loveland, Colorado, said it will file for bankruptcy next week in Delaware.

The company borrowed about $70 million from a $400 million loan guarantee provided by the U.S. Department of Energy. Abound made the last draw on the loan in August, around the time Solyndra LLC halted manufacturing in advance of its Chapter 11 filing in September.

Abound halted production in February from one plant in Colorado. A second was planned in Indiana.

A spokesman for the Energy Department said the government expects a loss of $40 million to $60 million on the loan guarantee. For the Bloomberg story, click here.

Coal Miner Xinergy Demoted to Caa3 on Negative Cash Flow

Coal miner Xinergy Corp. was dealt another downgrade yesterday because Moody’s Investors Service expects “negative free cash flow of as much as $40 million for the full year 2012.”

The new corporate grade is Caa3, two levels below the downgrade issued in April by Standard & Poor’s.

Xinergy’s financial difficulties result from what Moody’s characterizes as the “collapse” in coal prices stemming from the unusually warm winter and the low cost of natural gas.

Purchasers today were offering to buy the $195 million in 9.25 percent secured bonds due in 2019 for 65.25 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The five mining complexes for the Knoxville, Tennessee- based company are in West Virginia, Kentucky and Virginia.

Statistics

Claims Trading in May Second-Lowest in the Past Year

The $1.95 billion in claims traded during May were the second-fewest in the last year, exceeding only the $1.5 billion of claims that changed hands in April.

As usual, Lehman Brothers Holdings Inc. headed the pack, with $1.55 billion in face amount of traded claims. Lehman claims represented 80 percent of the month’s total, according to data compiled from court records by SecondMarket Inc.

MF Global Inc. was again in second place, with $246.1 million of traded claims, or 16 percent of Lehman’s. In number of traded claims, MF Global’s 253 reported trades approached the 265 for Lehman.

April was the slowest month for claims trading since February 2010. Trading dropped once Lehman began making distributions to creditors under the confirmed Chapter 11 plan.

Bankruptcy Video & Podcast

Kodak-Intel, Madoff, AMR, Pinnacle: Bankruptcy Audio & Video

Intel Corp. (INTC:US), Ricoh Co. (7752), Nikon Corp. (7731), Motorola Solutions Inc. (MSI:US) and Apple Inc. (AAPL:US) are among the high-technology companies mounting opposition to the attempt by Eastman Kodak Co. (EKDKQ:US) to sell digital-imaging technology at an auction tentatively scheduled for August, as Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle discuss on their newest video and podcast. The video also discusses the victory scored in the U.S. Supreme Court by the trustee liquidating Bernard L. Madoff Investment Securities Inc.

On the podcast, Pacchia and Rochelle discuss the implications of the May operating profit reported by American Airlines Inc. Pinnacle Airlines Corp. and families of victims of the February 2009 crash are jousting over punitive damages. The podcast closes by explaining why the Cordillera Golf Club in Colorado is a candidate for club members to seek a transfer of the case to Denver from Delaware.

To see the video, click here. To listen to the podcast, click here.

Advance Sheets

Buying a Claim and Changing a Plan Vote Not Permitted

A secured creditor was properly barred from buying the claim of the one unsecured creditor to block the use of cramdown, the U.S. Bankruptcy Appellate Panel for the Ninth Circuit in San Francisco ruled yesterday.

The case involved the bankruptcy of an office building the owner contended was worth more than the debt owing to the secured creditor with a $16 million claim. The plan provided for paying the mortgage at a reduced interest rate on a 30-year amortization schedule. The modified mortgage would mature in 10 years.

Naturally, the secured creditor voted against the plan.

One unsecured creditor voted in favor of the plan. After the voting deadline, the lender bought the claim and filed a motion for permission to change the vote on the unsecured claim from “yes” to “no.” The bankruptcy judge declined to allow a changed vote and confirmed the Chapter 11 plan. The lender appealed and lost.

Had the lender been allowed to change the vote on the unsecured claim, there would have been no accepting class and no ability to confirm the plan based on cramdown.

In a 33-page opinion, the Appellate Panel said that Bankruptcy Rule 2018(a) allows a vote to change only on a showing of “cause.” The appellate panel reviewed the bankruptcy court’s decision to determine if there was an abuse of discretion in finding no “cause.”

The bankruptcy judge said that “cause” requires something more than a “change of heart.” While it was a “close question,” the appellate panel concluded that the bankruptcy judge didn’t abuse her discretion in denying the motion to change the vote.

The bank also attacked the plan, saying it wasn’t filed in good faith because it artificially impaired unsecured creditors by paying no interest and stretching out payment over a few months. The bank contended the property owner easily could have paid the claim in full when the plan was confirmed.

The appellate panel again upheld the bankruptcy judge because it didn’t have a “definite and firm conviction that the bankruptcy judge erred” in deciding that the plan was filed in good faith.

The case is Beal Bank USA v. Windmill Durango Office LLC (In re Windmill Durango Office LLC), 11-1728, U.S. Bankruptcy Appellate Panel for the Ninth Circuit (San Francisco).

Alter Ego Claims Require Report, Recommended Findings

Although an alter ego claim was derived from a fraudulent transfer claim and isn’t a dispute where the bankruptcy court can make final rulings under the Supreme Court’s Stern v. Marshall ruling, the case nonetheless should remain in bankruptcy court, a federal judge said.

U.S. District Judge Shira A. Scheindlin in Manhattan ruled on June 26 in a 21-page opinion that the bankruptcy court could retain the lawsuit, while being limited to issuing recommended findings of fact and conclusions of law.

The case involved a lawsuit where the bankruptcy trustee sued defendants contending that a lease had been fraudulently transferred. The suit also alleged that a defendant was an alter ego for the bankrupt company.

The defendants filed a motion to withdraw the reference, asking Scheindlin to take the lawsuit out of bankruptcy court. Scheindlin refused.

She said that statements in Stern were dicta to the extent they said that fraudulent transfer claims involve private rights where bankruptcy courts can’t make final rulings. Regardless, she followed other courts in New York in ruling that fraudulent transfer suits fall within the ambit of Stern.

Scheindlin could find no cases saying whether an alter ego claim concerns a public right or a private right. She decided that the bankruptcy court lacks the ability to make final rulings because the alter ego claim was “entirely derivative” of the fraudulent transfer claim.

She left the lawsuit in bankruptcy court for the judge to make a report and recommendation.

The case is Messer v. Bentley Manhattan Inc. (In re Madison Bentley Associates LLC), 11-9027, U.S. District Court, Southern District New York (Manhattan).

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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