Bloomberg News

AMR Antitrust Judge Limits Union Court Briefs: Bankruptcy (1)

November 07, 2013

Unions representing workers at AMR Corp. and its intended merger partner, US Airways Group Inc. (LCC:US), will be able to submit friend-of-the-court briefs for an antitrust trial -- within limits.

U.S. District Judge Colleen Kollar-Kotelly in Washington is trying to prevent the unions and other bystanders from submitting hundreds of pages of briefs all making the same arguments in the lawsuit brought by the U.S. to block the merger.

After she allowed five other unions to submit a brief by Nov. 15, the US Airline Pilots Association, representing US Airways fliers, asked to file a brief of its own, saying it had a different perspective on the benefits to the public from merger of the airlines.

This week, the judge allowed the US Airways pilots to file eight pages, while telling them to exclude facts that won’t be in evidence at the antitrust trial set to start Nov. 25. If their arguments are the same, the pilots should join in the brief from the other unions, she said.

The judge is also allowing airports, the official AMR creditors’ committee and plaintiffs in a private antitrust suit to file briefs, each not to exceed 25 pages. Kollar-Kotelly said she would ignore arguments based on facts not introduced at trial and discouraged duplicative arguments.

American Airlines shares have risen steadily following a three-day fall in August after the U.S. sued to bar the airlines from merging under AMR’s Chapter 11 plan. Since then, the stock has more than tripled, closing yesterday at $9.22 in over-the-counter trading.

A bankruptcy judge formally approved the plan last month.

AMR rose 25 percent on Nov. 4 on news that the airlines and the government were in settlement talks. Selling for about 40 cents in October 2012, the stock rose to $1.30 before the merger was announced in February.

Fort Worth, Texas-based AMR listed assets of $24.7 billion and debt totaling $29.6 billion in the Chapter 11 reorganization begun in November 2011. It entered bankruptcy with 600 aircraft in the mainline fleet and another 300 with American Eagle, the feeder airline.

The Chapter 11 case is In re AMR Corp. (AAMRQ:US), 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The antitrust suit is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington).

Updates

Madoff Trustee Preparing to Sue Investors in France

The trustee for Bernard L. Madoff Investment Securities Inc. is casting his net toward France in hopes of making additional recoveries supplementing distributions to victims of the world’s largest Ponzi scheme.

This week Irving Picard, the Madoff trustee, filed papers with the bankruptcy court in New York under the Hague Convention intended to culminate with assistance from a French court compelling companies in that country to turn over documents.

Picard’s papers recite how almost $1.2 billion was transferred by the Madoff firm in six years before bankruptcy to two so-called feeder funds, Oreades SICAV and Luxalpha SICAV. Picard said a “substantial portion” of the funds, including $160 million in fictitious profits, went to four French companies from which the trustee wants documents.

Although Picard says he hasn’t sued the four French companies yet, he might. They are Ulysse Patrimoine Holding SAS, Massena Partners ASA, Foundation Bettencourt Schueller, and Tethys SAS.

Picard wants to know, among other things, whether any of the four companies saw any “red flags” hinting that Madoff was conducting fraud. As Madoff’s trustee, Picard may have claims against the four companies as so-called subsequent recipients of fraudulent transfers.

Cases are on appeal testing whether Picard is effectively limited to suing for transfers only within two years before bankruptcy, not six.

So far, Picard has distributed $5.59 billion, or more than 54 percent of customers’ claims for principal lost in the fraud. He is still holding $4.379 billion he can’t distribute as the result of outstanding lawsuits, appeals and disputes.

The Madoff firm began liquidating in December 2008 with appointment of Picard as trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009. His bankruptcy was consolidated with the firm’s liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.

The Madoff liquidation in bankruptcy court is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-bk-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).

Lehman Sues Credit Suisse to Kill Off $1.2 Billion in Claims

Reorganized Lehman Brothers Holdings Inc. sued members of the Credit Suisse Group AG (CSGN) yesterday in Manhattan bankruptcy court, contending that the Swiss-based bank inflated derivative claims by almost $1.2 billion.

Suing on behalf of creditors under the Chapter 11 plan, Lehman explains how Credit Suisse filed claims for almost $1.2 billion for tens of thousands of individual transactions all terminated just when the former investment bank was entering bankruptcy.

Lehman contends that Credit Suisse has valid claims for only $75 million and that the Swiss bank owes one Lehman subsidiary $150 million.

The bank hasn’t responded to multiple requests seeking an explanation for how Credit Suisse calculated loses on the derivatives, Lehman says. According to Lehman, Credit Suisse is one of the world’s largest derivatives traders.

Last month Lehman sued Giants Stadium LLC, contending there is no liability on swaps where the holder of the claim is asking for almost $600 million.

New York-based Lehman and its brokerage unit began their separate bankruptcies in September 2008. The Chapter 11 plan for the Lehman companies other than the brokerage was confirmed in December 2011 and implemented in March 2012, with a fourth distribution last this month.

Customers of the brokerage will be paid in full by the year’s end, although non-customers of the brokerage have yet to receive a distribution. The brokerage is in a separate liquidation with a trustee under the Securities Investor Protection Act.

The lawsuit is Lehman Brothers Holdings Inc. v. Credit Suisse, 13-bk-01676, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-bk-13555, while the liquidation proceeding for the brokerage is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-bk-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

ResCap Resolves Most Technical Objections to Plan Approval

When Residential Capital LLC arrives in bankruptcy court Nov. 19 for a confirmation hearing on its reorganization plan, about 30 objections will have been winnowed down to those from second-lien lenders who say they are entitled to payment in full.

In a report to the judge this week, the bankrupt mortgage-servicing unit of Ally Financial Inc. (ALLY:US) laid out 27 objections that were resolved consensually through modifications to technical provisions in the plan. In addition to the junior lenders’ complaints, there are a dozen homeowners who contend the plan doesn’t address their claims properly.

The U.S. Trustee still isn’t on board entirely with the plan. As she frequently does, the Justice Department’s bankruptcy watchdog says releases to non-bankrupt third parties are being given without sufficient justification.

ResCap nonetheless said it hopes to resolve the U.S. Trustee’s objections before the confirmation hearing. Other objections from the government are being settled, ResCap said.

In ResCap’s words, the plan has “overwhelming support from the vast majority of creditors.” The plan is financed in part by a $2.1 billion settlement contribution from Ally.

An ad hoc group holding $714 million in 9.625 percent junior notes oppose the plan, saying they are entitled to payment in full with interest.

Disclosure materials told holders of ResCap’s $2.15 billion in general unsecured claims to expect a 36.3 percent recovery. Unsecured creditors with $2 billion in claims against the so-called GMACM companies are predicted to get 30.1 percent.

The $1.1 billion in third-lien 9.625 percent secured notes due in 2015 last traded on Nov. 5 for 109.25 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. In January, the bonds sold for 107 cents.

The $473.4 million of ResCap senior unsecured notes due in April 2013 last traded on Nov. 4 for 36.719 cents on the dollar, a 56 percent increase since Dec. 19, according to Trace.

ResCap filed for Chapter 11 protection in May 2012.

The case is In re Residential Capital LLC, 12-bk-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Patriot Coal Plan Heading to Creditors for Vote

Patriot Coal Corp. was told yesterday by the bankruptcy judge that she will approve disclosure material explaining the Chapter 11 reorganization plan, thus allowing creditors to vote, the coal producer said.

The judge in St. Louis also authorized hiring Barclays Bank PLC (BARC), Deutsche Bank AG (DBK) New York Branch and a Deutsche affiliate to syndicate $375 million in loans and a $201 million letter of credit facility providing some of the financing for an exit from bankruptcy. The loans themselves will be approved when the court approves the reorganization plan.

At yesterday’s hearing, the judge also said she would approve settlements with Peabody Energy Corp. (BTU:US) and Arch Coal Inc. (ACI:US) that underpin the plan.

The disclosure statement explains the plan based on settlements among the unsecured creditors’ committee, the mine workers’ union, former parent Peabody and Arch.

Another $250 million in funding for the plan will come from two rights offerings where Knighthead Capital Management LLC is providing a backstop by agreeing to purchase securities not taken by other creditors. For details on the plan and funding, click here the Oct. 29 Bloomberg bankruptcy report.

One of the largest coal producers in the U.S., Patriot filed for Chapter 11 reorganization in July 2012, listing assets of $3.57 billion and debt of $3.07 billion as of May 2012. The bankruptcy was moved from New York to St. Louis in December.

Patriot’s $200 million in 3.25 percent senior convertible notes due 2013 last traded on Nov. 5 for 3 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $250 million in 8.25 percent senior unsecured notes due 2018 traded yesterday for 45.25 cents on the dollar.

The Chapter 11 case in Missouri is In re Patriot Coal Corp. (PCXCQ:US), 12-bk-51502, U.S. Bankruptcy Court, Eastern District of Missouri (St. Louis).

Detroit’s $350 Million Financing May Not Fly, Moody’s Says

When Detroit comes to bankruptcy court on Nov. 14 for approval of a $350 million loan, Moody’s Investors Service said the outcome is “uncertain” because the entire loan proceeds would be paid out immediately.

Apart from the immediate payout of all loan proceeds, Moody’s said in a report yesterday that the proposed Detroit loan is “structurally similar” to loans companies take down to finance reorganization.

Where most corporate loans are “credit positive” for a business in Chapter 11 reorganization, Moody’s sees the “credit impact” as “not clear at this time.”

Using up the entire loan all at once points up Detroit’s “narrow cash position,” Moody’s said, even though the city is not paying unsecured debt while withholding pension contributions.

Detroit intends to use the loan in part to terminate swap agreements that encumber the city’s casino-tax revenue. The loan is designed to free cash for infrastructure improvements and save $60 million eventually. Detroit is likely to prevail over workers and retirees and win the right to remain in municipal bankruptcy, according to a lawyer. The result will be losses for bondholders, he said.

For the Bloomberg story, click here.

Detroit is in the midst of a trial over its eligibility to be in Chapter 9 municipal bankruptcy. Unions and retirees are trying to show the city didn’t file bankruptcy in good faith because it never attempted serious negotiations with creditors before filing.

Detroit began the country’s largest-ever Chapter 9 municipal bankruptcy in July with $18 billion in debt. That includes $5.85 billion in special revenue obligations, $6.4 billion in post-employment benefits, $3.5 billion for under-funded pensions, $1.13 billion on secured and unsecured general obligations, and $1.43 billion on pension-related debt, according to a court filing. Debt service consumes 42.5 percent of revenue.

The city has 100,000 creditors and 20,000 retirees.

The case is City of Detroit, Michigan, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

AgFeed Needs Chapter 11 Trustee After ‘Massive Fraud,’ U.S. Says

Executives of AgFeed Industries Inc., a hog producer in the U.S. and China, should be ousted and replaced by a Chapter 11 trustee, according to the U.S. Trustee in Delaware.

In September, the Justice Department’s bankruptcy watchdog asked the bankruptcy judge to appoint an examiner in view of what she called a “massive fraud” in the company’s Chinese operations that went undetected for years.

In October, U.S. Bankruptcy Judge Brendan Shannon declined for the time being to order an investigation by an outsider, saying it might interfere with the sale process then under way. The company and the official creditors’ committee opposed having an examiner.

Upping the ante in papers filed Nov. 5 and this time seeking appointment of a trustee, the U.S. Trustee said incumbent management’s “continuing failure to make any meaningful disclosures” about fraud “evidences dishonesty or gross mismanagement.”

The government’s papers say the company failed to file corrected financial statements in the two years since the fraud was disclosed publicly.

According to papers from the U.S. Trustee, managers of the unit in China created multiple sets of accounting books while reporting fictitious sales and receivables.

AgFeed filed for Chapter 11 protection in July. In October, the company completed the sale of the U.S. operations to three buyers for $79.5 million, including $53.4 million cash. An auction is set for Nov. 20 to determine whether a $50.5 million bid is the best offer for operations in China. The sale-approval hearing will take place Nov. 21.

Opposing appointment of an examiner in October, the creditors’ committee said the second sale “may” generate sufficient funds so unsecured creditors are fully paid, “with excess proceeds for the equity holders.”

Robert S. Brady of Young Conaway Stargatt & Taylor LLP, a lawyer representing AgFeed, didn’t respond to a call seeking comment on the U.S. Trustee’s filing.

AgFeed has 21 farms and five feed mills in China producing more than 250,000 hogs annually. In the U.S., the business included 10 sow farms in three states and two feed mills producing more than one million hogs a year. AgFeed’s revenue in 2012 was $244 million.

The company listed debt as including $60.1 million on a revolving credit with Farm Credit Services of America PCA and $8.4 million on a term loan with Farm Credit Services of America LFCA.

The U.S. company is based in Ames, Iowa. Headquarters for the Chinese operations are in Hendersonville, Tennessee.

The petition lists assets of more than $100 million and debt less than $100 million.

The case is In re AgFeed USA LLC, 13-bk-11761, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Publisher GateHouse Media’s Prepack Plan Is Approved

Newspaper publisher GateHouse Media Inc. (GHSEQ:US) is set to emerge from reorganization given the signature of the bankruptcy judge yesterday on a confirmation order approving the Chapter 11 plan worked out before the bankruptcy filing Sept. 27.

Four limited objections to the plan were all resolved before the hearing, making confirmation uncontested, according to court papers. Approving the plan also required the bankruptcy judge in Delaware to rule that materials used to solicit votes on the plan were adequate.

GateHouse has 78 daily and 235 weekly newspapers, plus 343 associated websites. Last year, revenue of $491 million resulted in a $29.8 million net loss. Over the first six months of 2013, revenue of $230.2 million produced a $31.6 million net loss.

The GateHouse bankruptcy is part of a larger strategy where Fortress Investment Group LLC (FIG:US) is putting together a chain of more than 430 daily, weekly, and community newspapers. To accompany the GateHouse transaction, Newcastle Investment Corp. (NCT:US) pays $87 million to buy Dow Jones Local Media Group Inc. from News Corp. The acquired company has eight daily and 15 weekly newspapers in seven states. Local Media will manage GateHouse.

The GateHouse reorganization plan provides holders of $1.2 billion in secured debt with an option of taking 40 percent in cash or a share in ownership. Fortress owns 52 percent, or $626 million of the secured debt. Fortress also has 39.6 percent of GateHouse’s equity, according to data compiled by Bloomberg.

New York-based Fortress will convert its debt to equity in Fairport, New York-based GateHouse. Disclosure materials given to creditors showed the stock option as representing a recovery of 36 percent to 48.5 percent, based on the estimated range for the reorganized company’s enterprise value.

General unsecured creditors owed $15 million will be paid in full. The petition listed assets of $433.7 million and liabilities totaling $1.28 billion.

The case is In re GateHouse Media Inc., 13-bk-12503, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Dish Closing Last of 3,300 Blockbuster Stores

The last of what was once 3,300 Blockbuster Inc. stores in the U.S. are disappearing.

Dish Network Corp. (DISH:US) announced yesterday that it’s closing the remaining 300 stores it bought in April 2011 from Blockbuster’s aborted Chapter 11 reorganization.

Dish said it will continue to use the Blockbuster brand in the digital distribution business. Blockbuster is also terminating the mail distribution of DVDs. The stores will close in early January.

For other Bloomberg coverage, click here.

Dish’s Blockbuster acquisition had an advertised price of $320 million. After the sale, “old” Blockbuster changed its name to BB Liquidating Inc. (BLIAQ:US)

The BB Liquidating bankruptcy was converted to a liquidation under Chapter 7 in July.

Blockbuster began its attempted Chapter 11 reorganization in September 2010 with 5,600 stores, including 3,300 in the U.S. and the remainder abroad. The U.S. petition listed assets of $1.017 billion against debt of $1.465 billion.

The case is In re BB Liquidating Inc., 10-bk-14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Rural/Metro Plan Scheduled for Dec. 16 Confirmation

For Rural/Metro Corp., winning approval of disclosure materials and scheduling a confirmation hearing was easy once the official creditors’ committee came on board with the plan.

The bankruptcy court in Delaware approved the disclosure statement on Nov. 5. It explains the Chapter 11 plan scheduled for approval at a Dec. 16 confirmation hearing.

The plan for the Scottsdale, Arizona-based provider of emergency and non-emergency medical transportation was largely worked out before the Chapter 11 filing in early August.

The plan calls for unsecured noteholders with $312.2 million in claims to acquire all of the preferred stock and 70 percent of the common stock in return for a $135 million equity contribution through a rights offering. For details on the plan, click here for the Nov. 5 Bloomberg bankruptcy report.

Rural/Metro was acquired in 2011 in a leveraged buyout by Warburg Pincus LLC as part of a transaction valued at $676.5 million, according to data compiled by Bloomberg.

Rural/Metro also provides fire protection, airport fire rescue and home health-care services in 21 states. Debt includes $318.5 million on a secured term loan and $109 million on a revolving credit with Credit Suisse AG serving as agent. There is $312.2 million owing on two issues of 10.125 percent senior unsecured notes.

Yesterday buyers were offering to purchase the $200 million in 10.125 percent senior unsecured notes for 57.375 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The offering price for the $108 million in unsecured notes was the same.

The case is In re Rural/Metro Corp., 13-bk-11952, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Cengage Creditors Want Mediation, Not Disclosure Approval

The unsecured creditors’ committee for Cengage Learning Inc. is convinced there are “fatal flaws” in the college textbook publisher’s reorganization plan and scheduled a Nov. 12 hearing to seek permission to send creditors a letter urging them to vote against it.

Voting against the plan is a backup strategy for the committee. At next week’s hearing, they will try convincing the U.S. Bankruptcy Judge in Brooklyn, New York, that the plan shouldn’t go forward until the court decides whether first-lien lenders have valid liens on 15,500 copyrights and $273.9 million held in a money-market account.

The committee argues that the entire plan is based on an assumption the first-lien lenders’ liens are valid. At present, there are multiple unresolved lawsuits and litigated disputes over the validity of the liens and the value of collateral.

The committee doesn’t want the plan to proceed until mediation is completed. There were sessions held already, with more scheduled for December and early January.

The indenture trustee for second-lien lenders also opposes the plan, as does the U.S. Trustee in some respects.

Cengage filed under Chapter 11 in July after negotiating an agreement with holders of $2 billion in first-lien debt to eliminate more than $4 billion of $5.8 billion in debt. Second-lien creditors and holders of unsecured notes weren’t part of the agreement.

Cengage filed a reorganization plan in August, with amendments later. For details on the original plan, under which first-lien lenders would get the new stock plus a $1.5 billion term loan, click here for the July 3 Bloomberg bankruptcy report.

The company’s debt includes $3.87 billion on five first-lien term loans and revolving credits plus $725 million outstanding on first-lien notes and $710 million on second-lien notes. Cengage owes some $490 million on three issues of unsecured senior and subordinated notes.

Financial statements for the quarter ended March 31 showed assets of $4.68 billion against liabilities totaling $6.47 billion, following a $2.76 billion goodwill impairment.

Apax Partners LLP bought Cengage in 2007 from Thomson Reuters Corp. in a $7.75 billion transaction. The acquisition was funded in part with $5.6 billion in new debt financing.

First-lien lenders who signed the so-called plan-support agreement include funds affiliated with BlackRock Inc. (BLK:US), Franklin Mutual Advisers LLC, KKR & Co. (KKR:US) and Oaktree Capital Management LP.

The case is In re Cengage Learning Inc., 13-bk-44106, U.S. Bankruptcy Court, Eastern District of New York (Brooklyn).

Med-Depot Bank Lender Still Opposes Chapter 11 Plan

Med-Depot Inc. has yet to persuade revolving credit lender Texas Capital Bank NA (TCBI:US) to support the proposed bankruptcy reorganization plan.

Consequently, the company, a provider of respiratory therapy and home medical devices for hospices and their patients, is seeking a four-month extension of exclusive plan-filing rights to March 25.

Med-Depot filed for bankruptcy protection in July, proposed a Chapter 11 plan and received approval of the explanatory disclosure statement in October.

The confirmation hearing for approval of the plan has been set back twice and is now on the calendar for Nov. 18.

In a Nov. 4 court filing, Med-Depot said the bank and several other creditors oppose the plan. The company said it hopes at least to narrow disputed issues before a contested confirmation hearing.

Based in Plano, Texas, Med-Depot entered bankruptcy after working out a plan to restructure the first-lien debt while giving stock in return for the second-lien loan. The plan offers a pot of $200,000 in cash to unsecured creditors.

The company has $18 million in consolidated debt. It projected a $1.8 million net loss in the fiscal year on revenue of $14.5 million. By fiscal 2015, Med-Depot was forecasting revenue of $20.8 million and $1.6 million in net income.

The case is In re Med-Depot Inc., 13-bk-41815, U.S. Bankruptcy Court, Eastern District of Texas (Sherman).

Savient Pharmaceuticals Auction Pushed Back Two Weeks to Dec. 10

Savient Pharmaceuticals Inc. (SVNTQ:US), the developer of a treatment for gout, initiated a Chapter 11 reorganization on Oct. 14 and this week received court approval to hold an auction on Dec. 10, more than two weeks later than the company initially wanted.

Assuming there is no competitive bidding, an affiliate of US WorldMeds LLC will acquire the business for $55 million and $3 million in escrow. The purchase price will be reduced by adjustments and the cost to cure contracts that are behind in payment.

A hearing to approve sale is scheduled for Dec. 13.

Savient’s petition listed assets of $73.8 million against liabilities totaling $260.4 million. Bridgewater, New Jersey-based Savient owes $145 to unsecured noteholders.

The case is In re Savient Pharmaceuticals, 13-bk-12680, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Liquidated Digital Domain Media Seeks Final ‘Exclusivity’

Digital Domain Media Group Inc. (DDMGQ:US) said in a bankruptcy court filing that “certain critical parties” may not agree with the idea of proposing a liquidating Chapter 11 plan.

The provider of visual effects for the movie industry sold almost all its assets and filed papers on Nov. 5 for a fourth extension of its exclusive right to propose a plan.

If the bankruptcy judge in Delaware agrees at a Dec. 18 hearing, the deadline will be pushed back four months, to March 5. The extension will be the last because, by then, Digital Domain will have been in bankruptcy for 18 months, the longest Congress allows before any creditor can file a plan.

The remaining assets are lawsuits and a property in Port St. Lucie, Florida, that could be sold in a few months, the company said.

Previously, the company said there should be some recovery for the unsecured creditors flowing from a settlement negotiated by the unsecured creditors’ committee with secured lenders. For details, click here for the Nov. 12, 2012, Bloomberg bankruptcy report.

Most of the business was sold for $36.7 million to a joint venture between Galloping Horse America LLC, an affiliate of Beijing Galloping Horse Co., and an affiliate of Reliance Capital Ltd. (RCAPT), based in Mumbai.

Digital Domain listed assets of $205 million and liabilities totaling $214 million. Debt included $40 million on senior secured convertible notes plus $24.7 million in interest. There was another issue of $8 million in subordinated secured convertible notes. Debt to trade suppliers and accounts payable totaled $27.4 million, according to a court filing.

The case is In re Digital Domain Media Group Inc., 12-bk-12568, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Vertis Seeks Another Three Months for Liquidating Plan

Although Vertis Inc. sold most of its assets in Janurary, the Baltimore-based advertising and marketing services provider still isn’t ready to file a liquidating Chapter 11 plan.

The company filed papers this week for a fourth time seeking to extend its exclusive right to propose a plan. If approved at a Dec. 11 hearing, the new deadline will be Feb. 3, about two months short of the maximum permitted under the U.S. Bankruptcy Code.

Quad/Graphics Inc. (QUAD:US) bought the business for a net purchase price that worked out to be $170 million, the buyer said.

The sale created a $20 million fund to wind down the remainder of the bankruptcy. By this month, about $10 million is left.

Vertis was in bankruptcy twice before. The prior bankruptcy in late 2010 required less than a month to complete. That plan eliminated $700 million in debt.

In the new bankruptcy, Vertis listed assets of $837.8 million and debt totaling $814 million. Liabilities included $68.6 million on a revolving credit and $427.7 million on a secured term loan.

Through the first bankruptcy in 2008, Vertis merged with American Color Graphics Inc., also in Chapter 11 at the time. The first reorganization reduced combined debt by almost $1 billion.

The new Chapter 11 case is In re Vertis Holdings Inc., 12-bk-12821, U.S. Bankruptcy Court, District of Delaware (Wilmington). The 2010 bankruptcy was In re Vertis Holdings Inc., 10-bk-16170, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The first bankruptcies were In re ACG Holdings Inc., 08-bk-11467, and In re Vertis Holdings Inc., 08-bk-11460, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Journal Register Exits Chapter 11 Under New Name

Journal Register Co. changed its name to Pulp Finish I Co. after selling its newspapers and emerged from Chapter 11 last week under a reorganization plan approved on Oct. 15 when the bankruptcy judge in Manhattan signed a confirmation order.

The disclosure statement told unsecured creditors they won’t recover more than 5 percent and might get nothing.

Journal Register filed for Chapter 11 reorganization in September 2012 and sold its newspaper business to lender and owner Alden Global Capital Ltd., mostly in exchange for $114.2 million in secured debt and $6 million in cash.

After debts with higher priority were paid, what’s left from the cash and a $630,000 tax refund represented most of the unsecured creditors’ recovery, the New York-based company has said.

Journal Register had been in bankruptcy before. A Chapter 11 case three years previously gave ownership to secured lenders in exchange for debt.

Journal Register listed assets of $235 million and liabilities totaling $268.6 million. At the outset of the new Chapter 11 case, debt included about $13.2 million on a revolving credit. Alden had two term loans totaling $152.3 million, acquired from lenders in the prior bankruptcy.

Journal Register entered bankruptcy with a circulation of 410,000 on weekdays and 475,000 on Sundays. The newspapers are sold around Philadelphia, Detroit and Cleveland, and in upstate New York. The company also publishes free non-daily publications with a distribution of 1.7 million. The publications have accompanying websites.

The new case is In re Pulp Finish I Co., 12-bk-13774, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The previous case was In re Journal Register Co., 09-bk-10769, in the same court.

Downgrade

Printer R.R. Donnelley Sells Debt, Downgraded Again

Printer R.R. Donnelley & Sons Co. (RRD:US) enjoyed an investment grade rating until May 2011, when it was downgraded to the highest junk ratings by both Moody’s Investors Service and Standard & Poor’s.

On top of downgrades last year, S&P lowered the corporate grade to BB- this week as a consequence of R.R. Donnelley’s issuance of another $350 million in debt. S&P said the new bonds are “inconsistent with the company’s strategy to reduce outstanding debt.”

S&P is giving the new obligation a rating of BB-, accompanied by a guess that the debt holders will recover as much as 50 percent if there is a payment default.

The rating company said it had been assuming Chicago-based R.R. Donnelley would use an undrawn $1.1 billion revolving credit to cover both an acquisition and a $258 million debt maturity in April.

Moody’s and S&P both dropped the company to junk in May 2011 when it announced a repurchase of as much as $1 billion in stock through December 2012.

R.R. Donnelley fell 4 percent to $17.98 yesterday in Nasdaq Stock Market trading. The shares reached a three-year high of $21.34 on May 31, 2011, and a low of $8.58 on Dec. 17.

In the first three quarters this year, net income totaled $107.2 million on net sales of $7.73 billion.

R.R. Donnelley isn’t to be confused with yellow page publisher R.H. Donnelley Corp., which implemented a Chapter 11 reorganization plan in February 2010. Renamed Dex One Corp., that company merged this year with SuperMedia Inc. by prepackaged confirmation plans for both companies that were confirmed in six weeks.

Briefly Noted

Jefferson County to Emerge From Bankruptcy Investment Grade

When Jefferson County, Alabama, emerges from municipal bankruptcy, $1.74 billion in newly issued bonds will have investment-grade ratings.

The senior debt will have a BBB rating from Standard & Poor’s, two grades above junk. The subordinated debt has a preliminary rating of BBB-, the lowest investment grade. For a Bloomberg story on the financing, click here.

The new bonds will enable the county to pay off old bonds at a fraction of face value and emerge from Chapter 9 municipal bankruptcy.

Advance Sheets

Non-Recourse Underwater Mortgages Are Valid Claims

The U.S. Court of Appeals in Chicago handed down an 11-page opinion this week to state the obvious: a non-recourse subordinate mortgage completely under water nonetheless represents an unsecured claim under Section 1111(b)(1)(A) of the Bankruptcy Code.

The Chapter 11 case involved real property worth less than the $8.9 million first mortgage. The $2.5 million second mortgage was non-recourse, meaning the mortgage holder outside of bankruptcy could look only to the property and would have no claim against the owner for a deficiency. The debtor argued that the holder of the concededly valid second mortgage had no claim whatsoever.

The debtor advanced several theories, rejected in the Nov. 4 opinion for the three-judge panel by U.S. Circuit Judge William J. Bauer, including the notion that neither the state nor Section 1111(b) gave the mortgage holder a deficiency claim against the debtor.

Bauer surveyed the plain language of the statue, along with legislative history, to conclude that Section 1111(b) affords the mortgage holder an unsecured claim.

Bauer said the bankrupt was unable to cite any court opinion saying the mortgage holder had no claim at all.

The case is In re Brookfield Commons No. 1 LLC, 13-2241, U.S. Court of Appeals for the Seventh Circuit (Chicago).

Late Claim Doesn’t Invalidate Underlying Mortgage

The U.S. Court of Appeals in St. Louis joined two other circuit courts in ruling that the failure to file a timely claim doesn’t invalidate the underlying mortgage.

In a Chapter 13 case, the last day for filing claims was in January. The home mortgage lender, owed $210,000, didn’t file a claim until August. The individual bankrupts conceded that the mortgage was otherwise valid and enforceable.

The bankruptcy judge, upheld by the Bankruptcy Appellate Panel, rejected the bankrupts’ argument that the lien was invalid because the claim was untimely. The bankrupts relied on the plain language of Section 506(d) of the Bankruptcy Code.

Writing for three judges on the St. Louis appeals court, U.S. Circuit Judge Michael J. Melloy noted in his Nov. 4 opinion that the plain-meaning argument had some appeal, although it is overcome by the U.S. Supreme Court’s Dewsnup opinion, holding that mortgages ride through bankruptcy.

U.S. Courts of Appeal in Chicago and Richmond, Virginia have already issued opinions saying that a late-filed claim doesn’t invalidate the underlying mortgage.

The case is Shelton v. Citimortgage Inc. (In re Shelton), 12-3555, U.S. Court of Appeals for the Eighth Circuit (St. Louis).

Rollover IRA Remains an Exempt Asset in Bankruptcy

An investment retirement account created by a rollover from an existing IRA is an exempt asset under Section 522(b)(3)(C) of the Bankruptcy Code, according to a Nov. 4 opinion from the U.S. Bankruptcy Appellate Panel in St. Louis.

An individual in Chapter 7 held an annuity in an IRA worth $236,000. The trustee unsuccessfully argued in bankruptcy court that it wasn’t an exempt asset because the entire purchase price for the annuity was paid in one lump sum by rolling over another IRA.

U.S. Bankruptcy Judge Arthur B. Federman, writing for the three-judge panel, upheld the lower court by ruling that the annuity in the IRA was exempt.

Federman said neither the Internal Revenue Service nor any court had ever said a rollover IRA didn’t qualify under Section 408 of the IRS Code, governing what qualifies as an IRA.

Because the IRA qualified under Section 408, it was an exempt asset under Bankruptcy Code Section 522, Federman said.

The case is Running v. Miller (In re Miller), 13-6026, U.S. Bankruptcy Appellate Panel for the Eighth Circuit (St. Louis).

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net


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