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Borders, Solyndra, Lehman, Madoff, Xanadoo: Bankruptcy

September 06, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Borders and Madoff; adds Solyndra and Monarch in New Filings; Boise County in Updates; sections on Statistics and Bank Failures.)

Sept. 6 (Bloomberg) -- Jefferies & Co. Inc., the financial adviser and investment banker for Borders Group Inc., shouldn’t be paid a $1.5 million success fee after failing to sell the book retailer as a going concern, the U.S. Trustee said in a court filing last week.

Credit belongs to AlixPartners LLC, which was delegated the task of setting up a liquidation, according to papers filed by the U.S. Justice Department’s bankruptcy watchdog. Given the failure of the going-concern sale, the U.S. Trustee said, “it is unclear why Jefferies is entitled to the liquidation fee.”

The creditors’ committee chimed in with its own objection, saying Jefferies had no involvement in negotiating or arranging the store-closing sales. In the panel’s view, Jefferies is “overreaching” in an attempt to enhance its own compensation “at the expense of unsecured creditors.”

For work in July, Jefferies is seeking $1.7 million, including a $200,000 monthly fee. The U.S. Trustee didn’t object to the monthly fee. Absent objection, court-approved fee procedures would have entitled Jefferies to payment of 80 percent.

Former Borders worker Jared Pinsker filed a purported class-action suit against Borders on Sept. 2 alleging that employees at the head office were fired in July and August without 60 days’ notice required by federal law. If the workers have a valid claim, it may represent an expense of the Chapter 11 case that must be paid in full before there can be confirmation of a liquidating Chapter 11 plan.

Borders initiated going-out-of-business sales at its remaining locations on July 22. The creditors’ committee said before the liquidation began that the Ann Arbor, Michigan-based chain expected to generate $252 million to $284 million in cash from the sales. Borders arranged separate sales for the store leases and intellectual property.

The retailer had 642 stores upon entering bankruptcy in February and was operating 399 when the liquidation began. It listed assets of $1.28 billion and liabilities totaling $1.29 billion. Debt included $196 million on a revolving credit and $48.6 million on a term loan. Trade suppliers were owed $302 million for inventory.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

New Filings

Energy Department-Financed Solyndra Files to Sell or Liquidate

Solyndra LLC, a manufacturer of cylindrical solar systems for commercial rooftops, filed a Chapter 11 petition this morning in Delaware after shutting down operations Aug. 31. The company said in a court filing that it will use the first month in bankruptcy to search a going-concern buyer. If that fails, the alternative is a piecemeal liquidation, the company said.

Construction of Solyndra’s plant was financed in part with a $535 million loan guarantee from the U.S. Energy Department. Including the government loan, Fremont, California-based Solyndra has $783.8 million in total secured debt. Development of the business was supported by $709 million from eight issues of preferred stock, plus $179 million in convertible notes.

Construction of the plant began in September 2009. It began production in January and shut down in August when new financing failed to materialize. Revenue in 2010 of $142 million resulted in a $329 million net loss.

Solyndra blamed financial problems on the global oversupply of solar panels from foreign competitors benefiting from low- cost government financing.

The Chapter 11 case will be financed with a $4 million secured loan to come ahead of existing financing. The loan is being provided by Argonaut Venture I LLC and Madrone Partners LP, the lenders on the $75 million secured loan at the top of the capital stack. If approved, $2.5 million would be available on an interim basis.

The company said assets were $859 million while debt totaled $749 million as of Jan. 1.

For other Bloomberg coverage, click here.

Solyndra’s Chapter 11 filing was the third in a month by a major solar cell manufacturer. Last month, two U.S. manufacturers, SpectraWatt Inc. and Evergreen Solar Inc., sought bankruptcy protection.

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

William Johnson Files Company Chapter 11 to Stop Jet Foreclosure

Atlanta businessman William B. Johnson put a business he controls into Chapter 11 to prevent the Sept. 7 foreclosure of the Gulfstream GIII private jet the company owns.

The lender, Amegy Bank NA, sued Johnson and the aircraft owner, Monarch Flight II LLC, on Aug. 30 in U.S. District Court in Houston. Seeking judgment for $15 million on the loan used in part to purchase the jet, the suit made allegations of fraud and conversion, contending that Johnson, who guaranteed the loan, had disposed of the bank’s collateral in violation of the security agreement.

In the district court suit, Houston-based Amegy is seeking a temporary restraining order to prevent Johnson from disposing of collateral.

The bankruptcy filing was a so-called bare-bones petition consisting of the printed form plus a list of creditors and the resolution Johnson signed allowing Monarch to seek Chapter 11 relief.

The Chapter 11 case is In re Monarch Flight II LLC, 11- 12795, U.S. Bankruptcy Court, District of Delaware (Wilmington). The lawsuit is Amegy Bank NA v. Monarch Flight II LLC, 11-03218, U.S. District Court, Southern District Texas (Houston).


Lehman Creditors’ Committee to Prosecute LCPI Suits on Loans

Lehman Brothers Holdings Inc. agreed that the official creditors’ committee can take over prosecution and settlement of five lawsuits to void transfers of loan participations made just before and after bankruptcy by the bankrupt unit Lehman Commercial Paper Inc. A hearing to approve the committee’s takeover is set for Sept. 14.

Before bankruptcy, LCPI sold participations in the loans to investors. According to the committee’s papers filed last week, the investors didn’t own the loans. They only had an unsecured right to receive payments of principal and interest received by Lehman.

As Lehman’s bankruptcy approached, the investors exercised rights to convert the participations into ownership of the loans. New York-based Lehman commenced the suits, contending that conversion of unsecured participations into ownership within 90 days of bankruptcy was a preference.

As to the conversions that took place after bankruptcy, the complaint contends the transfers were unauthorized post- bankruptcy transfers that can be voided.

Last week the bankruptcy court approved an interim settlement with London-based Canary Wharf Group Plc, which asserted $4.78 billion in claims along with affiliates. Canary Wharf agreed to cap the claims at $780 million, while Lehman agreed to reserve enough cash as though the entire claim were approved in Class 3 for senior unsecured claims.

Lehman retained the right to reduce the claim even more and to contend it should be in another class. Canary Wharf agreed not to oppose confirmation of the plan.

Creditors soon will be voting on the Chapter 11 plan for the Lehman holding company. The confirmation hearing for approval of the plan is set for Dec. 6. The Lehman brokerage subsidiary is being liquidated under the Securities Investor Protection Act. It won’t have a plan.

The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold office buildings and the North American investment-banking business to Barclays Plc a 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 SIPA.

The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding under SIPA 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 Customers Seek Rehearing by All Circuit Judges

Customers of Bernard L. Madoff Investment Securities Inc. on the losing side of an Aug. 16 ruling by the U.S. Court of Appeals in Manhattan filed a motion last week for review of the case by all actives judges on the 2nd Circuit. The customers contend, in their motion called a petition for rehearing en banc, that last month’s ruling was in conflict with a 2004 decision from the same court in a case called New Times Securities Services Inc.

Last month, the circuit court ruled that customers’ claims must be measured by the amount of cash put in less the amount taken out. The appeals court refused to allow customer claims for so-called fictitious profits. Indirectly, the ruling means that customers may be left with no defenses against lawsuits by the Madoff trustee to recover fictitious profits. For a rundown on the August opinion, click here for the Aug. 29 Bloomberg bankruptcy report.

There is no right for rehearing by all circuit court judges in Manhattan. The appeals court will rehear the case if enough judges believe the opinion by the three-judge panel might be wrong. There is no fixed time within which the appeals court will rule on whether it will hear reargument.

The 2nd Circuit seldom rehears cases en banc. Cases are sometimes reheard if there was a cogent dissent. In the Madoff case, all three judge were in agreement that customers had no entitlement to fictional profits. The opinion was written by Chief Circuit Judge Dennis Jacobs. Other judges on the panel were Circuit Judges Reena Raggi and Pierre N. Leval.

In other developments, the Madoff trustee must contend with another indirect investor who wants a lawsuit dismissed on technicalities.

Tensyr Ltd., which describes itself as a structured investment vehicle organized on the island of Jersey, contends that the trustee’s lawsuit, filed in December, must be dismissed because it lacks enough “meaningful contact” with the U.S. to pass muster under the Due Process clause of the federal Constitution. The trustee in his complaint alleged that Tensyr “regularly conducted business in New York.”

Tensyr said it indirectly invested $450 million in the Madoff Ponzi scheme and took out $30 million. It claims to be a so-called net loser.

The trustee’s complaint lays out how Tensyr’s investments with Madoff were made through Fairfield Sentry Ltd., one of the largest feeder funds into the Madoff firm. By settling with Fairfield, Tensyr contends, the trustee bartered away the ability to have a fraudulent-transfer verdict. The Madoff trustee may respond to the defense by pointing out how part of the settlement gave him a $3.05 billion judgment against the Fairfield funds.

Tensyr also contends the money it received is protected by the so-called safe harbor of Section 546(e) of the U.S. Bankruptcy Code. Whether the safe harbor applies to a thoroughgoing fraud like Madoff’s is to be decided before the end of September by U.S. District Judge Jed Rakoff in Manhattan in the suit against Fred Wilpon, Sterling Equities Inc., the owners of the New York Mets baseball club and Wilpon’s friends, family and associates.

Tensyr contends that the suit fails because U.S. bankruptcy law has no applicability outside of the U.S. The trustee might respond by showing how bankruptcy courts traditionally contend their powers extend through the world to anyone who has sufficient contacts with the U.S.

The Madoff trustee must respond to the dismissal motion by Nov. 1. Tensyr’s reply papers are due Dec. 16. For other Bloomberg coverage, click here.

The Madoff firm began liquidating on Dec. 11, 2008, with the appointment of the trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009. His bankruptcy case was consolidated with the firm’s liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.

The appeal is In re Bernard L. Madoff Investment Securities, 10-2378, U.S. Court of Appeals for the Second Circuit (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, also in Manhattan bankruptcy court. The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court, Southern District of New York (Manhattan).

Boise County Not Eligible for Chapter 9, Judge Rules

Boise County, Idaho, isn’t eligible for Chapter 9 bankruptcy, U.S. Bankruptcy Judge Terry L. Myers from Boise ruled in a 43-page opinion on Sept. 2 saying he would dismiss the attempted municipal reorganization begun March 1.

The county filed for Chapter 9 protection after a developer named Alamar Ranch LLC won a $4 million judgment for violation of the U.S. Fair Housing Act with respect to a 72-bed residential treatment center for teenagers. The county filed under Chapter 9, claiming an inability to pay the judgment.

Unlike companies that can file bankruptcy even if solvent and paying their debts, municipalities must prove that they are insolvent, aren’t paying debt, or can’t pay upcoming debt maturities. In the case of Boise County, Myers concluded that the county was solvent and had been paying debts when they matured.

Consequently, the case turned on whether the county had the resources to pay the judgment, with interest. The county unsuccessfully argued that cash and investments were restricted and not available to discharge the judgment. Myers ruled that the county hadn’t proven that the reserves weren’t available.

The county also lost a lawsuit where it attempted to force an insurance company to pay the verdict.

The county listed assets of $27.8 million and debt totaling $7.4 million, including the judgment. The county has a population of about 7,500.

The case is In re Boise County, 11-00481, U.S. Bankruptcy Court, District of Idaho (Boise).

Xanadoo Should Have Chapter 11 Trustee, Secured Note Agent Says

A Chapter 11 trustee should be appointed for the units of Xanadoo Co., a 4G wireless Internet provider that filed for Chapter 11 protection on June 10, according to a motion filed last week by the agent for secured noteholders.

The bankruptcy in Delaware 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 contends that Xanadoo created a new intermediate holding company to hinder and delay creditors by taking over ownership of the operating companies.

The noteholders will ask the bankruptcy judge at a Sept. 27 hearing to dismiss the Chapter 11 filing by the newly created holding company. They also say they want the judge to appoint a Chapter 11 trustee for the operating companies.

The noteholder agent contends that creating a new holding company violated agreements. The case is nothing more than a two-party dispute, the motion says.

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

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

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

Evergreen Solar Creditors Oppose Company’s Initiatives

The newly formed creditors’ committee for Evergreen Solar Inc. filed papers last week opposing most of what the solar- panel maker said it hopes to accomplish at the first major hearing scheduled for today.

Most prominently, the committee opposes a quick sale where secured noteholders would buy all the assets in exchange for debt, even though not covered by the secured claim.

The committee said $200,000 being set aside for unsecured creditors is “virtually nothing.” The panel characterized the lenders’ strategy as “tantamount to renting the bankruptcy process for their own parochial interest.”

The creditors said a partly owned plant in Wuhan, China, isn’t covered by the noteholders’ lien. Likewise, 35 percent of the equity in other offshore affiliates isn’t the lenders’ collateral, the committee said.

The committee said that $50,000 being set aside for all creditors’ professionals isn’t enough to investigate the validity of secured claims.

For other Bloomberg coverage, click here.

Evergreen, based in Marlboro, Massachusetts, filed under Chapter 15 on Aug. 15 intending to sell the entire business quickly and listing assets of $424.5 million against debt totaling $485.6 million. Liabilities include $165 million on senior secured notes and about $208.3 million on two issues of convertible debt.

The case is In re Evergreen Solar Inc., 11-12590, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Otter Tail Implements Confirmed Liquidating Plan

Otter Tail AG Enterprises LLC, the former owner of a 55 million-gallon-a-year ethanol plant in Fergus Falls, Minnesota, implemented a liquidating Chapter 11 plan on Aug. 29 that the hometown bankruptcy court approved with an Aug. 12 confirmation order.

Green Plains Renewable Energy Inc. bought the plant for a base price of $55 million in cash and total consideration of $60.1 million including $4.4 million for inventory. The sale fully paid about $54 million in secured debt, leaving a municipal bond trustee and the county with about $12.2 million in deficiency claims for infrastructure improvements.

Other general unsecured claims amounted to some $435,000, according to the disclosure statement. The there will be about $2.5 million cash remaining for distribution after expenses are paid, according to the statement.

Before sale, Otter Tail negotiated a consensual reorganization plan with most of its larger creditors. The plan fell through because the company was unable to raise the required $12.5 million in equity.

Lenders initially were owed a combined $82.8 million, according to court papers. AgStar Financial Services PCA was owed $34.2 million on a construction loan.

Otter Tail filed for Chapter 11 reorganization in October 2009 in its hometown. The plant started operating in March 2008.

The petition listed assets of $66.4 million against $86 million in debt, almost all secured.

The case is In re Otter Tail AG Enterprises LLC, 09-61250, U.S. Bankruptcy Court, District of Minnesota (Fergus Falls).


DirectBuy Lowered to CCC on Lawsuit, Membership Loss

DirectBuy Holdings Inc., an operator of membership-based direct buying centers, had its corporate rating cut three notches on Sept. 2 to CCC by Standard & Poor’s.

The rating on the $335 million in senior secured notes dropped to CCC-, coupled with a prediction by S&P that holders won’t recover more than 30 percent after payment default.

S&P cited the “large declines in its membership base” that began in early 2010 at DirectBuy. S&P traced the drop in part to lawsuits alleging the company misrepresented the cost of merchandise. S&P said a settlement paid with available funds could “meaningfully tightening its liquidity.”

The Merrillville, Indiana-based company was acquired in 2007 by management and Trivest Partners LP.

Window Maker Atrium Dropped to B- on Immigration Audit

Atrium Cos. Inc., which implemented a Chapter 11 plan in April 2010, received a downgrade on Sept. 2 by Standard & Poor’s to a B- corporate grade. The new S&P rating is one step higher than the one issued the day before by Moody’s Investors Service.

Where Moody’s called the liquidity profile “uncertain,” S&P cited a recent “immigration audit” that cost a plant 58 percent of its workers. The loss of the workers will result in increased costs, S&P said.

Not seeing relief from an improvement in the housing market, S&P said its “economists have materially lowered their estimate of housing starts over the next year.”

Moody’s calculated that adjusted earnings before interest, taxes, depreciation, and amortization aren’t covering interest expense. Revenue for a year ended in June was about $520 million, Moody’s said.

Dallas-based Atrium, a maker of aluminum and vinyl windows, implemented a Chapter 11 plan where existing investors Kenner & Co. and Golden Gate Capital Corp. retained 92.5 percent of the equity by making new investments. For details of the plan, click here for the April 29, 2010, Bloomberg bankruptcy report.

The Chapter 11 case is In re Atrium Corp., 10-10150, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Vertrue, Membership Service Provider, Now CCC+ Rated

Vertrue Inc., a Norwalk, Connecticut-based provider of membership-service programs, has a CCC+ corporate rating this week after a two-notch cut by Standard & Poor’s on Sept. 2.

S&P predicts that revenue will decline this year by about 20 percent while earnings before interest, taxes, depreciation and amortization will be down some 35 percent. S&P said it expects further declines next year.

S&P lowered the second-lien debt to a CCC- rating coupled with a prediction that holders wouldn’t recover more than 10 percent after default.

S&P cited “poor operating performance and weakening liquidity following $35 million of debt prepayments and fees related to an amendment to the credit agreement.” S&P also recounted how some $33 million was spent to appeal an adverse decision in Iowa litigation. There’s also “narrow cushion of compliance” with loan covenants, S&P said.


Liquidity Downgrades Exceed Upticks 2 Months in a Row

Liquidity downgrades for junk-rated companies in August exceeded upgrades for a second month in a row, the first time there have been back-to-back increases in more than two years, Moody’s Investors Service said in a report last week.

Moody’s liquidity-stress index nonetheless remained flat at 3.9 percent because most downgrades were among higher-rated companies, Moody’s said. The index measures the percentage of junk-rated companies with the weakest liquidity scores.

The liquidity-stress index is a fraction of its 20.9 percent high in March 2009, Moody’s said.

Bank Failures

Two Bank Failures Bring Year’s Total to 70

Two bank failures in Georgia on Sept. 2 brought the year’s total to 70. The two failures together cost the Federal Deposit Insurance Corp. $71.7 million. For Bloomberg coverage, click here.

Last year there were 157 bank failures. The failures in 2010 were the most since 1992 when 179 institutions were taken over by regulators.

Advance Sheets

No Security Interest in Proceeds from FCC License

A secured creditor can’t have a valid security interest in proceeds from the sale of a broadcast license issued by the Federal Communications Commission, Chief U.S. District Judge Wiley Y. Daniel in Denver ruled on Aug. 31. The question is dividing the country’s federal courts.

Federal law prohibits granting a security interest in an FCC license. Consequently, lenders take the position that they nonetheless can have a security interest in proceeds from the sale, not in the licenses themselves.

Daniel agreed with the bankruptcy judge who ruled that there wasn’t even a security interest in proceeds.

The question is complicated by Section 522 of the Bankruptcy Code, which says, as a general proposition, that a pre-bankruptcy security interest doesn’t attach to property acquired after bankruptcy. The section contains an exception where proceeds become part of a lender’s collateral despite bankruptcy.

Like the bankruptcy court, Daniel theorized there can be no lien on proceeds because there could be no security interest in the license in the first place.

The case is Valley Bank & Trust Co. v. Spectrum Scan LLC (In re Tracey Broadcasting Corp.), 10-02522, U.S. District Court, District of Colorado (Denver).

--With assistance from Dakin Campbell in San Francisco; and Dawn McCarty, Steven Church, and Michael Bathon in Wilmington, Delaware. Editors: Andrew Dunn, Fred Strasser.

To contact the reporter on this story: Bill Rochelle in New York at

To contact the editor responsible for this story: John Pickering at

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