March 23, 2011, 8:11 AM EDT
By Bill Rochelle
(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Fisher Island and Quigley in Updates, Aryx in Filing Possible and Shearer’s in Downgrade.)
March 23 (Bloomberg) -- The business of trading claims against bankrupt companies will virtually vanish if Lehman Brothers Holdings Inc. confirms a Chapter 11 plan this year.
Lehman and its brokerage unit were responsible for almost $38.7 billion in traded claims during the past year, according to data compiled from court records by SecondMarket Inc. The companies in second and third places each had traded claims amounting to 2 percent of Lehman’s total.
Those companies, old General Motors Corp. and Mesa Air Group Inc., had claim trades of less than $800 million apiece in the period, according to New York-based SecondMarket, which describes itself as the largest secondary market for illiquid assets.
In the past few months, the trend has been toward larger dollar amounts and fewer trades, not surprising given the declining numbers of major Chapter 11 filings.
In February, $3.47 billion of claims changed hands in 524 transfers, compared with $2.55 billion in face amount on 636 trades in January. Lehman’s $2.72 billion in deals accounted for 78 percent of February’s total. Mesa followed with $551 million in face amount.
The number of reported trades in February was the fewest since June 2009, SecondMarket said. The 45 companies with traded claims were the fewest in two years.
Updates
Aurelius May File LBO Suits to Beat Statute of Limitations
Aurelius Capital Management LP plugged what it saw as a loophole in the ability to file lawsuits if the bankruptcy judge doesn’t sign a confirmation order approving the reorganization plan proposed by Tribune Co. by June.
Aurelius, one of the proponents of a competing plan, contends it automatically had the right this year to file lawsuits against shareholders who sold their stock in the 2007 leveraged buyout. Tribune lost the right to recover $8.2 billion in stock-redemption payments by failing to file suits in December as the two-year window for the bankrupt company closed, Aurelius said.
Aurelius took the position that Tribune’s failure to sue abandoned the claims, allowing creditors to sue in their own right.
At a hearing yesterday, the bankruptcy judge said he would allow the creditors to file suit to ensure their claims aren’t lost when the four-year statute of limitations runs out in June. The lawsuits still can’t go ahead until completion of the confirmation trial over Tribune’s plan, the judge said.
Other protective lawsuits, filed late last year by the creditors’ committee, are similarly on hold pending the outcome of the confirmation fight.
At yesterday’s hearing, the bankruptcy judge authorized insurance companies to pay defense costs in various lawsuits arising from the LBO. Tribune said it has $200 million in so- called directors’ and officers’ liability insurance coverage.
The bankruptcy judge held two weeks of trial to decide whether to confirm the Tribune plan or the competing Aurelius proposal. The trial will resume April 11. The judge warned the warring parties that he may confirm neither plan and appoint a Chapter 11 trustee instead.
Aurelius is the largest holder of debt predating the 2007 leveraged buyout. Three indenture trustees are also proponents of the competing plan, under which lawsuits would continue after plan confirmation to recover damages from alleged fraudulent transfers that occurred along with the LBO.
The company’s plan is co-sponsored by the official creditors’ committee and senior lenders Oaktree Capital Management LP, Angelo Gordon & Co. and JPMorgan Chase & Co. Tribune’s plan would largely impose settlements over claims arising from the LBO.
Tribune is the second-largest newspaper publisher in the U.S. It listed $13 billion in debt for borrowed money and assets of $7.6 billion in the Chapter 11 reorganization begun in December 2008. It owns the Chicago Tribune, Los Angeles Times, six other newspapers and 23 television stations.
The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Control of Fisher Island Disputed in Court Filing
The involuntary Chapter 11 petition filed March 17 against a developer on Fisher Island, Florida, was a “last ditch effort to maintain” claims to ownership, according to a bankruptcy court filing yesterday by lawyers who said they represent the actual owners.
A different law firm, saying it represents the company, filed papers on March 21 consenting to being in Chapter 11. The firm claiming to represent the true owners contends that the six creditors who filed the involuntary petition aren’t “actual creditors.”
A lawsuit is already pending in Florida state court to decide who properly is in control of the company. The state- court judge was scheduled to hold a March 29 hearing on a motion for summary judgment to decide the issue. Should the motion fail, a trial is set for June, according to yesterday’s bankruptcy court filing.
The pleading yesterday asks the bankruptcy judge in Miami to invalidate the consent to being in Chapter 11 and allow the state court action to proceed and decide who controls the company.
There are $100 million in legitimate claims for borrowed money and AIG Annuity Insurance Co. is one of the lenders, according to the filing.
The creditors who filed the involuntary petition said they are collectively owed $32.4 million. They also seek the appointment of a Chapter 11 trustee.
The first-filed case is In re Fisher Island Investments Inc., 11-17047, U.S. Bankruptcy Court, Southern District of Florida (Miami).
Pfizer, Asbestos Claimants Have New Plan for Quigley
Quigley Co., a non-operating subsidiary of Pfizer Inc., announced this week that a final settlement was reached between Pfizer and an ad hoc committee representing 40,000 asbestos claimants who claim they were injured by Quigley products.
The bankruptcy court in Manhattan scheduled a hearing on April 5 to consider approval of the so-called plan support agreement between Pfizer and the committee.
The settlement avoids holding a hearing in April on the committee’s motion to dismiss the Quigley reorganization that began in September 2004. The motion came in response to a ruling by the bankruptcy judge in September refusing to confirm Quigley’s reorganization plan.
The judge determined that the plan was filed in bad faith and wasn’t feasible. Objectors argued that Quigley’s bankruptcy was being used improperly to shield Pfizer from liability.
Even though Quigley’s plan was accepted by the required majorities of creditors, the bankruptcy judge found that improper incentives were given to some creditors to obtain their “yes” votes. Through the plan, including contributions from Pfizer, $757 million would have been distributed, the disclosure statement said.
Pfizer and the ad hoc committee agreed on a revised Chapter 11 plan. The new disclosure statement is yet to be filed. The new plan cures the defects the judge identified in September, according to court papers.
Before the plan can be implemented, creditors and asbestos claimants must vote after the judge approves a new disclosure statement. To read Bloomberg coverage, click here.
Quigley filed under Chapter 11 to deal with 500,000 asbestos claims.
The case is In re Quigley Co., 04-15739, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Paulson Fixes Loopholes in Lehman-Bankhaus Agreement
Paulson & Co. was among the group of creditors that found a loophole in a proposed agreement under which Lehman Brothers Holdings Inc. would pay $957 million to the German insolvency administrator for Lehman Brothers Bankhaus AG for notes in the face amount of $1.54 billion.
Paulson objected privately to Lehman, saying the German administrator could earn almost $100 million if certain unanticipated events were to occur. The loophole was fixed, Paulson said in a court filing.
The hearing for approval of the note-purchase agreement is tomorrow. For Bloomberg coverage, click here. For details on the agreement with the administrator, click here for the March 3 Bloomberg bankruptcy report.
A June 28 hearing is scheduled for approval of disclosure statements explaining the competing Chapter 11 plans. Paulson has a plan on file proposing substantive consolidation to compete with Lehman’s plan. Lehman is seeking a confirmation hearing on Nov. 17 for approval of one of two plans.
The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold office buildings and the North American investment-banking business to Barclays Plc one week later. The Lehman brokerage operations went into liquidation on Sept. 19, 2008.
The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding under the Securities Investor Protection Act for the brokerage operation is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Boeing Says Alabama Aircraft Owes $8 Million Secured
If Boeing Co. is correct and has $8 million in claims against Alabama Aircraft Industries Inc., the Alabama-based aircraft-repair facility may not be able to reorganize.
Boeing, based in Chicago, said in court papers last week that it subcontracted heavy maintenance on U.S. Air Force tankers to AAI. Boeing says AAI was late in completing work in “many instances” and was half a year behind in some.
Boeing wants the bankruptcy court in Wilmington, Delaware, to give it protection for the progress payments it is required to make to AAI for the four tankers still being repaired. Contending its rights of setoff and recoupment give it the status of a secured creditor, Boeing wants a first lien on payments it made after bankruptcy and a subordinate lien on AAI’s other assets.
The dispute with Boeing is scheduled for an accelerated hearing tomorrow in bankruptcy court.
AAI has a motion pending to terminate the existing collective-bargaining agreement with the United Auto Workers union. Without contract and pension relief, AAI says the business isn’t feasible.
Previously known as Pemco Aeroplex Inc., AAI provides scheduled maintenance for U.S. military aircraft. The company operates under a long-term lease at the Birmingham International Airport in Alabama, chiefly maintaining and repairing transport, tanker and patrol aircraft.
Pension Benefit Guaranty Corp. was listed as having the largest unsecured claim at $68.5 million. A fund affiliated with Tennenbaum Capital Partners LLC is owed $2.5 million on a note. Assets were on the books for more than $32 million in September, according to a court paper.
The case is In re Alabama Aircraft Industries Inc., 11- 10452, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Former Fuddruckers Owner Set for June 9 Confirmation
The former owner of the Fuddruckers restaurant chain received approval on March 21 for the disclosure statement explaining the liquidating Chapter 11 plan. The confirmation hearing for approval of the plan is scheduled for June 9.
The bankruptcy judge authorized the creditors’ committee to file two lawsuits seeking to recharacterize claims as equity or to subordinate them to the claims to other creditors.
The committee is attacking three claims for $28.9 million filed by Brosna International LLC. Michael Cannon is the other target on account of two claims seeking more than $5 million.
Restaurant operator Luby’s Inc. bought the Fuddruckers restaurant chain in July for $63 million. The Fuddruckers chain then changed its name from Magic Brands LLC to Deel LLC and filed a liquidating Chapter 11 plan in January. For details of the plan, click here for the Jan. 20 Bloomberg bankruptcy report.
After closing stores, Austin, Texas-based Magic Brands had 62 company-owned Fuddruckers locations operating in 11 states. It also owned the Koo Koo Roo restaurant brand, with three sites in California. Assets were less than $10 million while debt was less than $50 million, according to the petition.
The Koo Koo Roo stores were in bankruptcy a second time.
There were 135 Fuddruckers restaurants in 32 states owned by franchisees that weren’t in the bankruptcy.
The case is In re Deel LLC, 10-11310, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Nancy Rapoport to Be Station Casinos Fee Examiner
Nancy B. Rapoport, a law professor at the University of Nevada, Las Vegas, was named this week to serve as the fee examiner in the reorganization of Station Casinos Inc.
The company’s Chapter 11 plan was approved by a confirmation order in August in U.S. Bankruptcy Court in Reno, Nevada. The hearing for final approval of professional fees won’t be held for several months, Rapoport said in an e-mail.
Rapoport previously served as the court’s expert in evaluating the fees in the reorganizations of Pilgrim’s Pride Corp. and Mirant Corp. Rapoport is an expert on ethical issues in bankruptcy cases.
For details of the Station Casinos plan, click here for the July 29 Bloomberg bankruptcy report.
Station Casinos filed under Chapter 11 in July 2009, with 13 properties in Las Vegas plus five joint ventures. It also operated casinos for American Indian tribes. Station’s debt resulted from a leveraged buyout in November 2007 by Feritta Colony Partners LLC.
The case is In Re Station Casinos Inc., 09-52477, U.S. Bankruptcy Court, District of Nevada (Reno).
Constar Reports Losses in Second Reorganization
Constar International Inc., a manufacturer of blow-molded plastic beverage containers, filed operating reports for the first two months of the second Chapter 11 reorganization in two years.
For the last 20 days in January following the Chapter 11 filing, the net loss was $35.8 million, largely because of $30.6 million in “reorganization items.” Sales for Jan. 11 through Jan. 31 were $20.1 million.
In February, the net loss was $2.6 million on sales of $27.2 million. Operating losses were $1.5 million in February and $1.6 million in January.
Constar’s disclosure statement was approved in February. The confirmation hearing for approval of the plan is set for April 25.
The prepackaged plan calls for holders of 75 percent of the $220 million in senior secured floating-rate notes that survived the prior bankruptcy to convert their debt into a new $70 million term loan and $30 million of convertible preferred stock.
In the first reorganization, $175 million of 11 percent subordinated notes were exchanged for all of the new stock. The stock given out last time is being extinguished this time. For details of the new plan, click here for the Jan. 12 Bloomberg bankruptcy report.
The Sept. 30 balance sheet for Philadelphia-based Constar listed assets of $325 million and liabilities of $321 million. The new petition said assets are $418 million with debt of $414 million.
The new case is In re Constar International Inc., 11-10109, U.S. Bankruptcy Court, District of Delaware (Wilmington). The prior reorganization was In re Constar International Inc., 08- 13432, in the same court.
Filing Possible
Aryx Therapeutics Gives Up for Lack of FDA Approval
Aryx Therapeutics Inc. said it will make an “orderly disposition of assets” or possibly file for Chapter 7 liquidation following the delay in regulatory approval for Stage 3 testing of a drug for gastrointestinal disorders.
Aryx, based in Fremont, California, said earlier this month that new funding fell through after the announcement of the testing delay. The company decided at the time to wind down operations for lack of funding.
Lighthouse Capital Partners V LP, the secured lender, declared a default and is demanding to take possession of the assets.
Aryx’s balance sheet showed assets of $6 million and liabilities of $13.7 million on Sept. 30. The company is yet to generate revenue.
New Filing
Puerto Rico Hospital Files Chapter 11 to Keep Lights On
San Juan Bautista Medical Center Corp., the owner of a 375- bed teaching hospital in Caguas, Puerto Rico, filed for Chapter 11 protection on March 18 in Old San Juan to stop the power company from shutting off electric service.
Disputes with Puerto Rico Energy & Power Authority date back to 2002, according to court papers. On average, 85 beds are occupied each day.
The hospital operates in conjunction with the medical school named Escuela de Medecina San Juan Bautista. The medical school isn’t in bankruptcy.
Debt exceeds $10 million, according to the petition.
The case is In re San Juan Bautista Medical Center Corp., 11-02270, U.S. Bankruptcy Court, District of Puerto Rico (Old San Juan).
Bankruptcy Podcast
New York Times-Madoff, Blockbuster, Tribune: Bankruptcy Audio
The Bloomberg bankruptcy podcast opens with a discussion of why The New York Times may turn the liquidation of Bernard L. Madoff Investment Securities Inc. into a test case on whether court pleadings can be kept secret. Disputes between the Madoff trustee and New York Mets owner Fred Wilpon are also analyzed. We ask whether suppliers of Blockbuster Inc. will pursue an investigation to learn when the company realized it could no longer pay for goods supplied after bankruptcy. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle conclude by wondering whether Tribune Co. will become a case where the bankruptcy judge refuses to approve a so-called cramdown settlement. To listen, click here.
Downgrade
Mistral’s Snack-Food Maker Shearer Lowered to B- by S&P
Snack-food producer Shearer’s Foods Inc. sustained a one- notch downgrade when Standard & Poor’s lowered the corporate and senior secured ratings to B- yesterday.
S&P said headroom under loan covenants will be “very tight” for the quarter ending this month. S&P predicts that bank lenders won’t recover more than 70 percent in the event of payment default.
Following the Snack Alliance acquisition one year ago, S&P said earnings before interest, taxes, depreciation and amortization are 21 percent below budget. The acquisition increased revenue by more than 75 percent, S&P said.
Shearer’s, based in Brewster, Ohio, is the largest kettle chip producer in the U.S. It was acquired in January 2008 by Mistral Equity Partners.
Advance Sheets
Refusing to Settle Not Contempt of Mediation Order
Although a bankruptcy court can force someone to mediate, it can’t hold a party in contempt for failing to settle, U.S. District Judge William Pauley III held on March 18 in reversing a ruling by U.S. Bankruptcy Judge Cecelia Morris.
Wells Fargo Bank NA was ordered to mediate. There was an impasse soon after mediation began. Following a report by the mediator to the court, the bankruptcy judge conducted a hearing and eventually held the bank and its lawyer in contempt for failing to mediate in good faith.
In reversing, Pauley began his analysis by saying that “mediation is typically a voluntary process.” He then said the trial court can neither “force a party to settle” nor “coerce a party into making an offer to settle.”
The bank was “within its rights to enter the mediation with the position it would not make a settlement offer,” Pauley said. He said the bank also had the right to decide in advance that it wasn’t liable. Practically speaking, Pauley said an order to mediate “will not change the mind of a party who believes that settlement is not in their best interest.”
Although the trial court can investigate whether a party didn’t mediate in good faith, Pauley ruled that the confidentiality requirement surrounding mediation precludes the court “from inquiring into the level of a party’s participation.”
The case is In re A.T. Reynolds & Sons Inc., 10-2917, U.S. District Court, Southern District of New York (Manhattan).
--With assistance from Linda Sandler and Tiffany Kary in New York and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Stephen Farr, Peter Blumberg
To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net
To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net
