Scotia, Linens, Sharper Image, Quebecor: Bankruptcy

When timberland owner Scotia Pacific Co., affiliate Pacific Lumber Co. and the other contending parties return to bankruptcy court tomorrow for conclusion of the trial over which of two competing reorganization plan deserves confirmation, yet another offer will be on the table to purchase company assets.

Sierra Pacific Industries is offering to buy Palco's mill for $45 million and spend another $30 million upgrading the facility, according to a May 12 court filing by lawyers for the secured noteholders. Sierra Pacific also would buy the adjoined cogeneration plant and working capital.

The offer from Sierra Pacific plugs a hole in the reorganization plan filed by the noteholders, who have a lien on Scotia's 210,000 acres of California woodlands to secure their $800 million claim.

The noteholders' plan only covers Scotia and leaves Palco up in the air. The addition of the Sierra Pacific offer would assure continued operation of the Palco plant and provide jobs for 300 workers.

The other contending plan comes from Marathon Structured Finance Fund LP, the administrative agent for the companies' term loan and revolving credit, and by Mendocino Redwood Co., a family-owned operator of a sawmill and 230,000 acres of nearby redwood forests.

Scotia and Palco dropped their own three plans and now support the Marathon-Mendocino plan. The noteholders plan would sell the woodlands. The Marathon-Mendocino plan, as amended, would give the noteholders $520 million cash.

Sierra Pacific already owns 2 million acres of timberland in California and Washington. With 15 sawmills and eight cogeneration plants, the company says it is the second-largest lumber manufacturer in the U.S.

The bankruptcy judge, who has been urging settlement, is allowed by law to confirm only one plan. Neither plan received required acceptances by all classes of creditors. To confirm either, the bankruptcy judge must use the so-called cramdown procedure.

Competing plans became possible when Scotia and Palco last year gave up the exclusive right to propose a reorganization. The confirmation hearing began April 18. Both remaining plans would end ownership by Maxxam Inc. Headed by Texan Charles Hurwitz, Maxxam acquired the companies in a 1986 leveraged buyout.

Scotia, Palco and four affiliates filed Chapter 11 petitions in January 2007 when a $27 million payment was coming due on notes secured by the timberland.

The case is Scotia Pacific Co., 07-20027, Bankruptcy Court, Southern District Texas (Corpus Christi).

Other Updates

Linens Same-Store Sales Fell 5.7% in First Quarter

Linens 'n Things Inc., the home textiles, housewares and home accessories retailer that filed for reorganization on May 2, announced yesterday that comparable-store sales contracted 5.7 percent in the first quarter from a year earlier. Net sales decreased 0.8 percent to $567 million.

The U.S. Trustee appointed an official creditors' committee with seven members, including CIT Group/Commercial Services Inc., CVS Pharmacy Inc. and Simon Property Group Inc.

The company said it won't file first-quarter financial statements on time while it calculates an asset-impairment charge.

Linens 'n Things listed $369.3 in secured bank debt plus $650 million owing on secured floating rate notes. In all, the petition listed assets of $1.74 billion against debt totaling $1.42 billion.

With annual sales of about $2.8 billion, the Clifton, New Jersey-based company is second-largest in the market behind Bed Bath & Beyond Inc. Last year, the net loss was $191 million. With the Chapter 11 filing on May 2, the company said it would close 120 of its 593 stores.

Apollo Management LP and Silver Point Capital Fund Investors LLC acquired the company in February 2006 in a leveraged buyout.

The case is In re Linens Holdings Co., 08-10832, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Sharper Image Setting Up Sale Procedures Today

Sharper Image Corp., the specialty retailer that filed for reorganization in February and decided in April to sell in May, is in bankruptcy court today looking for approval of auction procedures.

If the bankruptcy judge agrees, the auction will be conducted May 28, followed by a sale approval hearing the next day. Sharper Image already solicited initial bids.

At today's hearing, the bankruptcy judge also will hear the U.S. Trustee object to a revised severance program that would pay as much as $3.6 million to non-management workers who were fired by May 1.

The U.S. Trustee says it's improper to pay workers in full for severance benefits accrued before the bankruptcy filing. The company said it's not asking for authority to pay the benefits as a claim. Sharper Image says the court has authority to validate a severance program to retain workers when it's approved by the creditors' committee and the lenders.

Before deciding to sell out entirely, Sharper Image decided to close 96 of its 184 stores.

The Chapter 11 petition listed assets of $251.5 million and debt totaling $199 million. At filing, Sharper Image owed $44.5 million on a pre-petition secured term loan and revolving credit agreement.

The case is In re Sharper Image Corp., 08-10322, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Quebecor World Aims to Sell Jet to Parent for $20.3 Million

Quebecor World Inc., the Montreal-based commercial printer being reorganized in both the U.S. and Canada, was given authority in April to purchase the Bombardier Challenger jet aircraft it was leasing. Quebecor expected to sell the aircraft for $20 million, turning a $8 million profit in the process.

The company is now asking for permission to sell the aircraft to an affiliate of the parent Quebecor Inc. for $20.3 million. The company says the offer is the best it's received.

Quebecor World will ask the bankruptcy court in Delaware to approve the sale at a May 22 hearing. The company said in papers filed May 12 that notice of the sale hearing will give other buyers one last chance to make a better offer.

Court filings made after the January Chapter 11 filing show the second-largest commercial printer in the U.S. as owing $735 million on a revolving credit, $1.45 billion in unsecured notes, and $184 million for secured equipment financing.

The case in New York is In re Quebecor World (USA) Inc., 08-10152, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Eos Airlines to Auction Assets Without Stalking Horse

Saying that ``time is of the essence'' given the cash position, Eos Airlines Inc. started the process of selling the assets at auction even though ``no single bidder has come forward to serve as a stalking horse,'' the all-business-class airline said in a May 12 court filing.

At a May 22 hearing, the U.S. Bankruptcy Court in Manhattan will say whether it agrees with the idea of requiring initial bids by June 6 preceding a June 9 auction.

Eos says it received ``several expressions of interest'' to buy all or parts of the assets. The company is retaining sufficient staff so it can maintain and sell the federal airline operating certificate.

To read other Bloomberg coverage, click here.

By filing under Chapter 11 in late April, Purchase, New York-based Eos became the sixth U.S. airline to require bankruptcy relief since December. It listed assets of $70.2 million against debt totaling $34.9 million.

The airline leased seven aircraft configured for a capacity of 48 passengers and generated $85 million in revenue in 2007.

The case is In re Eos Airlines Inc., 08-22581, U.S. Bankruptcy Court, Southern District of New York (White Plains).

Coudert Files Amended Plan Offering 39% to Creditors

Coudert Brothers, the New York-based law firm that began liquidating in 2005, filed a Chapter 11 plan that adopts recommendations by examiner Harrison J. Goldin, who said former partners collectively should contribute $11.8 million in return for complete protection from claims that could be made against them in connection with the firm's failure.

If the remnants of the firm collect $11.8 million from former partners together with $11.6 million in other recoveries, the disclosure statement explaining the plan estimates unsecured creditors with $26 million in claims should see up to 39 percent.

A partner who doesn't settle will be sued and won't be protected from claims by other creditors.

Partners will be invited to make payments into the settlement fund beginning when the disclosure statement is approved. The door to participating in the settlement will close Aug. 1.

Goldin in his report broke out how much each former partner should pay based on a variety of factors. The amounts for active partners ranged from $169,000 to $6,000. One partner who retired or left the firm before Jan. 1, 2005, could pay as little as $84.

The firm decided to begin liquidating out-of-court in August 2005. The Chapter 11 filing occurred 13 months later.

The new plan filed last week is an amendment of the liquidating plan Coudert originally filed in March 2007, proposing to give a pro rata distribution to unsecured creditors after payment of secured claims, priority claims and case costs.

The case is In re Coudert Brothers LLP, 06-12226, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Lender Seeks Foreclosure of Sun Valley Developer

As the holder of a $14.5 million mortgage, California National Bank filed papers asking the bankruptcy court for permission to foreclose the property of Valley Club Homes LLC, a housing developer with a project in Hailey, Idaho, near Sun Valley.

The bank acknowledges that the property is worth more than the debt. The bank also filed papers May 7 asking the court to rule that the case involves a single asset real estate project. If it's a so-called SARE case, it must proceed on a faster pace than an ordinary reorganization, otherwise the lender may foreclose.

A hearing won't be set on the foreclosure motion until the debtor objects.

The project filed a Chapter 11 petition on April 29 in Twins Falls, Idaho. Based in Ketchum, Idaho, Valley Club listed assets of $32.4 million against debt totaling $24.2 million.

The case is In re Valley Club Homes LLC, 08-40339, U.S. Bankruptcy Court, District of Idaho (Twin Falls).

Shapes/Arch Files New Plan Backed by H.I.G. Affiliate

Shapes/Arch Holdings LLC, a New Jersey-based producer of aluminum extrusions and windows that filed for reorganization in March, dropped its previous program for emerging from Chapter 11.

Shapes/Arch instead joined an affiliate of Signature Aluminum Inc., another manufacturer of extruded aluminum products, in a modified plan that boosts the payout to unsecured creditors from 2 percent over time to a range of 10 percent to 14 percent.

The company in March proposed selling the business without any opportunity for competitive bidding. Signature, a portfolio company of H.I.G. Capital Management Inc., objected and offered to pay off secured debt and provide $5 million for unsecured creditors, a $4.4 million improvement over the original offer.

In consultation with the creditors' committee, the company dropped the original plan and filed another on May 12 along with papers to test whether anyone will beat the offer from Signature.

The company is proposing that anyone intending to make a higher bid must submit an initial bid by June 25, followed by a June 27 auction.

Under the original plan, the buyer was to be Versa Capital Management Inc.

The best bid to emerge from the auction will end up owning the company if the court approves the reorganization plan at a contemplated July 8 confirmation hearing.

The company estimates unsecured claims will total more than $38 million. Secured debt will total $82 million, including funding for the reorganization taken over by Signature.

The case is In re Shapes/Arch Holdings LLC, 08-14631, U.S. Bankruptcy Court, District of New Jersey (Camden).

Auto-Parts Maker Blue Water Files Plan Contemplating Sale

The official creditors' committee having filed a motion to convert the reorganization to a liquidation in Chapter 7, Blue Water Automotive Systems Inc. filed a proposed Chapter 11 plan and disclosure statement on May 9 and won an adjournment of the conversion motion to June 6.

Blue Water, a designer and manufacturer of plastic components and assemblies for the auto industry, proposes selling the business and distributing the proceeds in the order of priority required in bankruptcy law.

The disclosure statement explaining the plan says unsecured claims total some $33.6 million while $15 million is owing on a revolving credit together with $19.5 million in other secured claims. The disclosure statement doesn't predict how much unsecured creditors will recover.

The asset sale program tentatively calls for signing an initial bidder to a contract by May 28 and gaining approval of a sale by June 20.

The creditors have been contending the Chapter 11 case and the financing are solely for the benefit of customers Chrysler LLC, Ford Motor Co. and General Motors Corp.

Acquired in 2005 by affiliates of KPS Special Situations Fund LP, a private equity fund, Blue Water has eight plants and development facilities generating $200 million in annual revenue.

The case is In re Blue Water Automotive System Inc., 08- 43196, U.S. Bankruptcy Court, Eastern District Michigan (Detroit).

Hyatt Gets $35 Million Discount on Waikiki Resort

Hyatt Corp. won approval yesterday for a $35 million discount off the $445 million price to buy Azabu Buildings Co., owner of the 1,230-room Hyatt Regency Waikiki Resort & Spa and the adjacent King's Village shopping center.

The U.S. Bankruptcy Court in Honolulu confirmed Azabu's Chapter 11 plan in June 2007, approving the sale to Hyatt. Delays held up the sale, until Hyatt gave notice it wouldn't complete the purchase at the original price.

The company and the creditors considered their options, including refinancing and continuing to own the hotel while looking for another buyer. They also considered attempting to retain Hyatt's deposit.

Ultimately, the company and the creditors decided that the most prudent course of action was to accept the discount and complete the sale to Hyatt. The bankruptcy judge signed an order yesterday authorizing the price reduction.

The disclosure statement explaining the plan last year didn't tell unsecured creditors how much they would receive. Similarly, the papers asking for approval of the discount don't disclose what creditors should recover.

Creditors filed an involuntary petition in November 2005 in Honolulu. Azabu converted the case to Chapter 11 in February 2006. The papers listed $613 million in secured debt and $4.2 billion in unsecured claims.

The case is In re Azabu Buildings Co., 05-50011, U.S. Bankruptcy Court, District of Hawaii (Honolulu).

Interstate to Sell Former Depot in Goleta, California

Interstate Bakeries Corp., the wholesale baker unable to confirm its reorganization plan in March, will sell a former depot in Goleta, California, for $1.6 million unless someone makes a better offer at a May 30 auction.

The property has a 3,500-square-foot building on a one-acre lot. Other bids are initially due May 28 in advance of the auction. The sale approval hearing will be June 4.

Interstate says it is continuing on a dual track either to sell the assets or emerge on its own from Chapter 11.

Interstate was the U.S.'s largest wholesale baker when it began the reorganization in September 2004. Interstate's brand names include Wonder, Hostess, Merita, Dolly Madison, Drake's, and Butternut. The company has 41 bakeries, 633 distribution centers, and 730 thrift stores.

The case is In re Interstate Bakeries Corp., 04-45814, U.S. Bankruptcy Court, Western District of Missouri (Kansas City).

Briefly Noted

Dura Automotive Systems Inc., the auto-parts maker that couldn't implement a reorganization plan creditors accepted last year, won the signature of the bankruptcy judge yesterday on a confirmation order approving the modified plan cutting creditors' recovery to 19 percent from 55 percent. Dura hopes to implement the plan and emerge formally from reorganization later this month. To read Bloomberg coverage of yesterday's confirmation hearing, click here. Dura filed under Chapter 11 in September 2006 with 16,000 employees at 63 factories in 14 countries. The petition by Rochester Hills, Michigan-based Dura listed $2 billion in assets and debt of $1.7 billion. The case is In re Dura Automotive Systems Inc., 06-11202, U.S. Bankruptcy Court, District of Delaware (Wilmington).

First NLC Financial Services LLC, the mortgage originating unit of Arlington, Virginia-based investment bank Friedman, Billings, Ramsey Group Inc., voluntarily converted the Chapter 11 effort to a liquidation in Chapter 7 on May 9. First NLC began a Chapter 11 liquidation on Jan. 18, one week after it stopped operating and fired most of its workers. The amended lists of assets and debt filed in April show assets of $32.3 million against $86.7 million in liabilities. First NLC had been the country's 22nd-largest subprime lender and had $11 million in mortgage loans in inventory on filing bankruptcy. The case is In re First NLC Financial Services LLC, 08-10632, U.S. Bankruptcy Court, Southern District Florida (West Palm Beach).

Thomas H. Lee Partners can have access to confidential documents held by Refco Inc. concerning Austrian bank Bawag PSK, a bankruptcy judge ruled yesterday. Lee needed the papers to defend itself in a $945 million lawsuit on Refco's collapse. Lee said that everyone else in the lawsuit had access. To read Bloomberg coverage, click here. Refco and affiliates completed their liquidating Chapter 11 plan in late December 2006. They filed in October 2005, one week after disclosure that $430 million was owing to Refco by purported customers secretly controlled by Chief Executive Officer Phillip Bennett. The case is In re Refco Inc., 05-60006, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Creditors of Delta Air Lines Inc. who tried unsuccessfully to upset the Chapter 11 plan confirmed in April 2007 are appealing the ruling last month by the bankruptcy court dismissing the suit. Click here to read the May 1 Bloomberg bankruptcy column containing a discussion about the suit, and click here to read other Bloomberg coverage of the appeal. The suit unsuccessfully contended Delta's regional airline subsidiary Comair Inc. ``falsely represented'' how the ``midpoint'' in the estimated recovery by Comair creditors was 91.25 percent when they knew total claims against Comair were ``materially understated.'' Delta and Comair won approval of their Chapter 11 plan in April 2007, concluding a reorganization begun in September 2005. Delta distributed its new stock to unsecured creditors in satisfaction of claims against both Delta and Comair. Delta's new stock traded as high as $22.79 on April 26, 2007 and closed yesterday at $7.39, down five cents in New York Stock Exchange trading. The low for the new stock was $6.56 on April 23, 2008. The Chapter 11 case is In re Delta Air Lines Inc., 05-17923, U.S. Bankruptcy Court, Southern District New York (White Plains). The lawsuit on appeal is Varde Investment Partners LP v. Comair Inc., 07-03065, U.S. Bankruptcy Court, Southern District of New York (White Plains).

Kimball Hill Inc., a homebuilder that filed for reorganization on April 23 in Chicago, was given final approval yesterday to borrow up to $51.8 million from a tax refund received by an affiliate also in Chapter 11. The company said it intends to save the refund for unsecured creditors and not consume the money in operating losses or give away the funds as collateral for secured creditors. The company won't have other, traditional secured lending to finance the reorganization. To read Bloomberg coverage, click here. Kimball is the second- largest homebuilder now in reorganization. It listed assets of $795.5 million and debt of $631.9 million as of Dec. 31. The case is In re Kimball Hill Inc., 08-10095, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

Downgrades

U.S. Shipping Partners Downgraded to Caa3

U.S. Shipping Partners LP, a U.S.-flagged marine transporter of petroleum products, was downgraded yesterday by Moody's Investors Service despite a ding in December. The corporate rating is down two more clicks to Caa3.

Five of the six integrated tug-barge vessels belonging to the Edison, New Jersey-based company are employed in the spot market, where prices are weak. Moody's is concerned about the possibility of violating loan covenants.

Homebuilder Standard Pacific Downgraded Again by S&P

Although it has a ``healthy positive cash flow,'' Standard Pacific Corp., an Irvine, California-based home builder, has another downgrade from Moody's Investors Service on top of a ding in January.

The new corporate rating is down one more level to B2 along with the senior unsecured notes while the subordinated notes became Caa1.

The new Moody's rating is one click lower than the S&P downgrade in February.

Last year's $2.6 billion in revenue resulted in a $767 million net loss.

Statistics

U.S. Foreclosures Rise 65% From Year Earlier

One in every 519 U.S. homes went into foreclosure in April, a 65 percent increase from the same month last year and 4 percent higher than the rate in March, according to a study by RealtyTrac Inc.

Bank repossessions in April increased 145 percent over the year. RealtyTrac predicts that by December, banks will own 1 million homes, or one-quarter of all homes for sale.

Nevada led the U.S., with one in every 146 homes in some stage of foreclosure. California was second, at one in every 204 households. Arizona was third, with one in 224 homes in foreclosure, followed by Florida at one in 242 homes.

To read Bloomberg coverage, click here.

Advance Sheets

Tax Indemnity Claim Reinstated Against Delta

Selling an aircraft in the face of impending foreclosure entitles the aircraft's owner to a claim for tax indemnity against the airline that defaulted on the lease, U.S. District Judge Shira A. Scheindlin ruled May 8 in the aftermath of the reorganization of Delta Air Lines Inc.

The case involved a typical leveraged aircraft lease where the owner provided approximately 25 percent of the cost of the aircraft with the remainder of the purchase price supplied by secured lenders. The aircraft was leased to Delta. The aircraft and the lease were collateral for the lender's loan. The loan was non-recourse, meaning the lenders couldn't try to collect from the owner if there were a default.

In Chapter 11 reorganization, Delta demanded a reduction in rental payments on the lease. The new cash flow would not pay required debt service owing to the secured lenders.

The secured lenders agreed with Delta to accept lower rent. The agreement required the lenders to foreclose the aircraft so they, as the new owners, could sign a revised lease with Delta.

Foreclosure impending, the owner sold the aircraft to a third-party buyer who had worked out an agreement with the lenders.

Leveraged leases are attractive to owners because they entitled the owners to take income tax deductions for depreciation of the entire aircraft and also write off interest payments. If the aircraft is prematurely foreclosed, the owner owes a large tax bill for forgiveness of indebtedness income.

As part of the original aircraft financing, Delta agreed to indemnify the owner for any premature tax recapture resulting from a breach of the lease and an exercise of remedies by the lenders.

The owner, Lone Star Air Partners LLC, filed a $15 million claim against Delta under the tax indemnity agreement to cover tax recapture. Delta convinced the bankruptcy judge to disallow the claim on the theory the tax recapture resulted from a voluntary sale and not an exercise of remedies by the lenders.

Scheindlin disagreed, reversed and reinstated the claim. She said the adverse tax consequences resulted from the lenders' agreement with Delta to foreclose the aircraft. It didn't matter to Scheindlin that the owner was able to make a better deal for itself by selling on the eve of foreclosure.

The case is Lone Star Air Partners LLC v. Delta Air Lines Inc. (In re Delta Air Lines Inc.), 07-11143, 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: Patrick Oster at poster@bloomberg.net.

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