Secured lenders of Chrysler LLC owed $6.9 billion disagree over whether it’s proper to spin off most of the auto-making operations into a company to be owned 20 percent at the outset by Italy’s Fiat SpA. (F)
A group of first-lien creditors calling themselves the non- TARP lenders filed papers yesterday saying the spinoff is “patently illegal,” is an “impermissible sub rosa plan of reorganization” and “improperly transfers value from senior creditors to junior creditors.”
While a minority of the first-lien creditors oppose Chrysler’s initiatives, a majority goes along with the idea of accepting $2 billion for their secured claims against the assets being sold. The majority also agreed that Chrysler may use cash representing part of the collateral for their claims.
The non-TARP lenders -- which have not participated in the Troubled Assets Relief Program -- argue that the proposed sale was “foisted” on Chrysler by the U.S. Treasury Department at a time when the automaker had “ceased to function as an independent company.”
The dissident lenders believe that paying billions to unsecured creditors violates the rules of priority in bankruptcy because they are to receive only $2 billion, which they say is the “rough equivalent” of what they would realize in liquidation.
According to the non-TARP lenders, payments being improperly made to junior creditors include $5.3 billion going to trade suppliers, $4.5 billion for warranty claims and employee wages, $9.8 billion for workers’ benefits, and $5 billion toward under-funded pensions.
The dissidents also contend Chrysler’s proposals violate their constitutional rights. They point to a 1935 decision from the U.S. Supreme Court as standing for the proposition that a law violating secured creditors’ rights isn’t saved by carrying out a “sound public purpose.” Quoting the decision from the Great Depression, they argue that their collateral can’t be “taken even for a wholly public use without just compensation.”
A lawyer for the secured creditors said 62 percent of the lenders holding 90 percent of the $6.9 billion loan don’t oppose Chrysler’s actions.
Although Fiat initially would have 20 percent of the stock of “new” Chrysler when the sale is completed, its stake could rise to 35 percent and eventually to 51 percent.
At yesterday’s hearing, the bankruptcy judge granted interim approval for what is to be a $4.5 billion loan provided by the U.S. government. Court papers show that interim funding would be as much as $1.8 billion.
The judge also authorized Chrysler to pay pre-bankruptcy debt to direct and indirect suppliers. Otherwise, a Chrysler witness told the court, some suppliers would go out of business. The company also was given authority to pay incentives to dealers.
An ad hoc committee filed a motion yesterday asking the bankruptcy court to form an official committee representing individuals with personal injury claims against Chrysler. Lawyers for the group say claims total $650 million.
Although Chrysler initially intended for the bankruptcy court to hold a hearing yesterday for approval of sale procedures, the hearing was postponed until this afternoon. Chrysler wants any competing bids by May 15. If there’s an auction, it would be held before the judge in bankruptcy court at a May 21 hearing for approval of the sale.
The U.S. government is to own 8 percent of “new” Chrysler while providing a $6 billion secured loan. The government is providing Chrysler with a $4.5 billion loan for the Chapter 11 case, if the bankruptcy judge approves.
After the sale, “old” Chrysler would retain no cash and eight plants with a book value of $2.3 billion. The government will make a $200 million secured loan designed to allow the “old” company to liquidate the remaining assets. Chrysler currently has 32 plants, including 23 in the U.S.
A trust to provide health-care benefits for retirees will own 55 percent of the stock of new Chrysler.
Cerberus Capital Management LP along with a group of investors acquired Chrysler from Daimler AG (DAI) in August 2007 for $7.4 billion. Cerberus and Daimler will have no ownership of new Chrysler.
Chrysler, the smallest U.S. automaker, listed assets for $39.3 billion and debt totaling $55.2 billion. Revenue in 2008 was $48.5 billion.
April Bankruptcy Filings Rise 38% From 2008, Ease From March
U.S. bankruptcy filings of all types totaled 128,700 in April, up 38 percent from a year earlier and slipping 2.4 percent from March.
Commercial bankruptcies in March continued to rise faster than individual bankruptcies. While commercial filings in April were little changed from March, they were 56 percent higher than a year earlier, according to data compiled by Automated Access to Court Electronic Records, a service of Jupiter ESources LLC in Oklahoma City.
Year over year, the increase in bankruptcy reorganization filings under Chapter 11 is even higher than for commercial filings, which are mostly made of failed businesses that liquidate in Chapter 7. Chapter 11 filings increased 4 percent from March. Compared with the same month in 2008, bankruptcy reorganization filings were up 136 percent.
Almost 1.1 million Americans filed for bankruptcy in 2008, a 32 percent increase from the 827,000 filed in 2007 and an 86 percent surge from the 590,500 filings in 2006. So far this year, bankruptcy filings total 453,000.
The all-time record for bankruptcy filings was 2.1 million in 2005, when 630,000 Americans resorted to bankruptcy in the two weeks before revisions to federal bankruptcy laws in October made it more difficult for individuals to erase debts.
Filene’s Basement Files in Chapter 11 for Sale to Crown
Filene’s Basement Inc., a 36-store retailer based in New York, filed a Chapter 11 petition yesterday in Delaware along with an agreement to sell 17 stores for $22 million to an affiliate of Stanley Chera’s Crown Acquisitions.
In Chapter 11 for a second time, Filene’s said its assets are $83.8 million while debt totals $182 million. Obligations include $16.9 million owed to secured bank lenders and $52.6 million on subordinated notes held by an affiliate of the former owner.
Revenue in the January fiscal year was $422 million, resulting in an operating loss of $53.1 million, according to a court filing. It closed 11 stores before the bankruptcy filing.
Filene’s estimates it also owes $30 million to trade suppliers and $35.3 million in accrued expenses.
The chain was acquired in April by Buxbaum Group, an Agoura Hills, California-based liquidator. It purchased Filene’s from Retail Ventures Inc. for no consideration.
Buxbaum is also an appraiser of retail and wholesale inventories. It retained liquidator Alan Cohen to serve as chief restructuring officer for Filene’s.
Before the sale, Filene’s was an affiliate of Value City Department Stores LLC, a retailer in Chapter 11 in New York since October. Filene’s was acquired in a bankruptcy sale in 2000 for $89 million, including $3.5 million in cash, $5 million in stock, $3.5 million in cash over three years and debt assumption.
To read other Bloomberg coverage, click here.
The case is In re Filene’s Basement Inc., 09-11525, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Three Lauth Property Affiliates File in Indianapolis
Commercial real estate developer Lauth Property Group put three of its projects into Chapter 11 late last week in Indianapolis. One, LIP Development LLC, said assets and debt both exceed $100 million.
To read Bloomberg coverage, click here.
Lauth Property Group isn’t in bankruptcy.
The case is In re LIP Development LLC, 09-06066, U.S. Bankruptcy Court, Sothern District of Indiana (Indianapolis).
Legacy Hotel from Rockville Files in Greenbelt, Maryland
The hotel is located in Rockville, Maryland.
The case is In re Congressional Hotel Corp., 09-17901, U.S. Bankruptcy Court, District of Maryland (Rockville).
Bunting Swine Farms Files in Wilson, North Carolina
Bunting Swine Farms LLC and Bunting Enterprises LLC, owned by brothers Clarence and Douglas Bunting, filed for Chapter 11 protection yesterday in Wilson, North Carolina, owning 83,000 animals between them.
The petition for Bunting Swine says assets are $4.8 million while debt is $18.3 million. For Bunting Enterprises, the corresponding numbers are $1 million and $12.4 million.
Both operations are centered in Pinetops, North Carolina.
The case is In re Bunting Swine Farms LLC, 09-03646, U.S. Bankruptcy Court, Eastern District North Carolina (Wilson).
Caraustar Facing June 1 Note Maturity
Recycled paperboard maker Caraustar Industries Inc., an investment-grade credit eight years ago, is at “imminent risk of default” with $190 million of senior notes maturing June 1, in the judgment of Standard & Poor’s.
The “expectation” of S&P is that Caraustar will be unable to repay the notes.
Moody’s Investors Service previously reported that Caraustar is negotiating with an ad hoc committee of noteholders.
The stock of Austell, Georgia-based Caraustar last traded yesterday just above 19 cents on the Nasdaq Stock Market. The two-year high for the stock was $7.54 on April 26 2007.
Pilgrim’s Pride to Have Official Shareholders’ Committee
Pilgrim’s Pride Corp. (PPC), the world’s largest chicken processor, will have an official committee to represent stockholders, U.S. Bankruptcy Judge D. Michael Lynn ruled last week.
Lynn concluded that the company is “solvent or nearly solvent” and the benefits of the committee will outweigh the cost. Still, the judge said the committee may spend no more than $425,000 a month, including the cost of a financial adviser.
Lynn also warned the committee’s professionals they could expect to see their fees reduced “or even eliminated” if they duplicate the work of the official creditors’ committee.
Lynn concluded that the company’s board of directors could not adequately represent shareholders given “fiduciary duties to creditors.”
Pittsburg, Texas-based Pilgrim’s Pride filed under Chapter 11 in December, listing assets of $3.75 billion and debt of $2.72 billion. In 2007, it completed a $1.1 billion, debt- financed acquisition of Gold Kist Inc., the country’s third- largest poultry producer. The prior purchase of the chicken business from ConAgra Foods Inc. (CAG) made it the second-largest in the market at the time, behind Tyson Foods Inc. (TSN)
Lenders Move to Dismiss 9 General Growth Chapter 11 Filings
Nine shopping malls owned by General Growth Properties Inc. (GGP) should be tossed out of bankruptcy reorganization, in the opinion of ING Clarion Capital Loan Services LLC, the special servicer for lenders with mortgages on the properties.
Clarion says the mortgages on all of the nine properties are current, there are no defaults, none of the mortgages are maturing soon, and cash flows cover the malls’ expenses.
Consequently, Clarion in its motion to dismiss filed yesterday says the reorganizations for the nine companies were filed in “bad faith.”
If they aren’t dismissed, Clarion says it will “wreak havoc with the structured finance market if allowed to proceed.”
The Chapter 11 filing by General Growth and its affiliates on April 16 was the largest real estate bankruptcy in U.S. history.
The balance sheet of Chicago-based General Growth had assets of $29.6 billion and $27.3 billion in total liabilities as of Dec. 31. It owns some 200 shopping mall properties.
The case is In re General Growth, 09-11977, Bankruptcy Court, U.S. District Court, Southern District of New York (Manhattan).
Monaco Auction Set for May 21; Navistar Offering $52 Million
Motor home maker Monaco Coach Corp. (MCOAQ) will hold an auction on May 21 testing whether there is a buyer that will pay more than $52 million for most of the business.
Under auction and sale procedures approved last week, other bids are due May 14. Truck-maker Navistar International Corp. (NAV) already is under contract at the $52 million price.
If there is another bidder, the auction will be May 21, followed by a May 22 hearing for approval of the sale to whomever made the best offer. The sale schedule was what Monaco wanted.
The sale includes plants in Indiana and Oregon, plus trademarks and intellectual property. It doesn’t include the five so-called resort properties that go up for auction separately on May 8.
Monaco filed for Chapter 11 reorganization on March 5. It sells mobile homes under the brand names Monaco, Holiday Rambler, Safari and Beaver.
The Coburg, Oregon-based company listed assets of $442 million against debt totaling $209 million. Revenue in 2007 was $1.29 billion. For the first 11 months of 2008, sales were $690 million.
The case is In re Monaco Coach Corp., 09-10750, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Qimonda Wins Approval of Loan, Seeks Exclusivity Extension
Qimonda North America Corp., a U.S. subsidiary of German semiconductor memory product maker Qimonda AG, received final approval from the bankruptcy judge yesterday for $60 million in secured financing to support its Chapter 11 effort until the assets can be sold.
Yesterday the company also filed a motion for a four-month extension of the exclusive right to propose a Chapter 11 plan. If the judge agrees at a May 19 hearing, so-called exclusivity will reach out until Oct. 18.
Qimonda says it has only begun the process of “searching for strategic purchasers globally” and selling “their highly technical equipment and facilities.”
The financing is being provided by an affiliate of Gordon Brother Group LLC named GB Merchant Partners LLC.
Qimond already has begun the process of selling its plant in Sandston, Virginia, that makes DRAM chips from 200-millimeter and 300-millimeter wafers along with other assets worth less than $1 million.
Qimonda North America, based in Cary, North Carolina, filed under Chapter 11 on Feb. 20, saying assets and debt both exceed $1 billion. It has a manufacturing plant in Virginia and three other facilities in the U.S. It also served as the North American marketing and sales arm for the German parent. Qimonda AG is controlled by German’s Infineon Technologies AG. (IFX)
The case is In re Qimonda Richmond LLC, 09-10589, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Pliant Reports Operating Loss in First Quarter 2009
Pliant Corp., a manufacturer of flexible packaging and plastic films that filed under Chapter 11 in February, had a $2.4 million operating loss for the first three months of 2009 on net sales of $214 million. The net loss for the period was $22.8 million.
The Chapter 11 filing was accompanied by a reorganization plan proposing to give all the new stock to the holders of the $393 million in first-lien notes. Other creditors, including the holders of $262 million in second-lien notes, would receive warrants to buy new stock.
Pliant also has $26.3 million in subordinated notes. The secured $167 million credit agreement is to be paid in full under the plan. The plan is supported by holders of more than two-thirds of the first-lien notes.
Pliant is in Chapter 11 a second time. It confirmed a Chapter 11 reorganization plan in June 2006 that left the second-lien notes in place without reducing the amount of the debt. The plan this time almost wipes out the second-lien notes.
The petition listed assets of $689 million against debt of $1.03 billion as of Sept. 30. Revenue for the first nine months of 2008 was $881 million. In 2007, sales were $1.1 billion. Schaumburg, Illinois-based Pliant has 21 plants.
The new case is In re Pliant Corp., 09-10443, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Constar International Inc., a manufacturer of blow-molded plastic beverage containers, obtained the signature of the bankruptcy judge last week on a confirmation order approving the reorganization plan negotiated before the Chapter 11 filing in late December. The plan cancels existing stock and exchanges $175 million of 11 percent subordinated notes for all of the new stock. Other secured and unsecured creditors are to be paid in full or reinstated under the plan, including $220 million in floating-rate notes. Constar expects to implement the plan this month. Solus Alternative Asset Management LP is the holder of the largest block of the subordinated notes. The Chapter 11 petition listed assets of $420 million against debt totaling $538 million, including $220 million in secured obligations. The case is In re Constar International Inc., 08-13432, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Racetrack owner Magna Entertainment Corp. was authorized by the bankruptcy judge yesterday to begin the process of selling some of its horseracing tracks after saying it wouldn’t sell Pimlico in Baltimore at this time. Santa Anita in California is among the tracks still slated for sale. The auction would be held in September. To read Bloomberg coverage, click here. In its Chapter 11 petition on March 5, Magna listed assets of $1.05 billion and $959 million in debt. Liabilities include $500 million in senior and junior secured financings and $255 million in subordinated notes. Trade debt is about $10 million, a court paper said. The case is In re Magna Entertainment Corp., 09-10720, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Bruno’s Supermarkets LLC was authorized by the bankruptcy judge yesterday to sell its 56 stores to C&S Wholesale Grocers Inc. under an agreement worth $45.8 million. C&S will operate 31 stores and liquidate the remainder. Closely owned C&S, from Keene, New Hampshire, is the second-largest food wholesaler in the U.S. The Chapter 11 reorganization begun Feb. 5 is Bruno’s second. It’s had four owners since 1995. The current owner is Lone Star Funds, a Dallas-based investor. On entering Chapter 11, Bruno’s owed $10.8 million on a revolving credit, $22.5 million to trade suppliers and other unsecured creditors, and $6.8 million to taxing authorities. The case is In re Bruno’s Supermarkets LLC, 09-00634, U.S. Bankruptcy Court, Northern District Alabama (Birmingham).
Noble International Ltd., an auto-parts maker that filed under Chapter 11 on April 15, has an agreement to sell the business for $11 million to private-equity investor Patriarch Partners LLC unless a higher offer turns up at auction. Patriarch was the losing bidder at the auction for Polaroid Corp. To read Bloomberg coverage, click here. Noble listed assets of $190.8 million and debt of $38.7 million. It has 23 plants in 12 countries, including eight in the U.S. The case is In re Noble International Ltd., 09-51720, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
Muzak Holdings LLC, a provider of music programming for businesses, generated $65 million in earnings before interest, taxes, depreciation and amortization in 2008, the company said yesterday in a statement. Revenue in 2008 was $249 million, down 0.5 percent from 2007. Ebitda in 2008 was 5.3 percent lower than 2007. The company ended April with cash of $35 million, more than when the Chapter 11 petition was filed in February. The statement didn’t mention 2008 net income. Muzak has been saying it doesn’t need outside financing. The petition listed assets of $324 million against debt totaling $465 million. Debt includes $101 million on a senior secured credit facility, $220 million in senior notes and $115 million in subordinated notes. The Fort Mill, South Carolina-based company said it intends to use Chapter 11 to “right size our capital structure.” The case is In re Muzak Holdings LLC, 09-10422, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Indalex Holdings Finance Corp., the second-largest producer of soft aluminum extrusions in the U.S., has final approval for $85.9 million in secured credit provided by JPMorgan Chase Bank NA (JPM), as administrative agent for the lenders. Indalex’s Chapter 11 petition filed March 20 listed assets of $356 million against debt totaling $456 million. It is one of 14 investments by private-equity investor Sun Capital Partners Inc. to file in Chapter 11 since January 2006. Sun Capital purchased Indalex in 2005 for $425 million. Lincolnshire, Illinois-based Indalex has almost $306 million in secured debt, including $70 million on a revolving credit and $30 million on two term loans, in addition to $198 million in second-lien notes. Annual revenue exceeds $1 billion. The case is In re Indalex Holdings Finance Inc., 09- 10982, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Exchange Offer News
Wolverine Tube Completes Exchange Offer
Wolverine Tube Inc., a leading producer of copper tubing for manufacturers of heating, ventilation and cooling equipment, announced yesterday that it completed the exchange offer where $122 million of maturing 10.5 percent unsecured notes were exchanged for new 15 percent senior secured notes to mature in 2012.
The Huntsville, Alabama-based company had a $32.4 million net loss over the first nine months of 2008 on revenue of $678 million. The stock, only briefly above $2 a share in the last two years, fell 2 cents yesterday to 18 cents in over-the- counter trading.
Drilling Service Provider Forbes Downgraded on Lower Cash Flow
The decline in oil and natural gas exploration resulted in a downgrade for Forbes Energy Services LLC that lowered the Moody’s Investors Service corporate rating by one notch to B3.
Moody’s said that the “large decrease” in cash flows “is likely to extend throughout 2009 and well into 2010.”
Forbes, based in Alice, Texas, is a subsidiary of Forbes Energy Service Ltd. and an oilfield services provider.
Trustees Not Automatic for Ponzi Scheme Bankruptcies
With Ponzi schemes being discovered frequently, a decision last week from the U.S. Court of Appeals in New York is important for ruling that a Chapter 11 trustee isn’t automatically required when a receiver was appointed before bankruptcy.
The U.S. Trustee unsuccessfully argued that the receiver appointed before bankruptcy was automatically ousted on the filing under Chapter 11. The case involved a hedge fund named Bayou Group LLC that turned out to be a Ponzi scheme.
The Second Circuit Court of Appeals reasoned that there was no management void, and thus no need for a Chapter 11 trustee, because the receiver had been given management powers in addition to custody of the assets. The Appeals Court also said there were no allegations that the receiver himself was incompetent or guilty of fraud.
The case is Adams v. Marwil (In re Bayou Group LLC), 07- 1508, 2nd U.S. Circuit Court of Appeals (Manhattan). The Chapter 11 case is In re Bayou Group LLC, 06-22306, U.S. Bankruptcy Court, Southern District New York (White Plains).
6th Circuit Permits Cramming Down Mobile Home Debt
Although the U.S. Senate last week decided against allowing bankruptcy judges to cut down mortgages on principal residences, two U.S. Circuit Courts of Appeal have now ruled that the mortgage on a mobile home can be reduced to market value when the owner files bankruptcy.
The new case was decided last week by the Court of Appeals in Cincinnati. Reading the bankruptcy statute as it’s written, the 6th Circuit said that the prohibition against trimming down home mortgages only applies to real property. Since a mobile home isn’t real property under Ohio law, the bankruptcy judge was authorized to cut down the mortgage to current market value.
As for the land where the mobile home sits, the property by itself isn’t a residence, so the cram-down prohibition doesn’t apply either.
The Court of Appeals sitting in Richmond, Virginia, reached the same result in a case decided in February. The 4th Circuit, considered to be conservative, also read Congress’ choice of words strictly.
The new case is Reinhardt v. Vanderbilt Mortgage & Finance Inc. (In re Reinhardt), 08-3309, 6th U.S. Circuit Court of Appeals (Cincinnati), and the prior case is Enis v. Green Tree Servicing LLC (In re Ennis), 07-2134, 4th U.S. Circuit Court of Appeals (Richmond, Virginia).
Claim Buyer May Challenge Discharge of Debt
If a claim is sold, the buyer has a right to file suit in bankruptcy court seeking a declaration that the debt isn’t wiped out by the bankruptcy discharge, the U.S. Court of Appeals in San Francisco ruled May 1.
The case involved a debt that was allegedly obtained based on a false financial statement used to deceive the lender. The lender transferred the claim and all rights associated with it to a buyer.
The buyer filed suit in bankruptcy court arguing that the debt couldn’t be discharged for the underlying fraud. The bankruptcy judge ruled against the buyer, saying the fraud had not been perpetrated against the buyer.
The bankruptcy appellate panel reversed, and the 9th Circuit affirmed.
Looking at the language of the statute, the Circuit Court concluded that Congress didn’t intend to bar dischargeability suits when a claim was sold. The court also saw the result as being consistent with the purpose of dischargeability laws in preventing fraud.
The case is Boyajian v. New Falls Corp. (In re Boyajian), 07-55713, 9th U.S. Circuit Court of Appeals (San Francisco).
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