Tribune, Majestic Star, Zayat, Regent Communications, Flying J: Bankruptcy

Newspaper publisher Tribune Co. may get an examiner following yesterday’s hearing in Delaware bankruptcy court.

Although he didn’t rule, U.S. Bankruptcy Judge Kevin Carey said he agreed with the U.S. Trustee’s argument as to why there should be an investigation by an independent examiner. Carey told both sides to confer and try to reach an agreement about the scope of an examination.

If there is no agreement, Carey will hold another hearing on April 22 where he will decide whether there should be an examiner.

To read Bloomberg coverage of yesterday’s hearing, click here.

Tribune filed a proposed Chapter 11 plan on April 12 to implement a settlement negotiated with some creditors. Even before the plan was filed, holders of $3.6 billion in pre- bankruptcy secured debt announced their opposition to the plan and the settlement.

The lenders, who say they have 42 percent of the secured debt under the May 2007 credit agreement, contend that all of the consideration flowing to unsecured creditors would come out of their take, while other participants in the allegedly defective leveraged buyout get away scot-free, protected by releases and indemnities.

Some creditors contend that the $13.8 billion leveraged buyout in December 2007, led by Sam Zell, included fraudulent transfers because operating subsidiaries pledged their assets for new loans and received no commensurate value in return.

To read details about the plan, the settlement and the parties’ arguments, click here to see the April 13 Bloomberg bankruptcy report.

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. The company 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).

New Filings

Pearl, Art Supply Dealer, Files in Fort Lauderdale

Pearl Cos., with six arts and crafts stores now in operation, filed a Chapter 11 petition on April 9 in Fort Lauderdale, Florida, listing assets of $7.9 million and debt totaling $10.9 million.

The liabilities don’t include landlords’ claims on 11 stores that were closed before the bankruptcy filing.

Based in Fort Lauderdale, Pearl said in a court filing that revenue in 2009 was $41.9 million, resulting in a $6 million estimated net loss. For the ensuing 12 months, Pearl anticipates revenue of $26 million.

Liabilities include $2.2 million owing to a bank with liens on all the assets. Pearl estimates that inventory is valued at $6 million, while the real-estate assets are worth $10 million.

The case is Pearl Companies Inc., 10-19336, U.S. Bankruptcy Court, Southern District Florida (Fort Lauderdale).

Teeth Whitener BSML Faces Involuntary Chapter 7

Ten creditors filed an involuntary Chapter 7 petition last week against BSML Inc., a retailer of teeth-whitening products and services.

BSML’s balance sheet for March 28, 2009, listed assets of $6.94 million against debt totaling $9.97 million. For the quarter that ended that day, the net loss was $598,000 on revenue of $4.17 million.

Among the 10 petitioning creditors, nine of the claims are for unpaid wages.

Boca Raton, Florida-based BSML has 23 stores operating under the name BriteSmile Professional Whitening Centers, according to a regulatory filing last year.

Discus Dental LLC sued BSML in June alleging violation of its BriteSmile trademark licenses.

Updates

Majestic Star Casino Mortgages Valid, Lenders Say

Lenders to casino operator Majestic Star Casino LLC sought to debunk a theory espoused by the creditors’ committee explaining why secured claims against two riverboat casinos in Gary, Indiana, are defective.

The committee surfaced a theory based on the idea that the floating casinos are no longer vessels because they are now permanently attached to land. To have valid security interests, the committee postulates that liens must be perfected as fixtures.

As fixtures, the committee argued that the necessary notices were incorrectly filed. Consequently, the committee filed a motion asking for authority to sue the lenders and void their security interests.

The indenture trustee for $300 million in senior notes responded to the motion, to be argued April 27 in bankruptcy court, that the committee is “simply wrong” in its theory about how to file a lien on fixtures.

Wells Fargo Capital Finance Inc., as agent for bank lenders, also contends that the casinos remain vessels, meaning that ship mortgages are still valid.

Because there are no valid theories worth pursuing, according to the noteholders and banks, both lender groups urged the bankruptcy court to deny the committee the ability to bring suit.

Majestic Star filed under Chapter 11 in November. It has four casinos in total, plus hotels with 806 rooms serving the two riverboat casinos in Gary. The other casinos are in Tunica, Mississippi, and Black Hawk, Colorado.

Debt includes $79.3 million owing on the senior secured credit facility. In addition to the $300 million in senior notes, Majestic Star owes $200 million on unsecured senior notes and $63.5 million on discount notes. The company reported assets of $406 million and debt of $750 million as of June 30.

The case is In re Majestic Star Casino LLC, 09-14136, U.S. Bankruptcy Court, District of Delaware (Wilmington).

NVR to Buy Orleans Homebuilders for $170 Million

Orleans Homebuilders Inc., a builder of homes and condominiums in seven states, will sell most of the assets to NVR Inc. for $170 million, plus the replacement of $52.6 million in letters of credit, unless a higher offer appears at an auction tentatively scheduled for June 23.

NVR, a homebuilder based in Reston, Virginia, operates under names including Ryan Homes. It is buying all but 200 of Orleans’s 4,300 lots. Orleans’s management and mortgage brokerage subsidiaries also aren’t being sold.

Orleans arranged a hearing on May 4 so the bankruptcy court in Delaware can set up auction and sale procedures. Orleans wants other bids by June 16, followed by a June 23 auction and a June 24 sale approval hearing.

Orleans said in a statement that it received an $18.2 million tax refund that was turned over to the lenders.

NVR generated $192.2 million of net income in 2009 on revenue of $2.68 billion.

Orleans’s Chapter 11 filing on March 1 resulted from the maturity of a revolving credit in February. At maturity, about $325 million was owing to the banks, not including $15 million on letters of credit.

Bensalem, Pennsylvania-based Orleans reported a $52.5 million net loss for the nine months ended March 31 on revenue of $247 million. The March 31 balance sheet listed assets of $591 million against total liabilities of $560 million.

The case is In re Orleans Homebuilders Inc., 10-10684, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Lehman Sues IRS for $110 Million in Tax Refunds

Lehman Brothers Holdings Inc. sued the Internal Revenue Service yesterday in bankruptcy court to recover more than $110 million in income tax refunds and penalties for 1999 to 2000.

The dispute with the IRS relates to income tax on dividends paid on borrowed foreign stock in transactions with a Lehman subsidiary in the U.K. The IRS disallowed $91.9 million in deductions Lehman claimed for foreign taxes paid on the dividends and assessed penalties.

Before the Chapter 11 filing, Lehman paid the taxes and penalties, reserving its right to seek a refund. When the IRS didn’t respond to a demand for a refund, Lehman exercised its right under bankruptcy law to sue the IRS in bankruptcy court.

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 London-based Barclays Plc one week later. The Lehman brokerage operations went into liquidation on Sept. 19, 2008, in the same court. The brokerage is in the control of a trustee appointed under the Securities Investor Protection Act.

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 Investors Protection Corp. v. Lehman Brothers Inc., 08-01420, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Fifth Third Attempting to Shut Off Cash for Zayat Stables

After a temporary peace, war has broken out again between racehorse owner Zayat Stables LLC and Fifth Third Bank, a secured lender owed more than $34 million.

The stables sued the bank on April 5, alleging “misleading, deceptive and predatory lending practices.” Four days later, the bank declared a default under an agreement for the use of so-called cash collateral and scheduled a hearing today to shut off the use of cash.

After the Chapter 11 reorganization began in February, the bank disputed the stables’ right to use cash. The controversy ended in a temporary settlement allowing Zayat to use cash under a budget until May 8. It also provided a scheme for selling two- year-old horses at auction and others in claiming races. Proceeds were to be held in an escrow account.

The agreement also requires the stables to file a Chapter 11 plan by April 16.

In papers filed in bankruptcy court on April 9, the bank recited how the agreement required selling nine two-year-old horses at auction. The bank contends that Zayat unilaterally withdrew four horses from the auction, in the process breaching the cash collateral agreement. The hearing today presumably will find the bank asking the bankruptcy judge in Newark, New Jersey, to shut off the use of cash.

The stables’ lawsuit alleges that the bank made “numerous promises to restructure” the loans. In asking for punitive damages, Zayat says the promises to restructure were “confirmed in a signed writing.”

A lawyer for the bank didn’t return a call requesting comment on the suit and the cash collateral dispute.

The bank says it holds personal guarantees given by Ahmed Zayat for as much as $38.7 million. Zayat said he personally invested $40 million in the business. The bank previously said that it wouldn’t restructure the loan because Ahmed Zayat demanded a release from his personal guarantees.

The stables, based in Hackensack, New Jersey, filed for Chapter 11 protection on Feb. 3 in Newark, contending that the bankruptcy was precipitated by the bank’s “predatory lending practices.” Fifth Third was seeking the appointment of a receiver when the bankruptcy began.

The stables’ more than 200 horses, which are collateral for the bank loan, are valued at $37 million, according an appraisal mentioned in a court paper. Zayat’s revenue in 2009 was $21 million.

The case is In re Zayat Stables LLC, 10-13130, U.S. Bankruptcy Court, District of New Jersey (Newark).

Regent Communications Confirms Prepack in Six Weeks

Control of radio-station owner Regent Communications Inc. will shift to Oaktree Capital Management LLC after the bankruptcy judge on April 12 signed a confirmation order approving the prepackaged reorganization that began March 1.

The restructuring agreement was reached before the bankruptcy filing with holders of 76.3 percent of the $205 million in secured debt.

In a swap for secured debt, the lenders are receiving all of the new stock, a $95 million secured loan and a $25 million unsecured loan that pays interest with more debt.

Unsecured creditors are being paid in full, allowing existing shareholders to split $5.5 million, or 12.8 cents a share. The plan reduces long-term debt by $86.7 million.

Regent said in a statement that it hopes to implement the plan around April 27.

Cincinnati-based Regent has 62 stations in 13 small and mid-sized markets. The Sept. 30 balance sheet listed assets of $176 million and liabilities of $205 million. For the nine months through September, the net loss was $29.8 million on $62.8 million in revenue.

The case is In re Regent Communications Inc., 10-10632, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Flying J Settles Pollution Claims Against Shell

Flying J Inc., an oil producer, refiner and marketer, agreed to settle $12.7 million in environmental claims against Shell Oil Products US in return for payments totaling $8.5 million.

A hearing will be held on April 26 for approval of the settlement.

The claims arose from the Big West oil refinery that Flying J purchased from Shell in 2005. Flying J was authorized in March to sell the non-operating, 70,000-barrel-a-day refinery in Bakersfield, California, to an affiliate of Alon USA Energy Inc. for $40 million cash plus the value of inventory. The refinery is owned by Flying J affiliate Big West Oil LLC.

Flying J filed a reorganization plan in February to pay creditors in full, with the excess going to existing shareholders. For details on the plan and how it is financed, click here for the Feb. 12 Bloomberg bankruptcy report.

At the outset of the Chapter 11 reorganization in December 2008, Flying J had a $53 million revolving credit along with a $395 million secured term loan. Pipeline-owner Longhorn Partners Pipeline LP owed $45 million on a revolving credit and $166 million on a secured note. The companies also owed $90 million on an unsecured revolving credit with Zions Bank.

The case is In re Flying J Inc., 08-13384, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Barclays Moves to Dismiss Last Week’s Westland Filing

Westland Devco LP, the owner of 55,000 acres of mostly undeveloped land in Albuquerque, New Mexico, filed a Chapter 11 petition on April 5 and one week later is facing a motion by the secured lender to dismiss the case.

The lender, Barclays Capital Real Estate Inc., claims it is owed more than $194 million. Barclays said in the motion to dismiss that the bankruptcy filing was designed to “stave off imminent state court foreclosure.” The affiliate of the London- based bank noted that the Chapter 11 petition was filed 45 minutes before a hearing in the state foreclosure court.

While Westland claims the property is worth $353 million, Barclays says its appraisal pegs the value at one-third of that amount.

Barclays contends the reorganization is hopeless, partly because Westland has only $50,000 a year in income and no more than $4,000 in cash.

In the Chapter 11 petition, Westland listed assets of $361 million against debt totaling $198 million.

The case is In re Westland Devco LP, 10-11166, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Assets Sold, Aviza Technology Confirms Liquidating Plan

Aviza Technology Inc. sold the business of supplying chipmaking equipment and confirmed a liquidating Chapter 11 plan on April 8.

The plan hands out sale proceeds according to priorities in bankruptcy law. The disclosure statement doesn’t say how much creditors may receive, partly because the $58 million purchase price includes notes for $38.7 million.

Sumitomo Precision Products Co. bought the assets in October for $15 million in cash, plus notes and the assumption of debt.

Outstanding secured claims are $18.7 million, with unsecured claims totaling almost $10 million, according to the disclosure statement. Secured creditors were paid $10.2 million when the sale was completed.

Scotts Valley, California-based Aviza filed under Chapter 11 in June in San Jose, California. The company in formal lists showed assets for $2.6 million and debt totaling $38.3 million.

The case is In re ATI Liquidating Inc., 09-54511, U.S. Bankruptcy Court, Northern District of California (San Jose).

Evolution Lighting to Acquire Catalina Lighting

Catalina Lighting Inc., a designer, importer and distributor of lighting products that filed a Chapter 11 petition in February, was authorized last week to sell the assets to Evolution Lighting LLC for just enough to pay off the $3.3 million owed to secured creditor Wachovia Bank NA.

Evolution also owned $18.6 million in Catalina’s second- lien debt that will be exchanged for the assets.

The order approving the sale requires Catalina to file a motion by June 1 either to dismiss the Chapter 11 case or convert to liquidation in Chapter 7.

Evolution is affiliated with Boyne Capital Partners Inc.

Court papers said Catalina’s assets were less than $10 million while debt exceeds $10 million.

Catalina’s brands include Catalina, Dana, Illuminada and Tensor. Manufacturing is in Asia through an affiliate. The products are sold in big box stores, a court filing says.

The case is In re Catalina Lighting Inc., 10-14786, U.S. Bankruptcy Court, Southern District of Florida (Miami).

Statistics

March Has Record Claim Trades, SecondMarket Says

Claims in the total face amount of $2.89 billion were traded in March, according to SecondMarket Inc., which describes itself as the largest secondary market for illiquid assets.

The statistics, based on reports filed with bankruptcy courts, once again have Lehman Brothers Holdings Inc. in the lead with 288 reported trades for $2.69 billion. Lehman claims for $9.34 billion were traded in the past year.

SecondMarket said in its report to customers that March had the most reported trades in number since it began keeping records. Claims against 58 different companies were traded during the month, according to SecondMarket.

Watch List

U.S. Concrete Doesn’t Make April 1 Sub Debt Payment

U.S. Concrete Inc., one of the 10 largest producer of ready-mixed concrete in the U.S., didn’t make an interest payment due April 1 on senior subordinated notes.

Although there is a 30-day grace period for the payment, U.S. Concrete said in March that it had begun talks on a “permanent restructuring” with lenders and holders of subordinated notes. At the time, the Houston-based company said the restructuring could be implemented either in or out of court.

U.S. Concrete’s financial difficulties resulted from the decline in construction that caused sales to fall 29 percent last year from 2008, to $534.5 million. The company reported a 2009 net loss of $88.2 million.

The company disclosed in February that it secured an additional $5 million of liquidity from lenders and amended the credit agreement so there would be no default until April 30 for not paying interest on the senior subordinated notes due in April.

U.S. Concrete’s balance sheet on Dec. 31 listed assets of $392.4 million and liabilities totaling $402.5 million.

U.S. Concrete has 125 fixed and a 11 portable plants serving markets in California, New Jersey, Texas and Michigan.

Briefly Noted

Madoff Trustee Allowed to Ease Terms of Surge Trading Sale

The trustee for Bernard L. Madoff Investment Securities Inc. was authorized by the bankruptcy judge yesterday to modify the contract with Castor Pollux Securities LLC, which bought the Madoff market-making business in June 2009 for $1 million cash plus as much as another $24.5 million based on gross revenue through December 2013.

Without modifying the contract, the trustee said that Castor Pollux, now formally named Surge Trading Inc., would go out of business. To read details about the change in the agreement, click here and see the Madoff item in the April 1 Bloomberg bankruptcy report. Click here to read the Bloomberg story on yesterday’s hearing.

The Madoff firm began liquidating in December 2008 with the appointment of a trustee under the Securities Investor Protection Act. Madoff himself went into an involuntary Chapter 7 liquidation in April. His bankruptcy case was consolidated with the firm’s liquidation. The liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court for the Southern District of New York (Manhattan).

Advance Sheets

Student Loan Discharge Complaint Allowed After Discharge

An individual was allowed three years after receiving a discharge in Chapter 7 to file papers declaring student loans to be dischargeable as an undue hardship, the Bankruptcy Appellate Panel for the 8th Circuit ruled in an April 9 opinion.

The three judges on the panel concluded that bankruptcy rules don’t require filing a complaint to discharge student loans before the general discharge is granted. They also ruled that the bankruptcy judge properly considered the bankrupt’s financial condition at the time of the student loan discharge trial, not at discharge three years earlier.

On the merits, the appellate judges found that the bankruptcy judge didn’t err in finding that the student loans were an undue hardship. The woman had been unable to work, largely because she was caring for two autistic children. She had five children in total.

The case is Educational Credit Management Corp. v. Walker (In re Walker), 09-6022, Bankruptcy Appellate Panel for the 8th Circuit.

California’s Bankruptcy Exemptions Ruled Constitutional

California has two sets of laws exempting some of an individual’s property from creditors’ claims. One applies only to individuals in bankruptcy and another protects some of an individual’s property outside of bankruptcy.

The California bankruptcy exemptions contain a so-called wild card that is almost twice as large as the wild card provided in bankruptcy law for people who elect to use federal exemptions.

A bankruptcy trustee challenged California’s special exemptions, contending they violated the Supremacy and Uniformity Clauses of the U.S. Constitution.

The Bankruptcy Appellate Panel for the 9th Circuit came down on the side of lower courts holding that separate “bankruptcy only” state exemptions don’t violate the Constitution.

One of these days, the issue will reach the U.S. Supreme Court.

The case is Sticka v. Applebaum (In re Applebaum), 09-1134, U.S. Bankruptcy Appellate Panel for the 9th Circuit.

2nd Circuit Narrowly Construes Contempt Powers

Although parties in a bankruptcy case were guilty of “reprehensible conduct” after a Chapter 11 plan was confirmed, the 2nd U.S. Circuit Court of Appeals in Manhattan vacated an award of $335,000 in sanctions for violating the discharge injunction contained in the plan confirmation order.

The circuit court held that violating discharge couldn’t be the basis for imposing sanctions for bad conduct because the guilty parties weren’t attempting to collect a pre-bankruptcy judgment. The court also ruled that the bankruptcy judge didn’t have so-called inherent power to impose the contempt sanction under section 105 of bankruptcy law.

The court remanded the case to the lower court, leaving open the possibility that the bankruptcy judge will be able to fashion a theory under which contempt sanctions will hold up.

The case is Solow v. Kalikow (In re Kalikow), 08-5268, 2nd U.S. Circuit Court of Appeals (Manhattan).

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

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