Movie Gallery, Fuddruckers, NexPak, Heller Ehrman, Horizon Cut: Bankruptcy

Movie Gallery Inc. doesn’t need to offer a breakup fee if a selected liquidator loses an auction for the right to sell its assets, a group of other prospective liquidators told the bankruptcy judge yesterday.

After deciding to liquidate in its second Chapter 11 case, Movie Gallery signed a contract in which Great American Group Inc. guaranteed $62.3 million in return for being named agent to close the chain’s last 1,028 video-rental stores. The contract calls for paying Great American a breakup fee of 3 percent of the guaranteed return if another liquidator wins the auction for the right to sell off the assets.

Hilco Merchant Resources LLC and an affiliate of Gordon Brothers Group LLC objected to the breakup fee, saying they offered almost the same contract with no such payment. They said the price they offered Movie Gallery was “substantially similar.” They also said that, aside from the breakup fee, Great American’s arrangement is nothing novel. They characterized it as a “traditional equity transaction that has been used many times.”

A bankruptcy judge in Richmond, Virginia, will hold a hearing today to decide whether Great American or anyone will qualify for a breakup fee.

Less than two years after the previous Chapter 11 case, Movie Gallery filed for reorganization in February and decided this month to liquidate. Movie Gallery had approximately 2,600 stores in operation in February. Since then, more than 1,400 have been closed and another 270 are almost liquidated.

The unsecured creditors’ committee agreed to give up claims against pre-bankruptcy secured lenders in return for $5 million placed in trust for unsecured creditors.

At the outset of the latest Chapter 11 case, debt included $100 million in secured revolving credit, $394 million on a first-lien facility and $146 million in claims held by second- lien creditors.

Movie Gallery operates under the names Movie Gallery, Hollywood Video, and Game Crazy. It had 3,490 stores before the first bankruptcy, which culminated in a confirmed Chapter 11 plan in May 2007. For details on this year’s filing, click here.

The new case is In re Movie Gallery Inc., 10-30696. The prior case is In re Movie Gallery Inc., 07-33849. Both were filed in U.S. Bankruptcy Court, Eastern District Virginia (Richmond).

Updates

Tribune Amends Reorganization Plan for Tomorrow’s Hearing

Tribune Co. filed an amended reorganization plan and disclosure statement this morning in anticipation of tomorrow’s hearing for approval of the disclosure statement.

The contending factions gave their conflicting views to the bankruptcy judge about the merits of the proposed settlement and how the opinions of the parties and the examiner should be presented to creditors when they vote.

Tribune received no objection, allowing the bankruptcy judge to extend the exclusive right to propose a reorganization plan until Aug. 8.

The examiner for the newspaper publisher is analyzing the strength of creditors’ claims that the $13.8 billion leveraged buyout led by Sam Zell in December 2007 included fraudulent transfers. The report is due July 12.

Tribune filed a proposed Chapter 11 plan in April to implement a settlement negotiated with some creditors. Even before the plan was filed, holders of $3.6 billion in pre- bankruptcy secured debt came out opposing the plan and the settlement. To read about the plan, the proposed 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. 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 Delaware (Wilmington).

Dolan Competing with Insiders for Brown Publishing

Brown Publishing Co., the publisher of the largest- circulation local newspaper on eastern Long Island, New York, filed under Chapter 11 on April 30 and will hold a hearing in bankruptcy court tomorrow setting up auction procedures testing whether a $15.9 million bid from insiders is the best offer for the business.

The prospective buyers include Roy Brown, the president and chief executive officer. The company’s papers said no other possible buyer was willing to purchase all the publications on acceptable terms.

Dolan Media Co., the publisher of the Long Island Business News, filed papers in bankruptcy court objecting to the proposed sale procedures and saying its attempts at negotiating a purchase were rebuffed. Dolan contends a breakup fee is unnecessary for the insiders. Minneapolis-based Dolan also believes an accelerated auction and proposed terms of sale unfairly benefit insiders.

Closely owned Brown, based in Cincinnati, listed assets of $94 million against debt totaling $104.6 million. First-lien lenders are owed $70.2 million on a revolving credit and term loan. Court papers say the book value of the lenders’ collateral is $94.9 million. Second-lien lenders are owed $24.3 million.

Brown has 15 daily, 32 weekly, 11 business and 41 free publications. There are also 51 websites. Seventy-eight of the publications are in Ohio. The business publications are in seven states.

Brown publishes Dan’s Papers, the weekly newspaper with the largest circulation on eastern Long Island. It also publishes the Montauk Pioneer.

The case is In re Brown Publishing Co., 10-73295, U.S. Bankruptcy Court, Eastern District New York (Central Islip).

Fuddruckers Auction Set for June 17, Breakup Fee Cut

Magic Brands LLC, the parent of the Fuddruckers and Koo Koo Roo restaurant brands, will sell the business at auction on June 17, although the breakup fee for the so-called stalking horse was reduced by more than 70 percent, court records show.

Magic Brands signed Tavistock Group to a $40 million contract for the assets, calling for a 3.5 percent fee if another buyer wins the business at auction. When Fidelity Newport Holdings LLC and American Blue Ribbon Holdings LLC offered to pay $1 million more without a breakup fee, creditors objected to Tavistock’s deal.

At a May 17 hearing May 17, the bankruptcy judge in Wilmington, Delaware, anointed Tavistock as the first bidder at auction, capping the breakup fee and expenses at $400,000 should Tavistock be outbid.

Competing bids are due June 14. The hearing for approval of the sale will take place June 22.

The judge also gave final approval for $13.8 million in financing for the Chapter 11 case. The judge approved a bonus program for executives and other officers. Depending on the result of the auction, the bonus pool could be as large as $1.66 million.

After closing 24 stores, Austin, Texas-based Magic Brands will have more than 85 company-owned Fuddruckers locations operating in 11 states. There are 13 Koo Koo Roo stores in California. Of the company-operated locations, 70 stores are leased and the remainder owned. The petition said assets are less than $10 million while debt is less than $50 million.

Prandium Inc. sold Koo Koo Roo to Magic Brands through Chapter 11 in 2004. The 135 franchised Fuddruckers stores in 32 states aren’t in the bankruptcy.

The case is In re Magic Brands LLC, 10-11310, U.S. Bankruptcy Court, District of Delaware (Wilmington).

NexPak Confirms Plan in Second Chapter 11 Case

NexPak Corp., a maker of injection-molded plastic packaging for music, video and video-game compact discs, had its liquidating Chapter 11 plan approved and signed by the bankruptcy judge yesterday. The disclosure statement explaining the plan was approved in October.

As modified just before confirmation, a settlement with the secured lenders carved out $150,000 cash to pay expenses of the Chapter 11 case, with anything left for distribution to the holders of $7.5 million in unsecured claims.

Lenders’ liens will remain on unsold assets, including a non-bankrupt affiliate in the Netherlands that had positive cash flow when the disclosure statement was approved. The banks waived unsecured claims resulting from the shortfall in the collateral NexPak pledged.

NexPak filed its second Chapter 11 bankruptcy in April 2009, intending to sell assets. The domestic assets went to a bidder who made a $1.5 million offer at auction.

The petition by Duluth, Georgia-based NexPak listed assets of $47 million against debt of $112 million as of Dec. 31, 2008. Revenue in 2008 was $65 million. Listed debt included $79 million owing to secured creditors and $5.6 million to unsecured trade suppliers.

NexPak carried out a so-called prepackaged bankruptcy reorganization in December 2004 where Highland Capital Management LP and affiliates took over as controlling shareholders by exchanging debt for equity. A company officer said in a court filing that the business consistently missed financial projections after that reorganization.

The case is In re NexPak Corp., 09-11244, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Heller Ehrman Plan Confirmation Set for July 6

Heller Ehrman LLC, a defunct San Francisco-based law firm, will seek approval of its liquidating Chapter 11 plan at a July 6 hearing. The bankruptcy judge approved the explanatory disclosure statement last week, according to court records.

The disclosure statement said unsecured claims will come in between $95 million and $155 million. Because of the number of variables, including recoveries in lawsuits, the firm didn’t guess how much unsecured creditors may recover under the plan.

Creditors of the firm, which once had 730 attorneys, are suing Bank of America NA to recover $58 million paid the lender before and after bankruptcy, saying the bank had a defective lien. According to the disclosure statement, victory in the suit will generate $60 million while the pool of unsecured claims will increase by the amount the bank pays.

The firm is projected to have $13.1 million cash on hand when the plan is confirmed. To exit Chapter 11, $11.5 million must be paid to priority creditors, such as the professionals who worked on the case. Among the funds needed, $3 million will come from a loan provided by six former partners, according to the disclosure statement.

The firm filed under Chapter 11 in December 2008, in time to sue the bank for a so-called preference. The bankruptcy was precipitated by the departure of key partners, leading to a violation of the bank loan agreement and a decision to dissolve the firm in September 2008.

The firm’s filing listed assets of $3.7 million cash and $52 million in accounts receivable. The firm also had a $7 million equity interest in its legal malpractice insurance provider. Debt at the time included $5.7 million then owing to the bank, $10 million in accounts payable and $4 million in taxes.

The case is In re Heller Ehrman LLC, 08-32514, U.S. Bankruptcy Court, Northern District California (San Francisco).

Statistics

April Claim Trades Set Record, SecondMarket Says

Claims with a total face amount of $3.65 billion were traded in April, the most for a single month since SecondMarket Inc. began keeping records in January 2008.

Lehman Brothers Holdings Inc. led with $3.19 billion.

The previous record, according to SecondMarket, was the $3.3 billion in traded claims registered with bankruptcy courts in December. SecondMarket calls itself the largest secondary market for illiquid assets.

In April claims were traded in 62 separate bankruptcy cases, SecondMarket said.

Briefly Noted

Lehman Professional Fees Continue Growing

The trustee for Lehman Brothers Holdings’ brokerage and his law firm were paid $84.4 million for 19 months’ work liquidating the defunct affiliate, according to a bankruptcy court filing.

The 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 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.

For a summary of fees paid so far to professionals liquidating Lehman Brothers and its brokerage, click here.

The 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).

Sunwest Sale to Blackstone Group Approved

Sunwest Management Inc., now formally named Stayton SW Assisted Living, was given formal authorization by the district judge for a $1.3 billion asset sale to a group including an affiliate of Blackstone Group LP, Emeritus Senior Living and Columbia Pacific Advisors, according to a statement from Emeritus. The price includes cash, securities and assumption of about $1 billion in debt. To read about the sale, click here for the May 12 Bloomberg bankruptcy report. The group is acquiring 149 communities made up of 12,165 units. As originally announced in August, Sunwest’s receiver, creditors, and investors reached agreement through mediation on a plan to restructure the company and make distributions to creditors through Chapter 11. A receiver was appointed by a federal district judge after the Securities and Exchange Commission alleged Sunwest was violating securities laws.

NutraCea Settles Securities Suit for $1.5 Million

NutraCea, a processor of byproducts from rice milling, negotiated a settlement of a securities class-action lawsuit where the entire payment of $1.5 million or more will come from the insurance company. The settlement must be approved by the bankruptcy court and the U.S. District Court, the company said in a statement. NutraCea filed under Chapter 11 in November. The petition listed assets of $83.7 million and debt totaling $18.9 million. NutraCea developed processes for converting raw rice bran into stabilized rice bran for use in food and feed products.

The case is In re NutraCea, 09-28817, U.S. Bankruptcy Court, District of Arizona (Phoenix).

New Filing

Oklahoma Trucker Paul Transportation Files for Reorganization

Paul Transportation Inc., a trucking fleet with more than 300 tractors and over 500 trailers, filed a Chapter 11 petition yesterday in Oklahoma City.

The Enid, Oklahoma-based company said assets and debt are both between $10 million and $50 million. It began operations in 2004, according to the website.

The case is In re Paul Transportation Inc., 10-13022, U.S. Bankruptcy Court, Western District Oklahoma (Oklahoma City).

Downgrades

New York Sports Club Owner Downgraded to Moody’s B2

Town Sports International Holdings Inc., operating in Manhattan as New York Sports Clubs, received a one-notch downgrade yesterday from Moody’s Investors Service that lowered the corporate grade to B2, matching the action taken in February 2009 by Standard & Poor’s.

Moody’s was responding to “minimal interest coverage” and lower revenue and profit in 2009. On the plus side, Moody’s said liquidity is “adequate” in the “near term.”

Town Sports has 161 locations in the Northeast and mid- Atlantic states. Other brand names are Boston Sports Clubs, Washington Sports Clubs and Philadelphia Sports Clubs. Revenue for a year ended in March was $476 million, Moody’s said. The company had a $732,000 net loss in the first quarter on revenue of $118 million. Revenue was down 7.6 percent from the first quarter of 2009.

The $467 million in assets on the balance are slightly exceeded by the $467 million in total liabilities.

The stock fell 18 cents yesterday to $3.53 on the Nasdaq Stock Market. The three-year closing high was $20.47 on June 18, 2007.

Container-Ship Operator Horizon Lines Lowered to Caa1

Horizon Lines Inc., an operator of 20 U.S. flagged container vessels, was cut to a Caa1 corporate rating yesterday by Moody’s Investors Service.

The one-notch drop resulted from “continuing slack demand” and what Moody’s called insufficient cash flow “to cover scheduled principal amortization of the term loan.”

Given possible cash demands from class-action lawsuits and a U.S. Justice Department investigation, Moody’s said a refinancing of the capital structure “likely” will be necessary.

Horizon, based in Charlotte, North Carolina, fell 36 cents to $4.54 yesterday in New York Stock Exchange composite trading. The shares reached a high of $36.51 on July 19, 2007, and a low of $2.20 on Nov. 20, 2008.

Advance Sheets

Judicial Lien Voided Without Homestead Exemption

A bankrupt individual isn’t required to claim a homestead exemption to void a judicial lien on a house, U.S. District Judge Glen Conrad of Harrisonburg, Virginia, ruled May 17.

The individual, in Chapter 7, sought to void a judicial lien on her home. She didn’t use any of her homestead exemption on the house since secured debts exceeded the property’s value. The holder of the judicial lien objected to voiding the lien, contending it was only permitted if the individual claimed the home as exempt property.

Conrad said the case turned on the plain meaning of section 522(f) of the Bankruptcy Code, which says that a judicial lien may be voided if it would impair an exemption to which the bankrupt “would have been entitled.”

No U.S. circuit courts of appeal have ruled on the issue, the judge said. Bankruptcy courts are split.

The language of the statute doesn’t require that the bankrupt actually claim the property as exempt before voiding the judicial lien, the judge said.

The case is Botkin v. DuPont Community Credit Union, 10- 00018, U.S. District Court, Western District Virginia (Harrisonburg).

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

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