NVR-Orleans Homebuilders, Bigler, Circuit City, Movie Gallery: Bankruptcy

NVR Inc., a homebuilder based in Reston, Virginia, sued Orleans Homebuilders Inc. in bankruptcy court on May 28, contending Orleans breached a contract never approved by the bankruptcy court to sell all of the assets to NVR for $170 million.

Orleans, a builder of homes and condominiums in seven states, announced an agreement in April where NVR would serve as a so-called stalking horse at an auction for the assets. Two days before the hearing where the bankruptcy judge in Delaware was to approve bidding procedures and authorize a $3.4 million breakup fee if NVR were outbid, Orleans said it would instead “pursue negotiations of a plan of reorganization” with senior lenders.

In the suit, NVR alleges that Orleans breached the contract, even though it was never approved by the bankruptcy judge. NVR says that a provision in the contract calling for Orleans to use its “reasonable best efforts” to have the judge approve bidding procedures didn’t require court approval to be binding.

It is unclear how much NVR seeks in damages. At one place in the complaint, NVR says it seeks expenses it was required to undertake, such as legal costs. Elsewhere, NVR more vaguely says it wants damages it sustained as a result of breach, “in an amount to be proved at trial.” In a typical breach of contract suit, the plaintiff will seek lost profits.

NVR also wants the bankruptcy judge to award it the $3.4 million breakup fee contained in the contract. NVR contends it provided value to Orleans by creating a “floor” that “stimulated interest in a stand-alone reorganization plan.”

Orleans is yet to file the plan under discussion with secured lenders. When Orleans terminated the NVR contract, it said it expected to file the plan “in late summer.”

The Chapter 11 filing on March 1 by Bensalem, Pennsylvania- based Orleans resulted from the maturity of a revolving credit in February. About $325 million was owing to the banks at maturity, not including $15 million on letters of credit. 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).

Updates

Visteon Rejects $1.2 Billion Johnson Controls Offer

Auto-parts maker Visteon Corp. rejected the unsolicited offer from Johnson Controls Inc. to buy the interiors and electronics business for $1.25 billion.

In a statement yesterday, Visteon said the offer “would not significantly enhance recoveries to our creditors.” Visteon also said a sale to Johnson Controls would “leave equity holders further removed from any recovery” and might require a “lengthy extension” of the time in Chapter 11. For Bloomberg coverage on the offer’s rejection, click here.

To read how Visteon’s various creditor constituencies are jockeying for position to propose a reorganization, click here for the May 25 Bloomberg bankruptcy report. For details on Visteon’s plan from May, click here for the May 7 Bloomberg bankruptcy report. For specifics of the March plan, click here for the March 16 Bloomberg bankruptcy report.

Visteon filed for reorganization in May 2009, listing assets of $4.6 billion against debt totaling $5.3 billion. Sales in 2008 were $9.5 billion, including $3.1 billion to Ford Motor Co. Visteon, based in Van Buren Township, Michigan, was spun off from Ford in 2000.

Visteon at the outset owed $2.7 billion for borrowed money, including $1.5 billion on a secured term loan, $862 million on unsecured bonds and $214 million on other debt obligations.

The case is In re Visteon Corp., 09-11786, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Smurfit-Stone Reports $62.9 Million Net Loss in April

Smurfit-Stone Container Corp., a corrugated container and containerboard maker, reported a $62.9 million net loss in April on sales of $512 million. The operating loss for the month was $30.7 million.

Before taxes and reorganization costs, the loss was $33.2 million. Reorganization costs were $29.1 million.

Smurfit reached a settlement in May allowing common and preferred shareholders to retain 4.5 percent of the stock, thus removing what the company believed to be the last major objections to the reorganization plan.

For details of the settlement, click here for the May 25 Bloomberg bankruptcy report. To read a summary of the plan, click here for the Feb. 1 Bloomberg bankruptcy report. Smurfit said it hopes to exit bankruptcy in “early summer.”

The contested confirmation hearing for approval of Smurfit’s plan began April 15 and required the judge to hear seven days of testimony about the value of the reorganized company. The last post-trial briefs were filed on May 18.

The Chapter 11 petition in January 2009 by the Chicago- based company listed assets of $7.45 billion against debt totaling $5.58 billion as of Sept. 30, 2008. Debt at the time included $1.2 billion under secured revolving credit and term loan agreements, five issues of unsecured notes totaling $2.28 billion, $388 million under an accounts receivable securitization facility, and $284 million owing on tax-exempt bonds.

The case is In re Smurfit-Stone Container Corp., 09-10235, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Bigler Sets June 16 Auction to Sell All Assets

Bigler LP, a diversified petrochemical producer, filed for Chapter 11 reorganization in October and will sell the assets at auction on June 16 in Houston.

Under sale procedures adopted last week by the bankruptcy judge, bids are initially due June 11. The hearing for approval of the sale will take place June 23. Secured creditors may bid their claims rather than cash.

No buyer is yet under contract.

Bigler, based in Houston, intends to sell the assets in three lots, composed of the petrochemical business, the terminals, and a tract of 145 acres of unimproved land.

The petition listed assets of $233 million against debt totaling $151 million. Liabilities include $67 million owing to secured lender Amegy Bank NA, which has a lien on all assets. Almost $40 million is owing to contractors with liens on the newly completed plant that produces high purity isobutylene.

The plant began operations in April 2009 and stopped production in August because of economic conditions. The plant was $40 million over budget in construction.

Bigler has production and storage facilities on 271 acres on the Houston Ship Channel.

The case is In re Bigler LP, 09-38188, U.S. Bankruptcy Court, Southern District of Texas (Houston).

No Class Claims in Circuit City Liquidation

Circuit City Stores Inc., a 721-store electronics retailer before liquidating, won’t have to face $150 million in class- action claims on behalf of former workers.

U.S. Bankruptcy Judge Kevin R. Huennekens wrote a 17-page opinion on May 28 where he refused to allow four class claims.

The motions for permission to file class claims were not filed until after the last day for filing claims. Because the motions to approve class claims came after the deadline, Huennekens ruled that class claims were barred on that basis alone. He also concluded that any timely-filed claims could be handled individually, without class status.

Because their motions for permission to pursue class claims weren’t filed until after the last day for filing claims and were invalid on that basis alone, Huennekens ruled. He also found that any timely filed claims could be handed individually, without class status.

Huennekens cited cases casting doubt on whether it’s ever proper to have class claims filed in bankruptcies.

Circuit City’s liquidating Chapter 11 plan is on hold, even though all but some $5 million to $20 million in secured claims already were paid in full. The judge will hold a status conference on June 8 to talk about when he might be able to confirm the plan.

Unsecured creditors with claims ranging from $1.8 billion to $2 billion were estimated to have a recovery ranging between nothing and 13.5 percent, according to the explanatory disclosure statement.

Circuit City filed under Chapter 11 in November 2008 in its hometown of Richmond, Virginia, listing assets of $3.4 billion and debt totaling $2.3 billion as of Aug. 31, 2008. Papers originally listed $898 million owing to the secured revolving credit lenders. Unsecured trade suppliers were owed another $650 million at the outset, the company said in a court filing.

The case is In re Circuit City Stores Inc., 08-35653, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

South Bay Plan Tied Up in Lien-Priority Dispute

South Bay Expressway LP, the owner of a nine-mile toll road near San Diego, says it can’t file a reorganization plan until there’s a decision on whether contractors have mechanics’ liens that come ahead of secured lenders.

South Bay, at a July 1 hearing, will ask the bankruptcy judge in San Diego for a four-month extension of the exclusive right to file a plan. If the judge goes along, the new deadline would be Nov. 17.

The toll-road operator claims it already has begun to explore “various alternatives to restructure the approximately $530 million in secured debt.”

Contractor Otay River Constructors removed a lawsuit to bankruptcy court that it filed against South Bay in state court in September to determine the question of lien priority. Otay is a joint venture between Washington Group International Inc. and an affiliate of Fluor Corp.

The toll road opened in November 2007. The expressway owes $340 million on a first-lien construction and term loan, plus another $170 million first-lien obligation on a loan provided by the U.S. Department of Transportation.

Ownership of the toll road is controlled by affiliates of Sydney-based Macquarie Group Ltd.

The case is In re South Bay Expressway LP, 10-04516, U.S. Bankruptcy Court, Southern District California (San Diego).

White Energy Has $1.06 Million Net Loss in April

White Energy Inc., the owner of three ethanol plants, reported a $1.06 million net loss in April on sales of $39 million. The operating loss in the month was $207,000.

Reorganization costs for April were $857,000. From the outset of the reorganization in May 2009, cumulative net income is $14.6 million on sales of $418 million.

A hearing for approval of the reorganization plan was to have been held in April. The confirmation hearing has been adjourned until a date to be determined. The plan was mostly negotiated before the Chapter 11 filing. It would give secured lenders owed $308 million almost all of the new stock. To read details, click here and see the White Energy item in the Dec. 17 Bloomberg bankruptcy report.

Competing plans are possible because the bankruptcy judge in December terminated the company’s exclusive right to propose a reorganization. White Energy’s owner, Columbus Nova Ethanol Holdings LLC, filed a competing plan that it later withdrew.

White Energy is one of the 10 largest ethanol producers in the U.S., with plants with a combined production capacity of 240 million gallons a year. It is the second-largest gluten maker. Two plants are in Texas and the third is in Kansas.

The Dallas-based company spent $323 million building the plants in Texas. The principal debt is $294 million owing to secured lenders, White Energy said when entering Chapter 11.

The case is In re White Energy Holding Co., 09-11601, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Lehigh Coal Allowed to Sell Assets in Debt Exchange

Lehigh Coal & Navigation Co., an anthracite coal producer from Pottsville, Pennsylvania, was authorized by the bankruptcy judge on May 28 to sell the assets to a secured creditor in exchange for $14.8 million in debt. There were no competing bids at auction.

The $5.5 million in financing for the Chapter 11 case matured in January. The lenders would permit use of cash only if an auction was scheduled promptly.

At a hearing on June 22, the judge will revisit the question of whether the reorganization should be converted to a liquidation in Chapter 7 or a trustee appointed in Chapter 11.

Lehigh consented to Chapter 11 reorganization in August 2008 after an involuntary petition was filed for the third time in less than four years. Lehigh is the oldest coal producer in the U.S., with 8,000 acres of coal-producing properties, according to its website. The previous involuntary petitions were dismissed with consent from creditors.

The case is In re Lehigh Coal & Navigation Co., 08-51957, U.S. Bankruptcy Court, Middle District of Pennsylvania (Wilkes- Barre).

Briefly Noted

Rangers’ Lenders Say They Have Competing Bidder

Secured lenders owed $525 million in connection with the Texas Rangers professional baseball club say they have a potential buyer who is willing to participate in an auction. The bankruptcy judge said he hasn’t decided whether to require an auction. The club proposes selling the team to a group including President Nolan Ryan in a transaction the Rangers value at $575 million. The team itself would only pay the lenders $75 million, leaving the lenders attempting to collect from affiliates. To read Bloomberg coverage, click here.

The bankruptcy judge in Fort Worth, Texas, tentatively scheduled a July 9 confirmation hearing for approval of the Chapter 11 plan, which claims to be paying all claims in full. For details on the Rangers’ proposed plan and sale, click here for the May 26 Bloomberg bankruptcy report.

The case is In re Texas Rangers Baseball Partners, 10- 43400, U.S. Bankruptcy Court, Northern District of Texas (Fort Worth).

Investors Sue Lehman Officers for Unloading Properties

Investors who were sold real estate investments by Lehman Brothers Holdings Inc. sued company officers and non-bankrupt Lehman investment funds, contending Lehman unloaded properties at the top of the market when the value was already less than they invested. To read Bloomberg coverage, click here. The new lawsuit is De Slaberry v. Lehman Brothers Real Estate Associates III LP, 10-cv-4299, U.S. District Court, Southern District of New York (Manhattan).

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 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).

Aleris Implements Reorganization Plan Confirmed on May 13

Aleris International Inc., a producer of rolled and extruded aluminum products, exited Chapter 11 yesterday by implementing the reorganization plan that the bankruptcy judge approved in a May 13 confirmation order. The plan transfers control to affiliates of Apollo Management LP, Oaktree Capital Management LLC and Sankaty Advisors LLC. The plan was financed in significant part by a $609 million rights offering and a $500 million asset-backed loan. TPG Inc. acquired Aleris at the end of 2006 in a $2.3 billion transaction.

Aleris filed under Chapter 11 in February 2009, listing assets of $4.2 billion against debt totaling $4 billion, including $472 million on revolving credit and related facilities, plus more than $1.1 billion on secured term loans. In addition, there are $1.1 billion in unsecured notes.

The case is In re Aleris International, 09-10478, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Bear Island Reports $396,000 Net Loss in April

Bear Island Paper Co., a U.S. subsidiary of Canada’s White Birch Paper Co., filed an operating report for April showing a net loss of $396,000 on sales of $9.05 million. The operating loss was the same as the net loss.

White Birch, based in Nova Scotia, is the second-largest newsprint maker in North America. Together with U.S. subsidiaries, it filed for reorganization simultaneously in the U.S. and Canada. Secured liabilities include $438 million on a first-lien term loan, $104 million on a second-lien term loan, $50 million on an asset-backed revolving credit, and $51.5 million on swap agreements. Trade suppliers are owed $9.5 million. The companies had sales of $667 million during 2009, with $125 million generated by Bear Island. The company said it would use reorganization to repair the capital structure. White Birch has three pulp and paper mills in the province of Quebec. The Bear Island plant is in Ashland, Virginia. White Birch is controlled by Brant-Allen Industries, according to Bloomberg Data.

The case is In re Bear Island Paper Co., 10-31202, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

Movie Gallery’s Cash Falls by $3.37 Million in April

Movie Gallery Inc., which is closing its last 1,028 movie- rental stores, filed an operating report showing a $92.7 million cash balance on May 9, a decline of $3.37 million from the prior month. Great American Group Inc. is closing the remaining stores while guaranteeing Movie Gallery a recovery of no less than $74.2 million.

Movie Gallery filed under Chapter 11 less than two years after the previous reorganization case. It had about 2,600 stores in operation upon filing in February. At the outset of the new case, debt included $100 million on a 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 concluded with a confirmed Chapter 11 plan in May 2007. For details on the second filing, click here.

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

Advance Sheets

Pennsylvania Trims Back Defenses in Auditor Suits

Auditors in Pennsylvania cannot escape liability under the so-called in pari delicto defense if they fail in some circumstances to detect fraud in financial statements.

Accountants can be tagged for liability if they weren’t “materially in good faith” and were involved in “secret collusion” with company officers perpetrating the fraud, the U.S. Court of Appeals in Philadelphia ruled on May 28.

The case involved Allegheny Health, Education & Research Foundation, a chain of Pennsylvania hospitals that filed under Chapter 11 in 1998. The creditors’ committee sued the auditors, now known as PricewaterhouseCoopers LLP, for breach of contract, professional negligence, and aiding and abetting a breach of fiduciary duty.

The district judge dismissed the suit against PwC under the in pari delicto defense. The district judge saw the defense as prohibiting the hospital system from suing the auditors when the hospital’s own executives were involved in committing the fraud. The committee suit was barred by the defense because the committee was suing on behalf of the hospitals.

When the case first went up on appeal to the 3rd Circuit in Philadelphia, the Court of Appeals identified areas of state law that hadn’t been definitively ruled upon by the Pennsylvania Supreme Court. The Appeals Court therefore certified questions on state law to be decided by the highest court in Pennsylvania. After the state Supreme Court issued its interpretation of state law, the 3rd Circuit revisited the case in its 22-page opinion on May 28 by Circuit Judge Thomas L. Ambro.

The Court of Appeals set aside dismissal and sent the case back to the district court to reconsider in light of the state Supreme Court’s rulings on governing Pennsylvania law. The Court of Appeals said that the in pari delicto defense is generally available to auditors in Pennsylvania. The defense doesn’t protect an auditor who doesn’t deal “materially in good faith” with the client being audited. Likewise, the defense doesn’t protect an auditor involved in “secretive collusion” with company officers to misstate the company’s financial condition.

The result in the AHERF case might not be the same were the law of another state to apply.

The case is Official Committee of Allegheny Health, Education & Research Foundation v. PricewaterhouseCoopers LLP, 07-1397, 3rd U.S. Circuit Court of Appeals (Philadelphia).

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

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