Garlock, Congoleum, Drug Fair, Accredited Home, Hartmarx: Bankruptcy

EnPro Industries Inc. said in a regulatory filing yesterday that the Chapter 11 reorganization begun on June 5 by subsidiary Garlock Sealing Technologies LLC “may” result in a gain for the quarter ending June 30.

Garlock, a Palmyra, New York-based gasket maker, sought Chapter 11 relief to deal with the last remaining 100,000 asbestos claims. The company, which says it intends to pay all creditors in full, including asbestos claimants, said it still has $194 million of insurance. With help from insurance companies, $1.4 billion already has been spent in resolving 900,000 asbestos claims. Another $400 million was spent in fees and expenses.

Garlock filed a motion yesterday in bankruptcy court in Charlotte, North Carolina, asking the judge for a temporary injunction to stop asbestos claimants from pursuing their lawsuits against the parent EnPro and 65 affiliates that aren’t in bankruptcy. The so-called automatic stay only stops suits against Garlock and two affiliates that filed under Chapter 11.

Charlotte, North Carolina-based EnPro said it entered into a new loan agreement with Bank of America NA, the secured lender. The Charlotte-based bank is to provide $10 million in separate financing for the Garlock reorganization. The revised loan agreement for EnPro is conditioned on approval of the financing for the Chapter 11 case. It also raises the interest rate and fees on the loan to EnPro while reducing the commitment from $75 million to $60 million. The bank also waives the default resulting from the Garlock bankruptcy.

Garlock was released from its liability on the bank loan to EnPro and affiliates. In the future, Garlock’s financial statements will be deconsolidated from those of EnPro, the parent said in the filing with the Securities and Exchange Commission.

Garlock had sales of $113 million in 2009. It was spending $100 million a year to settle and defend asbestos claims.

EnPro had assets of $1.33 billion and total liabilities of $923.5 million on the March 31 balance sheet. EnPro’s $99 million in net income included $5.6 million of income from continuing operations for the first quarter. EnPro makes engineered products, including diesel and natural-gas engines. It has 44 plants in the U.S. plus operations in 10 other countries.

The case is In re Garlock Sealing Technologies LLC, 10- 31607, U.S. Bankruptcy Court, Western District North Carolina (Charlotte).

Supreme Court News

Supreme Court Clarifies 2005 Bankruptcy Amendment

The U.S. Supreme Court ruled 8-1 yesterday that bankruptcy courts can take a bankrupt’s actual income into consideration at the time of plan confirmation in deciding how much an individual must pay unsecured creditors in Chapter 13. The losing side contended the judge was required to use the bankrupt’s income in the months before bankruptcy to decide how much must be paid in the future.

The court, in an opinion written by Justice Samuel A. Alito, upheld a ruling by the 10th U.S. Circuit Court of Appeals in Denver. Three other circuit courts of appeal reached the same conclusion. The lone dissenter, Justice Antonin Scalia, agreed with the conclusion by the 9th Circuit in San Francisco in a case called Maney v. Kagenveama (In re Kagenveama).

The case involved an individual who took a buyout from her employer within six months before bankruptcy. Under the so- called mechanical approach, favored by Justice Scalia in his dissent, her income in the future would be presumed to be the same as it was before bankruptcy when she received one-time income.

By assuming the bankrupt’s income would be the same in the future as it was in the months before filing, the individual could not have confirmed a Chapter 13 plan because she would not in reality take home enough income to pay creditors. Because her income in either case was above the statutory minimum, she would have been ineligible for Chapter 7 and as a result would have had no means of escaping her debt under any form of bankruptcy unless her actual income could be considered.

The split among the circuits resulted from amendments to bankruptcy law in 2005 where the term “projected disposable income” isn’t defined while a definition is given to “disposable income.” The majority on the Court concluded that the word “projected” should be given its “ordinary meaning” where future occurrences aren’t “based on the assumption that the past will necessarily repeat itself.”

The majority said that the so-called mechanical approach favored by Justice Scalia “would produce senseless results that we do not think Congress intended.”

In his 14-page dissent, Justice Scalia said it “would make no difference” even “if it were true that a mechanical reading resulted in undesirable outcomes.” He said “those results would be entirely irrelevant to what the statute means.”

The case is Hamilton v. Lanning, 08-998, U.S. Supreme Court.


Congoleum Quickie Plan Confirmation Takes 6 Years

Congoleum Corp. is on the verge of ending a Chapter 11 reorganization begun in 2003 that was intended to be a quick restructuring of asbestos liabilities.

The U.S. District Judge Joel A. Pisano in New Jersey held a two-hour hearing yesterday where he ruled in favor of approving the plan and instructed counsel to submit an appropriate confirmation order, court records show.

The plan is built around a $100 million settlement announced in January with nine insurance groups and the New Jersey insurance guaranty association. The $100 million is being placed into a trust for payment of asbestos claims. The ultimately confirmed plan is similar to the immediately preceding version from October, the company said. To read about the plan from October, click here to see the Oct. 28 Bloomberg daily bankruptcy report.

In February 2009, the bankruptcy judge refused to confirm Congoleum’s reorganization plan a third time. She then dismissed the Chapter 11 case. Pisano reversed the bankruptcy judge in August 2009 and reinstated the case. In addition to giving the company another try at confirmation, Pisano took the case away from the bankruptcy judge. He ruled that Congoleum’s plan, as it read at the time, did not show favoritism toward three now- deceased asbestos claimants who settled before the Chapter 11 filing in December 2003.

Mercerville, New Jersey-based Congoleum originally intended to complete a reorganization in July 2004 after the so-called prepackaged Chapter 11 filing in December 2003 to deal with asbestos claims. Congoleum’s petition listed assets of $187.1 million against debt totaling $205.9 million.

The district court case is In re Congoleum Corp., 09-04371, U.S. District Court, District of New Jersey (Newark). The bankruptcy case is In re Congoleum Corp., 03-51524, U.S. Bankruptcy Court, District of New Jersey (Trenton).

Sun Capital’s Drug Fair Confirms Liquidating Plan

Drug Fair Group Inc., a liquidated chain of 58 drug and general merchandise stores, has a liquidating Chapter 11 plan that the bankruptcy judge approved by signing a confirmation order yesterday. There were no objections.

Drug Fair rapidly liquidated its stores after the Chapter 11 filing in March 2009. The disclosure statement says unsecured creditors can expect a 0.5 percent recovery. The store liquidation already paid secured creditors in full on their $64.5 million in claims. A settlement in June with secured lenders left the company with some $2.5 million for distribution to unsecured creditors, whose claims totaled about $55 million, according to the disclosure statement.

The Drug Fair stores were in central and northern New Jersey. The company was indirectly owned by Sun Capital Partners Inc., a private-equity investor based in Boca Raton, Florida.

Assets were listed for $90.7 million against $120.3 million in debt as of July 2008. Debt included $44.1 million owing on a first-lien revolving credit. Second-lien lenders were owed $20.5 million on a term loan.

The case is In re Drug Fair Group Inc., 09-10897, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Tousa Proposes Bonuses for Remaining 29 Employees

Liquidating homebuilder Tousa Inc. is proposing an incentive bonus program for the remaining 29 employees and executives. Tousa estimates the cost at $1.7 million.

If approved by the bankruptcy judge, the plan would pay between 10 percent and 50 percent of base salaries if targets are met.

Tousa in addition seeks authorization to continue a severance program that would cost $500,000 and a policy of paying insurance premiums for two months after the end of employment costing another $400,000. Firing the remaining workers will require spending $300,000 on accrued vacation pay to comply with state law.

Over the last year, 537 employees were fired as the assets were sold, the court filing says. Tousa is asking the judge to schedule the bonus motion for approval at a June 16 hearing. The company said it made “various concessions and modifications” in the bonus program after discussions with “major creditor constituencies.”

In addition to the proceeds from the sale of assets, creditors will have additional recoveries if appellate courts uphold the judgment in a lawsuit brought by the official creditors’ committee against secured lenders, contending that a bailout and refinancing in mid-2007 of a joint venture in Transeastern Properties Inc. resulted in fraudulent transfers. The bankruptcy judge required the banks to post $700 million in bonds to hold up enforcement of the judgment pending appeal.

Tousa filed for bankruptcy reorganization in January 2008. The Hollywood, Florida-based company listed assets of $2.1 billion against debt totaling $2 billion. At the outset of the reorganization it was 67 percent-owned by Technical Olympic SA.

The case is In re Tousa Inc., 08-10928, U.S. Bankruptcy Court, Southern District of Florida (Fort Lauderdale).


Junk Default Rate Continues Decline in May to 7.5%

The global default rate on junk-rated debt declined in May to 7.5 percent from 9 percent in April, according to a report issued yesterday by Moody’s Investors Service about companies it rates. Defaults declined in each of the last six months, Moody’s said.

The junk default rate has plunged 44 percent from the peak of 13.5 percent in November, Moody’s said. So far this year, 23 defaults have been recorded compared with 145 in the same period in 2009. Only one Moody’s-rated company defaulted in May.

The trend is different for companies whose debt is trading at so-called distressed levels. Companies with distressed debt grew to 14.9 percent in May from 14.1 percent in April. Debt is considered distressed if the yield is 10 percent more than comparable U.S. Treasury securities.

Moody’s baseline prediction has the default rate declining to 2.4 percent by the year’s end and continuing to decline to 1.9 percent by May 2011. Under pessimistic assumptions, Moody’s prediction is for the default rate to be 5.6 percent in December and 10 percent by May 2011.

New Filing

Sports Dome in Anchorage Files for Reorganization

Anchorage Sportsplex Inc., the not-for-profit owner of an inflatable sports dome, filed a Chapter 11 petition on June 5 in Anchorage to forestall termination of the lease for the facility.

Known locally as The Dome, the facility owes $11.69 million on tax-exempt bonds issued to develop the property. Income has been insufficient to cover debt service. The Dome cost $13.9 million to build, according to court papers.

The facility was given interim authority yesterday to use cash. A final hearing on cash use is scheduled for July 8.

The petition says the asset are worth less than $10 million while debt exceeds $10 million.

The case is In re Anchorage Sportsplex Inc., 10-00475, U.S. Bankruptcy Court, District of Alaska (Anchorage).

Briefly Noted

Hartmarx Has Approval to Settle Claims Against Lenders

The bankruptcy judge in Chicago yesterday gave Hartmarx Corp. approval for a settlement with secured lenders that will bring in $750,000 cash while releasing $2.25 million being held aside for professional fees.

The creditors’ committee had sued Wachovia Capital Finance Corp., as agent for the lenders, alleging that the banks’ lien didn’t reach $12 million generated from ending a lease in New York. The bankruptcy judge in June 2009 authorized the sale of the business to Emerisque Brands U.K. Ltd. and SKNL North America Ltd. for $119 million, including $70.5 million cash, the assumption of $33.5 million in debt, and a junior secured note for $15 million.

Hartmarx filed under Chapter 11 in January 2009, listing assets of $483 million and debt totaling $261 million as of October 2008. Debt at filing included $114 million on a revolving credit, $15.5 million in industrial revenue bonds, $12 million in mortgages, and $70 million owing to trade suppliers. Manufacturing was performed in the company’s own facilities and by contractors. The brand names included Hart Schaffner Marx and Hickey Freeman.

The case is In re XMH Corp., 09-02046, U.S. District Court, Northern District Illinois (Chicago).

Accredited Home Has Exclusivity Until July 21

Accredited Home Lenders Holding Co., a former home mortgage originator and securitizer, agreed with the creditors’ committee, and the bankruptcy judge extended the company’s exclusive right to propose a Chapter 11 plan until July 21. The company previously said it’s near filing a Chapter 11 plan incorporating a settlement where the owner Lone Star Funds would pay $10.5 million cash.

Accredited sold the mortgage servicing business in July after the Chapter 11 filing in May 2009. Most of the mortgage loans were sold later. Lone Star also owns Bruno’s Supermarkets LLC and Bi-Lo LLC, two grocery retailers in Chapter 11. Bi-Lo exited Chapter 11 in May under a plan confirmed in April. Lone Star retained control of Bi-Lo by making a new investment. The Chapter 11 petition for Accredited Home said assets are less than $50 million while debt exceeds $100 million.

The case is In re Accredited Home Lenders Holding Co., 09- 11516, U.S. Bankruptcy Court, District of Delaware (Wilmington).


Moody’s Downgrades Boyd Gaming Lower than S&P in May

Casino operator Boyd Gaming Corp. was downgraded one level yesterday to a B2 corporate rating by Moody’s Investors Service, one step lower than the ding issued May 28 by Standard & Poor’s.

Moody’s’ puts the senior subordinated debt at Caa1.

In the so-called Las Vegas locals market, where Boyd generates 44 percent of cash flow, Moody’s said the decline in revenue “has slowed.” Where the locals market was the “hardest hit” by the recession, Moody’s said it is “likely to be one of the last to recover.”

Moody’s sees Boyd as being “challenged” to comply with loan covenants “during the next several quarters.”

Las Vegas-based Boyd generated net income of $8.4 million in the first quarter of 2010 on revenue of $350 million. For 2009, net income was $156 million on net revenue of $1.64 billion. It has 15 casinos in five states, plus a half-interest in the Borgata casino in Atlantic City, New Jersey.

To contact the reporter on this story: Bill Rochelle in New York at

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.