BP, Extended Stay, Vegas Strip Property: Bankruptcy

U.S. Representative John Conyers Jr., chairman of the House Judiciary Committee, introduced a bill on June 10 that would take away some of BP Plc’s bankruptcy options, should it choose reorganization to resolve liabilities for the oil spill in the Gulf of Mexico.

If passed in both houses of Congress and signed by the president, the bill would prevent any BP company liable for the spill from selling any property unless the buyer agrees to be liable for damages “arising from the incident” that aren’t paid by London-based BP.

If BP were to need bankruptcy protection, the proposed law would force it to do so in the U.S., according to Lynn LoPucki, a professor of law from the University of California at Los Angeles. If enacted, the legislation would also prevent BP from taking a page out of the General Motors playbook where assets were sold to a new company free from all claims, in the process cutting off creditors from seeking payment from “new” GM.

The bill would also prevent BP from using Chapter 15 of U.S. bankruptcy law, which governs cross-border insolvencies. If the bill passes, BP companies seeking bankruptcy protection in the U.S. could only utilize Chapter 7 for liquidation or Chapter 11 for reorganization.

Blocking access to Chapter 15 would take away an attractive option that could put a court in London in control of bankruptcies even in the U.S. Passing the bill would assure that U.S. bankruptcy courts would be the primary authority in the bankruptcy of any BP company, at least with respect to assets within the reach of U.S. federal courts.

For a company operating in several countries, Chapter 15 provides that the country with the head office is entitled for its court to be in charge of a worldwide bankruptcy. Where Chapter 15 is applicable, the U.S. court stops lawsuits and creditor actions in the U.S. Creditors, as a result, must prove their claims and receive their distributions in the foreign court.

Absent the change in law proposed by Conyers in H.R. 5503, BP and its subsidiaries could file for administration in U.K. courts, aiming to force U.S. creditors to prove their claims to the satisfaction of the U.K. court by filing under Chapter 15 in the U.S. The Conyers bill would foreclose the Chapter 15 option.

Even before enactment, the bill might scare away anyone thinking about buying assets from BP.

Updates

Starwood Unveils Competing Extended Stay Reorganization Plan

Hotel operator Starwood Capital Group LLC and the official creditors’ committee for Extended Stay Inc. took the wraps off the competing reorganization plan they hope the bankruptcy judge in Delaware will allow them to file.

If the competing plan wins the day, Greenwich, Connecticut- based Starwood would end up with at least 75 percent of the new stock of Extended Stay while secured lenders owed $4.1 billion would have their debt reinstated.

To submit the proposal, Starwood and the committee need the bankruptcy judge to end Extended Stay’s exclusive right to file a plan. The so-called exclusivity motion isn’t officially on the court’s calendar for hearing today. Nevertheless, it assuredly will be discussed when Extended Stay, the operator of more than 680 long-term lodging properties in 44 states, asks the bankruptcy judge to approve its disclosure statement so creditors can vote on the company’s plan.

If Extended Stay’s plan is confirmed, Centerbridge Partners LP, Paulson & Co. and Blackstone Group LP will end up as owners by paying $3.93 billion in cash. The committee and Starwood have an entirely different idea about a plan that would include distributions to creditors who otherwise would receive nothing in a sale to the Centerbridge group.

Starwood proposes to invest $560 million in cash for 75 percent of the new equity. Mortgage lenders owed $4.1 billion would have their debt reinstated and would receive any default- rate interest and principal payments due.

Mezzanine lenders owed $3.3 billion would have the right to participate in a rights offering to buy 20 percent of the stock for $140 million. To the extent the so-called mezz lenders don’t buy, Starwood is providing a backstop and will purchase unsold stock.

The mezzanine lenders would receive the remaining 5 percent of the new stock outright.

Unsecured creditors are being offer the right to participate in a litigation trust that would be funded with a $15 million loan.

Starwood and the committee want the bankruptcy judge to postpone approval of the company’s disclosure statement so both plans can go to creditors for vote. When the votes are counted, “the Court can decide which plan to confirm based on creditor preferences,” the committee says in its papers.

Starwood and the committee emphasize how holders of $175 million in subordinated mortgages will have their debt reinstated and paid. Under the company plan, they would receive nothing aside from a litigation trust, just like mezzanine lenders and unsecured creditors.

The committee and Starwood already filed papers asking the judge not to approve Extended Stay’s disclosure statement. In papers filed June 14, Starwood alleges that Extended Stay departed from court-approved auction rules by insisting on all- cash bids.

The lenders disagree in their own papers filed yesterday, saying no one insisted on cash alone. They also say Starwood never complained during the course of the auction about how it was being run.

For details about the company’s plan and the auction, click here to read the June 10 Bloomberg bankruptcy report. Before the auction, Extended Stay was hoping for a July 20 confirmation hearing to approve the plan.

Extended Stay’s Chapter 11 petition in June 2009 listed assets of $7.1 billion against debt totaling $7.6 billion, including $4.1 billion in mortgage loans and $3.3 billion in 10 different mezzanine loans.

Based in Spartanburg, South Carolina, Extended Stay says it’s the largest operator of mid-priced extended stay hotels in the U.S. The properties are almost all managed by HVM LLC, an affiliate that didn’t file in Chapter 11.

The case is In re Extended Stay Inc., 09-13764, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Vegas Judge Ends Plan Exclusivity for FX Luxury Strip Property

The future ownership of 17.7 acres on the Las Vegas Strip was thrown into doubt on June 11 when the bankruptcy judge granted a motion by second-lien lenders and terminated the exclusive right of FX Luxury Las Vegas I LLC to propose a reorganization plan, according to an e-mail from Lenard M. Parkins, one the lawyers from Haynes & Boone LLP in New York representing the junior lenders.

FX filed a so-called prepackaged reorganization plan along with the Chapter 11 petition on April 21. FX responded to the loss of so-called exclusivity by withdrawing the plan on June 14.

The now-withdrawn plan called for transferring the property to the first-lien lenders if there wasn’t a cash bid of at least $256 million. The principal owing to the senior lenders is $259 million. On the second lien, $195 million on principal is outstanding. Both debts matured.

The property, which is slated for redevelopment, had a liquidation value of $137 million at the end of 2009, FX said in a court filing.

Before ending FX’s exclusive rights on a plan, U.S. Bankruptcy Judge Bruce A. Markell in Las Vegas said he had never terminated exclusivity, according to Parkins.

The second-lien lenders said in court papers that they intend to propose a plan of their own promising to treat the senior lenders “consistent with bankruptcy law” while providing “some return to non-insider equity holders of the debtor.”

FX’s abandoned plan would have given nothing to the second- lien creditors and unsecured creditors.

For details on FX’s abandoned plan and negotiations that preceded the Chapter 11 filing, click here to see the April 22 Bloomberg bankruptcy report.

FX intended to develop the property into a hotel, casino, and other businesses until the financial markets collapsed and the Las Vegas gaming market declined. After default on the first mortgage, a receiver was appointed in June 2009.

The petition listed assets of $140 million against debt totaling $493 million.

The case is In re FX Luxury Las Vegas I LLC, 10-17015, U.S. Bankruptcy Court, District of Nevada (Las Vegas).

Capmark Creditors Question $1.5 Billion Secured Loan

The official creditors’ committee for Capmark Financial Group Inc. wants permission from the bankruptcy judge to investigate a $1.5 billion secured loan that was made 149 days before the Chapter 11 filing in October. The committee says the loan proceeds were used to pay off unsecured debt owing to practically the same lenders.

Having been made more than 90 days before bankruptcy, the loan cannot be attacked as a so-called preference. The committee says the loan only delayed the inevitable bankruptcy. The committee doesn’t say exactly how it believes the loan may be shown to be voidable in bankruptcy.

The committee says that Capmark itself is unwilling to take action to set aside the loan or the security interest. The bankruptcy judge in Delaware will hold a June 29 hearing on whether the committee should have power to investigate with the use of subpoenas.

Since filing in Chapter 11, Capmark completed three sales to generate more than $1 billion cash. Berkshire Hathaway Inc. and Leucadia National Corp. bought most of the business for $468 million.

Capmark previously said it intends to file a plan giving stock to unsecured creditors while reorganizing around its non- bankrupt bank subsidiary, which wasn’t sold. Based in Horsham, Pennsylvania, Capmark was called GMAC Commercial Holding Corp. before control was sold in 2006. It had been GMAC’s servicing and mortgage-banking business.

KKR & Co., Goldman Sachs Group Inc., Dune Capital Management LP and Five Mile Capital Partners LLC owned 75.4 percent of Capmark following a 2006 acquisition from General Motors Corp. for $1.5 billion cash and repayment of $7.3 billion in debt. Capmark’s debt includes a $1.5 billion term loan secured by all assets except Capmark’s bank’s, $234 million remaining under a bridge loan, a $4.6 billion senior credit, $2.34 billion in notes and a $250 million junior subordinated debt. The bank had assets of $11.1 billion and deposits of $8.39 billion, according to a court filing.

The case is In re Capmark Financial Group Inc., 09-13684, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Second-Lien Creditors Fighting EnviroSolutions Plan

EnviroSolutions Holdings Inc., a trash hauler and owner of three landfills, will face opposition from second-lien creditors at the July 21 hearing for approval of the Chapter 11 plan. The junior lenders argue that the first-lien creditors are being paid more than in full.

The unsecured creditors’ committee likewise believes the company is worth more than the first-lien debt. It urged unsecured creditors to vote against the plan that was negotiated with holders of about 75 percent of the $211 million in first- lien debt.

The plan calls for the first-lien creditors to receive nearly all of the new stock plus an $85 million secured term loan in return for their existing $198 million term loan. The explanatory disclosure statement projects a 78 percent recovery on the existing term loan.

The second-lien creditors, in their court filing yesterday, contend the stock alone is worth $160 million, meaning that the first-lien holders are taking home paper worth $245 million in total.

Second-lien lenders, owed $23.3 million, are to receive $1.2 million cash. If they all vote for the plan, grant releases, and don’t object to confirmation, the recovery rises to $1.4 million. The recovery on the second lien is projected to be 5.1 percent to 6 percent. The junior lenders believe the plan is an impermissible “death trap” since they must give releases to gain a larger distribution.

Northwestern Mutual Life Insurance Co., the holder of $41.7 million in subordinated notes, is to receive nothing.

General unsecured creditors, owed $5.9 million, are to be paid 16.9 percent in cash.

Based in Manassas, Virginia, EnviroSolutions had a $29.3 million net loss in 2009 on revenue of $134 million. It operates in the mid-Atlantic states and the Northeast.

The case is In re EnviroSolutions of New York LLC, 10- 11236, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Penn Traffic Files Liquidating Plan with Committee OK

Former supermarket operator Penn Traffic Co. filed a liquidating Chapter 11 plan on June 15 along with an explanatory disclosure statement. The official creditors’ committee supports the plan and urges creditors to vote “yes.”

The current draft of the disclosure statement has blanks where unsecured creditors will be told the percentage distribution they can expect. Secured creditors are to be paid in full.

At a hearing yesterday, the bankruptcy judge approved a bonus plan covering 20 executives and other employees that would cost a maximum of $315,000. The judge modified the program so one executive’s bonus is on a sliding scale depending on how much is collected in accounts receivable.

The judge yesterday approved a second settlement where Penn Traffic will pay Hilco Merchant Resources LLC $50,000 in settlement of a dispute over a $300,000 breakup fee. For background on the Hilco dispute, click here to see the May 13 Bloomberg bankruptcy report.

Tops Markets LLC purchased almost all of Penn Traffic’s stores as a going concern by paying $85 million cash. The sale was structured so Penn Traffic avoided a $72 million claim for pension plan termination and a $27 million claim by the principal supplier.

Penn Traffic filed under Chapter 11 again in November for the express purpose of selling the business. The petition listed assets of $150 million against debt totaling $137 million. Based in Syracuse, New York, Penn Traffic was in Chapter 11 twice before. Debt at the outset of the newest bankruptcy included $63.2 million owing to secured creditors, including $41.8 million to General Electric Capital Corp. on a senior secured facility and $10 million on a supplemental real estate credit with Kimco Capital Corp. serving as agent.

Penn Traffic operated stores in Pennsylvania, upstate New York, Vermont and New Hampshire using the names BiLo, P&C and Quality.

The case is In re Penn Traffic Co., 09-14078, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Tronox to Extend Reorganization Financing Until September 24

Tronox Inc., the world’s third-largest producer of the white pigment titanium dioxide, is requesting a blessing from the bankruptcy judge to extend $425 million in financing for the reorganization to Sept. 24 from June 24.

The hearing will be held June 24. Although Tronox is trying to broker a consensual reorganization plan, it’s taking longer than expected, the company said. To read about Tronox’s contemplated stand-alone reorganization plan, click here for the Jan. 21 Bloomberg bankruptcy report. To read Bloomberg coverage on the new financing motion, click here.

In March, Tronox mostly defeated a motion to dismiss a lawsuit in bankruptcy court against former parent company Kerr- McGee Corp. and Anadarko Petroleum Corp., which acquired Kerr- McGee for $18.4 billion in August 2006. If successful, the suit would recover environmental remediation costs Tronox was given when spun off from Kerr-McGee in March 2006. To read about the defendants’ most recent effort to dismiss the suit, click here for the May 28 Bloomberg Daily bankruptcy report.

The Chapter 11 petition by Tronox in January 2009 listed assets of $1.56 billion against debt totaling $1.22 billion. Debt includes $213 million on a secured term loan and revolving credit, $350 million in 9.5 percent senior notes, and a $40.7 million accounts receivable securitization facility.

Tronox’s products are used in paints, coatings, plastics, paper and consumer products. The operations outside of the U.S. didn’t file.

The case is In re Tronox Inc., 09-10156, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

No One to Sue, Questex Asks to Dismiss Chapter 11

Questex Media Group Inc. sold the assets, can’t find anyone to sue, and is asking the bankruptcy judge to dismiss the Chapter 11 case that began in October.

Now formally named QMG Winddown Inc., the company sold the assets in December to first-lien lenders in exchange for $120 million in secured debt and the assumption of $15 million provided to finance the reorganization.

The lenders set aside $500,000 to be used in winding down the case. The company and the creditors’ committee both say they performed investigations and didn’t identify any lawsuit worth filing.

There being no funds for making a distribution to creditors, the company will ask the bankruptcy judge at a July 6 hearing to dismiss the case. Questex previously said it was considering “all options,” including conversion to liquidation in Chapter 7, dismissal, or confirmation of a Chapter 11 plan.

Newton, Massachusetts-based Questex was a business-to- business media provider with 150 print and digital publications plus 28 conferences and trade shows. It generated $129 million in sales during 2008 and listed assets of $299 million against debt totaling $321 million.

The case is In re QMG Winddown Inc., 09-13423, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Black Crow Beats GECC Again in Dispute Over New Loan

Black Crow Media Group LLC, a privately held owner of 22 radio stations, continues coming out on top with secured creditor General Electric Capital Corp. when it comes to financing for the reorganization.

Black Crow won bankruptcy court approval on May 28 for a $1.5 million loan, over objection from Stamford, Connecticut- based GECC, the secured lender owed $38.9 million.

GECC appealed the order approving the new financing, only to find the bankruptcy judge denying a stay pending appeal.

GECC went to the U.S. District Court, also seeking a stay. The district judge on June 14 likewise denied a stay pending appeal. Without a stay, Black Crow can draw down the loan despite the appeal that nevertheless may go ahead.

Even if approval of the lending is later reversed on appeal, the loan can’t be set aside under bankruptcy law because there wasn’t a stay pending appeal.

GECC believes the bankruptcy judge improperly made its existing loan subordinate to the lien securing the new $1.5 million loan.

Black Crow filed for Chapter 11 protection in January, two days before a hearing in U.S. district court where GECC was seeking appointment of a receiver following default on the term loans and revolving credit. Black Crow’s stations are in five markets in Florida, Alabama, Georgia, and Tennessee. In addition to the GECC debt, there is another $6 million owing to unsecured creditors. Daytona Beach, Florida-based Black Crow had $12.9 million of revenue in 2009, a 23 percent decline from 2008.

The case is In re Black Crow Media Group LLC, 10-00172, U.S. Bankruptcy Court, Middle District Florida (Jacksonville).

Farkas, Former Taylor Bean Chairman, Indicted

Lee Farkas, former chairman of Taylor Bean & Whitaker Mortgage Corp. was arrested yesterday and charged by federal authorities with running a $1.9 billion fraud at what was once the largest independent mortgage originator in the U.S.

The indictment charges Farkas with concealing mortgage assets that were worthless or losing value and representing them as being securitized and sold into the secondary market. The charges also say that the fraud contributed to the failure of Colonial BancGroup Inc. and its bank subsidiary by selling Colonial more than $400 million in fake mortgage assets.

Farkas’ lawyer said he isn’t guilty. To read Bloomberg coverage, click here.

Taylor Bean itself is making claims against the company’s directors’ and officers’ insurance provider, National Union Fire Insurance Co. of Pittsburgh. Taylor Bean received subpoenas from the Securities and Exchange Commission and a federal grand jury in Georgia. Farkas was indicted in Alexandria, Virginia.

Taylor Bean’s bankruptcy occurred three weeks after federal investigators searched the offices of the Ocala, Florida-based company. The day following the search, the Federal Housing Administration, Ginnie Mae and Freddie Mac prohibited the company from issuing new mortgages and terminated servicing rights.

Taylor Bean managed an $80 billion mortgage-servicing portfolio. The petition said assets and debt both exceed $1 billion. After filing under Chapter 11 last August, Taylor Bean sold 1,046 parcels of repossessed real estate for $81.2 million to Selene Residential Mortgage Opportunity Fund LP.

The case is Taylor Bean & Whitaker Mortgage Corp., 09- 07047, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).

Watch List

K-V Pharmaceutical Has Going Concern Qualification

K-V Pharmaceutical Co. ceased manufacturing and distribution of almost all products in January 2009 after discovery that some tablets were oversized. The company said in a regulatory filing this week that there is substantial doubt about its ability to continue as going concern.

St. Louis-based K-V hasn’t filed financial statements going back to the report that should have been filed for the quarter ended in March 2009.

K-V pleaded guilty to two felony counts for failing to inform regulators about manufacturing problems. It also paid $27.6 million in fines. The company is being sued by CVS Pharmacy Inc. for at least $100 million for breach of a supply contract.

K-V’s $200 million in subordinated notes due in 2033 traded on June 15 at $30.25, down from $35 the prior week. The stock closed yesterday at $1.14, down 3 cents in trading on the New York Stock Exchange.

New Filing

Auto Floor Mat Maker Petty Products Files in Georgia

Petty Products LLC, a designer and manufacturer of floor mats for autos, filed a bare-bones Chapter 11 petition on June 15 in Newnan, Georgia, saying assets are less than $10 million while debt exceeds $10 million.

The website refers to LaGrange, Georgia-based Petty as the world’s leading floor mat supplier. It has a 200,000 square-foot facility.

The case is In re Petty Products LLC, 10-12286, U.S. Bankruptcy Court, Northern District Georgia (Newnan).

Briefly Noted

Taylor-Wharton Implements Confirmed Reorganization Plan

Taylor-Wharton International LLC, a manufacturer of propane and cryogenic pressure tanks, valves, and gauges, emerged from reorganization on June 15 by implementing the Chapter 11 plan that the bankruptcy judge in Delaware approved with a May 26 confirmation order. To read about the plan, which cuts debt in half, click here for the May 27 Bloomberg bankruptcy report.

The Mechanicsburg, Pennsylvania-based company was unable to service debt incurred following acquisition of the business from Harsco Corp. in November 2007 in a $340 million transaction. At the outset of Chapter 11, the company had 11 facilities in the U.S. and six abroad. The company estimated that revenue shrank to $237 million last year from $404 million in 2008.

The case is In re Taylor-Wharton International LLC, 09- 14089, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Daily Podcast

Texas Rangers, Visteon, Zayat Stables, Loehmann: Audio

Texas Rangers, Visteon Corp., Zayat Stables LLC, and retailer Loehmann’s Inc. are the bankruptcy cases covered in the latest bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

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

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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