Smurfit, Rubicon, Philly Papers, Morton, Abitibi, Brookstone: Bankruptcy

A disclosure statement explaining the Texas Rangers reorganization plan was approved late yesterday. The bankruptcy judge in Fort Worth, Texas, scheduled a confirmation hearing for July 9 where the professional baseball club will ask for approval of the Chapter 11 plan billed as paying all creditors in full.

U.S. Bankruptcy Judge Michael Lynn said in yesterday’s order that he hasn’t yet decided whether secured creditors, owed $75 million by the team, are ultimately entitled to vote on the plan. For now, Lynn is allowing them to vote. Should he decide that they are paid in full and not impaired, he will void their votes, the judge said.

The Rangers plan is built around a sale of the team to a group including current team President Nolan Ryan in a transaction valued at $575 million. Although the lenders are owed $525 million in total, they receive only $75 million directly from the team because that’s the limit of the secured debt the team itself guaranteed.

Lynn said in his ruling that he’s allowing the equity holders to vote for the time being. If he later decides they’re not adversely affected by the plan, then he will void the votes.

At a hearing last week, Lynn heard argument from the parties over whether the team’s ultimate owner, Thomas O. Hicks, is entitled to control the limited and general partnerships that own the equity in the team. If Hicks is in control, then the equity can vote for the plan.

The secured lenders contend they’re entitled to control the equity and presumably vote against the plan.

Lynn may hand down a decision today deciding who controls the equity and is entitled to vote on the plan. Even if he concludes that the lenders may take over the equity and vote against confirmation, the judge can still confirm the plan using the so-called cramdown process if it’s shown that the equity holders and the secured creditors are being given as much as they are entitled to receive.

A revision to the disclosure statement the Rangers filed last week says that the lenders ultimately will be paid a total of $256 million, including the initial $75 million plus the surplus left over from the sale price after creditors are paid.

The surplus will go to the lenders because they have a security interest in the limited and general partners that own the team.

The team filed under Chapter 11 on May 24 to complete the sale to the Nolan Ryan group since the lenders wouldn’t consent. The Rangers moved from Washington to Texas in 1972.

The team defaulted on payments owing to the lenders in March 2009. This writer’s brother is a lawyer for an agent for the lenders.

The partnership that owns the team, Texas Rangers Baseball Partners, said in its petition that the assets and debt are both less than $500 million.

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

Updates

Smurfit-Stone Plan Approved, Stockholders Keep Something

Smurfit-Stone Container Corp., a corrugated container and containerboard maker, is in a position to emerge from Chapter 11 by the end of June given the decision by the bankruptcy judge yesterday to sign a confirmation order approving the reorganization plan.

The plan ultimately was made possible by a settlement in May where common and preferred shareholders are to keep 4.5 percent of the stock.

Preferred shareholders are to have 2.25 percent and common stockholders will keep 2.25 percent of the new stock. Their shares come from those previously earmarked for general unsecured creditors.

Holders of as much as $3.1 billion in unsecured claims against the operating companies are to receive new common stock worth as much as 71 percent of their claims, according to the disclosure statement approved before the settlement with shareholders.

Secured creditors are to be paid in full in cash or new debt on account of their $969 million in claims. Secured creditor CIT Group Inc. is to be paid in full on its $34.9 million claim.

Unsecured creditors of the holding company owed $11.2 million are receiving nothing.

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 $2.275 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).

Rubicon Noteholders’ Reorganization Plan Confirmed Yesterday

Rubicon US REIT Inc. failed in its effort at stopping noteholders from taking over. The bankruptcy judge in Delaware entered a confirmation order yesterday approving the noteholders’ plan.

Rubicon, a Chicago-based real estate investment trust, contended there was a higher offer for $405 million which the noteholders didn’t disclose. The noteholders said the failure in disclosure was the company’s fault.

The disclosure statement for the noteholders’ plan projected a recovery of 68.7 percent by swapping notes for all the new common stock plus a $50 million note. The plan reinstates $311 million in mortgages while extinguishing existing common stock. Unsecured creditors, owed $1 million, are being paid in full.

The Class A preferred stockholders keep their equity thanks to the noteholders’ plan.

Noteholders were able to propose a plan of their own after filing a successful motion to end so-called exclusivity when the case was only three weeks old. Noteholders wanted their own plan to avoid being cashed out involuntarily.

The Chapter 11 filing in January by Rubicon and affiliates came more than a year after the bankruptcy of the Australian parent Allco Finance Group. Rubicon was required by the parent’s liquidator to attempt to sell the assets. Bankruptcy court papers say assets and debt exceed $100 million.

The case is In re Rubicon US REIT Inc., 10-10160, U.S. Bankruptcy Court, District of Delaware (Wilmington).

California Coastal Has Loan to Take Out Lenders

California Coastal Communities Inc., a homebuilder with three projects in Southern California, secured court approval for a commitment for a $182 million loan to finance a Chapter 11 plan.

Before landing the new loan, the company was proposing a plan where existing secured debt would be rolled over into new loans. The lenders were in opposition.

The new loan permits amending the plan so the lenders will be paid off in cash. The loan is provided by Luxor Capital Group LP. The plan provides for paying unsecured creditors in full, without interest, over two years.

The bankruptcy judge already approved a disclosure statement explaining the prior version of the plan. The confirmation hearing for approval of the plan is on the calendar for July 27.

California Coastal filed under Chapter 11 in October, listing assets of $291 million against debt totaling $231 million.

The Irvine, California-based company listed $81.7 million as being owed on a revolving credit and $99.8 million on a term loan. Both secured obligations were owed to KeyBank NA.

The company missed a $758,000 payment due KeyBank in September.

The case is In re California Coastal Communities Inc., 09- 21712, Bankruptcy Court, Central District of California.

Lehman Authorized to Invest $262 Million in Rosslyn, Virginia

Lehman Brothers Holdings Inc. was authorized by the bankruptcy judge last week to invest as much as $262.5 million to pay off maturing mortgages on commercial real estate in Rosslyn, Virginia, where it’s a 78.5 percent owner. The project, 98 percent leased, has 3 million square feet of space.

The trial resumed again yesterday where Lehman and its creditors’ committee are trying to prove that Barclays Plc took $11 billion more than it was entitled to receive when it purchased the brokerage business. To read Bloomberg coverage, click here.

The first two weeks of trial were completed in May. Lehman, as plaintiff, is finishing its case this week. Barclays is to begin presenting its witnesses on Aug. 23.

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).

Goldman Can’t Foreclose Sawgrass Marriott Resort

The owner of the Sawgrass Marriott Resort in Ponte Vedra Beach, Florida, won two victories yesterday in bankruptcy court against Goldman Sachs Mortgage Co., the secured lender owed $193 million.

The bankruptcy judge denied the lender’s motion to modify the so-called automatic bankruptcy stay so it could foreclose. The bankruptcy judge granted the resort owner’s request and extended exclusive right to propose a Chapter 11 plan until Dec. 31.

The resort owner takes the position that the property is worth $90 million. The lender say it’s worth $135.3 million. In a case where there is the possibility of a so-called cramdown, there can be tactical advantages for the lender to advocate a higher value than the bankrupt company.

There will be a preliminary hearing on July 20 where the bankruptcy judge eventually will put a value on the resort.

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

Before yesterday’s hearing, the resort owner said the secured lender has “pursued every opportunity to frustrate the debtor’s efforts to reorganize.” The lender believes reorganization is hopeless.

The resort filed under Chapter 11 on March 1 in Jacksonville, Florida, saying assets and debt both exceed $100 million.

The case is In re RQB Resort LP, 10-01596, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).

Lake at Las Vegas Development Confirms Reorganization Plan

The master developer of the Lake Las Vegas Resort 17 miles from the Las Vegas Strip will have an approved reorganization plan, the bankruptcy judge said at yesterday’s confirmation hearing.

The developer, known formally as Lake at Las Vegas Joint Venture LLC, was able to confirm the reorganization when the committee representing unsecured creditors threw their support behind the plan after a settlement with secured lenders owed $626 million.

Although they gave up claims against the lenders, the plan allows a lawsuit go to forward against Sid Bass, Lee Bass and other former owners of the project. Creditors dropped the suit begun in July 2009 against an affiliate of Credit Suisse Group AG, which was a secured lender and agent for the secured creditors.

The plan exchanges the secured lenders’ $127 million loan for the reorganization for 94 percent of the new equity. For their more than $627 million in pre-bankruptcy secured claims, the lenders receive 1 percent of the new equity, warrants that currently should have no value, and 80 percent of net recoveries from the lawsuit against insiders.

Unsecured creditors were predicted to see a 4.5 percent recovery from a $1 million cash fund plus 20 percent of lawsuit recoveries.

Lot owners will waive claims in return for remapping properties so they will have marketable title. For Bloomberg coverage of the confirmation hearing, click here.

The disclosure statement said that the plan was better for unsecured creditors than victory in the lawsuit because no defects could be found in the $127 million secured claim financing the reorganization. The disclosure statement took the position that that the property was worth less than the amount necessary to pay off the so-called debtor-in-possession loan.

The suit alleged that the loan from Credit Suisse in 2004 was a fraudulent transfer because all but $100 million from the $560 million loan went directly to the owners.

The formal lists of assets and liabilities showed $719 million in claims belonging to secured creditors, with the first mortgage totaling $671 million.

The development is a 3,600-acre master-planned community with a 320-acre man-made lake next to the Lake Mead National Recreational Area. It has three golf course, two hotels, a casino, retail stores and more than 1,600 completed residential units. The Chapter 11 filing was in July 2008.

The case is Lake at Las Vegas Joint Venture LLC, 08-17814, U.S. Bankruptcy Court, District of Nevada (Las Vegas).

Unions, Pension Funds Against Philly Newspapers’ Plan

Several labor unions and pension funds filed objections to the reorganization plan for Philadelphia Newspapers LLC, the publisher of the Philadelphia Inquirer and Philadelphia Daily News. The confirmation hearing for approval of the plan is scheduled to begin June 24.

The unions contend that the plan improperly cuts off the pension funds’ right to make the buyers liable as successors to the business.

McClatchy Co., which sold the newspapers to the current owners in 2006, likewise objected, saying some unsecured creditors are paid more than others. Sacramento-based McClatchy argues that mezzanine lenders in some circumstances could be paid three times as much as other unsecured creditors.

The business is to be acquired under the plan by the secured lenders who won the auction in April with a bid at the time said to be worth $139 million. For details on the plan, click here for the May 20 Bloomberg bankruptcy report.

The newspapers commenced the Chapter 11 reorganization in February 2009 in their hometown after defaulting on a term loan and revolving credit totaling $296.6 million and on $98.5 million in subordinated notes.

The major controversy in the case was a dispute over whether the lenders could bid their secured claims rather than cash at auction, a process known as credit bidding. Although the bankruptcy judge would have allowed the lenders to credit bid, appellate courts disagreed. The 3rd U.S. Circuit Court of Appeals in Philadelphia ruled that bankruptcy law doesn’t give secured creditors an absolute right to make a credit bid.

Consequently, the lenders bid cash at auction in late April.

The case in bankruptcy court is In re Philadelphia Newspapers LLC, 09-11204, U.S. Bankruptcy Court, Eastern District Pennsylvania (Philadelphia).

Nortel Aims to End U.S. Retiree Benefit Payments

Nortel Networks Corp., once North America’s largest communications-equipment provider, filed a motion asking authorization from the bankruptcy judge to terminate retirees’ medical and disability benefits on Aug. 31. A hearing on the motion is set for July 16.

Nortel said it’s spending $1 million a month on medical coverage for 4,019 retirees in the U.S. The disability program, covering 280 people, also costs $1 million a month. To read other Bloomberg coverage, click here.

Nortel already raised $2.6 billion from the sale of businesses. Patents and patent applications could bring another $750 million to $1.1 billion.

Ericsson AB, the world’s largest producer of wireless networks, bought the primary wireless carrier business for $1.13 billion. It was also part of a group that made the $103 million high bid for Nortel’s so-called GSM business. Ericsson offered to pay $242 million cash for Nortel’s half interest in a South Korean joint venture with LG Electronics Inc. named LG-Nortel Co.

Other sales include the optical networking and carrier Ethernet networks business bought by Ciena Corp. in December for $769 million. Nortel also sold the Internet telephony business for $182 million after adjustments.

The Toronto-based Nortel companies filed for bankruptcy reorganization in January 2009 in the U.S., Canada and London. The Nortel companies reported $11.6 billion in consolidated assets against debt totaling $11.8 billion as of Sept. 30. Revenue was $9.7 billion in 2007. For the first nine months of 2008, sales were $6.8 billion.

The Chapter 11 case is In re Nortel Networks Inc., 09- 10138, and the parent’s Chapter 15 case is In re Nortel Networks Corp., 09-10164, both in U.S. Bankruptcy Court, District of Delaware (Wilmington).

Agriprocessor’s Rubashkin Gets 27-Year Prison Sentence

Sholom Rubashkin, former chief executive of kosher meat producer Agriprocessors Inc., was sentenced yesterday to 27 years in prison by a U.S. District Court judge in Iowa. Rubashkin, 50, was also directed to pay $26.8 million in restitution to victims of the fraud. The judge let him off without a fine on top of restitution.

Rubashkin was found guilty in November on more than 80 counts including harboring undocumented aliens and creating false accounts receivable. He was acquitted on five counts.

The company’s assets were mostly sold in July 2009 in exchange for $8.5 million in secured debt. The Chapter 11 case was converted to a liquidation in Chapter 7 on consent from the Chapter 11 trustee who continued as the trustee in Chapter 7.

Agriprocessors once produced half the kosher beef and 40 percent of the kosher poultry in the U.S. The Chapter 11 trustee was appointed after Rubashkin was indicted on federal bank-fraud charges.

Bankruptcy followed soon after a raid by immigration authorities in May 2008 on the plant in Postville, Iowa, where 389 workers were arrested for having forged immigration documents. Agriprocessors originally said assets were more than $100 million while liabilities were less than $100 million. Annual revenue had been $300 million, according to court papers.

The case is In re Agriprocessors Inc., 08-02751, U.S. Bankruptcy Court, Northern District Iowa (Dubuque).

Morton Industrial Creditors Want to Sue Insiders

The creditors’ committee of Morton Industrial Group Inc. is asking the bankruptcy judge for permission to sue former officers and directors in connection with a leveraged buyout and recapitalization in August 2006.

The creditors’ panel for the former manufacturer of engineered components and subassemblies for construction and agricultural equipment believes the company became insolvent as a result of the LBO. They point out how insiders received more than $20 million through the transaction.

The committee believes that the 2006 LBO can be attacked as a fraudulent transfer because the company didn’t receive enough in return for the $10 a share it paid out to old stockholders. The motion for authorization to sue insiders is on the calendar for June 30.

The committee contends the company has no ability to pursue claims. It has no employees, and all of the directors resigned, the committee says. All of the asset were sold in June 2009 for $33 million.

The committee has a liquidating Chapter 11 plan on file, along with an explanatory disclosure statement. The plan would pay creditors in the order of priority prescribed in bankruptcy law.

Morton filed under Chapter 11 in March 2009. The Morton, Illinois-based company had five plants that generated $208 million in sales during 2008. Debt originally was listed to include $14.4 million on a secured revolving credit, $33.3 million on a secured term loan, and $27.4 million on subordinated notes. Another $14.8 million was owing to trade suppliers.

The case is In re MMC Precision Holdings Corp. 09-10998, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Hawaii Biotech Selling Vaccines at Auction July 19

Hawaii Biotech Inc., a developer of vaccines for West Nile and Dengue viruses, filed a Chapter 11 petition in December and will hold an auction for the assets in the courtroom in Honolulu on July 19.

Competing bids initially are due July 12. The hearing for the sale will take place in the courtroom at the same times as the auction on July 19.

The company already has an offer of $1.44 million to be paid by a credit against pre-bankruptcy secured debt.

Hawaii Biotech said money will run out by the end of July. It wants the sale completed quickly so there is no interruption in clinical trials.

The assets are intellectual property and proprietary information, a court filing said. The petition says assets and debt are both less than $10 million.

The case is In re Hawaii Biotech Inc., 09-02908, U.S. Bankruptcy Court, District of Hawaii (Honolulu).

Pope & Talbot Trustee Withdraws Late Abitibi Claim

The bankruptcy trustee for Pope & Talbot Inc., a primarily Canadian pulp and paper producer, missed the deadline for filing a $530,000 claim against AbitibiBowater Inc., the largest newsprint maker in North America.

The Pope & Talbot trustee filed a motion in February to excuse the late filing. Facing a hearing today, the trustee withdrew his motion last week that would have allowed the late- filed claim.

Pope & Talbot filed for reorganization in Delaware in November 2007 and converted to a Chapter 7 liquidation in May 2008 when an approved sale of three pulp mills fell through.

The hearing for approval of the AbitibiBowater’s disclosure statement comes up for hearing on July 7. If the disclosure statement is approved, creditors can begin voting on the reorganization plan. For details on the plan, click here for the May 25 Bloomberg bankruptcy report.

AbitibiBowater was formed in October 2007 through a merger between Montreal-based Abitibi-Consolidated Inc. and Greenville, South Carolina-based Bowater Inc. Abitibi is a producer of newsprint, uncoated mechanical paper, and lumber. Bowater also makes newsprint along with papers, bleached kraft pulp, and lumber. The Montreal-based company began reorganizing with 24 pulp and paper mills plus 30 wood-product plants. Revenue in 2008 was $6.8 billion. In Chapter 11 petitions filed in April 2009, the combined AbitibiBowater companies listed assets of $9.9 billion and debt totaling $8.8 billion as of Sept. 2008.

The case is AbitibiBowater Inc., 09-11296, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Briefly Noted

Taylor Bean Wants Exclusivity Until September 21

Taylor Bean & Whitaker Mortgage Corp., once the largest independent mortgage originator in the U.S., prompted creditors to file 3,200 claims for $9.2 billion. At a hearing on July 16, it will ask the bankruptcy judge in Jacksonville, Florida, to extend the exclusive right to propose a Chapter 11 plan until Sept. 21.

The bankruptcy was filed last August, 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. After the Chapter 11 filing, Taylor Bean sold 1,046 parcels of repossessed real estate for $81.2 million to Selene Residential Mortgage Opportunity Fund LP. The petition said assets and debt both exceed $1 billion.

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

Ethanol Maker Hawkeye Renewables Implements Chapter 11 Plan

Hawkeye Renewables LLC, the owner of two ethanol plants, implemented a Chapter 11 plan on June 18 that the bankruptcy judge approved with a June 2 confirmation order. Consummation of the plan ended a reorganization begun Dec. 21. After a settlement, second-lien creditors owed $168 million were given 1 percent of the equity and 10 percent above distributions of $435 million. First-lien creditors owed $593 million took the other 99 percent of the new stock plus a $25 million secured term loan. The plan gave nothing to unsecured creditors with claims totaling less than $1 million.

Hawkeye, based in Ames, Iowa, had $720 million in debt at the end of 2008 and generated $584 million in revenue that year. The plants are capable of producing 225 million gallons a year. Hawkeye was controlled by affiliates of Thomas H. Lee Partners LP.

The case is In re Hawkeye Renewables LLC, 09-14461, U.S. Bankruptcy Court, District of Delaware (Wilmington).

NYC Developer Tarragon Confirms Plan in New Jersey

Tarragon Corp., a Manhattan residential real estate developer, had its reorganization approved when the bankruptcy judge in New Jersey signed a confirmation order on June 18. The sponsor for the plan is UTA Capital LLC, an investor based in West Orange, New Jersey.

In the Chapter 11 filing in January 2009, Tarragon listed assets of $841 million against debt totaling $1.04 billion. The projects being developed actively at the time had 1,034 units while those in the so-called development pipeline totaled 1,846. Tarragon’s investment division had almost 7,400 stabilized apartment units and 3 apartment communities with almost 650 apartments being leased. Debt included $170 million owing to unsecured creditors plus $185 million in mortgages. Taberna Capital Management LLC was the largest unsecured creditor by holding $125 million in subordinated notes. Tarragon specializes in mid-rise and low-rise developments.

The case is In re Tarragon Corp., 09-10555, U.S. Bankruptcy Court, District of New Jersey (Newark).

Station Casinos Creditors Failing to Stop Auction

The official creditors’ committee for casino operator Station Casinos Inc. was denied an injunction from the bankruptcy judge putting a hold on a scheduled Aug. 6 auction for some of the casinos. The first bid of $772 million will come from a group including current owners Frank and Lorenzo Fertitta. The committee still can seek a stay from a U.S. District Court judge. The committee is taking an expedited appeal from a June 4 order of the bankruptcy judge in Reno, Nevada, scheduling the auction. For details on the auction, the appeal, and the Station Casinos reorganization plan, click here for the June 11 Bloomberg bankruptcy report.

A hearing for approval of Station Casinos’ disclosure statement explaining the Chapter 11 plan originally was scheduled for June 10. It was pushed back to July 15 and 16. The plan incorporates an agreement structured around the auction. Station Casinos filed under Chapter 11 in July 2009. It has 13 properties in Las Vegas plus five joint ventures. It also operates casinos for American Indian tribes. Station’s debt was the result of a leveraged buyout in November 2007 by Fertitta Colony Partners LLC.

The case is In Re Station Casinos Inc., 09-52477, U.S. Bankruptcy Court, District of Nevada (Reno).

Exchange Offer News

Brookstone Extends Offer for Notes at 80% Cash, Debt

Specialty retailer Brookstone Inc. extended the exchange offer until July 2 that otherwise would have expired on June 18.

For each $1,000 in face amount of existing 12 percent second-lien notes due 2012, holders can elect between 80 percent in cash or a new second-lien note for $800 due in 2017. If the offer is oversubscribed for cash, new notes will be substituted for cash.

Cash to support the offer comes from shareholders. It is conditioned on participation by two-third of the outstanding notes.

Merrimack, New Hampshire-based Brookstone was acquired in October 2005 in a $422 million transaction by a group including JW Childs Associates LP, Temasek Holdings Pte, and OSIM International Ltd.

New Filing

South Carolina Development Files in North Carolina

South Bay Properties LLC, the owner of 107 undeveloped lots in Georgetown, South Carolina, filed a Chapter 11 petition on June 18 in North Carolina, saying the property is worth $6 million while the secured debt is $9.1 million.

Unsecured claims are another $1.2 million. Priority claims are $562,000.

The secured lender with a mortgage on the 60-acre property is Bayside Properties LLC.

The case is In re South Bay Properties LLC, 10-04922, U.S. Bankruptcy Court, Eastern District North Carolina (Wilson).

Daily Podcast

Supreme Court, Texas Rangers, Lehman, Abitibi: Audio

A U.S. Supreme Court decision on bankruptcy, the Texas Rangers professional baseball club, and sales of property by Lehman Brothers Holdings Inc. and AbitibiBowater Inc. are the cases covered in the latest bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

Advance Sheets

Class-Action Suits Permissible in Bankruptcy Cases

It’s permissible to have a class-action suit in bankruptcy court where the plaintiff class is composed of individual debtors with bankruptcy cases filed in the district, the U.S. Court of Appeals in New Orleans ruled on June 18.

The case involved a proposed class action where the named plaintiffs alleged that Wells Fargo Bank NA, as a mortgage servicer, improperly charged people in Chapter 13 with fees and expenses that weren’t approved by the bankruptcy courts.

The bankruptcy judge certified the case as a class action and granted a direct appeal to the circuit court.

The 5th Circuit in New Orleans ruled against the bank by holding that class-action suits are permissible in bankruptcy court. To rule otherwise would nullify Bankruptcy Rule 7023 which specifies procedures for class-action adversary suits in bankruptcy court.

The opinion, by Circuit Judge Thomas M. Reavley, also held that it would be proper for a class to include bankrupts whose cases were pending before several bankruptcy judges.

The circuit court reversed the bankruptcy judge on certifying the class in the particular case, concluding that individual issues for each member of the class, such as damages, outweigh the common elements. In other words, although class suits can be proper, they weren’t in this case.

The case is Wells Fargo Bank NA v. Wilborn (In re Wilborn), 09-20415, 5th U.S. Circuit Court of Appeals (New Orleans).

No Absolute Right to Dismiss, 5th Circuit Rules

An individual in Chapter 13 doesn’t have an absolute right to dismiss his case, even though the governing statute seems to give the bankruptcy court no discretion, the U.S. Circuit Court of Appeals in New Orleans ruled on June 16.

The case involved an individual who was attempting to propose a repayment plan under Chapter 13. He filed a motion to dismiss the case after the Chapter 13 trustee made a motion for conversion to Chapter 7.

The bankrupt contended the court was compelled to dismiss the Chapter 13 case, because the governing statute, Bankruptcy Code section 1307, says that the case “shall” be dismissed if the bankrupt files a dismissal motion.

The circuit courts are split on the issue. The circuit courts for the 8th and 9th Circuits find discretion not to dismiss while the 2nd Circuit in New York ruled in 1999 that the obligation to dismiss is absolute.

The 5th Circuit, in an opinion by Circuit Judge Carolyn Dineen King, came down on the side of finding flexibility in the statute. The court said there is discretion not to dismiss in a case involving “bad-faith conduct or abuse of the bankruptcy process.”

The 5th Circuit said its ruling is the result of a 2007 U.S. Supreme Court decision in a case called Marrama v. Citizens Bank of Massachusetts, which held in a 5-4 ruling that an individual does not have an absolute right to convert a Chapter 7 case to Chapter 13. To read about Marrama, click here for the Feb. 22, 2007, edition of the Bloomberg daily bankruptcy report.

For a discussion of the 9th Circuit case reaching the same result as the 5th Circuit, click here for the Sept. 26, 2008, Bloomberg bankruptcy report.

The new case is Jacobsen v. Moser (In re Jacobsen), 09- 40023, 5th U.S. Circuit Court of Appeals (New Orleans).

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

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