Esmerian, St. Vincent, Mesa Air, Petters, Chemtura, Madoff: Bankruptcy

The examiner for newspaper publisher Tribune Co. filed his heavily redacted report yesterday evening and concluded it was “highly likely” that the completion of the leveraged buyout in December 2007 made the parent company “insolvent” and “reasonably likely” the subsidiaries were rendered insolvent.

Kenneth N. Klee, the examiner, also concluded that the solvency opinion given before completion of the leveraged buyout was “implausible.” He said that the Tribune board and special committee “failed appropriately to discharge their responsibilities” in allowing the completion of the $13.8 billion buyout led by Sam Zell.

Klee, a bankruptcy lawyer and law professor, was named to be the examiner in late May. The bankruptcy judge charged him with evaluating the strength of arguments about whether the 2007 leveraged buyout included fraudulent transfers that can be set aside in bankruptcy. He also was to give his opinion about remedies or damages creditors might be entitled to receive were he to conclude there indeed were fraudulent transfers.

Klee gave his opinions yesterday on a scale of 1 to 7, from “highly likely” to “highly unlikely.”

On the question of whether the December 2007 transaction was a constructively fraudulent transfer, Klee found that the companies didn’t receive “reasonably equivalent value” for the debt incurred at the time. He said that the bank lenders were acting in good faith at the time of the first part of the transaction in May 2007 although not at the second step in December.

Also on the question of a constructively fraudulent transfer, Klee believes it is “highly likely” a court would include the December transaction in evaluating capital adequacy when planning the first transaction in May.

Klee sees it as “somewhat unlikely” that a judge would collapse the May and Decembers transactions into one transaction.

The report found that Tribune “did not act forthrightly” in procuring the solvency opinion that was required before completion of the buyout in December 2007. He said it was “implausible” that accurate information was withheld from the board “unintentionally.”

He said that “fiduciaries” charged with assisting management “did not adequately discharge their duties.” He noted that no third party adviser evaluated the reasonableness of the solvency opinion.

The buyout fared better when Klee judged whether it was another species of fraudulent transfer made with actual intent to hinder or delay creditors. He concluded it was “reasonably likely” the first step in the transaction in June was not made to hinder or delay creditors. With regard to the second step in December and its $3.6 billion in debt, he said it was “somewhat likely” to be a fraudulent transfer with actual intent to hinder creditors.

On the issue of whether directors and officers can be liable, he said it was “somewhat likely” a court would find them responsible for not carrying out their duties properly. He believes it is “somewhat unlikely” that the lenders’ claims would be “equitably subordinated.”

Klee concluded it was “reasonably likely” that Wilmington Trust Co., as indenture trustee for some of the pre-LBO creditors, didn’t violate the automatic stay by filing a lawsuit in bankruptcy court objecting to the claims of some of the lenders. On the other hand, Klee sees it as “reasonably likely” that the lawyers for Wilmington Trust did violate a confidentiality agreement by including information in a court filing that should have been kept secret.

Klee filed most of his report under seal. While his conclusion are filed publicly, the underlying facts supporting his conclusions aren’t. The redactions in the publicly filed version result from the insistence on confidentiality by people and companies that supplied information to the examiner.

Tribune filed an emergency motion yesterday asking the bankruptcy judge to give the parties in the case immediate access to the entire report, while only the redacted version is publicly available for the time being. Klee explained in a court filing how he “strongly believes” the entire report should be made public.

Tribune believes that keeping the report under seal will be “highly disruptive,” given the confirmation hearing set for Aug. 30 where the judge is to consider approving the reorganization plan.

Unless the schedule is accelerated, the bankruptcy judge will hold an Aug. 9 hearing on whether to unseal the report.

A transaction is a constructive fraudulent transfer if the company making the transfer becomes insolvent and doesn’t receive reasonably equivalent value in return for what is given up.

Tribune’s Chapter 11 plan, if approved by the judge, would resolve the fraudulent transfer claims through a settlement opposed by some creditors. At the confirmation hearing, the judge will address the merits of the claims. Klee didn’t give an opinion on the merits of the settlement.

The plan, filed in April, is opposed by holders of $3.6 billion in pre-bankruptcy debt who announced their opposition even before the settlement was formally disclosed. For details on the plan, the proposed settlement, and the parties’ arguments, click here for 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).

Updates

Global Growth Files Terms of Plan and New Secured Loan

Capital Growth Systems Inc., more commonly known as Global Capacity, sought Chapter 11 protection on July 23 and approval of $10.25 million in secured financing.

The new loan will pay off the existing senior secured loan of about $5.1 million owing to Pivotal Global Capacity LLC. Another $3.2 million will be used for security deposits for utility companies.

There will be a hearing today for interim approval of the loan.

Terms of a proposed reorganization were spelled out in documents attached to the loan agreement. The plan deals with $52.1 million on several issues of secured subordinated convertible debentures. The subordinated debenture holders along with Downtown Capital are supplying the new loan.

When the Chapter 11 plan becomes effective, $3 million of the new loan will be rolled over. The remainder of the loan and the existing debentures will convert into the new equity.

General unsecured creditors are also to receive the new equity, if law permits.

The loan agreement requires having approval to sell the company to the debenture holders within 90 days. The plan itself is supposed to be approved in a confirmation order within 125 days.

Global is a Chicago-based provider of systems to integrate networks. Revenue in 2009 was $64.4 million. Revenue in the first quarter of 2010 was of $14.7 million.

The case is In re Global Capacity Holdco LLC, 10-12302, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Leighton Creditors Want Suit against Ralph Esmerian

The creditors’ trustee for liquidated antique jewelry retailer Fred Leighton LLC arranged a hearing on Aug. 26 to ask permission from the bankruptcy judge to continue a lawsuit against the company’s former owner, Ralph Esmerian, even though Esmerian and his company are now themselves in Chapter 11.

Esmerian and his R. Esmerian Inc. were the target of involuntary Chapter 7 petitions filed in May. Esmerian and the company took advantage of a right given them in bankruptcy law and switched the involuntary Chapter 7 cases to Chapter 11 reorganizations on June 23.

In view of the automatic halt on lawsuits resulting from the new bankruptcy cases, the trustee for the creditors’ trust from the Leighton case needs permission from the bankruptcy court to continue three lawsuits previously brought against Esmerian and the company that bears his name.

The three suits contend that Esmerian caused the Leighton company to improperly transfer more than $66 million both before and after the Leighton bankruptcy.

To fend off what likely would have been a push for a trustee to take over the new cases, Esmerian and his company had a motion on the court’s calendar last week for appointment of an examiner with expanded powers who would “oversee financial affairs generally” and be in charge of asset sales. The bankruptcy judge is yet to decide if there should be an examiner.

The creditors who filed the involuntary petition said they were collectively owed $40 million.

Merrill Lynch Mortgage Capital Inc. precipitated the Fred Leighton Chapter 11 in April 2008 by filing suit in state court to hold a foreclosure auction. Eventually, Fred Leighton was liquidated under a Chapter 11 plan proposed by Merrill. The Leighton plan was confirmed in November.

The new cases are In re R. Esmerian Inc. and In re Ralph Esmerian, 10-12719 and 10-12721, both in U.S. Bankruptcy Court, Southern District New York (Manhattan).

St. Vincent Has August Auction for Home Health Biz

St. Vincent Catholic Medical Centers, a shuttered 727-bed acute-care hospital in Manhattan’s Greenwich Village, will hold auctions on Aug. 10 and 11 for the certified home health-care agency and the long-term health-care program. The hearing for the approval of both sales is set for Aug. 19 under procedures approved July 23 by the bankruptcy judge in New York.

For the home health-care agency, the first bid of $15 million will come from North Shore University Hospital. For the long-term health-care program, Metropolitan Jewish Health Care Inc. will open the auction with an offer of $17.1 million.

For both, competing bids are initially due Aug. 5.

St. Vincent’s second trip into Chapter 11 is a liquidation. The new petition in April listed assets of $348 million and debt totaling $1.09 billion. The hospital ended the prior reorganization in July 2007 with a Chapter 11 plan claimed at the time to have a “a realistic chance” of paying all creditors in full. The prior reorganization left the medical center with more than $1 billion in debt. When the first bankruptcy started in July 2005, St. Vincent had seven operating hospitals. Five were sold.

The main facility has 941,000 square feet in 10 buildings. The not-for-profit hospital is sponsored by the Catholic Diocese of Brooklyn and the Sisters of Charity. It was founded in the mid-19th century.

The new case is In re Saint Vincent Catholic Medical Centers of New York, 10-11963, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The prior case was In re Saint Vincent Catholic Medical Centers of New York, 05-14945, in the same court.

Mesa Air Reports $13.7 Million June Operating Income

Regional airline Mesa Air Group Inc. reported $11.2 million of income in June before taxes and reorganization items. Revenue in the month was $74.4 million.

Operating income for the month was $13.7 million. The net loss of $275.4 million resulted mostly from $449 million in reorganization items resulting in large part from the termination of aircraft leases.

Mesa ended June with $52.2 million in cash, down from $60.8 million from May.

Mesa filed under Chapter 11 in January with a fleet of 178 aircraft. At the time, 130 were operating to provide 700 daily departures serving 127 cities in 41 states, Canada, and Mexico. Since then, Mesa abandoned or rejected leases on 76 aircraft.

Phoenix-based Mesa listed assets of $976 million against debt totaling $869 million. Liabilities include $393 million on loans secured by 24 owned aircraft, $26 million on three note issues, and $33.6 million secured by 20 other aircraft. In addition, there is $1.62 billion in potential liability on aircraft leases. Mesa operates regional aircraft under code- sharing agreements with US Airways Group Inc., UAL Corp.’s United Airlines, and Delta Air Lines Inc.

Mesa’s subsidiary in Hawaii, go! Mokulele, didn’t file.

The case is In re Mesa Air Group Inc., 10-10018, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Kaufman Rossin-Palm Beach Finance Settle on Petters

Kaufman Rossin & Co., a Florida-based accounting firm, agreed to pay almost $10 million in settlement of claims brought by hedge funds that ended up in liquidation in the U.S. or abroad as a consequence of the Ponzi scheme orchestrated by Thomas Petters.

The Kaufman firm was being sued by Palm Beach Finance Partners LP and Palm Beach Finance II LP, two hedge funds that invested in Petters’ companies. The Kaufman firm provided auditing services for the hedge funds.

The two funds ended up in Chapter 11 bankruptcy in November 2009, following public disclosure of the Petters fraud in September 2008. The two funds have about $143 million in claims by limited partner investors and another $790 in claims by unsecured creditors.

The two hedge funds filed a liquidating Chapter 11 plan yesterday along with an explanatory disclosure statement.

The almost $10 million being paid by the Kaufman firm will be split under a formula with offshore liquidations of affiliates.

Convicted of operating a $3.5 billion fraud, Petters was given a 50-year prison sentence.

The hedge funds’ Chapter 11 case is In re Palm Beach Finance Partners LP, 09-36379, U.S. Bankruptcy Court, Southern District Florida (West Palm Beach).

Briefly Noted

Chemtura May Complete Sulfonates Sale To Sonneborn

Specialty-chemical maker Chemtura Corp. was given court approval on July 23 to sell the remainder of the sodium sulfonates and oxidized petrolatums businesses to Sonneborn Inc. for $5 million plus adjustment. The bankruptcy judge approved the sale without holding an auction to test if there was a higher price.

Last week the judge said he would approve the disclosure statement after changes are made. Supported by the creditors’ committee and an ad hoc bondholder group, the reorganization plan would pay creditors in full while leaving the possibility of saving some value for existing shareholders. The plan would reduce debt for borrowed money from $1.3 billion to approximately $750 million. For details, click here for the June 18 Bloomberg bankruptcy report.

The Chapter 11 petition in March 2009 by Middlebury, Connecticut-based Chemtura listed assets of $3.06 billion against debt totaling $2.6 billion, including $1.02 billion owing on three issues of notes and debentures. Sales in 2008 of $3.5 billion declined to $2.5 billion in 2009. The subsidiaries outside of the U.S. didn’t file.

The case is Chemtura Corp., 09-11233, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Uno Chicago Grill Consummates Chapter 11 Reorganization Plan

Uno Restaurant Holdings Corp., the operator of Uno Chicago Grill casual-dining restaurants, implemented the reorganization plan approved in a July 6 confirmation order. The plan gave stock to noteholders while reducing debt from $176 million to $40 million. For details on the plan, click here for the July 7 Bloomberg bankruptcy report.

Uno, based in West Roxbury, Massachusetts, listed assets of $145 million against debt totaling $172 million.

The case is In re Uno Restaurant Holdings Corp., 10-10209, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Daily Podcast

Rangers, Almatis Plan, Tribune Secrecy, Siena Casino: Audio

Reporting by the Fort Worth newspaper on Texas Rangers sale; the settlement and revised plan for Almatis BV; secrecy in Tribune Co. and other bankruptcies, and a Nevada casino filing in California are analyzed in the new bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

Advance Sheets

Fairfield Sentry, Madoff Feeder Fund, Approved in Chapter 15

Fairfield Sentry Ltd., which was the largest feeder fund for Bernard L. Madoff Investment Securities Inc., received approval last week for the Chapter 15 petition filed in June.

Some investors in the fund objected to the Chapter 15 petition, saying the bankruptcy should be conducted in the U.S., not in the British Virgin Islands were the fund was incorporated.

U.S. Bankruptcy Judge Burton R. Lifland wrote a 10-page opinion explaining why the fund was entitled to protection under Chapter 15 on account of the liquidation being conducted in the British Virgin Islands.

Lifland concluded that the nerve center for the fund was offshore even though the fund had been managed in the U.S. by Fairfield Greenwich Group. Lifland reached his conclusion because the fund separated from the former manager months before the commencement of the Chapter 15 case. The business operations of the fund, according to Lifland, shifted to the British Virgin Island when the liquidators were appointed.

Now that Lifland recognized the offshore bankruptcy as the “foreign main proceeding,” all manner of creditor and investor actions in the U.S. are halted. From the automatic stay, Lifland excluded disputes with the Madoff trustee. Court papers say that the Madoff trustee and the fund are near settlement.

The Chapter 15 case will enable Lifland to help the fund in collecting assets in the U.S. Distribution of the assets will be the responsibility of the High Court of Justice in the British Virgin Islands.

The funds were created so non-U.S. citizens and certain tax exempt entities could invest with Madoff.

The liquidators say the funds invested more than $7 billion in the Madoff firm. The Madoff trustee has objected to allowance of the firms’ claims in the U.S. liquidation. In May 2009 the Madoff trustee sued Fairfield Greenwich for $3.54 billion, aiming to take back $3.2 billion withdrawn within six years and $1.2 billion taken out in 90 days before bankruptcy.

Bernard Madoff is serving a 150-year prison sentence following a guilty plea. The Madoff firm began liquidating in December 2008 with the appointment of a trustee under the SIPA. Bernard Madoff himself went into an involuntary Chapter 7 liquidation in April 2009. His bankruptcy case was consolidated with the firm’s liquidation.

The Fairfield case is In re Fairfield Sentry Ltd., 10- 13164, U.S. Bankruptcy Court, Southern District New York (Manhattan).

The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr- 00213, U.S. District Court, Southern District of New York (Manhattan).

Stub Rent Is Administrative Expense, Circuit Rules

The 8th U.S. Circuit Court of Appeals in St. Louis is the latest federal circuit court to rule that so-called stub rent must be paid in full as an expense of a Chapter 11 case. The question has been dividing lower courts.

The issue arises when a company files for Chapter 11 reorganization before rent comes due and the rent covers periods after bankruptcy. Some courts had ruled that the rent was partially or wholly a pre-bankruptcy unsecured claim because the rent came due before bankruptcy.

In the new case, the Bankruptcy Appellate Panel had reversed the bankruptcy judge and ruled that the entire rent was due. The bankruptcy judge had pro-rated the rent to cover the period after bankruptcy.

The circuit court upheld the appellate panel on July 23.

The case in the 8th Circuit involved rent for crop land. The company in Chapter 11 that rented the land argued that the pertinent provision in the U.S. Bankruptcy Code, Section 365(d), was intended to help shopping center landlords and shouldn’t be applied to rental of farm land. The 8th Circuit disagreed.

The court found Section 365(d) to be unambiguous.

The case involved a lease of land for three years, with rent paid in two installments. The second installment, for $90,800, came due on Dec. 1. The company filed in Chapter 11 two days before the rent was due. The lease was rejected the following March.

The appeals court ruled that the entire installment was an expense of the Chapter 11 case to be paid in full.

To read about the decision by the Bankruptcy Appellate Panel in the case, click here for the June 9, 2009, Bloomberg bankruptcy report. To read about a decision in June from the U.S. Court of Appeals in Philadelphia that came down the same way, click here for the June 8 Bloomberg bankruptcy report.

The opinion in the circuit court is Burival v. Creditor Committee (In re Burival), 09-2483, 8th U.S. Circuit Court of Appeals (St. Louis). The opinion by the Bankruptcy Appellate Panel is Burival v. Creditor Committee (In re Burival), 08-6026, Bankruptcy Appellate Panel for the 8th U.S. Circuit Court of Appeals (St. Louis).

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

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