Canal Corp, Calvary Baptist Church, Tronox, Spheris, Mexicana: Bankruptcy

A tax penalty of $37 million imposed on Canal Corp., the bankrupt packaging maker, was upheld by the U.S. Tax Court, which found the company used a tax avoidance technique based on a legal opinion from PricewaterhouseCoopers LLP that was “haphazard” and “tainted,” according to court files.

Judge Diane Kroupa, in a 38-page decision published Aug. 5, ruled that Richmond, Virginia-based Canal improperly avoided capital gains taxes in 1999 when it sold stock in a tissue paper subsidiary to Georgia-Pacific LLC, now owned by Koch Industries Inc.

Kroupa said Canal, formerly known as Chesapeake Corp., owed the penalty because the advice provided by David Miller, the PricewaterhouseCoopers lawyer who said the transaction would pass muster with the IRS, was “tainted by an inherent conflict of interest” as he also helped structure the transaction.

The ruling involves a leveraged partnership, which bankers often recommend to clients who want to monetize assets on a tax- deferred basis without selling them outright, said Robert Willens, president of Robert Willens LLC, a consulting firm that advises investors on tax and accounting rules.

Canal filed for bankruptcy protection Dec. 29, 2008, to sell its business to investors. Canal has run its operations as a debtor in possession.

J.P. Causey, acting chief executive for Canal Corp., said the company is “evaluating what our options are and looking at what the implications are for our bankruptcy.”

The tax case is Canal Corp. and Subsidiaries, Formerly Chesapeake Corp. and Subsidiaries v. Commissioner of Internal Revenue, 14090-06. 135 R.C. No. 9 (Aug. 5, 2010).

The bankruptcy case is Chesapeake Corp., 08-36642, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

For more on the tax decision, click here.

New Filings

Calvary Baptist Church World Outreach Centers Files Bankruptcy

Calvary Baptist Church World Outreach Centers, also known as Calvary Pointe Church and Calvary Church of Santa Ana, has filed for protection under Chapter 11 of the U.S. Bankruptcy Code, according to a petition filed Aug. 5 in the U.S. Bankruptcy Court in Santa Ana, California.

Santa Ana-based Calvary Baptist has fewer than 50 creditors, and assets and liabilities each in the range of $1 million to $5 million, according to court files.

The filing lacked required documents including schedules of equity holders, the 20 largest unsecured creditors, and secured creditors, according to a notice of case deficiency filed by the court. The debtor risks dismissal if it doesn’t file the necessary documents within 14 days, according to the notice.

The case is Calvary Baptist Church World Outreach Centers, 10-20895, U.S. Bankruptcy Court, Central District of California (Santa Ana).

Middletown & New Jersey RR Files for Bankruptcy in New York

Middletown & New Jersey RR Co. filed for Chapter 11 bankruptcy protection from creditors on Aug. 6 in Manhattan.

Listing fewer than 50 creditors, the railroad company said it has as much as $500,000 in assets and as much as $10 million in debts. The company owes $1.47 million to a secured creditor, the company said in a filing.

The case is In re Middleton & New Jersey RR Inc., 10-37378, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

556 Holding Files for Bankruptcy Protection in New York

556 Holding LLC, a single-asset real estate company, filed for Chapter 11 protection from creditors in Manhattan Aug. 6. KDMJ Realty Inc., which owns 99.5 percent of 556 Holding, also filed for Chapter 11. The remaining fraction of a share is owned by Dorothea Keeser.

556 Holding listed between $10 million and $50 million in both assets and liabilities, court records show. The largest unsecured creditor is the New York City Department of Finance, owed $172,962, according to its bankruptcy petition.

556 Holding asked the bankruptcy court to consolidate its case with KDMJ Realty’s bankruptcy case.

The case is In re 556 Holding LLC, 10-14267 U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Updates

Tronox Hearing on Disclosure Statement Hearing Adjourned

Tronox Inc., which filed for bankruptcy protection in 2009, seeks to delay a hearing on its disclosure statement and reorganization plan to Sept. 16, according to court files.

Tronox the world’s third-largest producer of white pigment titanium dioxide, will hold a status conference on Aug. 10, the date the hearing had been scheduled for, before U.S. Bankruptcy Judge Allan L. Gropper to provide the court and the parties with “an update” on the bankruptcy case, it said in court papers.

Tronox filed a reorganization plan in June in which unsecured creditors with an estimated $471 million in claims will get a recovery of 80 percent to 100 percent by receiving most or all of the new common stock. Tronox was expected to argue for approval of the plan at a hearing that was scheduled for Aug. 10. To read the details of the proposed reorganization plan, click here.

The Chapter 11 petition by Tronox in January 2009 listed assets of $1.56 billion and debt of $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.

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

Spheris Asks Court to Approve Compromise With MedQuist, CBay

Spheris Inc., the bankrupt provider of medical industry services, now known as SP Wind Down Inc., together with its units asked the U.S. Bankruptcy Court in Wilmington, Delaware, to approve a compromise it has reached with MedQuist Inc. and CBay Inc., according to court papers.

The compromise arises from the sale of the Spheris assets, which included the stock of non-debtor unit Spheris India Private Ltd. under an April 15 stock purchase agreement with MedQuist and CBay. After the sale closed April 22, “various disputes” arose between Spheris and MedQuist relating to the payment of COBRA medical insurance costs. Spheris claimed it was not liable for COBRA costs under the stock purchase agreement.

MedQuist a filed a proof of claim for $21.3 million on the estimated COBRA claim, which Spheris disputed.

After “engaging in extensive negotiations,” the debtor, MedQuist and CBay agreed it would be best to resolve the issues “consensually,” Spheris said in a filing.

The debtor seeks an order approving a settlement in which MedQuist will be allowed an administrative claim of $750,000. It agreed to give MedQuist and CBay until Aug. 25 to raise objections to the plan of reorganization, by which time the settlement will have been approved.

The case is In re SP Wind Down Inc., 10-10352, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Briefly Noted

Brookfield Asset Management Inc. said Aug. 6 in a statement that it expects General Growth Properties Inc. to emerge from bankruptcy “in the fall of this year,” and also said its investor group will own about 30 percent of the retail-space owner at that time. Separately, Brookfield said in the statement that over the past two years, through foreclosure or distressed purchase, it has acquired more than 6,000 multifamily apartment units in the U.S. Through a bankruptcy process, it also bought a 65 percent interest in Fairfield Residential, a large multifamily operating business Fairfield Residential. Fairfield acquires, develops and manages multifamily apartments in the U.S., Brookfield said in the statement. Fairfield currently manages about 55,000 apartment units. Brookfield intends “to utilize this platform to expand these operations” with its clients. The General Growth case is In re General Growth Properties Inc., 09-11977, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Fairfield case is In re Fairfield Residential LLC, 09-14378, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Compania Mexicana de Aviacion, Mexico’s largest airline by passengers, won’t solve its problems by reducing workers’ pay, said the head of the flight attendants union. The airline filed for bankruptcy protection in Mexico and in the U.S. The union is prepared for dialogue with the airline, said the union’s secretary general, Lizette Clavel, in comments in Mexico City. The company is in talks with unions after filing for protection from creditors on Aug. 3 in Mexico and the U.S. It said Aug. 5 that a Mexico City judge granted a temporary injunction to protect its assets from seizure. The U.S. case is Compania Mexicana De Aviacion SA de CV, 10-14182, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Possible Filing

Blockbuster Is Said Likely to Get Reprieve on Debt

Blockbuster Inc. will probably receive a one-month reprieve from creditors next week so the video-rental chain can prepare for a possible bankruptcy filing in September, three people with knowledge of the matter said.

Lenders are pushing for a pre-packaged bankruptcy in exchange for the 30-day extension on debt repayment, said the people, who declined to be identified because the negotiations are private. Blockbuster is reaching out to companies about buying assets in or out of bankruptcy, one of the people said.

Patricia Sullivan, a Blockbuster spokeswoman, said in an e- mailed statement that discussions are ongoing.

The company’s main asset is its inventory of DVDs and the name, which Michael Pachter, an analyst with Wedbush Securities Inc., valued at “tens of millions of dollars.”

For more, click here.

Default Notice

Midwest Banc Gets Default Notice Under $10 Million Debenture

Midwest Banc Holdings Inc., a community based bank holding company, received on Aug. 2 a notice of default on a Dec. 19, 2003, debenture of $10 million of junior, subordinated debt, from Wilmington Trust Co., the trustee on the indenture, according to a federal filing. The entry of Midwest Banc Holdings’ unit, Midwest Bank, into receivership with the Federal Deposit Insurance Corp., which has assumed its deposits and banking operations, constitutes a default under the indenture, Wilmington Trust stated in an Aug. 2 notice to Midwest Banc Holdings, according to the filing. The holding company “does not believe that these events in and of themselves constitute a default,” it said in the filing.

Bank Failure

Illinois Bank Ravenswood Shut as Failures This Year Reach 109

Ravenswood Bank, a Chicago-based lender with $265 million in assets, was shut by regulators as the number of U.S. failures this year reached 109.

Northbrook Bank & Trust Co. acquired Ravenswood’s $270 million in deposits and two branches, according to a statement posted Aug. 6 on the Federal Deposit Insurance Corp. website. The failure cost the FDIC’s deposit-insurance fund $68.1 million.

Ravenswood is the 13th Illinois lender shut this year, the statement said.

Regulators may close the most banks this year since 1992 as borrowers struggle to keep up with payments amid weak hiring and bad residential and commercial loans impair capital levels. Failures in 2010 will surpass last year’s total of 140, FDIC Chairman Sheila Bair said last month in a Bloomberg Television interview.

Statistics

Credit Risk Index Rises After Weaker-Than Expected Jobs Data

A benchmark gauge of U.S. corporate credit risk rose after a report showed private employers added fewer jobs than economists had estimated. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.63 basis points Aug. 6, after earlier dropping to as low as 100.8 basis points, according to Markit Group Ltd. The index, which reached a 12-week low on Aug. 2, typically rises as investor confidence deteriorates and falls as it improves.

Downgrades

First National of Nebraska’s Units Downgraded by Fitch

First National of Nebraska Inc.’s units First National Bank of Omaha, First National Bank (Fort Collins) and First National Bank (North Platte) have seen their ratings downgraded by Fitch Ratings Ltd., according to a statement issued by the ratings company.

The units’ ratings were changed as follows: the long-term issuer default rating to BB+ from BBB-; subordinated debt to BB from BB+; long-term deposits to BBB- from BBB; and individual rating to C/D from C.

For more ratings actions, click here.

Fitch has also placed the ratings for First National Bank of Nebraska and all of its rated subsidiaries on negative rating watch. The rating downgrade “reflects increased pressure on the parent company’s liquidity profile and a reduced ability to serve as a source of strength for the subsidiaries should the need arise,” Fitch said in the statement.

The negative watch placement was made because of concern over “liquidity balances” at First National of Nebraska, Fitch said.

To contact the reporter on this story: Carla Main in New Jersey at Cmain2@bloomberg.net.

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