MIG, W Hotel New York, Neff, WaMu, Mesa: Bankruptcy
MIG Inc., the indirect owner of 47 percent of the leading telecommunications provider in the Republic of Georgia, reached a settlement with the creditors’ committee that resulted in the approval of a disclosure statement on Aug. 19.
The disclosure statement explains the revised plan where the committee is a proponent. The plan provides improved treatment for preferred shareholders. Unsecured creditors are to be paid in full.
The confirmation hearing for approval of the plan is scheduled for Sept. 28. The settlement and the plan were the product of a compromise after MIG was faced with motions by the committee to end the company’s exclusive right to propose a reorganization, appoint a Chapter 11 trustee, or dismiss the case.
The committee contended that the Chapter 11 petition was filed “for the naked purpose” of obtaining a stay of a $188 million judgment by the Delaware Chancery Court in an appraisal action in favor of the preferred shareholders following MIG’s acquisition in 2007. The Chancery Court judgment was upheld on appeal by the Delaware Supreme Court in November.
Although MIG’s original plan on its face had full payment for the preferred shareholders, the committee said in a statement that the new plan has “substantially improved financial terms.”
Preferred shareholders will receive new secured notes bearing interest that begins at 15.5 percent and rises to 20 percent. Originally, the plan called for 10 percent interest.
In addition, the new notes will have liens on all the assets and the stock of reorganized MIG. The loan documents will contain covenants, sweep excess cash for payment on the notes, and require a portion of proceeds from a public offering to be used in payment of the notes.
MIG said from the outset that the company was worth enough to pay all creditors in full.
Charlotte, North Carolina-based MIG admitted that bankruptcy was the only alternative because the company lacked liquidity to pay the judgment in full immediately. MIG’s petition said assets and debt both exceeded $100 million.
The case is In re MIG Inc., 09-12118, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Senior Lender Objects to W Hotel New York Reorg Plan
The lender with the senior $115 million mortgage against the W New York Union Square hotel in Manhattan filed papers on Aug. 23 objecting to approval of the hotel’s Chapter 11 plan. The plan is set for approval at an Aug. 27 confirmation hearing.
The special servicer for the lender points out in its papers that it holds a mortgage against the owner of the hotel which isn’t in Chapter 11. Two holding companies that are the indirect owners of the hotel are the entities in bankruptcy. The indirect owners, named Hotels Union Square Mezz 1 LLC and Hotels Union Square Mezz 2 LLC, are to be reorganized under the plan.
The special servicer contends that the plan violates the loan agreement because it changes ownership of the hotel without the senior lenders’ consent. The special servicer also argues that the plan would improperly cut off guarantees of the mortgage debt.
If the plan goes through, it would transfer ownership interest in the hotel to a partnership led by Host Hotels & Resorts Inc. Many of the details regarding the sale and the underlying settlement are being kept secret.
Because all affected creditors are parties to the settlement agreement, the hearing on Aug. 27 is both to approve the disclosure statement and confirm the plan.
An affiliate of Dubai World purchased the hotel in 2006. The $285 million acquisition of the hotel was financed by a the $115 million first mortgage, three mezzanine loans totaling $117 million, and a $53 million equity investment.
After the mezzanine loans went into default, an affiliate of Lubert-Adler Real Estate Funds, which acquired the $20 million of third-tier mezzanine debt, foreclosed the so-called Mezz 3 entity. Mezz 1 and Mezz 2 filed Chapter 11 petitions in March to prevent their own foreclosures. Mezz 1 is the owner of the entity that owns the hotel. Mezz 2 owns Mezz 1, and Mezz 3 in turn owns Mezz 2. Dubai World previously owned Mezz 3 indirectly.
If confirmed, the plan would enable Union Square Real Holding Corp., the current owner of the claims against Mezz 2, to purchase an interest in the newly formed Host entity that will buy the hotel. The settlement and plan will end disputes over whether USRHC is properly the owner of the Mezz 2 interest.
DekaBank Deutsche Girozentrale, currently the owner of the $60 million in first-tier mezzanine debt against Mezz 1, will be paid $61 million cash under the plan plus advances made to cover debt service on the $115 million first mortgage.
The Lubert-Adler fund will receive $9.25 million cash and a note on account of its ownership of the Mezz 2 entity that has $37 million in debt. The fund in turn has an obligation to pay expenses of the Chapter 11 case, priority claims, claims of unsecured creditors, and any miscellaneous secured claims.
Unsecured creditors at all levels will be paid in full.
USRHC paid $3.6 million in March to buy the $37 million Mezz 2 loan. USRHC made the new investment to protect its $53 million investment in the hotel.
The case is In re Hotels Union Square Mezz 1 LLC, 10-10971, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Neff Revises Plan After Wayzata Wins Auction
Neff Corp., a closely owned equipment rental concern, modified the reorganization plan last week to accommodate the results of the auction where Wayzata Investment Partners LLC ended up the winner. The confirmation hearing for approval of the plan is set for Sept. 14.
The revised plan offers $73 million cash to second-lien creditors owed $299 million, an improvement of $63 million. In addition, they may participate in an equity rights offering.
First-lien term loan lenders, owed $87.9 million, can elect between being paid in full with interest at the default rate or participating in the $181.6 million rights offering that originally was for $118.9 million. Wayzata is fully backstopping the rights offering
The revised plan reduces debt by $400 million, the company said in a statement.
For details on the company’s finances and the original plan, click here for the May 17 Bloomberg bankruptcy report.
Wayzata and Apollo Capital Management together have more than 67 percent of the first-lien debt.
Miami-based Neff, with 63 branches in 14 states, listed assets of $299 million and debt totaling $609 million.
The case is In re Neff Corp., 10-12610, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Amelia Island Resort to be Purchased by Omni Hotels
Omni Hotels, a subsidiary of TRT Holdings Inc., emerged as the winning bidder at the auction for Amelia Island Plantation, a 1,350-acre resort on Amelia Island in Florida.
The winning bid by Irving, Texas-based Omni was $67.1 million, the company said in a statement. The opening bid of $47.4 million came from Noble Investment Group.
The sale to Omni is set for approval at a hearing tomorrow where the resort is also scheduled to apply for a confirmation order approving the Chapter 11 plan.
The door was opened to confirmation when the two secured lenders, owned a combined $58.7 million, reached a settlement on splitting up sale proceeds.
The disclosure statement says that current and former club members stand to recover between 30 percent and 80 percent on their claims aggregating about $46 million. The plan makes them members of a new club that will rent the facilities from the buyer with a view to purchasing.
General unsecured creditors with $13.9 million in claims are in line for an 11 percent recovery, the disclosure statement says.
The lenders are BBVA Compass Bank and PRIAC Realty Investments LLC, an affiliate of Prudential Retirement Insurance & Annuity Co.
The resort filed under Chapter 11 in Jacksonville, Florida, in November when it was faced with missing payroll. The resort has 249 rooms and three golf courses.
Revenue in 2008 was $69.5 million. Estimated revenue for 2009 was $57.3 million.
The case is In re Amelia Island Co., 09-09601, U.S. Bankruptcy Court, Middle District Florida (Jacksonville).
St. Vincent Selling Two Nursing Homes for $47 Million
St. Vincent Catholic Medical Centers, a shuttered 727-bed acute-care hospital in Manhattan’s Greenwich Village, will hold auctions on Sept. 21 for two nursing homes in Brooklyn, the Holy Family Home and the Bishop Mugavero Center for Geriatric Care.
The Holy Family Home has 200 beds while the Mugavero facility has 288 beds.
Nursing home operators Kenneth Rozenberg and Daryl Hagler are under contract to buy both. The price for Holy Family is $16.88 million while the sticker price on Mugavero is $30.12 million.
Under court-approved procedures, other bids are due Sept. 14. The hearing for approval of the sales is set for Oct. 7.
St. Vincent’s is in Chapter 11 a second time. This time, it’s 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.
Abitibi Settles Canadian Claim for C$130 Million
AbitibiBowater Inc., the largest newsprint maker in North America, reached a settlement with the government of Canada over what it called the expropriation of water and timber rights canceled after the company closed a plant in Newfoundland.
The provincial legislature passed a bill taking away the rights that went along with the mill. After negotiating for a year, Abitibi filed a lawsuit in February in Ottawa under the North American Free Trade Agreement seeking C$500 million ($471 million).
The settlement will have the Canadian government pay C$130 million. It must be approved by courts in Canada and the U.S. and incorporated into the pending reorganization plan. To read other Bloomberg coverage, click here.
Abitibi secured approval of the disclosure statement on Aug. 3 that explains the Chapter 11 plan. The plan is scheduled for approval at a Sept. 24 confirmation hearing. For details on Abitibi’s plan and disclosure statement, click here to read the July 29 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 September 2008.
The case is AbitibiBowater Inc., 09-11296, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Mesa Air Has $134,000 Million July Operating Income
Regional airline Mesa Air Group Inc. reported $134,000 of operating income in July. Revenue in the month was $66.3 million.
The net loss for the month was $27.8 million, resulting from reorganization items totaling $43.7 million. The operating report said that most reorganization costs arose from the rejection of aircraft leases.
July’s financials showed a tax benefit of $16.45 million. Mesa ended the month with $53.3 million cash, up $1.1 million from June.
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).
Suit on Trust Preferreds for Trial at WaMu Confirmation
The Nov. 1 confirmation hearing for approval of the reorganization plan of Washington Mutual Inc. will begin with a trial on a complaint filed in July by a group of funds that purchased $1 billion of trust preferred securities issued by the bank holding company. At a hearing yesterday, the bankruptcy judge decided that the confirmation hearing will lead off with the trial which must be concluded before WaMu can implement a plan.
The complaint asks the judge to declare that the holders remain the owners of collateralized securities. The judge should rule, they say, that the trust preferred securities were never properly converted into equity immediately before WaMu’s bank was taken over and sold.
Plaintiffs in the suit include funds affiliated with Black Horse Capital Advisors LP, Greywolf Capital Partners, Lonestar Partners LP, Riva Ridge Capital Management LP, and Whitebox Advisors LLC. They say there was collusion between WaMu and the Office of Thrift Supervision that voids the conversion of the trust preferred securities into equity.
The plaintiffs contend there was an undisclosed agreement to downstream the trust preferred securities to the failing bank rather than retain them at the holding company level. The holders of the securities say that their theory combined with success by the WaMu holding company in other lawsuits would result in full payment to WaMu’s creditors.
The bankruptcy judge delayed the hearing for approval of WaMu’s disclosure statement until Sept. 7, to allow an examiner time to issue a preliminary report on the merits of a proposed settlement with the Federal Deposit Insurance Corp. and JPMorgan Chase & Co. WaMu’s reorganization plan is designed to implement the settlement the examiner is investigating.
The plan would distribute more than $7 billion to creditors. To read about the settlement, click here for the May 24 Bloomberg bankruptcy report. Click here to read the May 18 Bloomberg bankruptcy report for a summary of WaMu’s plan.
Opponents of the plan include shareholders and bank bondholders. Although their goals are at odds, they believe WaMu and the Federal Deposit Insurance Corp. are giving up too cheaply and would prefer having lawsuits continue with JPMorgan and the FDIC.
The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank was the sixth-largest depository and credit-card issuer in the U.S. and the largest bank failure in the country’s history. The holding company filed formal lists of assets and debt showing property with a total value of $4.485 billion against liabilities of $7.832 billion.
The holding company Chapter 11 case is Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Spheris Settlement With MedQuist Approved
Spheris Inc., a transcriber of medical dictation for doctors and hospitals, was given approval this week for settlement of $21.3 million disputed claim asserted by MedQuist Inc. The settlement opens the door to approval of the liquidating Chapter 11 plan at a confirmation hearing tomorrow.
The settlement gives MedQuist a $750,000 administrative claim that must be paid in full in the plan.
The disclosure statement told unsecured creditors and holders of senior subordinated notes they should have a recovery up to about 23 percent. If the MedQuist claim hadn’t been knocked down so much, the dividend would have been lower.
Spheris, now formally named SP Wind Down Inc., sold the business for $98.83 million cash and a note later sold for $13.77 million. At Jan. 31, secured lenders were owed $75.6 million. Unsecured claims consist largely of $125 million on subordinated notes.
Franklin, Tennessee-based Spheris listed assets of $61 million against debt totaling $225 million, including $75.6 million on a senior secured credit and $125 million on subordinated notes. For nine months ended in September, revenue was $120 million.
The case is In re SP Wind Down Inc., 10-10352, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Taylor Bean Committee Seeks National Union Documents
The creditors’ committee for Taylor Bean & Whitaker Mortgage Corp. wants the bankruptcy court to authorize the conduct of an investigation of National Union Fire Insurance Co. of Pittsburgh, Pa., the provider of $5 million in officers’ and directors’ liability insurance coverage.
The committee says that Taylor Bean, which was once the largest independent mortgage originator in the U.S., has claims of its own under the policy to cover the cost of governmental investigations. The committee believes National Union, a subsidiary of American International Group Inc., intends to pay the claims of individual officers and directors before the company’s claims.
The committee’s application, known as a Rule 2004 motion, is scheduled for hearing on Sept. 10.
National Union previously filed an as yet unresolved motion for authority to make advances to cover directors’ and officers’ defense costs. Those making claims include Lee Farkas, the former chairman who was indicted for concealing mortgage assets that were worthless or losing value and representing them as being securitized and sold into the secondary market.
Taylor Bean filed under Chapter 11 in August 2009, 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, it sold 1,046 parcels of repossessed real estate for $81.2 million. 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).
Lenders Approved to Buy Medical Staffing Network for Debt
Medical Staffing Network Holdings Inc., a Boca Raton, Florida-based provider of temporary nursing services, received formal authorization on Aug. 23 for the sale of the business to lenders in exchange for secured debt. The lenders are owed $98.8 million.
Medical Staffing sought Chapter 11 relief on July 2 to implement agreement where the lenders would exchange $84.1 million in debt for ownership of the business. Holders of 90 percent of the $26.8 million in second-lien debt consented to the sale.
The buyers are providing the $15 million in financing for the Chapter 11 case. General Electric Capital Corp. is the agent for the senior lenders. NexBank SSB is agent for the junior secured lenders.
Warburg Pincus Private Equity VIII LP owns 45 percent of the equity of Medical Staffing. The company was created through 30 acquisitions since founding in 2008.
The petition listed assets of $87.8 million against debt totaling $140.9 million. Revenue of $341 million in 2009 resulted in an operating loss of $34.3 million. Revenue of $72 million in the first quarter of 2010 threw off a $1.3 million operating loss. Projected revenue for 2010 is $302 million.
The case is In re Medical Staffing Network Holdings Inc., 10-29101, U.S. Bankruptcy Court, Southern District Florida (West Palm Beach).
FairPoint Communications Has New Chief Executive
Paul Sunu was approved by the bankruptcy judge yesterday to be the new chief executive for FairPoint Communications Inc., a local exchange carrier with 1.7 million access lines. The secured lenders, who will become owners after FairPoint implements the reorganization plan, requested the change. To read Bloomberg coverage of yesterday’s hearing, click here.
The bankruptcy judge was unable to approve the Chapter 11 plan at a confirmation hearing in May due to the lack of regulatory approval from Vermont, New Hampshire and Maine. The judge overruled other objections to the plan. Since then, there were settlements with New Hampshire and Maine. For details on the plan, click here for the March 12 Bloomberg bankruptcy report.
FairPoint’s Chapter 11 petition listed assets of $3.236 billion against debt totaling $3.234 billion. Funded debt, aggregating $2.7 billion, included $2 billion under a secured credit facility, $575 million in senior unsecured notes, and $88 million on interest rate swap agreements.
The case is In re FairPoint Communications Inc., 09-16335, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Cynergy Data Has Fourth Exclusivity Extension
Former credit card processor Cynergy Data LLC for a fourth time was granted an extension of the exclusive right to propose a Chapter 11 plan. The new deadline is Oct. 28. The company said it should be in a position to file a liquidating plan “in the near future.” Cynergy said it negotiated a settlement in principle with secured lenders that’s delayed the case from the outset.
Cynergy sold the business to private-equity investor ComVest Group for $81 million, including $14 million in subordinated debt payable by the purchaser. Long Island City, New York-based Cynergy processed $10 billion in credit charges annually for 80,000 merchants before the Chapter 11 filing in September 2009. The petition listed assets of $110 million against debt totaling $186 million. Debt includes $39.8 million owing on a first-lien credit and $80.1 million on a junior secured credit. There is also $9 million owing by an affiliate that Cynergy guaranteed.
The case is In re CD Liquidation Co. Plus LLC, 09-13038, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Chemtura Settles Pollution Suits for $26 Million
Specialty-chemical maker Chemtura Corp. reached a tentative agreement to pay $26 million cash to settle environmental pollution claims in 14 states. A Chemtura Canadian subsidiary filed lists of its assets and liabilities. The subsidiary joined its sister companies in Chapter 11 this month to deal with claims related to the chemical diacetyl. For Bloomberg coverage, click here.
The bankruptcy judge approved Chemtura’s disclosure statement on Aug. 5. The confirmation hearing for approval of the reorganization plan is set for Sept. 16. Supported by the creditors’ committee and an ad hoc bondholder group, the reorganization plan is designed to 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).
Barclays Presents More Evidence in Lehman Trial
Barclays Plc continued presenting evidence yesterday in defense of the lawsuit where Lehman Brothers Holdings Inc. is attempting to prove that the bank took $11 billion more than it was entitled to receive when it purchased the brokerage business. For Bloomberg coverage, click here. The trial began in May.
The Lehman holding company and its non-brokerage subsidiaries filed a revised Chapter 11 plan and disclosure statement in April. For details, click here and here for the April 15 and 16 Bloomberg bankruptcy reports. 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, both in U.S. Bankruptcy Court, Southern District New York (Manhattan).
Marketer EMAK Files after Losing Burger King Account
EMAK said that the filing resulted in part from the loss of an account with Burger King Holding Inc., its largest customer. The company also was facing an order in July from the Delaware Chancery Court requiring payment of $2.5 million.
Assets were on the books for $41.3 million at the end of 2009, a court filing says. At the time, debt was $26 million. EMAK said the loss before interest, taxes, depreciation and amortization was $1.8 million for the first quarter of 2010.
Last week the bankruptcy court approved the so-called first-day orders.
EMAK hasn’t filed a quarterly financial report with the Securities and Exchange Commission since the second quarter of 2008.
The case is In re EMAK Worldwide Inc., 10-42779, U.S. Bankruptcy Court, Central District California (Los Angeles).
Circuits Split on Tax Relief for Family Farmers
The U.S. Supreme Court may be called on to resolve a split among the circuit courts of appeal with regard to 2005 amendments to federal bankruptcy law intended to be help so- called family farmers who file for reorganization in Chapter 12.
Section 1222(a)(2)(A) of the Bankruptcy Code provides that tax claims of governmental units resulting from the sale of farm property will not be treated as a priority claim so long as the farmer receives a discharge. Before the change, the sale or foreclosure of a farmer’s property often resulted in large capital gains or income stemming from depreciation recapture. As a result, farmers often had large tax liabilities making them unable to confirm Chapter 12 plans because priority tax claims must be paid in full.
Chapter 12 contains special reorganization provisions applicable only to farmers.
Bestowing a benefit on farmers, Congress changed the section so it clearly says that property sold before bankruptcy gives rise to tax claims that are general unsecured claims that are discharged so long as the bankrupt receives a discharge.
There is ambiguity in the statute over the tax treatment afforded to sales of property after bankruptcy.
The Court of Appeals in St. Louis ruled in 2009 that post petition sales also give rise to dischargeable unsecured claims. The bankruptcy appellate panel for 10th Circuit reached a similar result this year. Click here to read about the appellate panel’s decision from the May 20 Bloomberg bankruptcy report.
In a 2-1 opinion on Aug. 16, the 9th Circuit in San Francisco reached the opposite result, holding that a post- petition sale results in a priority tax claim that must be paid in full.
Clifford Altfeld, attorney for the farmer in the 9th Circuit case, said in an interview that he will file papers this week asking for rehearing by all the active judges on the Circuit Court. Altfeld also said that current plans are to file for review in the U.S. Supreme Court, if necessary.
Altfeld said that several law schools are already offering to assist.
The case is USA v. Hall, 08-17267, 9th U.S. Circuit Court of Appeals (San Francisco)
Restitution Payments Not Immune from Preference Claim
If convicted criminals make restitution to a state fund as part of a plea agreement, the payment can be recovered as a preference by a bankruptcy trustee, the U.S. Court of Appeals in San Francisco ruled on Aug. 12.
The case involved a husband and wife who pleaded guilty to a fraud indictment. Under the plea agreement, they paid $100,000 to a state restitution fund.
The couple filed in Chapter 7 soon after the payment. The trustee sued to recover the $100,000 as a preference. Requiring the return of the payment as a preference, the bankruptcy judge in the Central District of California declined to follow a ruling by a district judge in another California district who held that criminal restitution payments were immune from preference attack.
Saying there is no preference exception for restitution payments, the 9th Circuit in San Francisco upheld the lower courts. Although the state fund must return the payment, the Circuit Court noted that the requirement to pay restitution is not dischargeable in the individuals’ bankruptcies. Consequently, the bankrupts must pay restitution twice.
The appeals court also ruled that a bankruptcy judge in one district isn’t required to follow the ruling of a district judge in another district in the same circuit.
Although the court didn’t reach the issue, the Circuit’s opinion suggested in a footnote that bankruptcy judges are not bound by decisions by district judges in their own districts. The Circuit noted that district judges are not bound by rulings from brother and sister district judges. Thus, bankruptcy judges cannot be required to follow what may be conflicting law within their own districts, the footnote said.
The opinion didn’t address the concept that bankruptcy courts are units of the district courts and thus are not bound to follow district court rulings.
The case is State Compensation Insurance Fund v. Zamora (In re Silverman), 08-56508, 9th U.S. Circuit Court of Appeals (San Francisco.)
San Francisco Circuit Surveys Fraudulent Transfers
Law professors and lawyers who are expert on fraudulent transfer law must read an Aug. 10 opinion from the U.S. Court of Appeals in San Francisco called Tramiel v. Decker (In re JTS Corp.).
In a case involving California state law, the 9th Circuit in San Francisco in substance reinstated the result reached by the bankruptcy judge who concluded there were sufficient offsets so the defendant on a fraudulent transfer wasn’t required to pay anything.
The bankruptcy court concluded that there was a fraudulent transfer because an insider bought property from a soon-to-be bankrupt company for less than reasonably equivalent value. The lower court pegged reasonable value at about $11.8 million, or more than the approximately $10.4 million the defendant paid.
Other defendants had settled, paying $4.5 million. The bankruptcy judge, affirmed in the Circuit Court, concluded that the insider could take credit for the $10.4 million he paid plus the $4.5 million paid by settling defendants. As a result, the insider, although guilty of a so-called constructive fraudulent transfer under California law, wasn’t required to pay anything.
The insider’s credit for the $4.5 million settlement was under California law.
The case is Tramiel v. Decker (In re JTS Corp.), 07-15970, 9th U.S. Circuit Court of Appeals (San Francisco).