Lehman, Innkeepers, Trico, Meruelo Maddux: Bankruptcy

Lehman Brothers Holdings Inc. filed papers early this morning to stay 50 lawsuits, mostly those it began in the last few days as the two-year deadline was approaching for the commencement of suits to recover fraudulent transfers and preferences.

The suits, according to Lehman’s motion, involve 230 transactions. Many challenge so-called flip clauses in swap agreements where collateral ordinarily would go first to a Lehman subsidiary as the swap counterparty. The flip clause caused collateral to go first to noteholders and only to Lehman after the noteholders were fully paid.

Lehman said other suits may be filed in coming days.

The flip clause was invoked because the swap agreements changed the order of priority for receiving collateral when Lehman or an affiliate filed bankruptcy. The bankruptcy judge ruled for Lehman in January by deciding in one of the transactions that the flip clause violates a provision in bankruptcy law prohibiting the loss rights simply as the result of filing in bankruptcy.

In today’s motion, on the calendar for an Oct. 20 hearing, Lehman wants the bankruptcy court to put all the suits on hold while it makes further investigations into the facts and attempts to work out settlements. Lehman would have the right to restart a suit. A defendant could also, although only with permission from the judge.

To read about the January decision regarding flip transactions, click here and see the Advance Sheets item in the Feb. 1 Bloomberg bankruptcy report.

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).

Updates

Innkeepers Mortgage Holders Seek Own Chapter 11 Plan

Innkeepers USA Trust, a real estate investment trust, and Midland Loan Services Inc., the servicer for $825 million on the REIT’s mortgage debt, shouldn’t be permitted to control the plan-formulation process, said the trustee for holders of $160 million in mortgages on five hotels.

After persuading the bankruptcy judge to kill a so-called plan support agreement proposed by Innkeepers, Midland offered a proposed plan of its own and filed a motion asking the bankruptcy judge for permission to move ahead with a competing reorganization.

Wells Fargo Bank NA filed a motion on Sept. 14 seeking the ability to file a reorganization plan dealing with the five hotels. Wells Fargo, the trustee for holders of the secured debt sold in securitizations, also supports Midland’s motion to terminate Innkeepers’ exclusive right to propose a plan.

The exclusivity motions by Midland and Wells Fargo are on the bankruptcy court’s calendar for Sept. 30. An ad hoc group of preferred shareholders filed a motion this week asking the judge to appoint an official committee for them. The motion also is on the Sept. 30 calendar. To read Bloomberg coverage about the motion, click here.

Wells Fargo asserts that Innkeepers, which is owned by Apollo Investment Corp., “abandoned any pretense of neutrality and instead chose to favor a minority creditor and the debtor’s 100 percent equity holder.” Click here for the Sept. 7 Bloomberg bankruptcy report on Judge Shelley C. Chapman’s ruling barring Innkeepers from locking in a deal in which the new equity would be split between Apollo and a unit of Lehman Brothers Holdings Inc.

The judge said in her ruling that Innkeepers had “not shown that they acted in good faith.” She also said that the controversial plan support agreement “causes me to question the debtors’ honest interest in exercising due care.”

Midland has liens on 45 of Innkeepers’ 72 properties. It has a competing plan that would be financed by selling the new stock for $236 million to Five Mile Capital Partners LLC. For details on Innkeepers’ plan and Midland’s proposal for a competing plan, click here for the Aug. 31 Bloomberg bankruptcy report.

The Lehman unit, Lehman Ali Inc., has $238 million in floating-rate mortgages on 20 properties.

In total, Palm Beach, Florida-based Innkeepers has 72 extended-stay and limited-service properties with 10,000 rooms in 20 states. Apollo acquired the company in July 2007 in a $1.35 billion transaction. The Innkeepers petition listed assets of $1.5 billion and debt of $1.52 billion.

The case is In re Innkeepers USA Trust, 10-13800, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Trico Marine Nearing Required Consents for $22 Million Loan

Trico Marine Services Inc., a provider of support vessels for the offshore oil and gas industry, is close to obtaining consent from holders of 11.875 percent senior secured notes to allow $22 million in new secured financing for non-bankrupt subsidiary Trico Shipping AS.

In addition to approval from the bankruptcy court, Trico must get consent from holders of all of the 11.875 percent notes. Trico said in a Sept. 14 statement that it has consents from holders of 99.93 percent of the issue. To encourage holders to consent, Trico is offering a 2.5 percent fee.

The hearing for approval of the $22 million in financing is scheduled for today. The financing is provided by Tennenbaum Capital Partners LLC and holders of some of the 11.875 percent senior secured notes.

The financing for the subsidiary is raising objections that will surface again on Sept. 21 when Trico aims for final approval of its own financing. The holders of the 8.125 percent second-lien convertible debentures are contending they have the right under an inter-creditor agreement to share any new collateral given to senior lenders.

The Chapter 11 filing in August was the second by Woodlands, Texas-based Trico. The company completed a so-called prepackaged reorganization in 2005 that swapped $250 million in debt for equity. Shareholders were given warrants. Aside from a Cayman Islands holding company, none of the foreign subsidiaries are in bankruptcy the second time around. The consolidated balance sheet for June listed assets of $904 million against liabilities totaling $1.027 billion. The bankruptcy petition listed liabilities of $354 million for Trico Marine.

Liabilities include $202.8 million on secured convertible debentures and $150 million owed on unsecured convertible debentures. Non-bankrupt Trico Shipping owes $400 million on the 11.875 percent senior secured notes.

The new reorganization is being financed primarily with a $35 million secured credit supplied by Tennenbaum.

The case is In re Trico Marine Services Inc., 10-12653, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Meruelo Maddux Reorganization Resorts to Name-Calling

The reorganization of Meruelo Maddux Properties Inc., a Los Angeles-based developer and manager of commercial and multifamily residential property, is becoming an exercise in name-calling.

The company issued a statement on Sept. 9 that the official creditors’ committee called “inaccurate and materially misleading.” The committee said the press release was an “improper and inaccurate solicitation” of votes on a plan before a disclosure statement is approved.

Creditors are looking forward to voting on three competing plans. One is by the company and another is from lenders Legendary Investors Group No. 1 LLC and East West Bank. The committee is recommending that creditors’ turn down the company plan. According to the committee, the lenders’ plan will pay creditors in full with interest shortly after plan confirmation. The company plan would pay creditors in full over five years.

The company’s release called the lenders’ proposal a “hostile takeover” and characterized the bankruptcy judge as having “not approved” the plan. The company also said in the release that its plan “was approved in court last month.”

The committee said in its Sept. 14 motion that the statements are false. The company plan wasn’t approved and the East Plan wasn’t disapproved. Rather, the committee says the judge schedule another hearing to have been held yesterday on the disclosure statements.

The committee wants the judge to prohibit the company from making public statements or soliciting acceptances or rejections of the plan.

The lenders’ plan includes a $5 million cash injection and conversion of $65 million of debt to equity. The committee previously said it found the lenders’ plan to be “far superior.”

Another plan is from existing shareholders Charlestown Capital Advisors LLC and Hartland Asset Management Corp. The creditors’ committee previously said that the shareholders’ plan would give the reorganized company more liquidity from a $30 million cash infusion at confirmation.

The bankruptcy court in Woodland Hills, California, began allowing other plans in May. The Chapter 11 petition filed in March 2009 listed assets of $682 million and debt of $342 million.

The case is In re Meruelo Maddux Properties Inc., 09-13356, U.S. Bankruptcy Court, Central District California (Woodland Hills).

Majestic Star Casino Files Fourth Exclusivity Motion

In a previous motion where Majestic Star Casino LLC sought an extension of the exclusive right to propose a Chapter 11 plan, the casino operator predicted the reorganization proposal would be on the table by Aug. 20.

In a new exclusivity motion filed this week, Majestic Star says the plan will be filed by tomorrow. Although the motion says the plan will be “supported by a significant portion” of the creditor groups, the company warns that the play not “proceed on a fully consensual basis.”

If approved by the bankruptcy judge at a Sept. 28 hearing, exclusivity will be pushed out to Jan. 15.

The reorganization became complicated when quick access by customers from Chicago to the Indiana properties was cut off by the indefinite closing of a bridge for structural repairs.

Majestic Star has four casinos, plus hotels with 806 rooms serving the two riverboat casinos in Gary, Indiana. The other casinos are in Tunica, Mississippi, and Black Hawk, Colorado.

Debt includes $79.3 million owing on the senior secured credit facility, with Wells Fargo Capital Finance Inc. as agent. Senior secured noteholders with a second lien are owed $300 million. Majestic Star owes $200 million on unsecured senior notes and $63.5 million on discount notes. Assets were $406 million and debt was $750 million in the quarterly report for the period ended June 30.

The case is In re Majestic Star Casino LLC, 09-14136, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Taylor Bean Officers Given $3 Million from D&O Policy

Lee Farkas, former chairman of Taylor Bean & Whitaker Mortgage Corp., has $1 million to help pay for his criminal defense, thanks to a Sept. 14 ruling by the bankruptcy judge in the company’s Chapter 11 case.

National Union Fire Insurance Co. of Pittsburgh, PA, the provider of $5 million in insurance for directors’ and officers’ liability, supplemented a motion filed in June seeking permission to reimburse Farkas and two other former officers for cost incurred in defending themselves in criminal and civil matters. The insurance company was willing to make the payments.

The creditors’ committee objected, contending the company also has claims on the policy. The committee was afraid the policy would be depleted by the three individuals.

U.S. Bankruptcy Judge Jerry A. Funk wrote a seven-page opinion in which he concluded that the proceeds of the policy aren’t property of Taylor Bean, even though the policy itself is. Funk also noted how the company has “no current viable claims under the terms of the policy.” The company made claims for expenses in regulatory proceedings that the insurance company denied as not being covered by the policy.

Funk is allowing National Union to pay $1 million each to Farkas, Paul Allen, a former chief executive, and to Ray Bowman, a former president.

To read about a recent appellate decision regarding whether insurance belongs to the company or to the officers, click here to see an Advance Sheets item in yesterday’s Bloomberg bankruptcy report.

Farkas faces trial in November on an indictment charging him with concealing mortgage assets that were worthless or losing value and representing them as being securitized and sold into the secondary market. The government has frozen his assets, cutting off the other avenue for paying his criminal defense counsel.

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 listed both assets and debt of more than $1 billion.

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

Strauss Discount Auto Settles with Autobacs, Plan Confirmed

Auto-parts retailer Strauss Discount Auto has clearance from a bankruptcy judge to emerge from Chapter 11 for a third time.

The bankruptcy judge in Delaware signed a confirmation order yesterday approving the newest Chapter 11 plan. Confirmation was facilitated by a settlement reached with the parent Autobacs Seven Co., the holder of a $44 million unsecured claim.

The settlement prohibits the sale of the company’s new stock until there’s a resolution of the validity of the Autobacs claim. If the parent ends up being entitled to receive a majority of the new stock, Autobacs will have the right to replace the board of directors.

The plan gives all the new stock to creditors along with a second-lien note for $8.5 million. Strauss Auto didn’t try to confirm a prior version of the plan even though the bankruptcy judge had approved a disclosure statement. Autobacs opposed the prior plan.

Unsecured creditors in two classes with approximately $18.7 million in claims are predicted to have a 45 percent recovery, assuming complete victory in a lawsuit against Autobacs. The suit is designed to void the former owner’s entire $44 million claim. If the suit fails, the disclosure statement said that the recovery by unsecured creditors will be less than 14 percent plus the new stock.

The current reorganization is Strauss Auto’s third trip through Chapter 11. The stores are in New York, New Jersey, and Pennsylvania. The new petition in February 2009 listed assets of $75 million against debt totaling $72 million, including $44 million owning to the parent Autobacs under loan agreements, $9.6 million owing to suppliers, and $12 million to landlords and other unsecured creditors.

There were 86 stores and no secured debt when the new Chapter 11 case began. Twenty stores were closed.

The new case is In re Autobacs Strauss Inc., 09-10358, U.S. Bankruptcy Court, District of Delaware (Wilmington). The prior case was In re 1945 Route 23 Associates, 06-17474, U.S. Bankruptcy Court, District of New Jersey (Newark).

New Filings

Two Manhattan Office Buildings Being Sold in Prepack

U.S. subsidiaries of Rock Joint Ventures Ltd. filed a prepackaged Chapter 11 petition yesterday in Delaware to sell the two buildings they own in Manhattan for a combined $168.7 million. The buildings are 100-104 Fifth Ave. and 183 Madison Ave.

The plan was accepted before yesterday’s filing by Bank of Scotland Plc, the agent for the senior and subordinated secured lenders. The lenders are owed $267 million on the senior debt and $26 million on the subordinated.

Because no creditors aside from the senior lender will receive anything under the plan, no one other than the senior lender voted on the plan. The company wants the bankruptcy judge to hold one hearing, both to approve the disclosure materials and approve the plan by signing a confirmation order.

The plan says the senior lender should have a 63.2 percent recovery. The $98.1 million deficiency claim will be treated as an unsecured claim that will receive nothing under the plan. A court filing says there is another $381,000 in unsecured claims.

There are no plans to hold an auction in hopes of attracting higher purchase prices. The two buyers are paying $93.5 million for the Fifth Avenue property and $75.2 million for the building on Madison Avenue.

The parent is in administration in the U.K. The administrators control the U.S. companies that filed in Chapter 11.

The case is In re Rock US Holdings Inc., 10-12982, U.S. Bankruptcy Court, District of Delaware (Wilmington).

CineMagic Theaters Files Chapter 11 in Minneapolis

Midwest Theatres Corp. the operator of nine movie theaters in Minnesota, Iowa and Wisconsin, filed a Chapter 11 petition on Sept. 14 in Minneapolis after the secured lender began foreclosure on a property owned by a non-bankrupt affiliate.

The petition says assets are $9.4 million against debt totaling $10.7 million.

Court papers admit that the business “suffered substantial losses during the past three years.” Income in 2009 was $16.4 million.

The theaters operate under the name CineMagic. They have 91 screens.

Debt includes $6 million owing on first- and second-lien obligations to two banks. United Bankers Bank was foreclosing an $8.6 million mortgage on an affiliate’s property. St. Michael, Minnesota-based Midwest guaranteed the debt.

The case is In re Midwest Theatres Corp., 10-46834, U.S. Bankruptcy Court, District of Minnesota (Minneapolis).

Briefly Noted

Hawaiian Telcom Nears Emerging from Chapter 11 Reorg

Although Hawaiian Telcom Communications Inc. confirmed a reorganization plan in November 2009, the 10th-largest local telephone company in the U.S. still hasn’t emerged from Chapter 11. The company announced late yesterday that the Federal Communications Commission approved the transfer of control. The statement said that approval from the Hawaii Public Utilities Commission, expected “soon,” is the final hurdle to emerging from bankruptcy. For details on the plan that lowers debt from $1.15 billion to $300 million, click here to read the Nov. 16, 2009, Bloomberg bankruptcy report.

Hawaiian Telcom filed under Chapter 11 filing in Delaware in December 2008. The case was transferred to Honolulu on request by creditors. The company was created in May 2005 from a leveraged buyout where Carlyle Group bought the Hawaiian operations from Verizon Communications Inc. in a $1.6 billion transaction.

The case is Hawaiian Telcom Communications Inc., 08-02005, U.S. Bankruptcy Court, District of Hawaii (Honolulu).

Downgrades

Pulte Group, Acquirer of Centex, Demoted to BB- by S&P

Although homebuilder Pulte Group Inc. reported its first quarterly profit in almost four years, Standard & Poor’s lowered its corporate rating on Sept. 14 by one notch to BB-. Pulte had an investment grade rating from S&P until November 2007.

S&P says it doesn’t expect Pulte to generate “substantial profits” until after 2011 “because the housing market is recovering more slowly than we had previously anticipated.”

S&P also demoted the $4.3 billion in unsecured notes issued by Centex Corp. to BB-. Pulte acquired Centex last year in a $1.3 billion stock transaction.

The new S&P rating is one level above the downgrade issued by Moody’s Investors Service to both companies at the time of the acquisition. The combination created the largest homebuilder in the U.S.

Pulte is based in Bloomfield Hills, Michigan.

Candle Maker Blyth’s Sales in ‘Material Decline’

Blyth Inc., manufacturer, marketer, and distributor of candles and household fragrance products, received a downgrade yesterday from Moody’s Investors Service on top of a ding issued in December.

The corporate peg slipped another step to B2 in light of “continued material sales declines.” Moody’s laid the blame on the “poor housing and job market that has affected sales of more discretionary purchases.”

The $100 million in senior unsecured notes also went down one grade to B3.

Greenwich, Connecticut-based Blyth generated $382.2 million revenue for six months ended in July, down 7.7 percent from the same period in 2009. Net income for the half year was $4.8 million, with an operating profit of $11.2 million. Twelve-month sales were $926 million through July. The cash balance at July 31 was $118 million.

Watch List

Wastequip Uses PIK-Toggle Feature in Mezzanine Debt

Wastequip Inc. exercised its option to pay interest on mezzanine debt by issuing more debt, according to Standard & Poor’s. The Charlotte, North Carolina-based company took advantage of the so-called PIK-toggle feature to comply with loan covenants, S&P said.

Moody’s Investors Service said in December that it had “questions” about the company’s ability to refinance the revolving credit in 2012 and the term loan in 2013. The Moody’s rating is Caa2. As a result of paying interest in kind, S&P lowered the corporate rating from CCC+ to “SD,” meaning selective default.

Closely held Wastequip is the U.S.’s largest manufacturer of non-mobile waste handling equipment such as dumpsters and compactors.

Corrugated Steel, Pipe Maker Contech May Restructure

Contech Construction Products Inc., a West Chester, Ohio- based manufacturer of corrugated steel and plastic pipe, has new and more restrictive loan covenants that “may result in a restructuring of its debt obligations,” Standard & Poor’s said yesterday in the course of lowering the corporate debt rating by two notches to CCC.

The downgrade results from what S&P sees as “lower than expected” residential and commercial construction.

Daily Podcast

Tribune, Philly Papers, Lehman, Movie Gallery: Audio

The move by the Tribune Co. creditors’ committee to file lawsuits and the request for a trustee, the new auction for Philadelphia Newspapers LLC, a guess on how long the Lehman Brothers Holdings Inc. will remain in Chapter 11, the distribution to creditors by Movie Gallery Inc., the dispute over fees for Tronox Inc. backstop parties, the opportunity to buy four Hooters restaurants, and thoughts on the state of the economy are discussed in the latest bankruptcy podcasts on the Bloomberg terminal and Bloomberglaw.com. To listen, click here and here.

Advance Sheets

Equity in Home Not Fixed at Filing, Appeals Court Says

The equity in a home is not fixed at the filing of a bankruptcy petition, the 9th U.S. Circuit Court of Appeals in San Francisco ruled on Sept. 14. As a result, a bankruptcy trustee can sell the home if a later increase in value raises the equity to a level that exceeds the exemption under state or federal law.

The two cases involved situations in which the equity in the property on the filing date was less than the applicable state exemptions. Consequently, both individual bankrupts believed they could retain their homes by paying the mortgages.

Looking at this year’s Supreme Court decision in Schwab v. Reilly, the 9th Circuit said that the entire property wasn’t taken out of the estate when the trustee didn’t make a timely objection to the exemption. The exemption was taken out of the estate, not the home itself. Therefore, the bankruptcy trustees were free to apply years later to the bankruptcy courts for permission to sell the homes.

The appeals court said that its ruling was consistent with prior 9th Circuit rulings that a trustee can benefit from post- bankruptcy appreciation in the value of property. The ability of the trustee to sell a home is only cut off when the case is closed.

The appeals court said its ruling “will lead to uncertainty about the status of exempt property.” In one of the cases, the former bankrupt remained in his home and continued paying the mortgage for five years, thinking he had clear title. He even refinanced the mortgage. The court said the “misapprehension was shared by” the new mortgage lender.

The appellate court ruled that the homeowner couldn’t block the trustee under a theory called estoppel.

To read about Schwab v. Reilly, click here for the June 21 Bloomberg bankruptcy report.

The case is Gebhart v. Gaughan (In re Gebhart), and Chappell v. Klein (In re Chappell), 07-16769 and 07-34704, 9th U.S. Circuit Court of Appeals (San Francisco).

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

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

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