Idearc, Inquirer, Rangers, Innkeepers: Bankruptcy

Verizon Communications Inc. was sued this week by the creditors’ representative of former unit Idearc Inc. in a complaint alleging that the 2006 spinoff was a fraudulent transfer designed to generate $9.5 billion for the second-largest phone company in the U.S.

According to the complaint, filed on Sept. 15 in U.S. District Court in Dallas, the print-directory business at Idearc was declining while revenue from online directories wasn’t growing so fast. The trustee for the trust created under Idearc’s confirmed Chapter 11 plan alleges that New York-based Verizon latched onto the idea of spinning off the subsidiary “not in the marketplace, but through the use of lawyers and Wall Street Investment bankers.”

The creditors’ trustee claims the spinoff was structured so that Idearc would transfer almost $2.5 billion in cash to Verizon. In addition, Idearc took on about $9 billion in debt, with the resulting cash either going to Verizon or used to pay off debt owed by the parent, the complaint says.

The complaint contends the spinoff included fraudulent transfers because “Verizon effectively removed approximately $9.5 billion from Idearc without providing Idearc with reasonably equivalent value in exchange.”

Verizon General Counsel Randal Milch said in a statement that the “lawsuit is baseless and without merit.” The directory business was “appropriately valued” at the time of the spinoff, he said.

Now named SuperMedia Inc., Idearc was the second-largest yellow pages directory publisher in the U.S. It implemented a Chapter 11 reorganization plan in January that the bankruptcy judge in Dallas approved in a December confirmation order. The plan, mostly worked out before the Chapter 11 filing in March 2009, reduced debt to $2.75 billion from $9 billion.

Idearc is based near DFW Airport outside Dallas.

The new lawsuit is U.S. Bank National Association v. Verizon Communications Inc., 10-01842, U.S. District Court, Northern District of Texas (Dallas). The bankruptcy case is In re Idearc Inc., 09-31828, U.S. Bankruptcy Court, Northern District of Texas (Dallas).

Updates

Philadelphia Newspapers’ Lenders May Vote again on Plan

At the second auction for Philadelphia Newspapers LLC, the price is likely to decline in view of the new bidding terms approved by the bankruptcy judge at a hearing yesterday, a lawyer for the lenders said in court.

Although the prior reorganization plan was approved in a confirmation order in late June, there is no assurance the revised plan will be confirmed now that the lenders have the right to vote again. The lenders aren’t required to vote again until the results of the auction are known.

A new auction became necessary after the Teamsters union blocked a court-approved sale of the publisher of the Philadelphia Inquirer and Philadelphia Daily News. The secured lenders won the original auction with a bid of $139 million in cash. The lenders’ original purchase contract automatically terminated when a new collective bargaining agreement with the Teamsters wasn’t reached by this week’s deadline.

Bids are due Sept. 22 in advance of an auction the next day. A confirmation hearing on the revised Chapter 11 plan will take place on Sept. 30. The lenders may vote on the plan by Sept. 28. Unsecured creditors aren’t required to vote again. Consequently, the lenders have the opportunity to vote down the new plan.

The minimum bid at the new auction is $50 million cash. From the purchase price, the plan calls for using $30.9 million to pay off the secured loan financing the Chapter 11 case, along with professional fees.

The revised plan, like the former version, carves out 2.3 percent of the stock in the new newspaper company for the benefit of the holders of $110 million in unsecured debt claims. The revised disclosure statement estimates the recovery by the class will be 1.5 percent.

The revised plan carves out $1.09 million cash for general unsecured creditors with claims estimated at $4.2 million. Those claims may grow by $12.8 million if the claim of McClatchy Co. is allowed. Claims in the class will increase another $150 million if the buyer doesn’t take over pension claims.

As a result, the recovery for general unsecured creditors will range from 23 percent in the most favorable case to less than 1 percent, the disclosure statement says.

The secured lenders, with claims of $318.8 million, will receive cash left over from the sale plus the value of real estate estimated to be worth $29.5 million. The plan requires the lenders to waive their deficiency claims.

The new auction is designed so the successful bidder shouldn’t have any ability to refuse to complete the acquisition.

For Bloomberg coverage of yesterday’s hearing, click here. For details of the prior plan, click here for the May 20 Bloomberg bankruptcy report.

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

New York Times Seeks to Unseal Rangers Transcript

New York Times Co. wants the bankruptcy judge in Fort Worth, Texas, to unseal the transcript of a Texas Rangers conference held in the judge’s chambers on July 9. At the time, U.S. Bankruptcy Judge Michael Lynn was urging the warring parties to settle.

A court reporter told the Times that the transcript had “contents that could be embarrassing.” Lynn didn’t give reasons for sealing the transcript when he directed that it not be disclosed publicly.

Judges sometimes hold conferences in their offices when they think it isn’t appropriate for the discussions to be public. Lynn could decide to unseal the transcript if none of the participants in the conference objects. There will be a hearing on Nov. 15 where the Times will argue for public disclosure.

Judges hold conferences in chambers for a variety of reasons. If settlement is the topic of discussion, a judge may want avoid forcing a party to make public disclosure of its bargaining position. Sometimes, a judge will make a statement in the privacy of a chambers conference if a party would be embarrassed were it said in open court.

The Times argues in its Sept. 15 motion that there is a presumption of public access to court proceedings. Were judges required to make public disclosure of all conferences in chambers, judges might decide not to have transcripts taken or not hold the conferences in the first place.

The reorganization of the baseball team ended in August with the confirmation of a Chapter 11 plan and a sale to a group including team President Nolan Ryan and sports lawyer Chuck Greenberg for $385 million.

The Rangers filed under Chapter 11 on May 24. The original contract with the Ryan-Greenberg group had a cash price of $304 million.

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

Midland Wants Change in Innkeepers Cash Collateral

Midland Loan Services Inc., the servicer for $825 million in mortgage debt on properties owned by Innkeepers USA Trust, filed a motion yesterday asking the bankruptcy judge in New York to modify some of the terms she approved this month in a so- called cash collateral order allowing the real estate investment trust to use income.

Innkeepers gained the right to use cash collateral on Sept 2. Cash collateral is incoming cash that is security for the claim of a secured lender. Midland doesn’t like a provision allowing as much as $5.5 million of revenue to be used to pay Innkeepers’ lawyers and other professionals.

Midland argues that a lender’s cash collateral can be used to pay the bankrupt company’s professionals only if the lender consents. Since Midland didn’t consent, it contends the money can’t be used for lawyers unless it is somehow replaced.

The dispute over cash collateral will be argued in court on Sept. 30.

U.S. Bankruptcy Judge Shelley C. Chapman refused to allow Innkeepers to lock in a deal where the new equity would be split between the current owner, Apollo Investment Corp., and a subsidiary of Lehman Brothers Holdings Inc. The Lehman subsidiary, Lehman Ali Inc., has $238 million in floating-rate mortgages on 20 properties.

Midland has liens on 45 of Innkeepers’ 72 properties. It seeks permission to file a competing plan to 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.

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 against debt totaling $1.52 billion.

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

Tronox Has Rival Bid for $185 Million Rights Offer

Tronox Inc. began the hearing yesterday for approval of an agreement providing assurance it could finance a reorganization plan by raising $170 million in a so-called equity-rights offering.

Tronox, the world’s third-largest producer of the white pigment titanium dioxide, was met with a competing proposal for a $185 million backstopped rights offering on terms claimed to be more favorable. The bankruptcy judge postponed the hearing so Tronox could consider the rival offer. The proponents of the new offer are willing for the financing to be used under either the Tronox plan or a competing plan from the official shareholders’ committee.

When the hearing continues today, the bankruptcy judge will consider the fees to be paid to so-called backstop parties, who would buy any stock not purchased by creditors. Objecting shareholders say the fee under the Tronox agreement is $32 million or more. The competing offer has a $21 million fee.

Other issues on the rights offering will be taken up again at the Sept. 23 hearing for approval of disclosure statements explaining the two reorganization plans. For Bloomberg coverage of today’s hearing, click here.

To read about the equity committee’s plan and Tronox’s plan, click here for the Sept. 7 Bloomberg bankruptcy report. For details of Tronox’s plan, click here for the Sept. 2 Bloomberg bankruptcy report.

The Chapter 11 petition by Tronox in January 2009 listed assets of $1.56 billion against debt totaling $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. Tronox’s products are used in paints, coatings, plastics, paper and consumer products. The operations outside of the U.S. didn’t file.

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

Chemtura Begins Contested Plan Confirmation Hearing

Specialty chemical maker Chemtura Corp. began the contested confirmation hearing yesterday for approval of the reorganization plan. The hearing will continue on Sept. 20 and Sept. 21 if necessary.

For Bloomberg coverage of yesterday’s hearing, click here.

The plan is supported by the creditors’ committee and an ad hoc bondholder group. It is intended to pay creditors in full while leaving the possibility of preserving some value for existing shareholders. The plan reduces debt for borrowed money from $1.3 billion to about $750 million. For details, click here for the June 18 Bloomberg bankruptcy report.

Shareholders claim they are entitled to more because they contend the company’s value exceeds Chemtura’s $2.05 billion estimate.

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).

Sea Island Resort Auction Set for October 11

Sea Island Co., a resort and real-estate development company, received approval from the bankruptcy judge on Sept. 15 for auction procedures to test whether there is a better offer for the properties.

Sea Island’s properties are on or near St. Simons Island and Sea Island, Georgia. A company affiliated with Oaktree Capital Management LP and Avenue Capital Group is under contract to buy the business for $197.5 million.

Procedures call for the submission of competing offers by Oct. 4. The auction will taken place Oct. 11. Assuming the so- called stalking horse isn’t outbid, the sale will be approved when the bankruptcy judge signs a confirmation order approving the Chapter 11 plan negotiated before the bankruptcy petition was filed on Aug. 10. Synovus Bank, Bank of America Corp. and Bank of Scotland are lenders.

The case is In re Sea Island Company, 10-21034, U.S. Bankruptcy Court, Southern District of Georgia (Savannah).

New Filings

Heritage Exploration Companies File in Dallas to Sell

Heritage Consolidated LLC and an affiliate filed Chapter 11 petitions on Sept. 14 in Dallas to sell their oil and natural- gas exploration and production assets.

The Dallas-based companies have an agreement to sell assets in return for the assumption of secured debt. They intend to hold an auction to test if a better price is available.

Assets and debt both exceed $10 million, according to the petition. A Chapter 11 plan will be filed within days, the companies said in a court filing. The secured lender is CIT Capital USA Inc.

Heritage operates in the Permian Basin in West Texas and southeastern New Mexico. Bankruptcy resulted partly from $11.6 million in debt run up on an uncompleted well where there were “operational mistakes and difficulties with the wellbore,” a court filing says.

Bankruptcy counsel for one of the Heritage companies is the firm in which a name partner is Michael “Buzz” Rochelle, brother of Bloomberg reporter Bill Rochelle.

The case is In re Heritage Consolidated LLC, 10-36484, U.S. Bankruptcy Court, Northern District of Texas (Dallas).

OMC, Sheet Metal Contractor, Files Owing Union

OMC Inc., a subcontractor that makes and installs sheet metal ductwork for heating and cooling systems, filed for Chapter 11 protection on Sept. 14 in Manhattan after running up debt to the Sheet Metal Workers Union.

The company president said in a court filing that revenue declined to $13 million in 2009 from $25 million in 2007. Depressed cash flow resulted in a $4 million liability to the union and a $1 million debt to the union pension fund.

The Bronx, New York-based company resorted to Chapter 11 when negotiations with the union on a stretchout didn’t bear fruit. OMC intends to use Chapter 11 to “restructure its outstanding liabilities to the union.”

Assets are less than $10 million while debt exceeds $10 million, according to the petition.

The case is In re OMC Inc., 10-14864, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Daily Podcast

Lehman, Innkeepers, Taylor Bean, and Meruelo Maddux: Audio

The decision by Lehman Brothers Holdings Inc. to put a hold on 50 newly filed lawsuits, increasing complexity for Innkeepers USA Trust, name calling in Meruelo Maddux Properties Inc., the right of company managers to draw on a directors’ and officers’ liability insurance policy, and the chance to buy nine movie theaters are discussed in the latest bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

Watch List

Icahn Buys One-Third of Blockbuster Bonds

Carl Icahn has purchased about one-third of the Blockbuster Inc. bonds while reducing his stock ownership. The movie rental chain could file under Chapter 11 this month, according to people with knowledge of the matter. To read Bloomberg coverage, click here.

Blockbuster is operating under a forbearance agreement that expires Sept. 30. Blockbuster’s balance sheet is upside down, with assets on the books for $1.16 billion against liabilities totaling $1.61 billion in July. The company had a $134.1 million net loss and a $67.4 million operating loss for the six months ended July 4 on sales of $1.73 billion.

Dallas-based Blockbuster had 5,220 company-owned and 1,300 franchised stores as of Jan. 3. Blockbuster said in February that it is closing an additional 545 stores this year on top of 347 that were shuttered in 2009.

Yellow Page Publisher Local Insight Faces Restructure

Yellow page publisher Local Insight Regatta Holdings Inc. “is likely to violate financial covenants” for the quarter ending this month and “will need to restructure its balance sheet in the near term,” Moody’s Investors Service said yesterday.

Revenue fell 8.3 percent in the first half of the year to $266 million. During the same period, earnings before interest, taxes, depreciation and amortization declined about 20 percent, Moody’s said.

The company drew down the remainder of the revolving credit in July, and the capital structure is “untenable,” Moody’s said.

Moody’s lowered the corporate rating by three levels to Ca. Moody’s says that consumers are moving away from print to online search tools.

Local Insight, whose yellow pages are also on the Internet, had a net loss of $9.2 million in the first six months this year, narrowing from a net loss of $11.3 million in the same period last year.

The company is controlled by venture capital investor Welsh, Carson, Anderson & Stowe.

Briefly Noted

Capmark Settles Affordable Housing Deals with Merrill

Capmark Financial Group Inc. was given approval by the bankruptcy judge on Sept. 15 to settle disputes with Merrill Lynch Capital Services Inc. over their involvement in affordable housing transactions.

Merrill, which guaranteed investors’ returns, is waiving a $58 million secured claim and a $61 million unsecured deficiency claim. Capmark disputed the amount of the claims. Capmark said it expects to realize $35 million from the settlement.

Capmark has said it intends to file a reorganization plan with stock for unsecured creditors while reorganizing around its non-bankrupt bank subsidiary. Based in Horsham, Pennsylvania, Capmark was called GMAC Commercial Holding Corp. before control was sold in 2006. It had been GMAC’s servicing and mortgage banking business.

KKR & Co., Goldman Sachs Group Inc., Dune Capital Management LP and Five Mile Capital Partners LLC owned 75.4 percent of Capmark following a 2006 acquisition from General Motors Corp. for $1.5 billion cash and repayment of $7.3 billion in debt. Capmark’s debt includes a $1.5 billion term loan secured by all assets except Capmark’s bank’s, $234 million remaining under a bridge loan, a $4.6 billion senior credit, $2.34 billion in notes and a $250 million junior subordinated debt. The bank had assets of $11.1 billion and deposits of $8.39 billion, according to a court filing.

The case is In re Capmark Financial Group Inc., 09-13684, U.S. Bankruptcy Court, District of Delaware (Wilmington).

NutraCea Heads for Full Payment Confirmation on Oct. 19

NutraCea, a processor of byproducts from rice milling, sold a non-core facility in Phoenix for $4.5 million to pay off remaining secured debt.

The company has a confirmation hearing scheduled for Oct. 19 to approve the reorganization plan designed to pay unsecured creditors in full with interest. Distributions to unsecured creditors will be about $6.2 million, according to the disclosure statement.

NutraCea filed under Chapter 11 in November. The petition listed assets of $83.7 million and debt totaling $18.9 million. NutraCea developed processes for converting raw rice bran into stabilized rice bran for use in food and feed products.

The case is In re NutraCea, 09-28817, U.S. Bankruptcy Court, District of Arizona (Phoenix).

National Envelope Wants Exclusivity Until January 6

National Envelope Corp. completed the sale of the business this month and filed a motion this week for an extension of the exclusive right to propose a Chapter 11 plan. If granted by the bankruptcy judge at an Oct. 6 hearing, the new plan deadline would be Jan. 6.

Affiliates of Gores Group LLC bought the business under a contract valued at $208 million, including $149.9 million in cash. National Envelope filed under Chapter 11 in June.

Based in Uniondale, New York, National Envelope had 14 manufacturing plants in 11 states, plus three warehouses. Sales in 2009 were $676 million. The petition said assets and debt are both less than $500 million. Liabilities included $74.3 million on a secured term loan, $70.6 million on a secured revolving credit, and $89 million owing on unsecured debts to trade suppliers.

The case is In re NEC Holdings Corp., 10-11890, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Downgrade

JPMorgan’s NCO Group Lowered to B- Corporate by S&P

NCO Group Inc., an accounts receivable services manager, had its corporate credit rating lowered one notch yesterday to B-. Standard & Poor’s said there are “questions surrounding NCO’s ability to meet its interest-coverage covenant through the end of 2010 due to significant declines” in the generation of earnings before interest, taxes, depreciation, and amortization.

S&P calculated that ebitda contracted about 25 percent in the first half of 2010 compared with last year.

S&P also lowered the senior secured and unsecured ratings. They are now B- and CCC, respectively.

When S&P issue a prior downgrade in December 2008, it said NCO was operating in a “difficult collections environment.”

The Horsham, Pennsylvania-based company was acquired in May 2006 for $1.2 billion by a group including JPMorgan Chase & Co.

Advance Sheets

Fees Must Be Paid Even When Mortgage is Under Water

When collateral is worth less than the debt, the lender’s claim for fees and expenses is usually an unsecured claim under Section 506(b) of the Bankruptcy Code. The U.S. Court of Appeals in Cincinnati ruled on Sept. 15 that the general rule doesn’t apply in a Chapter 13 case when the bankrupt intends to pay a mortgage in full and thereby retain the home.

The case involved an individual in Chapter 13 whose home was worth less than the mortgage. She proposed a plan to cure arrears on the mortgage over time and retain the house. She took the position that some $4,600 claimed by the bank for fees and expenses should be treated as an unsecured claim under Section 506(b).

The 6th Circuit disagreed, ruling that the result is commanded by the “plain language” of Section 1322(e). The circuit court said that the fees are part of the secured claim that must eventually be paid in full if the bankrupt intends to keep the home.

Section 1322(e) says that “notwithstanding” Section 506(b), the amount required to cure arrears “shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”

The 6th Circuit said its ruling is in line with decisions from the Court of Appeals in Philadelphia and the Bankruptcy Appellate Panel in New York.

The case is Deutsche Bank National Trust Co. v. Tucker, 6th U.S. Circuit Court of Appeals (Cincinnati).

Bankrupt Can’t Keep Extra Income If 401(k) Loan Paid

After an individual in Chapter 13 pays off a 401(k) loan, the extra income must be used for payments to creditors and cannot be contributed to the savings plan, the Bankruptcy Appellate Panel for the 6th Circuit ruled on Sept. 14.

The appellate panel followed decisions in similar cases from appeals courts in New Orleans and St. Louis. The panel was also influenced by this year’s U.S. Supreme Court decision in a case called Hamilton v. Lanning.

In the Hamilton case, the Supreme Court said that certain or virtually certain changes in income must be used to calculate “projected disposable income” when deciding how much creditors are entitled to receive.

For a discussion of Hamilton, click here and see the Advance Sheets item in the June 8 Bloomberg bankruptcy report.

The case is Burden v. Seafort (In re Seafort), 09-8062, Bankruptcy Appellate Panel for the 6th Circuit (Cincinnati).

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

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.