Tribune, General Growth, Lehman, Tronox: Bankruptcy

Newspaper publisher Tribune Co. could end up being reorganized under the Chapter 11 plan filed on Sept. 17 by Oaktree Capital Management LP and Angelo Gordon & Co., whose funds hold what they say are several billion dollars in senior loan claims.

The plan by Oaktree and Angelo Gordon would enable the companies to emerge from reorganization while fraudulent transfer lawsuits continue over the second part of the $13.7 billion leveraged buyout led by Sam Zell in 2007. Creditors can file plans because Tribune’s exclusive right to propose a reorganization expired in June after 18 months in Chapter 11.

The plan proponents said they will participate and are hopeful court-ordered mediation beginning Sept. 26 will bring agreement on a plan. If there isn’t a “fully consensual” plan, the two said they are willing to negotiate over their proposed reorganization. The plan they filed was 79 pages long, not including exhibits and schedules. The accompanying disclosure statement takes up 216 single-spaced pages to describe the plan.

The plan is a separate reorganization for the Tribune parent and each of the dozens of subsidiaries. Oaktree and Angelo Gordon said it is possible that the subsidiaries, which have the operating companies, could emerge from reorganization while the parent remains in Chapter 11.

The plan by Oaktree and Angelo Gordon would recognize the validity of $6.6 billion in claims arising from the first part of the LBO in June 2007. The plan would form a litigation trust for creditors to prosecute a fraudulent transfer lawsuit aimed at $2.1 billion in debt arising from the second part of the LBO in December 2007. Oaktree and Angelo Gordon say that Tribune’s examiner concluded there is a better than 50 percent chance the second part of the LBO in December 2007 can be attacked successfully. The first part, in June 2007, won’t be attacked because the examiner, they say, found a less than 50 percent probability of success.

The plan proponents base their proposal on the assumption that the operating companies are worth less than the senior loans they guaranteed. Thus, creditors with lower priorities receive less or nothing, as the case may be. The plan proponents hold part of the $2.1 billion in debt that would be subject to attack.

The plan for the Tribune parent would provide an initial 4.2 percent recovery for $6.47 billion in senior loan claims. The recovery would be made up of 8.8 percent of a new term loan, 8.8 percent of excess cash, and 8.8 percent of the new stock. They would share the term loan, cash and new stock with holders of the $1.62 billion bridge loan and the $1.28 billion in senior notes. The new term loan would be the lesser of $1.2 billion or twice operating cash flow for the prior 12 months.

The recovery would be the same 4.2 percent for the bridge loan and the senior notes.

Other unsecured creditors of the parent could elect between receiving 10 percent cash or taking a pro rata share of the cash, debt and stock.

At the holding company, the $225 million in so-called EGI- TRB LLC notes and the $761 million in so-called Phones note claims are “likely” to receive nothing, the new disclosure statement says. If the claims survived attack, subordination provisions are to be enforced, and recovery on the debt would go to senior creditors. The bankruptcy judge would decide if the subordination provisions should be enforced.

At the operating subsidiaries, the senior loan claimants, as a result of the subsidiaries’ guarantees, would see an 83 percent to 83.9 percent recovery from receiving 91.2 percent of the new term loan, 91.2 percent of available cash, and 91.2 percent of the new stock.

At the subsidiary level, the $1.62 billion bridge loan creditors wouldn’t receive anything because of the subordination agreement.

General unsecured creditors at the operating companies, with claims of as much as $150 million, are being offered 65 percent if they vote for the plan or 10 percent if the class votes “no.”

Tribune told its employees that the Oaktree-Angelo Gordon plan may become the basis for a reorganization if mediation fails.

Tribune withdrew its own Chapter 11 plan in August. It was designed to force through a settlement of claims resulting from the LBO. Tribune abandoned the plan following the report of the examiner, Kenneth N. Klee, who concluded that there was some likelihood that the second phase of the leveraged buyout could be attacked successfully as a constructively fraudulent transfer.

Klee found less likelihood that the first phase of the transaction could be unraveled as a fraudulent transfer. For a summary of some of the examiner’s conclusions, click here for the July 27 Bloomberg bankruptcy report.

For details on the withdrawn plan, the proposed settlement, and the parties’ arguments, click here for the April 13 Bloomberg bankruptcy report.

Tribune is the second-largest newspaper publisher in the U.S. It listed $13 billion in debt for borrowed money and assets of $7.6 billion in the Chapter 11 reorganization begun in December 2008. It owns the Chicago Tribune, Los Angeles Times, six other newspapers and 23 television stations.

The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District Delaware (Wilmington).

Updates

Vegas Monorail Lenders Seek Right to File Own Plan

While Las Vegas Monorail Co. won’t have a hearing on its proposed disclosure statement until Oct. 5, bondholders will be in bankruptcy court on Sept. 22 to argue the Chapter 11 reorganization plan is dead on arrival.

First-tier bondholders, owed $451 million, say they represent more than 99 percent of creditors’ economic interest in the case. In the motion to be argued Sept. 22, the bondholders say they will vote against the plan, which they claim is fatally defective.

The senior bondholders are asking the bankruptcy judge in Las Vegas to allow them to file a competing Chapter 11 plan. To read Bloomberg coverage, click here.

The Monorail’s plan would give the senior bondholders new notes totaling $18.5 million for their secured and deficiency claims. Unsecured creditors, with claims totaling as much as $175,000, are in a separate class and would share $175,000 cash. The bondholders contend that carving out general creditors into a separate class is so-called gerrymandering created to insure that at least one class will vote in favor of the plan.

A plan cannot be crammed down on a dissenting class like the senior bondholders unless at least one class votes in favor of the plan.

Holders of $159 million in second-tier bonds and $48.5 million third-tier bonds would receive nothing in the plan.

The senior bondholders object to provisions in the plan that carve out up to $26.6 million through 2019 that the Monorail can use for working capital, capital improvements or otherwise. The bondholders believe the money belongs to them.

The bondholders also object to how the plan cuts off their right to realize any increase in the value of the project.

U.S. Bankruptcy Judge Bruce A. Markell ruled in April that the Monorail is not a municipality and therefore can reorganize in Chapter 11. For a discussion of Markell’s ruling, click here for the April 27 Bloomberg bankruptcy report.

The Monorail, a nonprofit corporation, began operation in 2004. It built a 3.9-mile driverless transportation system running behind the Las Vegas Strip to the convention center. Revenue was never enough to service debt.

Making seven stops, the monorail takes 15 minutes for the entire trip. It winds behind hotels and casinos on the east side of the Strip. There were plans for extending the monorail to the airport.

The case is In re Las Vegas Monorail Co., 10-10464, U.S. Bankruptcy Court, District of Nevada (Las Vegas).

General Growth Settles with Hughes for $230 Million

General Growth Properties Inc. negotiated a $230 million settlement with former investors in Hughes Corp. General Growth will pay $10 million cash, with the remainder in cash or stock of the reorganized shopping mall owner, the company said in a statement this morning.

General Growth has the right under the settlement to elect whether the $220 million will be in cash or stock. The settlement heads off a hearing that would have been held Sept. 23 where the bankruptcy judge was to decide whether the Hughes investors should have been treated like creditors or shareholders. The confirmation hearing for General Growth’s plan is scheduled for Oct. 21.

General Growth said the Hughes settlement is one of the “last remaining material issues impacting the capital structure.” The Hughes investors are to be paid “shortly after” General Growth emerges from reorganization, the statement said.

Hughes Corp. owned a 22,500-acre master planned community outside Las Vegas named Summerlin. Some of the investors include heirs of the late Howard Hughes. In early August the bankruptcy judge required the parties to arbitrate some of the economic issues underlying the claim.

Creditors of General Growth’s four top-tier companies are to receive full payment under the Chapter 11 plan. The plan preserves some of the stock for existing shareholders. The plan is financed in part with an $8.55 billion debt and equity commitment from a group led by Brookfield Asset Management Inc. General Growth’s property-owning subsidiaries already confirmed Chapter 11 plans paying their creditors in full.

General Growth intends to emerge from reorganization in October and remain the second-largest mall owner in the U.S. with 180 properties in 43 states.

General Growth began the largest real-estate reorganization in history by filing under Chapter 11 in April 2009. The books of Chicago-based General Growth had assets of $29.6 billion and total liabilities of $27.3 billion as of Dec. 31, 2008.

The case is In re General Growth Properties Inc., 09-11977, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Lehman Cash Grows to $19.8 Billion at End of August

Lehman Brothers Holdings Inc. had $19.8 billion in cash at the end of August, the holding company for the liquidating broker said in a monthly operating report filed with the bankruptcy court on Sept. 17. Cash grew about $535 million during the month.

Cash receipts in the month were $1.85 billion.

Lehman Brothers Special Financing Inc. led the Lehman companies with $7.37 billion in cash. In second place was Lehman Commercial Paper Inc. with $3.52 billion, followed by the holding company with $2.36 billion.

Professional fees since the case began now total $961.2 million, including $44.6 million in August.

Alvarez & Marsal LLC, the financial advisers, billed $16.4 million in August, bringing the total since September 2008 to $342.4 million. The fees for Weil Gotshal & Manges LLP, chief bankruptcy counsel, now total $220.9 million, including $8.6 million in June. Attorneys for the official creditors’ committee from Milbank Tweed Hadley & McCloy LLP have been paid $69.3 million, including $8.2 million in August.

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 Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District New York (Manhattan).

Meruelo Maddux Ordered to Retract Inaccurate Release

Meruelo Maddux Properties Inc. was quickly slapped down by the bankruptcy judge after the official creditors’ committee accused the Los Angeles-based developer and manager of commercial and multi-family residential property of issuing a press release that the committee characterized as “inaccurate and materially misleading.”

The company issued another press release on Sept. 17 saying that the bankruptcy judge “required that the [prior] press release be retracted in its entirety.” Meruelo Maddox said it will issue another statement in a form approved by the bankruptcy judge.

The committee contended that the original Sept. 9 release was an “improper and inaccurate solicitation” of votes on a plan before a disclosure statement is approved.

Creditors may have the opportunity to vote 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.

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 against debt totaling $342 million.

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

Tronox Has Approval for Backstopped $185 Million Offering

Tronox Inc., the world’s third-largest producer of the white pigment titanium dioxide, received approval from the bankruptcy judge on Sept. 17 for a revised agreement assuring the sale of $185 million in equity to provide part of the financing for a reorganization plan.

The judge will hold another hearing on Sept. 23 for approval of the disclosure statement explaining the plan.

Originally, Tronox was proposing a backstopped $170 million stock offering. Objecting shareholders argued that the fee for the backstop was $32 million or more. The backstop agreement was revised when a competing agreement surfaced for $185 million.

The revised agreement, providing a $185 million backstop, includes an 8 percent fee which the bankruptcy judge said was market rate. To read Bloomberg coverage of the hearing, click here.

There is a competing reorganization plan for Tronox proposed by the official shareholders’ committee. To read about the equity committee’s plan and Tronox’s plan, click here for the Sept. 7 Bloomberg bankruptcy report. For details on 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. did not file.

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

Orleans Homebuilder Committee Not on Board with Plan

The creditors’ committee for Orleans Homebuilders Inc. hasn’t come to terms yet on a reorganization plan although the hearing for approval of the explanatory disclosure statement is scheduled for Sept. 23.

Orleans, a builder of homes and condominiums in seven states, filed a plan in August giving stock and new secured debt to revolving credit lenders owed $234 million. Unsecured creditors are slated to receive lawsuit recoveries and share in proceeds from sales of properties after secured debt is paid.

The committee objects to releases being given to insiders and likewise doesn’t like what it claims is “profit margin” the company will keep from property sales.

The draft disclosure statement currently on file has blank spaces where creditors in all classes eventually will be told their predicted percentage recoveries.

Orleans said it worked out the plan with holders of more than 80 percent of the secured debt. The plan reduces debt from more than $400 million to less than $200 million, the company said in a statement.

Orleans originally intended to sell the business for $170 million to rival homebuilder NVR Inc. Orleans dropped the sale in favor of a plan where lenders would take ownership. NVR sued for breach of contract.

The Chapter 11 filing on March 1 by Bensalem, Pennsylvania- based Orleans resulted from the maturity of the revolving credit in February. Approximately $325 million was owing to the banks at maturity, not including $15 million on letters of credit. The March 31 balance sheet listed assets of $591 million against total liabilities of $560 million.

The case is In re Orleans Homebuilders Inc., 10-10684, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Watch List

Graceway Pharmaceuticals Misses Interest on 2nd Lien

Graceway Pharmaceuticals LLC didn’t make an Aug. 31 interest payment on $330 million in second-lien debt, according to a report from Standard & Poor’s.

Graceway’s patent on the drug Aldera expired in February. The Bristol, Tennessee-based company was unable to block the introduction of generic competitors. Graceway derived 80 percent of income from Aldera in 2008.

Generic competition led to “sharply declining” sales, S&P said.

Aldera is used to treat skin diseases such as external genital warts.

Statistics

Claim Trading Up in Number of Names, Down in Amount

The total dollar value in trading of claims against bankrupt companies is declining now that Lehman Brothers Holdings Inc. has been in Chapter 11 for two years. With less interest in Lehman, claims traders are swapping debt in more companies, according to data compiled from court records by SecondMarket Inc.

The face value of traded claims in August was $2.65 billion, compared with $12.7 billion in July, SecondMarket reported. August trades exceeded June’s $2.14 billion. Most of the decline in the face value of claims is due to Lehman, said SecondMarket, which calls itself the largest secondary market for illiquid assets.

With the slowdown in Lehman trading, activity is picking up elsewhere. August had trading for 61 companies, compared with the monthly average of 55 over the last year, SecondMarket said.

Claims against the Lehman holding company and broker were responsible for $1.93 billion of August’s $2.65 billion in trades. For the last year, trading in claims against the Lehman broker and holding company totaled more than $31 billion.

With almost 2,800 transactions in the last year, claims against Smurfit-Stone Container Corp. were the most actively traded in number. The Lehman companies were in second place with 1,937 trades.

Claims against the Lehman broker are trading in the high single digits to the low teens, SecondMarket said. Pricing for the Lehman holding company is in the mid to high teens. The highest prices, in the mid-to high 40s, are for Lehman Brothers International Europe and Lehman Brothers Commodity Services. Lehman Brothers Special Funding is pricing in the high 30s to low 40s, while Lehman Commercial Paper is in the low to mid-30s.

New Filing

Sheraton St. Louis City Center Files in Chapter 11

The owner of the Sheraton St. Louis City Center Hotel and Suites on South 14th Street in St. Louis filed for Chapter 11 protection on Sept. 15 in the hometown.

The hotel is in a landmark building dating from 1929. Court papers don’t give a reason for the filing.

The hotel is subject to a mortgage in the original amount of $27 million, according to a court filing. The mortgage is currently collateral for a pool of mortgage-backed securities.

The case is In re Breckenridge Edison Development LC, 10- 50558, U.S. Bankruptcy Court, Eastern District Missouri (St. Louis).

Daily Podcast

Texas Rangers, Philly Papers, Verizon-Idearc: Audio

The potentially embarrassing transcript from a Texas Rangers chambers conference, the conundrum facing secured lenders to Philadelphia Newspapers LLC, and the fraudulent transfer suit against Verizon Communications Inc. are covered in the new bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

Briefly Noted

Tousa’s Cash Slips to $473.5 Million in August

Liquidating homebuilder Tousa Inc. filed an operating report for August showing a $473.5 million cash balance at the month’s end. Cash shrank by $2.1 million in the month. Revenue was less than $1.5 million. Cash was $486 million at the end of May.

There will be an Oct. 27 hearing for approval of the disclosure statement explaining the Chapter 11 plan filed in July. For a rundown on the plan, click here for the July 20 Bloomberg bankruptcy report. The plan assumes appellate courts uphold a judgment the committee won in October where the bankruptcy judge ruled that a bailout and refinancing in mid- 2007 of a joint venture in Transeastern Properties Inc. resulted in fraudulent transfers. The appeal will be argued in October in U.S. District Court.

Tousa filed for bankruptcy reorganization in January 2008. The Hollywood, Florida-based company listed assets of $2.1 billion against debt totaling $2 billion. At the outset of the reorganization it was 67 percent-owned by Technical Olympic SA.

The case is In re Tousa Inc., 08-10928, U.S. Bankruptcy Court, Southern District of Florida (Fort Lauderdale).

Dillard’s Wins Dismissal of Highland Mall Chapter 11

Department-store operator Dillard’s Inc. prevailed on the motion it filed in late July for dismissal of the Chapter 11 reorganization begun in May by the owner of the Highland Mall in Austin, Texas. The bankruptcy judge signed an order last week dismissing the case “without prejudice.” Dillard’s said that the shopping center owner has few creditors and contended that Chapter 11 was being used impermissibly as a litigation tactic. The Chapter 11 case stopped Little Rock, Arkansas-based Dillard’s from terminating the lease.

Highland Mall, opened in 1971, was the first enclosed, air- conditioned mall in Austin. It is owned by a pass-through trust for which Wells Fargo Bank NA serves as trustee. The owner is an affiliate of a lender that made a $71 million loan for the property in 2001.

The case is In re JPMCC 2002-CIBC4 Highland Retail LLC, 10- 11331, U.S. Bankruptcy Court, Western District of Texas (Austin).

Bids Received for Bear Island, White Birch Auction

Bear Island Paper Co. and its Canadian parent White Birch Paper Co. announced that they received bids for the auction taking place tomorrow. Details on the offers weren’t provided. The initial bid of $90 million in cash comes from affiliates of Black Diamond Capital Management LLC, Credit Suisse Group AG and Caspian Capital Advisors LLC. They hold 65 percent of the first- lien debt. The hearing for approval of the sale will take place Sept. 24 in Canada and Sept. 30 in the U.S.

Based in Nova Scotia, White Birch and U.S. subsidiaries filed for reorganization simultaneously in the U.S. and Canada in February. White Birch is the second-largest newsprint maker in North America.

Secured liabilities include $438 million on a first-lien term loan, $104 million on a second-lien term loan, $50 million on an asset-backed revolving credit, and $51.5 million on swap agreements. Trade suppliers are owed $9.5 million.

The companies had $667 million in sales during 2009, with $125 million attributable to Bear Island. White Birch has three pulp and paper mills in Quebec. The Bear Island plant is in Ashland, Virginia. White Birch is controlled by Brant-Allen Industries, according to Bloomberg Data.

The case is In re Bear Island Paper Co. LLC, 10-31202, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

Downgrade

Aircraft Component Maker Synchronous Lowered to Caa

Synchronous Aerospace Group, a manufacturer of structural components for commercial and military aircraft, was downgraded one notch on Sept. 17 to a Caa1 corporate rating by Moody’s Investors Service.

The Santa Ana, California-based company was acquired in August 2007 when Littlejohn & Co. took a majority interest.

Bank Failures

Six Bank Failures Bring Year’s to Total to 125

Six banks in four states were closed by regulators on Sept. 17, bringing total bank failures for the year to 25.

The failed banks were in Georgia, New Jersey, Ohio and Wisconsin. They cost the Federal Deposit Insurance Corp. $347.6 million.

To read Bloomberg coverage, click here.

There were 140 bank failures in 2009, five times more than 2008. The failures in 2009 were the most since 1992, when 179 institutions were taken over by regulators.

Advance Sheets

Bankrupt’s Fraud Prevents Trustee From Collecting Judgment

A trustee was precluded from collecting a $1 million judgment in favor of the bankrupt following a Sept. 16 ruling by Chief Judge Edith H. Jones of the U.S. Court of Appeals in New Orleans.

The case involved a fireman who filed bankruptcy after he obtained judgment in excess of $1 million against the city which had been his employer. He repeatedly failed to disclose the judgment in his bankruptcy papers.

The failure to disclose the judgment became known only after the judgment was affirmed in the Court of Appeals and remanded to recalculate damages. Later, the bankruptcy judge revoked the bankrupt’s discharge.

The bankruptcy trustee sought to collect the judgment. In district court, the judge created a novel remedy where the trustee would have been allowed to collect enough to pay creditors in the bankruptcy case, with the remainder returned to the city.

On appeal, Jones reversed and allowed neither the trustee nor the bankrupt to collect anything.

Jones said it was not proper to “distinguish the debtor’s conduct from the trustee in applying judicial estoppel.” Without citing case-law authority, Jones said that the trustee “succeeds to the debtor’s claim with all its attributes,” including the “potential for judicial estoppel.”

Jones said that the “balance of harm” prohibited the trustee from collecting even on behalf of creditors. She noted how there were few creditors, and most of the money would have gone to lawyers whose fees were made larger by the bankrupt’s deception. Jones said that equity should not permit a result that would be “for the primary benefit of attorneys.”

The case is Reed v. City of Arlington, 08-11098, 5th U.S. Circuit Court of Appeals (New Orleans).

Cramdown Possible Even Absent Market for Property

A district judge in Las Vegas grappled with the question of whether a company can cram down a plan on a secured lender when there is no current market for the property.

The case involved a company that owed more than $17 million on a mortgage secured by 30 acres of undeveloped land in Henderson Nevada. Using cramdown, the bankruptcy judge in Las Vegas confirmed a plan over the “no” vote of the lender.

The plan provided that interest would accrue at the 9.5 percent contract rate for three years. If the lender wasn’t previously paid in full by a sale or refinancing, the new note would come due in three years. By maturity, the loan and interest would total about $21 million.

On appeal, U.S. District Judge Philip M. Pro ruled that the bankruptcy judge didn’t make clearly erroneous findings of fact when he concluded the property was intrinsically worth enough to cover the debt at maturity with a cushion. The bankruptcy judge admitted there was no market for the land at the time of confirmation.

Pro also sided with the bankruptcy judge by ruling that the lack of a market doesn’t preclude the use of cramdown. Otherwise, Pro said, “a plan would not be capable of confirmation when things are at their worst, which is not the intent of the Bankruptcy Code.”

Pro found fault with the bankruptcy judge in deciding whether the plan properly utilized one of the alternatives allowing cramdown. Full cash payment after three years doesn’t satisfy the first alternative, which permits cramdown if the bankrupt makes deferred cash payments.

The second alternative, a sale, wasn’t applicable, so Pro looked at the third alternative, so-called indubitable equivalent.

Pro said that the bankruptcy judge hadn’t made a finding about whether the plan provided the indubitable equivalent of the value of the claim. He therefore sent the case back to the bankruptcy court to decide if the plan could be confirmed.

The case is East West Bank v. Ravello Landing, 09-02224, U.S. Bankruptcy Court, District of Nevada (Las Vegas).

Filing Notice Insufficient to Save Reclamation Claim

A supplier must do more than file a timely reclamation demand to preserve reclamation rights, a U.S. district judge in Richmond, Virginia ruled on Sept. 3 in upholding a decision by the bankruptcy judge in the liquidation of Circuit City Stores Inc.

The supplier, Paramount Home Entertainment Inc., filed a notice immediately after the Circuit City Chapter 11 filing demanding the return of $11.6 million in goods delivered within 45 days of bankruptcy.

Paramount didn’t object to financing for the Chapter 11 case which was secured by all Circuit City assets, including inventory. Paramount likewise didn’t object when Circuit City sought authority to liquidate all stores in going-out-of- business sales. By the time Paramount objected, there was no inventory left.

The bankruptcy judge ruled that Paramount had only a general unsecured claim. Chief U.S. District Judge James R. Spencer upheld the bankruptcy judge.

Citing an opinion from the U.S. Court of Appeals in Cincinnati with approval, Spencer said a “reclaiming seller must diligently assert its rights.” He said that once Paramount “learned that Circuit City planned to use the goods in connection with the post-petition DIP financing facility, it should have objected.” “To make matters worse,” he added, “Paramount then failed to object to Circuit City’s liquidation of its entire inventory.”

By requiring reclamation claimants to file objections to financing or seek modification of the automatic stay, Spencer believes the bankruptcy court will ultimately be faced with less litigation.

The bankruptcy judge also concluded that secured lenders with liens on inventory rendered Paramount’s claim unsecured because the inventory wouldn’t pay lenders in full. The bankruptcy court ruled that 2005 amendments to bankruptcy law didn’t create a separate federal claim for reclamation creditors.

The case is Paramount Home Entertainment Inc. v. Circuit City Stores Inc., 10-316, U.S. District Court,, Eastern District of Virginia (Richmond).

Separated Spouses Must Combine Income in Chapter 13

When a married couple file a joint Chapter 13 petition, they must aggregate their incomes even though they live separately, the U.S. Court of Appeals in St. Louis ruled on Sept. 3.

The Eighth Circuit said the result was commanded by the plain language of Section 101(10A)(A) which says that currently monthly income in a joint case includes income for the debtor and the debtor’s spouse.

Consequently, the bankrupts were required to propose a plan paying creditors over five years rather than three years.

The case is Harman v. Fink (In re Harman), 8th U.S. Circuit Court of Appeals (St. Louis).

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

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