Auto Deductions, Tousa, Tribune, Lehman: Bankruptcy

The U.S. Supreme Court heard oral arguments yesterday on the first of two bankruptcy cases to be decided in the term that began this week. The argument was the first heard by Elena Kagan since she was sworn in as an associate justice on the court.

The case will decide whether an individual in Chapter 13 bankruptcy may take an auto expense deduction for a vehicle owned free and clear. The outcome of the case affects how much creditors must be repaid under a Chapter 13 plan when there is no loan outstanding against a car.

If the auto deduction can be taken in absence of a car loan, the individual in Chapter 13 will have less disposable income and would thereby be permitted to discharge debt while paying less to unsecured creditors. The U.S. courts of appeal are split 3-1 on the answer.

The case turns on what Congress meant when it used the word “applicable.” The case, known as Ransom, results from ambiguities introduced into the federal bankruptcy law when Congress tightened rules for individual bankrupts in 2005.

Chief Justice John Roberts summed up the reaction of several justices when he said that the arguments by both sides ultimately lead to “absurd results.” With regard to policy issues, Justice Roberts asked why a bankrupt should be worse off for paying off an auto loan in advance of bankruptcy.

Justice Antonin Scalia honed in on the exact language of the statute and asked where the law says that deductions can be taken in the “amount specified if applicable.”

Although the newest on the court, Justice Kagan wasn’t afraid to ask questions during oral argument. Except for Justice Clarence Thomas, all of the justices participated actively in questioning the lawyers.

The U.S. Court of Appeals in San Francisco ruled in August 2009 that the deduction may not be taken when there is no debt on the auto. Courts in St. Louis, New Orleans and Chicago ruled the other way.

In a decision also in August 2009, the U.S. Court of Appeals in St. Louis allowed the expense deduction, saying the result was commanded by the literal wording of the statute adopted by Congress. The two judges in the majority said they were not persuaded by contrary arguments based on “broad statements of legislative intent.

The dissenting judge in the St. Louis case followed the San Francisco court, which said that disallowing the expense deduction for a lien-free auto comported with congressional intent “intended ‘to ensure that debtors repay creditors the maximum they can afford.’”

For additional discussion of the issue, click here and read the June 17 Bloomberg bankruptcy report under the heading “Advance Sheets.”

The case in the Supreme Court is Ransom v. MBNA, 09-907, U.S. Supreme Court.

The decision in the 9th Circuit is Ransom v. MBNA America Bank, NA (In re Ransom), 9th U.S. Circuit Court of Appeals (San Francisco). The 8th Circuit ruling going the other way is eCast Settlement Corp. v. Washburn (In re Washburn), 08-2023, 8th U.S. Circuit Court of Appeals (St. Louis). The prior circuit court cases also allowing the deduction are Tate v. Bolen (In re Tate), 08-60953, 5th U.S. Circuit Court of Appeals (New Orleans), and Ross-Tousey v. Neary (In re Ross-Tousey), 07-2503, 7th U.S. Circuit Court of Appeals (Chicago).

Updates

Tousa Directors Lose Motion to Dismiss Creditor Suit

Directors of homebuilder Tousa Inc. lost a motion in which they were attempting to dismiss a lawsuit filed against them by the official creditors’ committee for breach of duty to the company. Although the directors wrote 447 pages of briefs explaining why they couldn’t be sued, U.S. Bankruptcy Judge John K. Olson wrote a 25-page opinion yesterday explaining why they could.

The committee’s suit relied largely the same facts that led Olson in October 2009 to rule that bailing out an affiliate six months before Chapter 11 resulted in fraudulent transfers that could be recovered from secured lenders. To read about the suit and other Tousa fraudulent transfer litigation, click here to see the Jan. 8 Bloomberg bankruptcy report.

The directors argued that Delaware law gave them no fiduciary duties to creditors of subsidiaries. Since the suit was brought on behalf of the subsidiaries or their creditors, the directors contended they had no liability.

Olson disagreed with the premise of the directors’ motion to dismiss the complaint. He said there is “no basis in law for the proposition that the directors of an insolvent subsidiary can permit it to be plundered for the parent’s benefit.” He said that “Delaware law expressly rejects the notion that directors of a corporation owe no fiduciary duties” to an affiliate they control.

Three times in the opinion, Olson said that some of the directors’ arguments were “frivolous.”

Olson also rejected the directors’ argument that the committee was improperly suing for wrongs done to creditors. He pointed out how he authorized the committee to file suits based on wrongs done to the subsidiaries. The so-called derivative claims brought by the committee are proper, Olson said.

A derivative claim typically is one in which shareholders sue to redress a wrong done to the company. When a company becomes insolvent like Tousa, Olson pointed to the law in Delaware, where creditors have the right to bring claims for wrongs done to the company.

In denying the directors’ motion to dismiss, Olson was required to assume the truth of the allegations in the committee’s complaint. The directors can still win the case by showing that the committee is wrong on the facts.

When Olson found the lenders liable last year for receiving fraudulent transfers, he required the banks to post $700 million in bonds to hold up enforcement of the judgment pending appeal. The appeal is to be argued this month in U.S. District Court. The suits are based on a theory that pledging assets of the operating subsidiaries was a fraudulent transfer because the subsidiaries received no benefit from a bailout and refinancing in mid-2007 of a joint venture in Transeastern Properties Inc.

Tousa has a hearing scheduled on Oct. 27 for approval of a disclosure statement explaining the Chapter 11 plan filed in July. For a summary of the plan, click here for the July 20 Bloomberg bankruptcy report. The plan assumes appellate courts uphold the judgment the creditors’ committee won in October 2009 against the lenders.

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).

American Mortgage Has Plan Approval After Narrower Releases

American Mortgage Acceptance Co. has a confirmed Chapter 11 plan that established a template for the extent of third-party releases that U.S. Bankruptcy Judge Martin Glenn in New York is willing to allow.

At a hearing in June, Glenn refused to approve American Mortgage’s disclosure statement because the plan would have given blanket releases to officers and directors, in the process prohibiting suits by shareholders and creditors. American Mortgage revised the plan. Glenn signed a confirmation order yesterday approving the plan which contains more narrow releases for third parties.

Under the approved version of the plan, creditors and shareholders aren’t being precluded from suing American Mortgage’s officers, directors, employees and advisers for violations of state or federal securities laws. Creditors will be precluded from filing suits of other types.

American Mortgage itself can’t sue the officers, directors, employees, and advisers. Likewise, shareholders can’t file so- called derivative suits where they are suing in the name of the company.

The revised plan trimmed down indemnifications American Mortgage can give to its directors and officers. Now, directors and officers will be indemnified only to the extent there was a pre-bankruptcy law or agreement that called for indemnification. The surviving indemnification obligations will represent unsecured claims against American Mortgage not extinguished by the plan.

Glenn allowed the plan to protect those who participated in the plan-negotiation and confirmation process, so long as there were no gross negligence or willful misconduct.

American Mortgage was a real estate investment trust that had $666 million of assets in 2007. It now has two creditors. To read about the original version of the plan, click here for the May 14 Bloomberg bankruptcy report.

The case is In re American Mortgage Acceptance Co., 10- 12196, U.S. Bankruptcy Court, Southern District New York (Manhattan).

New Filing

International Garden, Rose Grower, Files in Delaware

International Garden Products Inc. from Damascus, Oregon, filed for Chapter 11 reorganization yesterday in Delaware along with four affiliates. Through its Iseli Nursery Inc. affiliate, the company produces dwarf conifers and Japanese maples. The Weeks Wholesale Rose Grower affiliate is one of the largest growers of roses in the U.S., a company statement said.

IGP blamed the filing in part on $27 million in what it called legacy contingent liabilities on leases for a business that was sold. The recession resulted in lower sales, and a customer named Jackson & Perkins Wholesale Inc. went bankrupt and didn’t take delivery for a rose bush order for spring 2010. The Chapter 11 case is to be financed with a secured $7.5 million loan provided by a group led by Harris NA.

IGP owes $30.7 million on a secured revolving credit and $13 million on a secured term loan.

The company said that customers can place orders for the 2011 season with “complete confidence.”

EF Private Equity Partners (Americas) LP has more than half of the common stock and the Series A preferred stock.

The company has more than $10 million in debt and assets, the petition says. IGP is a supplier for independent garden stores, landscapers, and landscape suppliers.

The case is In re International Garden Products Inc., 10- 13207, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Briefly Noted

Loose Contract Leads to Long Lehman, Barclays Lawsuit

When U.S. Bankruptcy Judge James M. Peck authorized Lehman Brothers Holdings Inc. to sell the North American investment banking business to Barclays Plc four days after the Chapter 11 filing in September 2009, he permitted changes in the sale so long as they weren’t material. The result has been a trial in progress since April, where Lehman accuses Barclays of taking billions of dollars more assets than the judge permitted.

To read a Bloomberg feature story, click here.

Tribune Reorganization Plan Due by Oct. 15, Judge Rules

Publisher Tribune Co. and any creditor wishing to propose a reorganization must file a Chapter 11 plan by Oct. 15, the bankruptcy judge said at a hearing yesterday. Tribune lost the exclusive right to propose a plan because it’s been in Chapter 11 for more than 18 months.

Tribune said last week that it reached agreement on a plan to be co-sponsored by creditors Oaktree Capital Management LP and Angelo Gordon & Co. LP. The official creditors’ committee immediately came out in opposition, saying the new company plan would “not provide fair value to all creditors.”

Tribune had a plan on file that it withdrew in August following a report by the examiner who concluded that there was some likelihood that the second phase of the leveraged buyout in December 2007 could be attacked successfully as a constructively fraudulent transfer. The examiner found less likelihood that the first phase of the transaction, in June 2007, 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. Tribune’s abandoned plan would have forced a settlement of the LBO claims on terms that some creditors opposed.

For details on the withdrawn plan, the proposed settlement, and the parties’ arguments, click here for the April 13 Bloomberg bankruptcy report. For a rundown on the new plan by Tribune, Oaktree, and Angelo Gordon, click here for the Sept. 29 Bloomberg bankruptcy report. For Bloomberg coverage on yesterday’s hearing, click here.

The $13.7 billion leveraged buyout in 2007 was led by Sam Zell.

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).

Daily Podcast

Supreme Court Argument, Claim Jumper Sale, DBSD Transfer

The Supreme Court argument where the Chief Justice said the theories on both sides lead to “absurd results,” dueling plans between SunCal Cos. and Lehman Brothers Holdings Inc., the auction for restaurant owner Claim Jumper Restaurants LLC, and the impending reorganization of satellite phone provider DBSD North America Inc. are subjects discussed in the bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

Watch List

Loehmann’s Tenders for Secured Notes, Interest Missed

Loehmann’s Inc., a discount retailer with more than 60 stores in 16 states, is making a tender offer for the $110 million in senior secured notes. Meanwhile, Loehmann’s won’t be making the interest payment due Oct. 1, Standard & Poor’s said.

The notes, which are to mature in 2011, can be exchanged for new notes in the same amount, maturing in 2014, so long as the tender is made by Oct. 13. Anyone tendering later will receive $970 for each $1,000 in old bonds.

In the event of a payment default, S&P said that holders of the old notes likely won’t recover more than 10 percent.

The private exchange offer will expire on Oct. 27 unless extended. To complete the exchange, at least 97 percent of the old bonds must be tendered.

The Bronx, New York-based company is owned indirectly by Istithmar PJSC, an investment firm owned by the government of Dubai.

Loehmann’s emerged from a 14-month Chapter 11 reorganization with a confirmed plan in September 2000. At the time, it was operating 44 stores in 17 states.

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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