Workflow, Movie Gallery, Capmark, CBGB: Bankruptcy

Arnold & Porter LLP is ineligible to serve as a special counsel for Workflow Management Inc., according to objections lodged by the U.S. Trustee and the first- and second-lien lenders.

Workflow, a provider of promotional marketing services and business documents, filed for Chapter 11 protection last month in Norfolk, Virginia, and sought court permission to retain Richmond, Virginia-based McGuireWoods LLP as primary bankruptcy counsel. The company also applied to engage Washington-based Arnold & Porter as a so-called special counsel.

Silver Point Finance LLC, as agent for the second-lien lenders, filed an objection to Arnold & Porter’s retention, pointing out that the firm in other matters simultaneously represents Perseus LLC, Workflow’s Washington-based controlling shareholder and a subordinated creditor.

Credit Suisse AG, Cayman Islands Branch, filed a similar objection in its role as agent for the first-lien lenders. The U.S. Trustee, an arm of the Justice Department, echoed the objections of the two agents.

By having Arnold & Porter alongside McGuireWoods, Silver Point argued that “Perseus seeks to place a loyal firm on the inside.” The objectors also say that Arnold & Porter would duplicate the services of primary bankruptcy counsel because the work it would perform is broadly described. The objectors contend that Arnold & Porter fails the so-called disinterestedness test.

Workflow may be intending to employ cramdown procedures to push through a reorganization, after a holder of first- and second-lien debt blocked an out-of-court restructuring.

Workflow filed a proposed Chapter 11 plan where the creditor holding both first- and second-lien debt would be placed into classes by itself. Creditors holding only first- or second-lien obligations would be classified separately. For details of the plan, click here for the Oct. 1 Bloomberg bankruptcy report.

Workflow, based in Dayton, Ohio, owes $146.5 million on first-lien debt, including $30.2 million on a revolving credit and $111.5 million on a term loan. The second-lien debt is $196.5 million.

With 49 offices, 17 distribution centers and nine plants, Workflow had about $600 million revenue in 2009.

The case is Workflow Management Inc., 10-74617, U.S. Bankruptcy Court, Eastern District of Virginia (Norfolk).

Updates

Movie Gallery to Auction Trademarks on November 9

Movie Gallery Inc., the liquidating movie-rental chain, will sell its trademarks at auction on Nov. 9, assuming the bankruptcy court in Richmond, Virginia, goes along with the idea at an Oct. 25 hearing.

The marks to be sold include Hollywood Video, Movie Gallery and Game Crazy, plus the associated domain names and customer data bases. No buyer is yet under contract.

Movie Gallery has been using Streambank to market the intellectual property. Although 28 potential buyers signed confidentiality agreements and several offers were received, Movie Gallery said none was good enough to warrant being designated as a so-called stalking-horse bid.

Movie Gallery is proposing that the judge require the initial submission of bids by Nov. 5. The auction and sale-approval hearing would both occur on Nov. 9.

With a confirmation hearing set for Oct. 28, Movie Gallery hopes the liquidating Chapter 11 plan will have been approved before the auction takes place. For details of the plan, click here for the Sept. 14 Bloomberg bankruptcy report.

Movie Gallery liquidated the last 1,028 movie-rental stores. It had some 2,600 stores in operation on filing under Chapter 11 again in February. The new filing was less than two years after a previous bankruptcy reorganization.

Debt when the new case began included $100 million on a secured revolving credit, $394 million on a first-lien facility, and $146 million in claims held by second-lien creditors.

Movie Gallery operated under the names Movie Gallery, Hollywood Video and Game Crazy. It had 3,490 stores before the first bankruptcy. The prior Chapter 11 case concluded with a confirmed Chapter 11 plan in May 2007. For details of the second filing, click here.

The new case is In re Movie Gallery Inc., 10-30696, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond). The prior case is In re Movie Gallery Inc., 07-33849, in the same court.

Capmark Begins Lender Settlement Approval Trial

Capmark Financial Group Inc. (CPMK) held the first day of a two-day trial yesterday where the bankruptcy judge in Delaware will decide whether to approve a settlement with secured lenders. If the judge doesn’t sanction the accord, the official creditors’ committee seeks authority to sue the lenders.

The committee believes the proper result would be allowing them to sue lenders for a $1.5 billion secured loan made 149 days before the Chapter 11 filing in October 2009. The committee says loan proceeds were used to pay off unsecured debt owing to practically the same lenders. Because the loan was made more than 90 days before bankruptcy, it’s immune from attack as a preference. The committee therefore believes the security for the loan could be voided as a fraudulent transfer.

If U.S. Bankruptcy Judge Christopher Sontchi instead decides to approve the settlement, the lenders will be paid 91 percent in cash on the $1.5 billion they are owed. In addition, the lenders will receive interest and reimbursement of fees spent in the Chapter 11 case.

Capmark says the settlement will save at least $108 million and as much as $135 million. The lenders are willing to give up 9 percent in return for not being sued.

The Capmark reorganization has become another case like Washington Mutual Inc. (WM) and Tribune Co. where the bankrupt company tries to push through a settlement that some creditors oppose.

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

Capmark has said it intends to reorganize around its non-bankrupt bank subsidiary by giving stock to unsecured creditors. 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. (KKR), 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. (GM) 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 the 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).

Hilly Kristal Estate Owns CBGB Intellectual Property

CBGB Holdings LLC doesn’t own trademarks and other property associated with what was a music club at Bowery and Bleecker Streets in Manhattan, U.S. Bankruptcy Judge Stuart Bernstein ruled on Oct. 13.

Bernstein explained in his opinion how the estate of Hillel Kristal, the club’s former founder, foreclosed the trademarks and other property before the Chapter 11 petition was filed in June. The estate for Krystal, who was known as Hilly, also asked Bernstein to dismiss the CBGB Chapter 11 case on the theory there isn’t any property to reorganize.

Although Bernstein ruled that CBGB lost ownership, the judge said there are unresolved issues on the question of whether to dismiss the Chapter 11 case. Another hearing must be held on dismissal, Bernstein said.

Opened in 1973, the club’s name is an acronym for Country, Blue Grass, and Blues. It closed in October 2006, less than a year before Kristal’s death. Kristal’s estate sold the CBGB trademarks and other intellectual property to the company that filed under Chapter 11 in New York in June. The buyer paid $3.5 million, with $1.11 million in cash and the remainder covered by a secured note with a lien on the assets. Kristal’s estate said the debt was $2.58 million when it foreclosed.

CBGB’s bankruptcy schedules list assets with a value of $133,500 against debt totaling $3.59 million.

The case is In re CBGB Holdings LLC, 10-13130, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

South Bay Express Needs Exclusivity Until Lien Trial

South Bay Expressway LP, the owner of a nine-mile toll road near San Diego, needs a second extension of the exclusive right to propose a reorganization plan because a pivotal lawsuit won’t be tried until later this month.

The ability to propose a plan must await the outcome of a trial beginning on Oct. 25 where U.S. Bankruptcy Judge Louise DeCarl Adler in San Diego will decide whether holders of mechanics’ liens come in ahead of other secured debt. In the meantime, the expressway wants so-called exclusivity extended to Feb. 15.

A hearing on the exclusivity motion will take place Nov. 4.

The expressway opened in November 2007. It owes $340 million on a first-lien construction and term loan, plus another $170 million first-lien obligation on a loan provided by the U.S. Department of Transportation. Ownership of the toll road is controlled by affiliates of Sydney-based Macquarie Group Ltd. (MQG)

The case is In re South Bay Expressway LP, 10-04516, U.S. Bankruptcy Court, Southern District of California (San Diego).

OMC Wins Injunction to Reinstate Pension Fund

OMC Inc., a subcontractor that makes and installs sheet metal ductwork for heating and cooling systems, won a victory in bankruptcy court against the multi-employer pension plan for the Sheet Metal Workers Union.

After OMC filed for Chapter 11 protection on Sept. 14, the pension fund terminated the company’s participation in the pension program on account of $1 million that was in arrears. The pension plan then notified workers that they would no longer get credit for additional pension benefits. Several employees quit and went to work for a competitor, OMC said.

OMC went to bankruptcy court contending the pension fund violated the automatic stay resulting from the Chapter 11 filing. U.S. Bankruptcy Judge Martin Glenn agreed in an Oct. 13 opinion and granted a temporary injunction requiring the reinstatement of OMC in the pension program.

The temporary injunction will last until Oct. 27. If there isn’t agreement between the parties, OMC can ask for a preliminary injunction continuing participation on the pension plan. Glenn required OMC to make payments to the fund every week rather than every month.

The company president said in a court filing that depressed revenue resulted in a $4 million liability to the union and a $1 million debt to the union pension fund. OMC intends to use Chapter 11 to “restructure its outstanding liabilities to the union.”

The petition says assets are less than $10 million while debt exceeds $10 million.

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

TERI Settlement Allows October 18 Plan Confirmation

The Education Resources Institute Inc., once a not-for-profit educational loan guarantor, is in a position to confirm a Chapter 11 plan at an Oct. 18 hearing following a settlement compromising the $87 million claim of First Marblehead Corp. (FMD)

In return for dropping claims on both sides, First Marblehead will have an approved unsecured claim for $28.1 million. The claim resulted mostly from the rejection of the agreements between the two companies. First Marblehead provided back office and other services in connection with originating and securitizing loans.

The disclosure statement explaining the Chapter 11 plan says that secured lenders, with as much as $400 million in claims, will be paid in full over time. Unsecured creditors, including deficiency claims of secured lenders, should see up to 60 percent on claims that may reach $375 million.

The plan was developed by TERI and the creditors’ committee. TERI filed under Chapter 11 in April 2008, saying demand for bonds backed by student loans “evaporated.” Based in Boston, TERI had $16.2 billion in guarantees outstanding at the end of 2007, according to Moody’s Investors Service.

The case is In re The Education Resources Institute Inc., 08-12540, U.S. Bankruptcy Court, District of Massachusetts (Boston.)

Watch List

Nebraska Book is Refinancing Risk, Moody’s Says

Nebraska Book Co. and its parent company, NBC Acquisition Corp., were downgraded yesterday by Moody’s Investors Service to a Caa1 corporate rating as a consequence of “amplified refinancing risk” in the next year.

In addition, Moody’s is concerned there may be restrictions in 2011 on the operating company’s ability to upstream dividends to the parent to provide cash for servicing the $77 million in senior discount debentures due 2013.

Among the debts receiving one-notch downgrades were the $175 million in senior subordinated notes due 2012, which are now rated Caa2.

Based in Lincoln, Nebraska, the company is a wholesaler of used textbooks with operations in 275 college bookstores. For fiscal 2010, net income was $2.3 million on revenue of $605.5 million. For the first quarter ended June 30, there was a $1.27 million net loss on revenue of $72.4 million. The company recorded a $100.5 million net loss in fiscal 2009 following a $107 million goodwill impairment charge.

Daily Podcast

Lender Control, Hines Files Again, Tribune, Mesa Air: Audio

A Delaware judge limits control by secured lenders, bankruptcy recidivism in the plant-growing business, the newest Tribune Co. settlement, and a plan by Mesa Air Group Inc. creditors are covered in the new bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

New Filings

Ex-Anglo Irish Bank Chief Drumm Files Chapter 7 in Boston

David K. Drumm, former chief executive officer of Anglo Irish Bank Corp., filed a bare-bones Chapter 7 bankruptcy petition yesterday in Boston. Drumm didn’t yet file required papers showing whether is he eligible for Chapter 7 or will be forced to convert his case to Chapter 13 or Chapter 11.

The filing came after the bank turned down his offer to settle a lawsuit in Irish courts over an 8.5 million-euro ($12 million) loan. He has resided in Massachusetts for the past six months and lives in Wellesley, according to court papers.

The Chapter 7 filing in the U.S. may have been calculated to prevent the filing of an involuntary bankruptcy against him in Ireland or to stop the lawsuit there. The filing of the petition may force his Irish creditors to come to the U.S. to test whether he is eligible for bankruptcy in the U.S.

The petition says assets and debt are both between $1 million and $10 million.

Drumm resigned from Dublin-based Anglo Irish in December 2008, a month before the bank was seized by the Irish government.

The case is David K. Drumm, 10-21198, U.S. Bankruptcy Court, District of Massachusetts (Boston).

Inn at Jackson Hole, Wyoming, Files Chapter 11 in Boston

The 83-room Inn at Jackson Hole filed for Chapter 11 protection on Oct. 11 in Boston.

Old Colony LLC, the Saugus, Massachusetts-based owner of the resort in Teton Village, Wyoming, purchased the property for $26 million in May 2007.

The first and second mortgages are in default. Wells Fargo NA is owed $17.5 million on the first mortgage, while JH Lending Trust has the $3.5 million second mortgage.

Old Colony blames its problems in part on the second mortgage, which carries interest at 15 percent a year.

The case is In re Old Colony LLC, 10-21100, U.S. Bankruptcy Court, District of Massachusetts (Boston).

Owner of Land Outside Los Angeles Enters Chapter 11

Castaic Partners LLC, the owner of 847 acres of unimproved land on Tapia Canyon Road in Castaic, California, filed a Chapter 11 petition on Oct. 13 in Los Angeles owing $24 million on a mortgage held by Compass USA SPE LLC.

The property owner is also delinquent on almost $2 million in property taxes owing to Los Angeles County.

Court papers claim the land is worth $29.5 million.

Castaic is 40 miles northwest of Los Angeles off Interstate 5.

The case is In re Castaic Partners LLC, 10-53956, U.S. Bankruptcy Court, Central District of California (Los Angeles).

Mixed-Use Project in Dracut, Massachusetts, Files in Worcester

Beaver Brook Village LLC, the owner of a mixed-use real estate development in Dracut, Massachusetts, filed for Chapter 11 protection on Oct. 11 in Worcester, Massachusetts, after defaulting on a $10.3 million mortgage. The lender is Wells Fargo Bank NA.

The project has 47 apartments and 30 commercial units on 6.5 acres. Beaver Brook owes $1 million to creditors under a prior Chapter 11 case that concluded in late 2008 with a confirmed reorganization plan. Payments under the prior plan are also in default.

Cash flow has continued to decline since the first reorganization, according to a court filing.

The case is In re Beaver Brook Village LLC, 10-45054, U.S. Bankruptcy Court, District of Massachusetts (Worcester).

Briefly Noted

HSH Delaware Confirmation Put off Until December 21

HSH Delaware GP LLC is pushing back the confirmation hearing for approval of the reorganization plan to Dec. 21 from Oct. 19. The company said it needs more time to work out definitive documents with the lenders. The voting deadline is now Dec. 14.

The company negotiated a settlement in August with lenders owed $550 million. The disclosure statement was approved that month.

The plan will convert the lenders’ unpaid fees and expenses into principal owing on the debt. The maturity will be extended to Dec. 31, 2014. The plan gives the company time to sell the equity or the assets. If there is a surplus above the debt to the lenders, the plan contains an agreement to share the excess between the company and the lenders.

Unsecured creditors would be paid in full.

HSH filed under Chapter 11 in January to prevent what it called a “firesale” of the HSH Nordbank stock. It was formed in 2006 by J.C. Flowers & Co. to buy 26 percent of the German bank HSH Nordbank AG. The 1.25 billion-euro ($1.76 billion) purchase price was financed in part with the bank loan, according to court papers.

The case is In re HSH Delaware GP LLC, 10-10187, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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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