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Boston Generating, Lehman, TerreStar: Bankruptcy

The bankruptcy court has the right to preside over the sale of Boston Generating LLC, the owner of five electric generating plants in the Boston area, U.S. District Judge Denise Cote in Manhattan ruled.

The bankruptcy judge, on the other hand, isn’t allowed to decide whether Boston Generating can reject a contract to supply transportation for natural gas to be used as fuel at a plant, Cote said in her Nov. 1 opinion.

Cote will rule on whether the transportation agreement can be rejected. Algonquin Gas Transmission LLC, a subsidiary of Spectra Energy Corp., successfully brought the motion to withdraw the reference on the rejection issue. Withdrawal of the reference is the technical term used to describe when a particular dispute is required by bankruptcy law to be decided in district court rather than in bankruptcy court.

If there isn’t a higher bid at auction, Constellation Energy Group Inc. will buy the facilities for $1.1 billion. Competing bids were initially due Nov. 1. Final bids have a Nov. 13 deadline in advance of the Nov. 15 auction. The hearing for approval of the sale will take place Nov. 17.

Cote withdrew the reference of the motion to reject the contract because the Federal Energy Regulatory Commission has exclusive jurisdiction over rates charged by gas pipelines. Cote noted that courts in the reorganizations of Mirant Corp. and Calpine Corp. previously ruled that withdrawing the reference is mandatory with regard to rejection of gas transportation agreements.

Cote went on to mention that the Mirant and Calpine courts reached different conclusions on the ultimate question of whether the contract can be rejected under the Bankruptcy Code.

Observing that FERC has an independent right to approve the sale, Cote said there is no need to withdraw the motion for approval of the deal.

The bankruptcy case is In re Boston Generating LLC, 10- 14419, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Updates

Lehman Seeks to Convert More Archstone Debt to Equity

Although Lehman Brothers Holdings Inc. was authorized by the bankruptcy judge in May to restructure debt of a real estate investment trust named Archstone-Smith, the transaction is yet to be completed. In a motion filed yesterday, Lehman is asking the judge to allow the conversion of an additional $65 million of debt it holds into equity.

Lehman participated in the group that acquired Archstone in a $20 billion transaction in 2007. In general terms, Lehman along with affiliates of Barclays Capital Real Estate Inc. and Bank of America NA were authorized in May to convert $5.2 billion of existing debt into new classes of preferred equity.

The other investors will convert an additional $172 million into equity. Lehman says that the overall restructuring should be completed soon after the bankruptcy court authorizes the additional debt-to-equity swap.

For details on the original restructuring, click here for the May 10 Bloomberg bankruptcy report.

Originally, Lehman and the other owners invested $4.8 billion to acquire the stock of Archstone, which at the time was the second-largest publicly traded multi-family real estate investment trust in the U.S. Lehman provided $2.4 billion of the capital to acquire 47 percent of the common equity. Lehman by this year also held $2.5 billion of various loans used for the acquisition.

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 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. Lehman said it intends to amend the plan in the last quarter of the year and have the plan approved in a confirmation order by March.

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).

Preferreds Seek Dismissal of Some TerreStar Cases

Preferred shareholders of TerreStar Corp. filed a motion on Nov. 1 asking the bankruptcy judge in New York to dismiss the Chapter 11 cases filed Oct. 19 by seven affiliates of unit TerreStar Networks Inc., a provider of mobile and Internet communications services.

The holders of Series B convertible preferred stock of the parent oppose the restructuring backed by EchoStar Corp., the largest secured creditor. The preferred holders contend that the Chapter 11 case is an attempted “looting by EchoStar” of “assets to which it has no legal claim.”

The preferred shareholders want the bankruptcy judge to hold a hearing on Nov. 16. The holders of the preferred stock are funds affiliated with Solus Alternative Asset Management LP and Millennium International Management LP.

They argue that the seven subsidiaries don’t need reorganization and won’t be receiving any proceeds from the loan for the Chapter 11 case. They contend that the value of the subsidiaries should flow upstream to the parent for the benefit of shareholders.

TerreStar, based in Reston, Virginia, provides mobile satellite coverage throughout the U.S. and Canada where traditional mobile networks are unavailable. EchoStar, a television-equipment and satellite-services company, is providing financing for the Chapter 11 case.

EchoStar and New York hedge fund Harbinger Capital Partners are TerreStar Corp.’s largest shareholders, according to Bloomberg data. EchoStar, based in Englewood, Colorado, has agreed to support a restructuring plan in which it would swap TerreStar secured debt for equity. EchoStar would also backstop $100 million of a $125 million rights offering.

TerreStar Networks listed assets $1.4 billion and debt totaling $1.64 billion.

The case is In re TerreStar Networks Inc., 10-15446, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Luby’s Wants Out of Nine Fuddruckers Franchise Deals

Restaurant operator Luby’s Inc. accused Magic Brands LLC of misrepresenting the terms of nine franchise agreements before it was authorized in June to buy the Fuddruckers stores and franchise business for $63.5 million.

Magic Brands, which changed its name to Deel LLC after the sale, separately is seeking a two-month extension of the exclusive right to propose a Chapter 11 plan. If granted by the bankruptcy court at a Nov. 16 hearing, the new deadline would be Jan. 18.

Magic Brands said that any extension of exclusivity beyond Jan. 18 won’t apply to the official creditors’ committee.

Luby’s said the data room didn’t show how nine franchise agreements had been modified less than a year before bankruptcy to be “far more onerous” to the franchisor. The franchise fee was reduced to 3 percent from 5 percent, personal guarantees were terminated, and the franchisor’s option to buy the assets was deleted. There is a long list of other undisclosed changes in Luby’s court papers.

Luby’s said it doesn’t know whether the allegedly faulty disclosure was “by accident or artifice.”

Luby’s wants the bankruptcy court to modify the sale- approval order to eliminate the requirement to purchase the nine franchise agreements with Daltex Restaurant Management Inc.

The creditors’ committee’s lawyers previously said the sale to Luby’s should generate “substantial recoveries for unsecured creditors.” Magic Brands previously said the sale “could” result in full payment for unsecured creditors.

After closing stores, Austin, Texas-based Magic Brands had 62 company-owned Fuddruckers locations operating in 11 states. It also owned the Koo Koo Roo restaurant brand, with three stores in California. The petition said assets are less than $10 million while debt is less than $50 million.

The Koo Koo Roo stores are in bankruptcy a second time. Owned by Prandium Inc., they were sold to Magic Brands through Chapter 11 in 2004. The 135 Fuddruckers stores in 32 states owned by franchisees aren’t in the bankruptcy case.

The case is In re Deel LLC, 10-11310, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Broadstripe Loss Exceeds Depreciation, Amortization

Broadstripe LLC, a St. Louis-based broadband cable operator, reported a $2.63 million net loss in September on revenue of $7.68 million. Depreciation and amortization for the month totaled $2.2 million.

Broadstripe was authorized in October to adopt a bonus program for 12 executives that may cost as much as $446,000. To qualify, the cable system for which the employee works must be sold. A worker who takes or is offered a job with the buyer won’t receive a bonus. In applying for approval of the bonuses, Broadstripe said it has been “testing the market for sale of their cable systems.”

The chief executive officer can qualify for a $1.5 million bonus if the total sale price exceeds $170 million. If the sales bring less than $150 million, there is no bonus. The minimum bonus is $375,000 for sales that generate between $150 million and $160 million.

Any creditor is at liberty to file a plan because Broadstripe has been in Chapter 11 more than 18 months. The company has been saying it can’t carry out a plan given an unresolved lawsuit where the unsecured creditors’ committee contends that secured lenders’ claims should be subordinated or recharacterized as equity. In addition, there are two claims by rival cable operators totaling almost $160 million based on Broadstripe’s alleged failures to complete asset purchase agreements.

Broadstripe filed a reorganization plan in January 2009 centered on an agreement reached before the Chapter 11 filing with holders of the first- and second-lien debt. At the outset of Chapter 11, Broadstripe had 93,000 customers in Maryland, Michigan, Washington State and Oregon. It was created through four acquisitions in 1998 and 1999 and filed for Chapter 11 reorganization in January 2009.

The case is In re Broadstripe LLC, 09-10006, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Barzel to Sell Property with Truncated Auction

Barzel Industries Inc., a steel processor and manufacturer before selling almost all of the assets in November 2009, intends to sell a building and land in Hartford, Connecticut, for $475,000.

Barzel is proposing a streamlined auction procedure. Instead of first holding a hearing to approve auction procedures, Barzel will entertain higher offers at a hearing on Nov. 30 to approve the sale. Barzel said it had been marketing the property for 18 months.

The 33,150-square-foot building is situated on a 1.43-acre plot.

Barzel sold most of the assets last November for $75 million to Norwood, Massachusetts-based Chriscott USA Inc. Secured lenders agreed to a settlement later where they received a release of claims in return for giving up $800,000. Even after the settlement, Barzel said it doesn’t know whether “a liquidating plan is appropriate and feasible.”

Barzel had 15 facilities. The petition listed assets of $366 million against debt totaling $385 million, including $315 million on senior secured notes. Another $18.4 million was owing on an asset-backed loan with a first lien on accounts receivable.

The case is In Barzel Industries Inc., 09-13204, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Watch List

Loehmann’s May File Chapter 11 Again Next Week

Retailer Loehmann’s Inc., unable to complete an exchange offer in October, may file under Chapter 11 as soon as next week, said two people familiar with the plan.

Loehmann’s, a discount retailer with more than 60 stores in 16 states, received tenders from holders of 92.4 percent of the $110 million in senior secured notes maturing next year. Although enough for confirmation of a so-called prepackaged plan, the tenders were short of the 97 percent required to implement the offer outside court.

Loehmann’s is working on a prepackaged plan, according to the people, who asked not to be identified because the deliberations are private. For Bloomberg coverage, click here.

Under the expired exchange offer, the existing notes, maturing in 2011, could have been exchanged for new notes in the same amount, maturing in 2014.

The 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 a Chapter 11 reorganization with a confirmed plan in September 2000. At the time, it was operating 44 stores in 17 states.

InSight in Talks, Misses Interest Payment on Notes

InSight Health Services Corp. moved in the direction of a restructuring or another Chapter 11 reorganization when it didn’t make the $4.2 million interest payment due Nov. 1 on $293.5 million in senior secured floating-rate notes due in November 2011.

InSight said it is in discussions on a “restructuring” with holders of a “significant majority” of the notes. The company’s revolving credit lender agreed to forbear from exercising remedies until Dec. 1.

The Lake Forest, California-based company provides diagnostic-imaging services in 30 states. It had 62 fixed and 104 mobile facilities at the end of the June fiscal year.

InSight’s auditors previously said that they have substantial doubt about the company’s ability to continue as a going concern. The company’s parent, InSight Health Services Holdings Corp., began a so-called prepacked Chapter 11 case in May 2007 and completed the reorganization that July.

The plan paid creditors in full other than holders of the $194.5 million in notes, who were given 90 percent of the stock. Existing shareholders retained 10 percent.

The balance sheet on June 30 was upside down with assets of $141 million and total liabilities of $321 million.

The parent’s stock closed on Nov. 2 at 7 cents, down 2 cents a share in the over-the-counter market.

Prepack Possible

Vertis Will Prepack If Tenders Offer Falls Short

Vertis Inc., an advertising and marketing services provider, announced a stock-for-debt exchange offer that will be completed through a so-called prepackaged Chapter 11 filing if 98 percent of the affected debt isn’t tendered.

The offer is supported by holders of 68 percent of the $258 million in 13.5 percent senior pay-in-kind, or PIK, notes due 2014 and 80 percent of the $478 million in 18.5 percent second- lien notes due 2012, according to Vertis.

The restructuring will reduce debt by more than $700 million, or 60 percent, Chapter 11 veteran Vertis said. Previously, Vertis was offering a combination of cash, new senior secured notes and stock.

The new proposal calls for holders of the second-lien notes to receive between 8.49 and 8.065 shares of new stock for each $1,000 in debt. The PIK debt holders would get 2.46 shares for each $1,000 in existing debt. The new stock will be issued after a 60,111 to 1 reverse stock split.

Holders of the second-lien debt can also buy as much as $100 million in additional equity, to be used for further reduction in company debt.

Vertis said it has commitments for a $175 million revolving credit and a $425 million term loan to be implemented when the exchange offer or reorganization is completed.

Second-lien debt holders will receive a 2.5 percent consent fee for tendering by Nov. 15. Holders of PIK debt will receive a consent fee in the form of an additional 0.82 shares for each $1,000 in tendered debt. The offer expires on Dec. 1, unless extended.

The offer comes slightly more than two years after Vertis and American Color Graphics Inc., the third-largest insert printer in North America, merged by confirming companion Chapter 11 reorganizations. Completed in August 2008, the companies’ previous reorganizations reduced their combined debt by almost $1 billion.

First announced in April, the exchange offer was amended several times. In May, Vertis was aiming to reduce debt by $185 million.

ACG, based in Brentwood, Tennessee, had $528 million in debt before the prior bankruptcy while the debt of Baltimore- based Vertis was $1.7 billion at the holding company.

The prior cases were In re ACG Holdings Inc., 08-11467, and In re Vertis Holdings Inc., 08-11460, both in U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filing

Pro Beach Volleyball Tour Cancels Season, Files Chapter 11

AVP Pro Beach Volleyball Tour Inc., a producer of beach volleyball tournaments, filed for Chapter 11 relief on Oct. 29 in Los Angeles after canceling the remainder of the season.

AVP, based in Torrance, California, said a lack of working capital forced it to cancel the last five events in the 12-event season. AVP blamed the loss of corporate sponsors, who provide 80 percent of revenue.

The company called itself the operator of the “most prominent professional beach volleyball tournaments in the U.S.” and said in court papers that it has more than 200 “top volleyball professionals under exclusive contracts.”

AVP is 72 percent-owned by RJSM Partners LLC, the secured lender owed $5.4 million. Unsecured debt is $5 million, according to court papers. Assets are less than $500,000 while debt exceeds $1 million, according to the petition.

The case is In re AVP Pro Beach Volleyball Tour Inc., 10- 56761, U.S. Bankruptcy Court, Central District California (Los Angeles).

Briefly Noted

Tribune Committee Sues Lenders and Officers Over LBO

The official creditor’s committee for publisher Tribune Co. took advantage of authority given by the bankruptcy judge at an Oct. 22 hearing by filing lawsuits on Nov. 1 to set aside some of the transactions making up the publisher’s 2007 leveraged buyout. Defendants in the two suits include lenders plus officers and directors.

For a discussion of the three competing plans filed by creditors to reorganize Tribune, click here for the Nov. 1 Bloomberg bankruptcy report. For details of Tribune’s own plan filed Oct. 23, click here for the Oct. 25 Bloomberg bankruptcy report.

Tribune withdrew a prior version of a reorganization in August following the examiner’s report finding 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 attacked successfully.

The second part of the buyout entailed the issuance of $2.1 billion on the senior credit and a $1.6 billion bridge loan. 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 through a settlement some creditors opposed.

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).

Citadel Rescinds Stock Awards to Chief Executive

Citadel Broadcasting Corp., a Las Vegas-based owner of 224 radio stations, will rescind stock awards to Chief Executive Officer Farid Suleman, according to a bankruptcy court filing yesterday by R2 Investments LDC, a creditor who alleged in October that the awards violated the confirmed reorganization plan.

R2 said Citadel instead will issue stock options in accordance with the plan.

R2, which supported the Citadel Chapter 11 plan implemented in June, contended that management and directors gave themselves stock worth $110 million when the plan only allowed options to vest over three years at strike prices equaling the market or higher. For other Bloomberg coverage, click here. For details on R2’s allegations, click here for the Oct. 11 Bloomberg bankruptcy report.

For details on Citadel’s plan, click here for the May 18 Bloomberg bankruptcy report. The predicted recovery for Citadel’s secured creditors was 82 percent. For unsecured creditors, it was 36 percent.

The case is Citadel Broadcasting Corp., 09-17442, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Landry’s Approved to Buy Claim Jumper Restaurants

Claim Jumper Restaurants LLC, the operator of a chain of 45 western-themed restaurants, received approval at a hearing yesterday to sell the business to Landry’s Restaurants Inc. in a transaction valued at $76.6 million.

Landry’s bid included $48.3 million cash, the assumption of $23.3 million in debt, and $5 million in cash to collateralize existing letters of credit. At the auction that Landry’s won, the opening cash bid was $27 million from a company formed by Black Canyon Capital LLC and Bruckmann Rosser Sherrill & Co. Black Canyon is an affiliate of the unsecured mezzanine lender, according to court papers.

Landry’s purchased Oceanaire Inc., a chain of bankrupt seafood restaurants, following an auction in April.

For Bloomberg coverage, click here.

In addition to $69.5 million in secured debt, Claim Jumper owes $112.5 million on subordinated notes. The petition says assets are worth more than $50 million while debt exceeds $100 million.

The case is In re Claim Jumper Restaurants LLC, 10-12819, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Daily Podcast

Tribune’s Competing Plans and the Freedom to Threaten: Audio

The four plans competing to reorganize Tribune Co., the upcoming reorganization of the publisher of Star and National Enquirer, the lawsuit by Downey Financial Corp. to take tax refunds away from the Federal Deposit Insurance Corp., and the freedom to make threats about filing a lawsuit are analyzed in the bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

Advance Sheets

Scotia, Palco Buyers Seek Full 5th Circuit Review

The purchasers of Scotia Pacific Co. and affiliate Pacific Lumber Co. filed a motion yesterday asking all of the active judges in the U.S. Circuit Court of Appeals in New Orleans to rehear an Oct. 19 ruling by a panel of three judges that in substance told the buyers they must pay more than they bargained for the California timberland owners.

Chief Judge Edith H. Jones from the U.S. 5th Circuit Court of Appeals overturned the two lower courts and told Scotia and Palco that they must pay an extra $29.7 million because the bankruptcy judge made a mistake in calculating the amount owed to secured lenders for use of their collateral during the Chapter 11 case. Because Marathon Structured Finance Fund LP and Mendocino Redwood Co. bought Scotia and Palco for $580 million cash and the conversion of $160 million of debt into equity, they must come up with the extra $29.7 million to retain their investment.

In the petition for rehearing to all the 5th Circuit judges, Marathon and Mendocino argue that Jones didn’t follow prior opinions from her circuit on the issue called equitable mootness. The two buyers contend that the doctrine prevents imposing a new liability on a formerly bankrupt company without consideration of the impact on third parties, such as investors and lenders.

For the rehearing motion, the buyers retained G. Eric Brunstad Jr., the lawyer who in recent years has argued the most bankruptcy cases in the U.S. Supreme Court. Brunstad is from the Hartford, Connecticut, office of Dechert LLP.

Brunstad contends that the opinion last month creates a so- called conflict of circuits because it differs from rulings on mootness in the U.S. Courts of Appeal in New York, Chicago and Philadelphia.

Brunstad’s papers characterize the Jones opinion as meaning that a “third party investor can no longer rely on the finality of confirmation.” By saying there is a conflict among circuit court ruling on the issue, Brunstad is laying the foundation for a possible appeal to the U.S. Supreme Court, if necessary.

For details on Jones’s opinion from October, click here to read the Oct. 22 Bloomberg bankruptcy report.

Scotia, Palco and four affiliates filed Chapter 11 petitions in January 2007 when a $27 million payment was coming due on notes secured by the timberland. The bankruptcy judge approved the Chapter 11 plan in a confirmation order in June 2008.

The opinion by Jones is Bank of New York Trust Co. NA v. Pacific Lumber Co. (In re Scopac), 09-40307, U.S. 5th Circuit Court of Appeals (New Orleans). The bankruptcy court case is Scotia Pacific Co., 07-20027, U.S. Bankruptcy Court, Southern District Texas (Corpus Christi). The prior appeals court decision is Bank of New York Trust Co. v. Official Unsecured Creditors’ Committee (In re Pacific Lumber Co.), 08-40746, U.S. 5th Circuit Court of Appeals (New Orleans).

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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