Ambac, TerreStar, Black Crow, Orleans: Bankruptcy

Ambac Financial Group Inc. drew first blood in the Chapter 11 reorganization begun Nov. 8 by suing to block the Internal Revenue Service from taking back $700 million in tax refunds already paid.

Ambac said yesterday that the IRS, unless stopped, could scuttle the rehabilitation of Ambac Assurance Corp., the principal insurance subsidiary that was taken over by regulators in Wisconsin earlier this year.

The IRS headed off an immediate conflict by agreeing not to take action to recover the refund without five days’ notice. Next year, the bankruptcy court is to decide if it has the power to stop the IRS from recovering the refund.

Ambac said in papers filed in bankruptcy court in Manhattan that the refunds were turned over to AAC, the principal operating subsidiary. The IRS recently informed Ambac that it may re-assess tax liabilities and demand a return of refunds already paid.

The Wisconsin insurance regulator already obtained help from the state court intended to block the IRS from levying on assets in the rehabilitation. Ambac is concerned that the IRS may believe it isn’t bound by the state court action.

Rather than enjoining the IRS from taking back the refund, Ambac wanted the bankruptcy judge to enter an injunction requiring the IRS to give five days’ notice of any effort to recover the refunds. The IRS in effect agreed in a stipulation to be given the judge to sign. The complaint filed against the IRS also asks the bankruptcy judge to declare that Ambac has no tax liability for the years 2003 through 2008.

Eventually, a sticking point for Ambac may be the Anti- Injunction Act, part of federal tax law that precludes any court from making an injunction to stop the collection or assessment of taxes. Ambac argues that the Anti-Injunction Act isn’t applicable in bankruptcy as the result of a provision in the Bankruptcy Code where the federal government waives sovereign immunity.

Ambac filed under Chapter 11 after it was unable to work out a so-called prepackaged reorganization with the insurance commissioner and an ad hoc committee of holders of senior debt. Instead, it has a “non-binding term sheet” with the insurance commissioner, to be the “basis for further negotiations with the ad-hoc committee,” the company said in a court filing.

Ambac’s petition listed liabilities on a non-consolidated basis of $1.69 billion, including $1.22 billion on six issues of senior unsecured notes and $400 million in subordinated notes.

The Wisconsin regulator created a so-called special account in March for more than $57 billion in policies issued by AAC. The policies in the segregated account are for credit default swaps, residential mortgage-backed securities, the Las Vegas Monorail and some student loans. The remainder of AAC’s insurance policies aren’t in the state-court rehabilitation.

AAC stopped paying dividends to Ambac in 2007 and stopped writing new business in mid-2008.

The term sheet with the insurance regulator would allow Ambac to reorganize around the insurance business that isn’t in rehabilitation. Other assets to be kept by Ambac include some of the $7.5 billion in tax-loss carryforwards.

The Wisconsin regulator proposed a rehabilitation plan for the special account under which holders of allowed claims would be paid 25 percent in cash and 75 percent in notes.

The case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Updates

Opposition Mounts to TerreStar Loan, Reorganization Plan

TerreStar Networks Inc. has a hearing on Nov. 16 where the bankruptcy judge in New York may make rulings that decide whether the provider of mobile and Internet communications services is taken over in a debt-for-equity swap by EchoStar Corp., the largest secured creditor.

Several creditors filed objections yesterday to approval of financing and a so-called plan support agreement which would commit TerreStar to pursue the plan giving control to EchoStar. The agreements are to be considered for approval at the Nov. 16 hearing.

TerreStar filed the plan and explanatory disclosure statement last week. Approval of the disclosure statement is set for consideration at a Dec. 12 hearing.

The plan would exchange 97 percent of the reorganized company’s common stock for the $944 million in 15 percent senior secured pay-in-kind notes. The secured creditors also would have the right to purchase 97 percent of the preferred stock in a $125 million rights offering. EchoStar would backstop $100 million of the offering.

Unsecured creditors, including holders of the $179 million in 6.5 percent exchangeable pay-in-kind notes, would share 3 percent of the new stock and the right to purchase 3 percent in the rights offering.

Opposition to the financing and the plan-support agreement was lodged by Harbinger Capital Partners LLC, Solus Alternative Asset Management LP, Remus Holdings LLC and Sprint Nextel Corp.

Harbinger argues that the financing serves no purpose other than allowing EchoStar to take control of the case. Solus and Remus say the “timeline” in the financing makes other plans “all but impossible.” They contend that the plan-support agreement is a “sub rosa plan.”

Sprint Nextel says the financing improperly gives unencumbered assets to EchoStar.

Solus and Millennium International Management LP, holders of preferred stock, also have a motion on the Nov. 16 calendar asking the bankruptcy judge to dismiss the Chapter 11 cases of seven TerreStar affiliates. They say the companies don’t need reorganization and the value of their businesses should flow to the parent company, TerreStar Corp.

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 offering financing for the Chapter 11 case.

EchoStar, based in Englewood, Colorado, and New York hedge fund Harbinger are TerreStar Corp.’s largest shareholders, according to Bloomberg data.

TerreStar Networks listed assets $1.4 billion and debt totaling $1.64 billion. In addition to the 15 percent and 6.5 percent notes, debt includes $86 million on a purchase money credit agreement. The purchase money debt would remain in place under the TerreStar plan.

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

Black Crow Files Reorganization Plan as Exclusivity Expires

Black Crow Media Group LLC, a closely held owner of 22 radio stations, filed a proposed Chapter 11 plan on Nov. 8, just as the exclusive right to propose a reorganization was expiring.

The plan offers alternatives to General Electric Capital Corp., the secured lender owed $38.9 million at the outset of the reorganization in January. The first option would allow Stamford, Connecticut-based GECC to take $13 million in cash and walk away. The second option would give GECC a 10-year note for about $15.6 million, representing the value of the collateral.

The note would pay 4 percent interest and 1 percent a year in principal, plus a portion of excess cash flow. For the deficiency claim, GECC would receive 20 percent of sale proceeds above $3 million. If GECC votes against the plan, it would take the second option if the judge approves the plan.

Black Crow hopes to come out even better as the result of a lawsuit filed in October. Based on what it called “misconduct” by GECC before and during the Chapter 11 case, Black Crow says GECC’s claim should be subordinated.

The plan would pay unsecured creditors in full over five years. Unsecured claims are less than $700,000, according to the disclosure statement explaining the plan.

The bankruptcy judge said in July that Black Crow’s exclusive right to propose a plan wouldn’t be extended beyond Nov. 8 “unless truly extraordinary circumstances occur which could not have been reasonably anticipated.” In March, Black Crow defeated a motion by GECC to dismiss the case or allow foreclosure.

Black Crow filed for Chapter 11 protection in January, two days before a hearing in a U.S. district court where GECC was seeking appointment of a receiver following defaults on term loans and a revolving credit.

Black Crow’s stations are in five markets in Florida, Alabama, Georgia and Tennessee. In addition to the GECC debt, Black Crow said at the outset that another $6 million was owing to unsecured creditors. Daytona Beach, Florida-based Black Crow had $12.9 million of revenue in 2009, down 23 percent from 2008.

The case is In re Black Crow Media Group LLC, 10-00172, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).

Nearing Confirmation, Orleans Has More Exclusivity

Orleans Homebuilders Inc., whose reorganization plan is scheduled for approval this month, received an extension of the exclusive right to propose a plan until Nov. 26, in case the plan isn’t approved at the Nov. 16 confirmation hearing.

The bankruptcy judge on Nov. 8 also approved a settlement where Chairman and Chief Executive Jeffrey P. Orleans will receive $700,000 cash to resign and waive claims. For details and background on the settlement, click here for the Oct. 19 Bloomberg bankruptcy report. For a summary of the plan, click here for the Nov. 8 Bloomberg bankruptcy report.

Orleans, based in Bensalem, Pennsylvania, builds homes and condominiums in seven states. The Chapter 11 filing in March followed maturity of the revolving credit the prior month. About $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).

Washington Times Wins $40,000 in Damages From Petitioner

Filing an unsuccessful involuntary bankruptcy petition against Washington Times LLC cost Richard A. Steinbronn $40,000.

Steinbronn, a lawyer, filed the involuntary petition on Oct. 21. The bankruptcy judge in Washington dismissed the petition six days later, reserving the newspaper’s right to seek damages from Steinbronn.

Rather than fight, Steinbronn consented to having a $40,000 judgment entered against him, court records show. Steinbronn also admitted that he didn’t have the right to file the petition on behalf of two companies that joined him as involuntary petitioners.

Bankruptcy law includes penalties for improperly filing an involuntary petition. If the petition is dismissed, the petitioner can be required to pay the allegedly bankrupt company’s attorneys’ fees.

By agreeing to the $40,000 judgment, Steinbronn avoided the possibility that the bankruptcy judge in addition would assess punitive damages for a bad faith filing.

The case is In re Washington Times LLC, 10-01041, U.S. Bankruptcy Court for the District of Columbia.

Statistics

Individual Bankruptcies Up, Commercial Filings Down

The almost 130,000 bankruptcy filings in October represented a 1.7 percent increase from the daily rate in September and the third-highest total for any month this year.

Bankruptcies may total almost 1.6 million this year, about 10 percent more than the 1.45 million in 2009, according to data compiled from court records by Epiq Systems Inc. Filings last year climbed 32 percent from 2008.

While total filings increase, commercial bankruptcies and Chapter 11 reorganizations are declining this year.

Through October, Chapter 11s by larger companies filing to reorganize or liquidate are on track to decline about 9.5 percent compared with the almost 15,200 in 2009, Kansas City, Kansas-based Epiq said in its report.

Commercial filings, which include businesses in all forms of bankruptcy, are declining 3.7 percent from the almost 90,000 in 2009.

Nevada remains the state with the highest per capita filings, followed by Georgia and Tennessee. Filings are increasing most rapidly in Hawaii, California and Utah.

Bankruptcy filings still trail the record 2.1 million in 2005, when 630,000 Americans sought protection from creditors in the two weeks before revisions to federal bankruptcy law became effective in October of that year. The changes made it more difficult for individuals to erase debt.

New Filing

HMP Services Files to Liquidate and Distribute Assets

HMP Services Holdings Sub III LLC, formerly one of the largest U.S. suppliers to the graphics industry, filed a Chapter 11 petition on Nov. 8 in Delaware to liquidate and distribute the remainder of the assets.

Most of the assets were sold in August to Agfa Corp. for $74.9 million in cash and other considerations. The sale paid off one secured loan, leaving $4.2 million owing to Orix Finance Corp., another secured creditor.

The sale took away all assets except tax refunds, the surrender value of insurance policies, and lawsuits against third parties, a court filing says.

The company filed a proposed liquidating Chapter 11 plan and disclosure statement along with the petition. Orix would get most of the liquidation proceeds under the plan. The papers don’t say what percentage recovery Orix or unsecured creditors can expect.

In addition to Orix, the Grafton, Massachusetts-based company owes $9.4 million on unsecured claims, according to the filing.

Financial failure resulted from the 2007 acquisition of a company called Charrette and a sales decline of 29 percent from fiscal 2007 through fiscal 2010. The loss was $8.1 million for the first five months of 2010.

The case is In re HMP Services Holdings Sub III LLC, 10- 13618, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Daily Podcast

Bankruptcy Ethics, Garlock Sealing and Brown Publishing: Audio

A significant ruling limiting when lawyers may solicit business from creditors and an analysis of rulings from non-New York and non-Delaware judges in the reorganizations of Garlock Sealing Technologies LLC and Brown Publishing Co. are covered in the bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

Briefly Noted

General Growth Implements Last of Chapter 11 Plans

General Growth Properties Inc. completed the largest real estate reorganization in history yesterday by implementing the Chapter 11 plan for the top-tier companies that the bankruptcy judge approved in an Oct. 21 confirmation order. The plan splits the company into two parts, with shareholders of record on Nov. 1 receiving stock in both. The primary company, continuing the General Growth name and trading under the symbol GGP, will have 183 shopping malls in 43 states.

Subsidiaries owning the properties previously confirmed their own Chapter 11 plans. All plans paid every creditor in full. For other Bloomberg coverage, click here.

General Growth began the reorganization 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).

Circuit City Trust Filing 600 Preference Suits

Another painful experience in the liquidation of electronics retailer Circuit City Stores Inc. is just now beginning for some creditors. The liquidating trust created under the confirmed Chapter 11 plan is filing 600 lawsuits, mostly to recover preferences, said Robert J. Feinstein, a lawyer with Pachulski Stang Ziehl & Jones LLP, which represents the trust.

A preference is a payment made within 90 days of bankruptcy on account of overdue unsecured claims. There can be several defenses to offset part or all of a preference claim.

For a description of Circuit City’s liquidating plan, which was confirmed in September, click here for the Sept. 1 Bloomberg bankruptcy report.

The Chapter 11 filing was in November 2008 in Circuit City’s hometown of Richmond, Virginia. The petition listed assets of $3.4 billion and debt totaling $2.3 billion as of Aug. 31, 2008.

The case is In re Circuit City Stores Inc., 08-35653, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

Rhode Island Twin River Casino Consummates Plan

The Twin River racetrack-casino in Lincoln, Rhode Island, implemented the reorganization plan on Nov. 5 that the bankruptcy judge approved in a June 24 confirmation order. UTGR Inc., the track’s owner, needed the state to adopt legislation to implement the reorganization. The new law allowed UTGR to halt dog racing and operate 24 hours a day, seven days a week.

First-lien creditors owed $415 million are to take home an estimated 89 percent by receiving all the new stock plus a $300 million secured note. For details on the plan, click here for the June 25 Bloomberg bankruptcy report.

The formal lists of creditors showed debt of $568 million, with $564 million secured. Revenue in 2008 was $410 million.

The case is In re UTGR Inc. d/b/a Twin River, 09-12418, U.S. Bankruptcy Court, District of Rhode Island (Providence).

Mexicana Has $154 Million Plan to Resume Operations

Compania Mexicana de Aviacion SA, the Mexican airline known as Mexicana, may resume operations if its unions and creditors embrace a proposal for a 1.9 billion-peso ($154 million) investment by PC Capital SAPI, a Mexican private equity firm. The Mexican government supports the proposal. It would allow Mexicana to resume operations with 28 aircraft serving 17 international and seven domestic destinations. For Bloomberg coverage, click here.

This week, the bankruptcy judge in New York recognized the Mexican reorganization as the “foreign main proceeding” under Chapter 15 of U.S. bankruptcy law. Mexicana filed the Chapter 15 petition on Aug. 2 and simultaneously began a reorganization in Mexico called a concurso mercantile. Mexicana stopped flying on Aug. 28.

The U.S. case is Compania Mexicana De Aviacion SA de CV, 10-14182, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Watch List

Clearwire Downgraded to CCC on Depleting Cash

Clearwire Corp., the builder of what it calls the “first nationwide 4G mobile broadband network,” had its corporate rating lowered yesterday to CCC, a two-notch downgrade from Standard & Poor’s.

S&P was reacting to the company’s disclosure in financial reports for the September quarter that liquidity will be depleted by mid-2011 absent additional financing.

Clearwire, based in Kirkland, Washington, calls its system WiMax. The company posted a $1.47 billion operating loss for the nine months ended Sept. 30 on revenue of $347 million.

Clearwire said in the regulatory filing that there is substantial doubt about its ability to continue as a going concern.

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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