Loehmann’s, Madoff, WaMu, Lehman, Trico: Bankruptcy

Discount retailer Loehmann’s Inc. filed a reorganization plan and explanatory disclosure statement yesterday fleshing out the agreement reached before the Chapter 11 filing on Nov. 15.

The plan is based on a new $25 million investment from current owner Istithmar PJSC and Whippoorwill Associates Inc., the owner of 70 percent of the secured notes. Istithmar, an investment firm owned by Dubai’s government, will provide 64 percent of the $25 million to buy new convertible preferred stock.

The plan will exchange the $80.4 million owed on secured Class A notes for 42.4 percent of the new common equity. Class A noteholders can participate in a rights offering for $25 million of preferred stock convertible into 47.2 percent of the new common stock. The recovery on the Class A notes is estimated to be 37.1 percent.

Class B noteholders, owed $38 million, are to receive 8.6 percent of the new common equity for a 13.8 percent recovery.

General unsecured creditors, owed $26.2 million, should see a 4.2 percent dividend by splitting up $1.1 million cash.

The plan, which would reduce debt by about $115 million, has support from holders of 73 percent of the Class A notes and 64 percent of the Class B notes, according to the disclosure statement.

Other debt included $30.5 million outstanding at filing on a revolving credit with Crystal Financial LLC, which is providing a $45 million secured credit for the court reorganization.

The loan agreement requires Loehmann’s to proceed on a dual track, in case the plan fails.

A hearing for approval of the disclosure statement is set for Jan. 5. In case the plan isn’t working, the loan agreement requires filing a motion by Jan. 14 to sell the business. The plan must be confirmed and implemented by Feb. 18.

Loehmann’s has 48 stores in 13 states and the District of Columbia. Eight locations are closing.

Loehmann’s emerged from a 14-month Chapter 11 reorganization with a confirmed plan in September 2000. It was then operating 44 stores in 17 states. Loehmann’s was acquired by Istithmar in July 2006 in a $300 million transaction.

The case is In re Loehmann’s Holdings Inc., 10-16077, U.S. Bankruptcy Court, Southern District of New York Manhattan).

Updates

Madoff Trustee Sues JPMorgan Chase for $6.4 Billion

JPMorgan Chase & Co. and affiliates were sued for $6.4 billion yesterday by the trustee liquidating Bernard L. Madoff Investment Securities Inc.

The trustee in a statement said that the New York-based bank aided and abetted Madoff by being “willfully blind to the fraud, even after learning about numerous red flags.” Contending that JPMorgan was “thoroughly complicit,” the Madoff trustee said the bank had “clear, documented suspicions.” To determine if there was fraud, the trustee said the bank “had only to review its internal account records.”

JPMorgan was Madoff’s primary bank and broker. The bank said it “did not know about or in any way assist in the fraud orchestrated by Bernard Madoff.” It called the complaint “irresponsible and over-reaching.”

The trustee said any recovery in the suit will be customer property, meaning that proceeds from settlement or judgment will go entirely to customers and won’t be used to pay expenses of the liquidation.

The suit seeks $1 billion in fees and profits and $5.4 billion for damages. For other Bloomberg coverage, click here.

The trustee also filed a $3.14 billion lawsuit against an unnamed company. To read Bloomberg coverage, click here.

The Madoff firm began liquidating in December 2008. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009 and his bankruptcy case was consolidated with the firm’s liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.

The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr- 00213, U.S. District Court, Southern District of New York (Manhattan).

WaMu Examiner’s Report Excluded from Evidence at Hearing

The first day of the confirmation hearing for approval of the reorganization plan for Washington Mutual Inc. was marked by the bankruptcy judge’s decision not to admit the examiner’s report into evidence.

The examiner concluded in his Nov. 1 report that the plan was based on a settlement that “reasonably resolves contentious issues.”

In this writer’s view, it wasn’t even a close question on whether the bankruptcy judge could consider the report in deciding whether to approve the plan and in the process use the cramdown mechanism on the six classes of creditors that voted against confirmation.

The examiner’s report was based in part on confidential information given to the examiner that isn’t even known to all the parties supporting or opposing the plan. In this writer’s view, the information in the report is hearsay that can’t be used to show the truth of the information or conclusions report.

The report also isn’t admissible as the opinion of an expert. The Federal Rules of Evidence allow a qualified expert to give an opinion based on his or her “scientific, technical or other specialized knowledge.” In that regard, the examiner is not like an appraiser who draws a conclusion about value. Further, an expert must be subject to cross-examination, which won’t happen in the case of the examiner.

Ultimately, it’s the job of the judge, not an examiner, to draw legal conclusions and make findings of fact, in this writer’s opinion.

Excluding the examiner’s report from evidence doesn’t mean the report was waste of time. Courts appoint examiners to dredge up facts and make conclusions that may lead contending parties to settle. Examiner’s reports also provide a roadmap for the parties to use in lawsuits if settlement fails.

The WaMu confirmation hearing continues today. To read Bloomberg coverage of the hearing, click here.

Four of ten classes of creditors voted in favor of the plan. If confirmed by the bankruptcy judge, WaMu’s revised plan would distribute more than $7 billion to creditors. For a summary of changes WaMu made to its plan in October, click here for the Oct. 7 Bloomberg bankruptcy report. To read about the settlement before it was modified, click here for the May 24 Bloomberg bankruptcy report. Click here to read the May 18 Bloomberg bankruptcy report for a summary of WaMu’s plan.

The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank, which had been the sixth-largest depository and credit-card issuer in the U.S., was the largest bank failure in the country’s history. The holding company filed formal lists of assets and debt showing property with a total value of $4.49 billion against liabilities of $7.83 billion.

The holding company Chapter 11 case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

MGM Confirms Prepackaged Plan in Less than One Month

Metro-Goldwyn-Mayer Inc. prevailed on the bankruptcy judge to sign a confirmation order approving the reorganization plan two days short of a month after the prepackaged Chapter 11 filing.

The plan swaps about $5 billion of secured debt for most of the new equity. There were no objections to confirmation. Creditors voted before the Chapter 11 petition was filed. The plan pays general unsecured claims in full while existing stockholders receive nothing.

For Bloomberg coverage of confirmation, click here.

MGM’s assets include 4,100 feature films and 10,800 television episodes. The assets as of Sept. 30 were $2.67 billion with total liabilities listed for $5.77 billion, without adjustments under generally accepted accounting principles. MGM owns 62.5 percent of United Artists Entertainment LLC, which isn’t in bankruptcy.

MGM, based in Los Angeles, was acquired in April 2005 in a $4.8 billion transaction by a group including Credit Suisse Group AG, Providence Equity Partners Inc., Sony Corp. and TPG Capital.

The case is In re Metro-Goldwyn-Mayer Studios Inc., 10- 15774, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

SIPC Trims Fees 10% for Lehman Brokerage Liquidation

Securities Investor Protection Corp., which foots the bill for liquidating the remnants of the Lehman Brothers Holdings Inc. brokerage subsidiary, drives a hard bargain when it comes to paying professional fees.

SIPC negotiated a 10 percent reduction in the standard time charges by trustee James W. Giddens and his law firm Hughes Hubbard & Reed LLP. SIPC is also requiring that another 10 percent of approved fees be held back until later in the case.

SIPC filed a paper in bankruptcy court yesterday recommending that the bankruptcy judge approve a $22.8 million fee allowance for the trustee and his firm covering the four months ended in May, before deduction for the 10 percent holdback. On top of the 10 percent reduction, SIPC prevailed on the firm to reduce its fees an additional $23,300. The firm and the trustee worked almost 50,000 hours on the Lehman brokerage liquidation during the period.

There will be a Dec. 9 hearing in bankruptcy court for approval of the fee request.

Under the Securities Investor Protection Act, so-called customer property can’t be used to pay costs of the liquidation, including professional fees. Consequently, SIPC uses its fund to pay professional fees in a case like that of the Lehman brokerage, where there aren’t enough other assets to pay liquidation costs. When SIPC is paying the fees, the statute says the judge should put “considerable reliance” on SIPC’s recommendation.

The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008. The brokerage operations went into liquidation four days later in the same court. The brokerage is in the control of Giddens, 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).

AbitibiBowater Settles with Woodbridge Over Augusta Plant

AbitibiBowater Inc., the largest newsprint maker in North America, reached a settlement of most disputes with Woodbridge Co., its partner in a mill in Augusta, Georgia, named Augusta Newsprint Co.

AbitibiBowater will purchase Woodbridge’s 47.5 percent stake for about $15 million in cash and a four-year note for about $90 million. The note will be secured by AbitibiBowater’s ownership interest in the mill.

The settlement ends a dispute on appeal in U.S. District Court in Delaware. The dispute stemmed from a so-called call agreement, under which AbitibiBowater said it would have been forced to buy out Woodbridge’s interest in the plant or risk “losing all of its equity in the partnership.”

To avoid the loss, the bankruptcy court in October authorized AbitibiBowater to reject the call agreement as a so- called executory contract. Woodbridge appealed.

The settlement avoids a situation where a victory on appeal by Woodbridge might result in the loss of AbitibiBowater’s interest in the plant. The settlement preserves Woodbridge’s right to claim damages arising from rejection of the call agreement.

The bankruptcy court approved AbitibiBowater’s reorganization plan in a Nov. 23 confirmation order. For a summary of the plan, which treated creditors differently at each of the 40 affiliated companies, click here for the Nov. 23 Bloomberg bankruptcy report.

The company was formed in October 2007 by a merger of Montreal-based Abitibi-Consolidated Inc. and Greenville, South Carolina-based Bowater Inc. Abitibi produces newsprint, uncoated mechanical paper and lumber. Bowater also makes newsprint, along with papers, bleached kraft pulp and lumber.

The Montreal-based company began reorganizing with 24 pulp and paper mills plus 30 wood-product plants. Sales in 2008 were $6.8 billion. In Chapter 11 petitions filed in April 2009, the combined AbitibiBowater companies listed assets of $9.9 billion and debt totaling $8.8 billion as of September 2008.

The case is AbitibiBowater Inc., 09-11296, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Second Auction Brings Trico Marine $5.3 Million More

Trico Marine Services Inc., a provider of support vessels for the offshore oil and natural-gas industry, made even more money from selling two vessels after the bankruptcy judge took the unusual step of reopening the auction.

Originally, Trico intended to sell the vessels Trico Moon and Trico Mystic for $26 million without holding an auction. The creditors’ committee objected to the lack of an auction, saying it knew about a higher offer.

The judge ordered an auction. Following the auction, Trico announced that the top offer, $30.5 million, came from the original buyer, Tidewater Inc. The price was pushed higher because three other bidders participated in the auction.

A disappointed bidder came to court and objected, saying it wasn’t given the ability to submit a better offer at the auction. U.S. Bankruptcy Judge Brendan Linehan Shannon reopened the auction. This time, PACC Offshore Services Holdings Pte Ltd. came out on top with an offer of $31.3 million, meaning that Trico creditors will realize in excess of $5 million more from the auction process.

The Chapter 11 filing in August was the second by The Woodlands, Texas-based Trico. It completed a so-called prepackaged reorganization in early 2005 by exchanging $250 million in debt for equity. Shareholders received warrants.

Other than a Cayman Islands holding company, none of the foreign subsidiaries are in bankruptcy this time. The consolidated balance sheet for June listed assets of $904 million and liabilities of $1.03 billion. The bankruptcy petition listed liabilities of $354 million for Trico Marine.

Liabilities include $202.8 million on secured convertible debentures and $150 million owing on unsecured convertible debentures. Non-bankrupt Trico Shipping owes $400 million on the 11.875 percent senior secured notes.

The case is In re Trico Marine Services Inc., 10-12653, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Schutt Sports to Test Stalking Horse Bid at Dec. 14 Auction

Schutt Sports Inc., a football-helmet manufacturer, will hold an auction on Dec. 14 to learn whether a $25.1 million offer is the best bid for the business.

The so-called stalking-horse bidder is Kranos Intermediate Holding Corp. Competing bids are initially due Dec. 10. The hearing for approval of the sale is scheduled for Dec. 15.

Schutt estimates that secured debt at the time of sale will be about $19.8 million, with administrative expenses amounting to $3.5 million more.

When Schutt filed under Chapter 11 in September, $34.8 million was owed to the secured lender, Bank of America NA. Another $17.5 million was owing on a subordinated note held by Windjammer Mezzanine & Equity Fund II LP. The pre-bankruptcy secured debt was replaced with a $34 million credit to finance the Chapter 11 case.

Before picking Kranos as the stalking horse, Schutt had five letters of intent. The financing required a sale. Schutt was forced into Chapter 11 by a $29 million patent-infringement judgment in favor of competitor Riddell Inc.

Based in Litchfield, Illinois, Schutt said assets and debt both exceed $50 million.

The case is In re Schutt Sports Inc., 10-12795, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Palm Harbor Gets Interim Approval to Borrow All $50 Million

Palm Harbor Homes Inc., a Dallas-based maker of factory- built homes, filed under Chapter 11 on Nov. 29 and on Dec. 1 was given interim authority by the bankruptcy judge to borrow the entire $50 million in financing provided by prospective buyer Fleetwood Enterprises Inc.

A hearing for final approval of financing is set for Dec. 22. Fleetwood, a venture between Cavco Industries Inc. and a fund advised by Third Avenue Management LLC., was purchased out of Chapter 11 this year for $26 million by Cavco, a Phoenix- based producer of manufactured homes.

The new loan will be used to pay off $34 million owing to Textron Financial Corp.

To buy the business, Fleetwood proposes paying $50 million or the amount of outstanding financing for the Chapter 11 case, whichever is more, plus $6.5 million attributed to the assumption of liabilities on warranties. The price is subject to a possible reduction.

The petition said assets are $321 million with debt totaling $280 million. In addition to the $34 million owing to Textron, $53.8 million was owing on 3.25 percent convertible senior notes due 2024.

The case is In re Palm Harbor Homes Inc., 10-13850, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Watch List

Solo Cup Downgraded with Upside Down Balance Sheet

Solo Cup Co., a leading manufacturer of disposable food- service items, was downgraded one notch yesterday by Standard & Poor’s, partly on account of “negative free cash from operations.” The new corporate grade is B-.

S&P was also reacting to “limited ability to pass through higher raw material costs, sluggish sales volumes, and competitive industry conditions.”

Solo’s balance sheet was upside down as of Sept. 26, with assets of $980 million and total liabilities of $1.05 billion. For the three quarters through September, sales of $1.17 billion led to an operating loss of $33.1 million and a net loss of $87 million. Asset-impairment charges in the period were $16.7 million.

Brands of Highland Park, Illinois-based Solo include Solo and Sweetheart.

Indianapolis Downs Misses Grace Period on Second-Lien

Indianapolis Downs LLC, the operator of a horserace track and casino 25 miles from Indianapolis, didn’t make the interest payment due Nov. 1 on $375 million in second-lien notes within the grace period, Moody’s Investors Service reported yesterday.

Moody’s said that the track remains current on the first- lien credit facility and the third-lien senior secured subordinated notes. The capital structure is “unsustainable,” Moody’s said.

The track is named Indiana Downs. The permanent facility opened in March 2009. It has 2,000 slot machines and electronic table games.

Forbearance Lapses for David Stern’s DJSP Enterprises

DJSP Enterprises Inc., part of David J. Stern’s foreclosure business, said in a regulatory filing that the forbearance agreement with Bank of America NA, the revolving credit lender, ran out on Nov. 26.

Amid what DJSP called “continuing discussions,” the company paid $3.5 million on the credit, reducing the principal balance to $8.43 million, the filing said.

Stern is the Florida foreclosure lawyer under investigation by the state’s attorney general. DJSP provides processing services for the Law Offices of David J. Stern PA, which has been barred from providing services to government-owned mortgage companies Fannie Mae and Freddie Mac.

DJSP, based in Plantation, Florida, previously said that the default on the revolving credit also caused a default on a separate $1.85 million equipment loan with a bank affiliate. The bank used the default to bar DJSP from paying interest on subordinated debt, according to a prior disclosure.

DJSP previously said that an affiliate didn’t pay November rent on the principal offices.

After firing 700 workers, the company has been sued for not giving required notices under labor law, the regulatory disclosure said.

DJSP rose 6 cents, or 13 percent, to 52 cents in Nasdaq Stock Market trading yesterday. The closing high was $13.50 on April 23.

Daily Podcast

Two Burton Lifland Opinions, Blockbuster and NOLs: Audio

Two opinions by U.S. Bankruptcy Judge Burton R. Lifland in the liquidation of Bernard L. Madoff Investment Securities Inc., the delayed filing of the reorganization plan for the Blockbuster Inc. movie-rental chain, and the importance of protecting net operating loss carryforwards in Chapter 11 are topics discussed in the bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

Briefly Noted

Old GM Nearing Approval of Plan Disclosure Statement

A lawyer for old General Motors Corp. told the bankruptcy judge at a hearing yesterday that there was agreement with the U.S. Treasury and the creditors’ committee that will permit formal approval of the disclosure statement explaining the Chapter 11 plan. The judge tentatively approved the disclosure statement in October. Click here to read Bloomberg coverage describing the compromises that may permit disclosure statement approval at a Dec. 7 hearing.

Old GM filed the liquidating Chapter 11 plan in August. It will create a trust for unsecured creditors that will distribute the stock and warrants issued by new GM as consideration for the sale of the assets. New GM is formally named General Motors Co. For details of the plan, click here for the Sept. 1 Bloomberg bankruptcy report.

Old GM began the largest manufacturing reorganization in history by filing under Chapter 11 on June 1, 2009. The sale to new GM was completed on July 10, 2009. GM listed assets of $82.3 billion against debt totaling $172.8 billion.

The case is In re Motors Liquidation Co., 09-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

NYC OTB Closing Today Before State Senate Votes

Off-Track Betting Corp. in New York City is closing down today, even though Democratic leaders in the state Senate haven’t given up on passing legislation proposed by the governor to form the basis for a reorganization plan. The bill lacks Republican support in the legislature’s upper chamber. The bill passed in the state Assembly even after defections from some Democrats.

For Bloomberg coverage, click here.

Although the bankruptcy judge approved a disclosure statement, NYC OTB said it won’t solicit creditors’ votes unless the enabling legislation is passed.

The bankruptcy judge ruled in March that NYC OTB is eligible to reorganize in Chapter 9. The petition, filed in December 2009, said assets are less than $50 million while debt exceeds $100 million. Liabilities include $8 million in governmental statutory claims, $43.7 million owing to the racing industry, and $6.3 million in claims held by general unsecured creditors. There is almost no secured debt.

The case is In re New York City Off-Track Betting Corp., 09-17121, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

CBGB Reorganization Dismissed After Trademark Ownership Lost

The bankruptcy reorganization of CBGB Holdings LLC was dismissed this week following a ruling by the bankruptcy judge in October that the company didn’t own trademarks and other property associated with what was once a music club at Bowery and Bleecker Streets in Manhattan. For a rundown on who owns the trademarks and why, click here to see the Oct. 15 Bloomberg bankruptcy report.

Opened in 1973, the club’s name was an acronym for Country, Blue Grass, and Blues. It closed in October 2006, less than a year before the death of founder Hillel Kristal.

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).

FairPoint Has Exclusivity Until Jan. 31, Just in Case

FairPoint Communications Inc., a local exchange carrier, won an extension until Jan. 31 of the exclusive right to propose a Chapter 11 plan, in case the plan awaiting confirmation isn’t eventually pushed through. The bankruptcy judge couldn’t confirm the Chapter 11 plan in May for lack of regulatory approval from Vermont, New Hampshire and Maine. He overruled other objections to confirmation. New Hampshire and Maine later settled. The company is working on a resolution with Vermont regulators.

Lenders would own FairPoint after Chapter 11. For details on FairPoint’s reorganization plan, click here for the March 12 Bloomberg bankruptcy report.

FairPoint’s Chapter 11 petition listed assets of $3.24 billion against debt totaling $3.23 billion. Funded debt, aggregating $2.7 billion, included $2 billion under a secured credit facility, $575 million in senior unsecured notes, and $88 million on interest-rate swap agreements.

The case is In re FairPoint Communications Inc., 09-16335, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Downgrades

S&P Questions Waterford Ability to Refinance in 2014

Waterford Gaming LLC, a 50 percent partner in the developer of the Mohegan Sun casino in Connecticut, received a downgrade yesterday from Standard & Poor’s to match the demotion that S&P gave to the casino on Nov. 24.

The corporate rating is now CCC. S&P said that Waterford won’t be able to refinance notes at maturity in 2014 without “significant improvement in revenue generation,” which appears “increasingly unlikely.”

Moody’s Investors Service was of the same opinion when it downgraded Waterford in September. Moody’s said Waterford needs “material and sustained” improvement in revenue to be in a position to repay $82 million of senior notes that mature in 2014. Waterford is paid a so-called relinquishment fee based on revenue at the casino.

The new S&P grade is one level higher than the September ding by Moody’s.

Milk Processor Dean Foods Lowered to B+ by S&P

Dean Foods Co. and its subsidiary Dean Holding Co. were downgraded one notch yesterday by Standard & Poor’s to a B+ corporate grade in view of “softer volumes” and “aggressive private label retail milk price discounting.”

The senior notes were reduced to a B- rating, coupled with a guess that holders wouldn’t recover more than 10 percent following payment default. There is a prior claim on the assets by the almost $4.5 billion of first-lien debt.

Dean, based in Dallas, is the leading U.S. producer and distributor of dairy products with a 40 percent market share, according to S&P.

Moody’s Investors Service upgraded Dean to Ba3 in March and affirmed the rating in November, although it lowered the outlook to negative. The new S&P rating is one notch below Moody’s.

Advance Sheets

Lawyer Disbarment Fines Not Discharged in Bankruptcy

The obligation to reimburse a state bar client security fund for payments made to clients isn’t discharged in bankruptcy, U.S. District Judge A. Howard Matz ruled.

Section 523(a)(7) bars discharge of a debt owing to a governmental unit as a fine or penalty, so long as it is “not compensation for actual pecuniary loss.”

A previously disbarred lawyer contended the debt was discharged because it was to reimburse the state fund for payments to his former clients. Matz, based in Los Angeles, disagreed on Dec. 1.

The relevant inquiry, according to Matz, is the “governmental interest and purpose in imposing a fine,” not on the “ultimate destination of the money.”

Matz followed an opinion called Findley from early this year by the U.S. Court of Appeals in San Francisco. To read about Findley, click here for the Feb. 3 Bloomberg bankruptcy report.

Even though the fine was to reimburse the fund for money it spent, Matz said the purpose served “the state’s interest in the rehabilitation and punishment of attorneys.”

The case is In re Emir Phillips, 09-2138, U.S. District Court, Central District of California (Los Angeles).

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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