WaMu, Madoff, Point Blank, Abitibi, GM: Bankruptcy

The second day of the trial on confirmation of the Washington Mutual Inc. reorganization plan was like watching Odysseus navigate between Scylla and Charybdis.

In June 2009, a bankruptcy judge in Delaware, Kevin J. Carey, refused to approve a settlement between Samsung Electronics Co. and Spansion Technology Inc., a manufacturer of flash-memory semiconductors that filed under Chapter 11 earlier that year.

Carey concluded that Spansion’s chief restructuring officer “incredibly” didn’t rely on advice from patent counsel in deciding to settle. Cary concluded that the proposed settlement was “based less on an evaluation of the merits” of the lawsuits than on a “desire to negotiate a quick settlement.”

Where the Spansion doctrine is like Scylla, the rules of evidence are WaMu’s Charybdis. In Greek mythology, Scylla and Charybdis were on opposite sides of a narrow strait. By avoiding Scylla, a six-headed monster, ships were lost to Charybdis, a whirlpool.

In the WaMu trial before U.S. Bankruptcy Judge Mary F. Walrath on Dec. 3, the bankrupt holding company was trying to shield its lawyers from having to testify by presenting evidence showing that company officers were able to divine the merits of settlement without relying on the advice of lawyers. The centerpiece of WaMu’s plan is a settlement with the Federal Deposit Insurance Corp. and JPMorgan Chase & Co.

By not relying on the advice of counsel, WaMu is exposing itself to the argument that led to the defeat of the Spansion settlement.

If WaMu were to say that the opinions of counsel played a role in the decision to settle, rules of evidence would come into play. If a company executive were to testify in substance, “The settlement is good because my lawyer says so,” the statement would be barred from evidence because it would violate the rule against hearsay evidence. To put the conclusion into evidence, WaMu might be forced call the company’s lawyer to the witness stand to testify about the merits of settlement.

If a WaMu lawyer were to take the witness stand, opposing parties could be given the right in advance to review written communications and memoranda from the lawyer to the company about the settlement. If WaMu chose to raise the attorney-client privilege as reason for not producing the lawyer’s documents, then the lawyer might be barred from testifying.

To enable a lawyer to testify, WaMu therefore might be required to waive the attorney-client privilege and produce the lawyer’s legal memoranda.

The dangers for WaMu don’t end there.

If a WaMu lawyer were to testify, and if the testimony or the lawyer’s documents turned out to be adverse to WaMu, the lawyer and his or her firm in turn might be disqualified from representing WaMu in the confirmation trial.

Given these considerations, WaMu is taking the position that the merits of the settlement are self-evident even without advice of counsel. Also, lawyers will be able to give the judge their views about the legal merits of settlement when they file post-trial briefs. For Bloomberg coverage of the Dec. 3 hearing, click here.

The confirmation hearing continues today.

If Walrath confirms WaMu’s revised plan, it will 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 unit, 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).

New Filings

Louisville Symphony Files, Halts Performances

The Louisville Symphony Orchestra filed for Chapter 11 relief on Dec. 3 in its hometown, saying assets and debt both exceed $1 million.

The orchestra said in court papers that the ensemble won’t perform again in the current season, although it hopes to mount concerts in April and May for the last two months of the season if it has obtained “sufficient commitments from donors.”

The orchestra filed an emergency motion asking the bankruptcy judge for interim relief from the union contract with musicians. The contract calls for employing 71 musicians for 37 weeks a year at a total cost of $2.84 million, including wages, pension costs and health benefits.

The non-profit orchestra, founded in 1937, said in a court filing that it won’t have enough cash to cover payroll due Dec. 15. The last payroll in November was paid as the result of the “extraordinary generosity of an anonymous donor,” the orchestra said.

The Honolulu Symphony is currently undergoing Chapter 11 reorganization.

The case is Louisville Symphony Orchestra Inc., 10-36321, U.S. Bankruptcy Court, Western District of Kentucky (Louisville).

Goodwill Industries in Wisconsin & Michigan Files

Goodwill Industries of Northern Wisconsin & Upper Michigan Inc. filed for Chapter 11 reorganization on Nov. 30 in Milwaukee, saying assets and debt both exceed $1 million.

The organization describes its activities as providing employment and training to people with “barriers to employment.”

It has three work centers, nine retail stores, and a warehouse in nine communities in Michigan and Wisconsin.

The case is In re Goodwill Industries of Northern Wisconsin & Upper Michigan Inc., 10-38904, U.S. Bankruptcy Court, Eastern District of Wisconsin (Milwaukee).

Updates

Madoff Trustee Sues HSBC, Feeder Funds for Billions

The trustee liquidating Bernard L. Madoff Investment Securities Inc. began another multibillion-dollar lawsuit. The new targets are HSBC Holdings Plc, its affiliates and feeder funds it created.

The complaint, according to the trustee’s statement, alleges that the London-based bank holding company “enabled” Madoff’s Ponzi scheme and engaged in “financial fraud and misconduct” by being “willfully and deliberately blind to the fraud.”

The complaint seeks $9 billion on “theories of contribution” and $2.3 billion for receipt of fraudulent transfers. The complaint says the HSBC feeder funds directed more than $8.9 billion to Madoff. Had they “reacted appropriately” to “obvious badges of fraud,” the Madoff trustee says the illicit scheme would have ended years sooner.

To read other Bloomberg coverage, click here.

The Madoff trustee is busy filing lawsuits because the two- year deadline after the bankruptcy filing will run out on Dec. 11. If lawsuits are filed by then, the trustee can be confident that they will have begun in time to allow recoveries as far back as the law permits.

The Madoff firm began liquidating in December 2008 with the appointment of a trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009. 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 for the Southern District of New York (Manhattan).

Point Blank Shareholders Given Shot at Avoiding Sale

The bankruptcy judge won’t allow Point Blank Solutions Inc. to sell the business out from under shareholders without first giving the official equity committee a shot at nailing down replacement financing for the Chapter 11 case.

The pivotal hearing will take place Dec. 9.

Point Blank, a manufacturer of soft body armor for the military and law enforcement, wanted U.S. Bankruptcy Judge Peter J. Walsh in Delaware to schedule an auction on Dec. 15 even though no buyer is yet under contract. Point Blank was seeking a $14 million minimum bid.

The official shareholders’ committee has been opposing sale, contending it has a backstopped and funded reorganization plan superior to a sale. The committee also said it has replacement financing to take over when the existing loan expires at year’s end.

Walsh scheduled a hearing for Dec. 9 where the shareholders can attempt to prove the bona fides of their replacement loan. The creditors’ committee also wants to know whether new financing would supply sufficient liquidity for the first half of 2011. Dec. 9 will also be a hearing on Point Blank’s motion to extend the exclusive right to propose a plan and a hearing on the motion to approve bidding procedures.

Based in Pompano Beach, Florida, Point Blank has two plants. Revenue in 2009 exceeded $153 million. The former chief executive and chief operating officers of Point Blank were convicted in September of orchestrating a $185 million fraud.

The Chapter 11 petition in April listed assets of $64 million against debt totaling $68.5 million. Debt included a $10.5 million secured loan paid off by financing for the Chapter 11 case. Point Blank said it also owes $28.2 million to trade suppliers.

The case is In re Point Blank Solutions Inc., 10-11255, U.S. Bankruptcy Court, District of Delaware (Wilmington).

AbitibiBowater Has $6.9 Million October Net Profit

AbitibiBowater Inc., the newsprint maker with a confirmed Chapter 11 plan, reported $6.9 million in net income during October on net sales of $405.7 million.

Operating income for the month was $120.5 million, according to the operating report filed with the bankruptcy court in Delaware. Interest expense in the month was $110.4 million.

The largest newsprint maker in North America confirmed its Chapter 11 plan on Nov. 23. 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 between Montreal-based Abitibi-Consolidated Inc. and Greenville, South Carolina-based Bowater Inc. Abitibi is a producer of 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. Revenue in 2008 was $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).

MediCor Implements Plan with 26% for Secured Lenders

MediCor Ltd. implemented the liquidating Chapter 11 plan last week that the bankruptcy court in Delaware approved with a Nov. 9 confirmation order.

According to the disclosure statement, the plan is expected to pay 26 percent to secured lenders on their claims totaling $57.1 million. For their unsecured deficiency claims, the recovery was said to be “speculative” recoveries from litigation.

General unsecured creditors, whose claims will range from $4 million to $22 million, were projected to have a recovery of 5.3 percent to 29.3 percent from splitting almost $1 million cash plus the fruits of lawsuits.

The plan carries out a previously reached settlement with the Nevada state court receiver for Southwest Exchange Inc. who was claiming a constructive trust over company funds on behalf of his creditors. The receiver took home $3.95 million and waived other claims.

MediCor completed the sale of the assets in May 2008 for $51.5 million. The net proceeds from the sale were approximately $45.5 million at the time.

Claiming to have 17 percent of the breast-implant market outside of the U.S. and generating almost $40 million in annual sales, MediCor began the Chapter 11 case in June 2007 after the flow of money from affiliate Southwest Exchange Inc. was cut off.

The case is In re MediCor Ltd., 07-10877, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Banning Lewis Tests Out-of-State Reorganizations in Delaware

A Dec. 8 hearing in the reorganization of Banning Lewis Ranch, a master-planned community in Colorado, will determine whether bankruptcy judges in Delaware remain willing to entertain cases where the principal assets are located far away.

The city of Colorado Springs filed a motion in November, two weeks after the Chapter 11 case began, telling the bankruptcy judge the case should be moved to Colorado. The owners of the development and KeyBank NA, agent for lenders, take the position that the case is properly based in Delaware.

The developers and the lenders say venue is proper in Delaware because the company and its owners are incorporated there. They point to law saying that deference should be given to the choice of a bankrupt company about where it should reorganize. They believe that Delaware is more convenient for parties in the case with the most money at risk.

For itself, Banning Lewis says that it’s nothing more at this stage than 21,000 acres of undeveloped land 20 minutes northeast of Colorado Springs. They say there will be no development during the Chapter 11 case, thus minimizing the impact on Colorado Springs. The company points out that only one creditor supported Colorado Springs’ idea about moving the case to Colorado.

The petition said the assets are worth more than $50 million while debt exceeds $100 million.

Greenfield BLR Partners LP and Farallon BLR Investor LLC hold $141 million in debt. Together, they also have 85 percent of the stock and support having the case in Delaware.

KeyBank NA is owed another $65 million on a bank loan, court papers say.

The case is In re Banning Lewis Ranch Co. LLC, 10-13445, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Assets Sold, Milacron Seeks Conversion to Chapter 7

Milacron Inc., a manufacturer at one time of plastics processing equipment, sold the assets last year and filed a motion in November for conversion of the Chapter 11 case to liquidation in Chapter 7 where a trustee will be appointed.

There were objections by the Nov. 30 deadline, thus requiring the bankruptcy court in Cincinnati to hold a hearing before the switch to Chapter 7.

Milacron sold the assets last year to a group of senior secured noteholders including DDJ Capital Management LLC and Avenue Capital Group under a contract valued at $178 million. The purchasers owned 93 percent of the 11.5 percent senior secured notes. The price included paying off loans funding the Chapter 11 case, assuming other debt and a $6.1 million credit bid of secured notes.

The Chapter 11 petition filed in the company’s Cincinnati hometown in March 2009 listed assets of $523 million against debt totaling $752 million as of Dec. 31. Worldwide revenue in 2008 was $788 million. At filing, $44.7 million was owing on a revolving credit.

The case is In re Milacron Inc., 09-11235, U.S. Bankruptcy Court, Southern District of Ohio (Cincinnati).

Statistics

Defaults Total for the Year Reaches 75, S&P Says

There have been 75 defaults around the world this year by companies with rated debt, Standard & Poor’s said in a report.

The U.S. produced 52 of the defaults, S&P said. Bankruptcy filings in the U.S. and abroad resulted in 23 defaults this year. Distressed exchanges produced 20 defaults.

Daily Podcast

Goldman Sachs’s Arbitration Defeat, Junk Maturities: Audio

Deciding to arbitrate may have been a $20.6 million mistake for Goldman Sachs Execution & Clearing LP, the bankruptcy sale of a large plot for development in Manhattan’s Greenwich Village, inappropriate customers for a Lehman Brothers interest rate swap, the growing pot of maturing junk debt, and how a lawyer can rectify a messenger’s mistake are analyzed in the bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

Advance Sheets

Circuit Lets Lawyer with Bad Client Off the Hook

The U.S. Court of Appeals in San Francisco ruled on Dec. 1 that a bankruptcy judge was wrong in imposing sanctions on a bankruptcy lawyer and his firm even though the lawyer was “negligent” by failing to become familiar with the case before agreeing to serve as counsel and appearing in court on short notice.

The appeals court said the record didn’t support findings that the lawyer “acted in bad faith.”

The 9th Circuit said it “strains reason” to conclude that a lawyer “acts in bad faith” when he “agrees to represent a client, learns within a few days that the client’s position lacks merit, and seeks to dismiss the action the next day.”

Providing protections for lawyers representing unpopular clients, the circuit court said it is “untenable that an attorney who argues that his client should not be sanctioned is necessarily condoning the action of his client.”

The case is Chapman v. U.S. Trustee (In re Aston-Nevada LP), 08-15792, 9th U.S. Circuit Court of Appeals (San Francisco).

Lawyers Reimbursed Only for Successful Fee Defense

When an objection is made to a fee application in a bankruptcy case, U.S. Bankruptcy Judge Robert Gerber in New York agreed with a prior opinion by Chief Bankruptcy Judge Stuart M. Bernstein and ruled that there is no automatic right to reimbursement for time spent defending the fee request.

Gerber, like Bernstein, refined the general rule by holding that a law firm can be reimbursed if it “substantially prevails” and defeats an attack on its fees.

In the case of a “split decision,” the law firm must pay the costs itself.

Gerber wrote his opinion in the old General Motors Corp. Chapter 11 case.

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

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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