Madoff, Lehman, Vitro, Blockbuster: Bankruptcy

The trustee liquidating Bernard L. Madoff Investment Securities Inc. filed lawsuits seeking $1.421 billion against affiliates of seven financial institutions, including Citigroup Inc. and Natixis, a Paris-based commercial bank.

The complaints, which are all under seal, contend that the banks received transfers from Madoff feeder funds when they “knew or should have known” it was a fraud, the trustee’s statement said.

The trustee also sued Sandra Manzke, family members, and her Maxam Capital Management LLC for $100 million.

The bank complaints describe how the financial institutions created new sources of funds for Madoff by structuring derivatives linked to the feeder funds. The derivatives they created promised returns based on returns of the Madoff funds. The banks hedged their exposure by purchasing shares in the feeder funds.

The Madoff trustee is seeking $400 million from New York- based Citibank NA and $400 million from Natixis. Other defendants and the amounts being sought are Fortis Bank SA ($230 million), ABN Amro ($270 million), Banco Bilbao Vizcaya Argentaria SA ($45 million), Nomura Holdings Inc. ($35 million), and Merrill Lynch & Co. Inc. ($16 million).

The suit against Manzke says she continued doing business with Madoff after she left Tremont Group Holdings, which the trustee previously sued. The suit says she and other defendants were responsible for bringing $300 million into the Madoff fraud.

The trustee again said that recoveries will be treated as customer property for distributions to customers in accordance with their approved claims. By treating the recoveries as customer property, proceeds from the suit won’t be used to pay expense of the liquidation unless customers are paid in full.

To read other Bloomberg coverage, click here and here.

The steady stream of Madoff suits will end this week, because Dec. 11 is the second anniversary of the bankruptcy. Two years is the deadline for the trustee to file suits being sure that he can reach back to recovery on transactions that took place up to six years before bankruptcy.

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 of 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).

Updates

Lehman Opposed on Derivatives Mediation with SPVs

Lehman Brothers Holdings Inc. may not have smooth sailing at a Dec. 15 hearing for approval of procedures to mediate disputes over derivatives transactions where the counterparty is a so-called special purpose vehicle.

When the counterparty is technically an SPV, the trustees for the SPVs say they don’t have authority to mediate, and the investors with the monetary interests in the derivatives contracts haven’t come forward to participate in settlement talks, Lehman says.

To force those with the economic interest to mediate, Lehman wants the court to require that the SPVs within 60 days designate someone with authority to negotiate settlement.

Several trustees objected to the procedure, saying neither they nor anyone with an economic interest has the right under relevant contracts to bind everyone. Any settlements must provide an ability for an investor to opt out.

If approved, the mediation process would be similar to those the bankruptcy court approved in September for the negotiation of settlements of derivatives where the counterparty isn’t an SPV. Lehman said it already collected $280 million from settlement on derivates.

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 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 Investors Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District New York (Manhattan).

Mexico’s Vitro Turns Up Heat on Dissenting Creditors

Vitro SAB, Mexico’s largest glassmaker, said in a statement yesterday that it has enough votes for approval of a reorganization under Mexico’s version of Chapter 11, even though only $30 million of $1.2 billion in senior notes tendered their debt in the exchange offer.

Noteholders objecting to the reorganization say Vitro has enough votes only because it created $1.9 billion of intercompany debt that would be voted for the reorganization.

Vitro said it will begin the consurso mercantil by filing in a Mexican court by Dec. 16. To encourage noteholders to go along with reorganization, Vitro is extending the exchange offer from Dec. 7 to Dec. 21. Noteholders who tender will be given a consent fee.

For additional leverage against dissenting bondholders, Vitro says it’s considering charging the expenses it incurs in opposing “baseless litigation commenced by certain dissident bondholders” against the distributions they otherwise would receive in the Mexican reorganization.

Vitro has said that proceedings in Mexico will be accompanied by a Chapter 15 filing in the U.S.

Holders of $75 million of the bonds filed an involuntary Chapter 11 petition in Fort Worth, Texas, on Nov. 17 against Vitro’s U.S. subsidiaries. They say they are part of a larger group which says it holds almost $700 million of $1.2 billion of bonds in default since the company first missed interest payments on the notes in February 2009. The U.S. companies implied they will fight the involuntary petition when they said previously that they are paying their debts as they come due.

Where the noteholders won’t be paid in full, they object to how the reorganization would allow shareholders to retain equity.

The U.S. Vitro companies said in their bankruptcy court filing that third-party debt of the parent is $1.96 billion, with $1.2 billion owing on the unsecured bonds. The parent is proposing a court restructuring in Mexico designed to deal with about $1.5 billion in debt, a bankruptcy court filing said.

Vitro previously said noteholders would recover as much as 73 percent by exchanging existing debt for cash, new debt or convertible bonds.

Vitro is based in Monterrey, Mexico.

The bondholders who filed the involuntary petition are Lord Abbett Bond Debenture Fund, Davidson Kempner Distressed Opportunities Fund LP, Brookville Horizons Fund LP, and Knighthead Master Fund LP.

The first-filed involuntary case is In re Vitro Asset Corp., 10-47470, U.S. Bankruptcy Court, Northern District of Texas (Fort Worth).

Blockbuster and Creditors Oppose Lyme Regis Discovery

Blockbuster Inc., the movie-rental chain, and secured noteholders are opposing a motion by Lyme Regis Partners LLC seeking permission to perform an investigation of its own into Carl Icahn’s trading in company securities. The hearing will take place Dec. 16.

Blockbuster says the official creditors’ committee already has authority to conduct an examination into anything that would benefit creditors generally. The company contends that Lyme Regis, which it calls a “rogue bondholder,” is bent on suing Icahn for claims unrelated to the Chapter 11 case.

The Lyme Regis motion is opposed by the creditors’ committee, the indenture trustee for the 11.75 percent senior secured notes and a group of senior noteholders.

Lyme Regis is seeking discovery under Rule 2004 of the Bankruptcy Rules. Unlike a motion for the appointment of an examiner, there is no absolute right to take discovery under Rule 2004.

Currently, Blockbuster is scheduled to file a Chapter 11 plan by Dec. 15. Before filing for reorganization, Blockbuster negotiated a plan with holders of 80 percent of the $630 million in 11.75 percent senior-secured notes. The plan would give them the new stock. General unsecured creditors would have warrants for 3 percent of the stock. Holders of the $300 million in 9 percent subordinated notes would receive nothing.

Dallas-based Blockbuster has 5,600 stores, including 3,300 in the U.S., with the remainder abroad. Among the U.S. stores, 3,000 are owned and while the rest are franchised.

The petition listed assets of $1.017 billion against debt of $1.465 billion. Blockbuster estimated it owes $57 million in accounts payable in addition to the secured and subordinated notes.

The case is In re Blockbuster Inc., 10-14997, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Homebuilder California Coastal Has Plan Agreement

California Coastal Communities Inc., a homebuilder that filed for bankruptcy reorganization with three projects in Southern California, reached agreement with principal creditors on a Chapter 11 plan in which holders of a $99.8 million term loan will end up with the new stock.

The company reached agreement on the plan with holders of 81 percent of the revolving credit and 88 percent of the term loan. The so-called plan-support agreement is scheduled for consideration at a Dec. 16 hearing in U.S. Bankruptcy Court in Santa Ana, California.

At the same hearing, the bankruptcy judge will be asked to give interim approval for a $15 million loan that could continue as a first-lien obligation when the plan is confirmed.

The holders of the $81.7 million revolving credit are slated to have their loan continue after bankruptcy, secured by a second lien and maturing in 2016.

In exchange for the $99.8 million term loan, the lenders would receive a new third-lien note for $44 million maturing in 2017 plus all the new stock. The third-lien note would accrue interest at 15 percent. Neither interest nor principal would be paid until the first- and second-liens are fully repaid.

Unsecured creditors would split a fund consisting of $2 million to $3 million.

California Coastal filed under Chapter 11 in October 2009, listing assets of $291 million and debt of $231 million. The Irvine, California-based company listed $81.7 million as being owed on a revolving credit and $99.8 million on a term loan. Both secured obligations were owed to KeyBank NA.

The company missed a $758,000 payment due KeyBank in September 2009.

The case is In re California Coastal Communities Inc., 09-21712, U.S. Bankruptcy Court, Central District of California (Santa Ana).

Las Vegas Monorail Reports October Loss of $1.45 Million

Las Vegas Monorail Co. filed an operating report showing $2.15 million income in October and expenses before reorganization costs of $3.44 million. The net loss for the month was $1.45 million.

Since the case was filed in August 2009, total revenue has been $18.9 million, with a net loss of $19.44 million. The October loss and the cumulative loss don’t include an accrual for interest expense.

The bankruptcy judge ruled this year that the monorail isn’t a municipality and is eligible to reorganize in Chapter 11. Bondholders followed the decision by asking for a stay to halt the entire case until the issue went up on appeal.

Both the bankruptcy judge and the district judge denied the requested stay. The district judge also ruled that bondholders couldn’t appeal until the Chapter 11 case concluded.

The monorail winds its way behind casinos on the east side of the Las Vegas Strip. It filed a proposed Chapter 11 plan in August. The senior bondholders, owed $451 million, oppose the plan, which would give them notes totaling $18.5 million for their secured and deficiency claims.

Monorail, a nonprofit corporation, began operation in 2004 and built the 3.9 mile driverless transportation system. Revenue was never enough to service debt.

Making seven stops, the monorail takes 15 minutes to travel the route connecting the Las Vegas Convention Center, hotels and casinos.

The case is In re Las Vegas Monorail Co., 10-10464, U.S. Bankruptcy Court, District of Nevada (Las Vegas).

Manhattan Lipstick Building Has Final Cash Authority

The owner of the so-called Lipstick Building on Third Avenue in Manhattan received final authorization yesterday to use cash representing collateral for the holder of the mortgage. The right to use cash continues until March 31 unless an event occurs that causes an earlier termination of the right to use cash.

The building’s owner filed a prepackaged Chapter 11 petition Nov. 16 in New York to reduce the $210 million mortgage to $115 million. The plan already was accepted by the only two classes of affected creditors. For details on the plan, click here for the Nov. 17 Bloomberg bankruptcy report.

A confirmation hearing for approval of the plan is scheduled for Dec. 22. Before approving the plan, the bankruptcy judge must determine that the disclosure materials to solicit votes were adequate.

The 34-story property, between 53rd and 54th streets on Manhattan’s East Side, was built in 1986. The nickname resulted from the building’s dark pink color and elliptical shape.

The case is In re Metropolitan 885 Third Avenue Leasehold LLC, 10-16103, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Downgrade

Supervalu Downgraded to B1 on Debt Maturities

Supermarket operator Supervalu Inc. was downgraded yesterday by Moody’s Investors Service in view of “weak industry conditions as well as unique company factors.” The corporate rating when down one notch to B1 while the senior unsecured debt is now B2.

Moody’s says that upcoming debt maturities will “restrict store investment for some time.”

Based in Eden Prairie, Minnesota, Supervalu is the third- largest supermarket chain in the U.S., with almost 2,400 stores, including almost 900 operated by third parties. It also has a distribution business serving about 1,900 independent stores.

Supervalu reported a $1.47 billion net loss for the quarter ended Sept. 11 on net sales of $8.66 billion. The loss was attributable to a $1.6 billion asset impairment charge. For the first two quarters, the net loss was $1.4 billion on net sales of $20.2 billion.

For the fiscal year ended Feb. 27, net earnings were $393 million on net sales of $40.6 billion.

New Filing

Failed Brokerage Lighthouse Files to Liquidate Assets

Lighthouse Global Partners LLC and its broker-dealer unit Lighthouse Financial Group LLC filed Chapter 11 petitions yesterday in New York, where they did business.

Lighthouse Financial violated net capital requirements and was forced to stop doing business in August by the Financial Industry Regulatory Authority. The cessation of business by the broker cut off income to the parent Lighthouse Global, the companies said in bankruptcy court filings.

They intend on using Chapter 11 to wind down the businesses and liquidate assets. Ordinarily, brokerages may only file for liquidation under the Securities Investor Protection Act. If a brokerage has no customers, it is eligible to file in either Chapter 11 or Chapter 7.

Neither company has any secured creditors, court papers show. The parent said it has assets of less than $1 million and liabilities of $7.4 million.

The brokerage listed assets of $4.1 million and debt of $14.6 million. There are $1.3 million of priority claims against the broker, according to a court filing.

The cases are In re Lighthouse Global Partners LLC, 10-16501, and In re Lighthouse Financial Group LLC and 10-16506, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Advance Sheets

Bankruptcy Trustee Can Be Personally Liable for Negligence

A bankruptcy trustee can be held personally liable for negligence in administration of the bankrupt estate, Chief U.S. District Judge Garrett E. Brown Jr. in Newark, New Jersey, ruled on Dec. 7.

During a Chapter 7 case, the sale of property resulted in a tax liability. The trustee was several years late in filing federal tax returns. The estate paid $149,000 in interest and penalties. The bankruptcy judge caught the mistake after the trustee filed an amended final report showing that the Internal Revenue Service paid a $50,000 refund, reducing the net interest and penalties to about $98,000.

The bankruptcy court on its own directed the bankruptcy trustee to show cause why he shouldn’t be held personally liable for the $98,000. The trustee appealed after the bankruptcy judge surcharged the trustee for the interest and penalties.

On appeal, Brown noted that the U.S. Court of Appeals in Philadelphia hasn’t directly ruled on whether a trustee can be held personally liable for negligence. Some courts, Brown said, only hold a bankruptcy trustee liable for “willful violations of fiduciary duties.”

Brown decided to follow the majority of courts and find liability for negligence. Brown also ruled it was proper for the bankruptcy judge to have reopened the case and hold the trustee liable on the judge’s own motion.

The case is Frost v. Hussain (In re Hussain), 10-2103, U.S. District Court, District of New Jersey (Newark).

Jury Trial Gives No Right to Withdrawing Reference

A lawsuit by a bankruptcy trustee against a lender alleging collection of a debt in violation of Florida state law should remain in bankruptcy court, according to a Dec. 7 opinion by U.S. District Judge James Whittemore in Tampa, Florida.

Capital One Bank (USA) NA filed a motion in U.S. district court arguing that the lawsuit by the trustee shouldn’t be conducted in bankruptcy court. Whittemore denied the motion for withdrawal of the reference, at least for the time being.

The bank argued that it has a right to a jury trial and that it doesn’t consent to a jury trial in bankruptcy court. Whittemore said that an eventual right to a jury trial doesn’t require immediate withdrawal of the reference.

Whittemore said that it would be more efficient for pretrial proceedings to take place in bankruptcy court. He said that withdrawing the reference now would result in “pitting the case against the competing criminal and civil litigation demands of the district court’s docket.”

The case is Esposito v. Capital One Bank (USA) NA (In re Stone), 10-2517, U.S. District Court, Middle District of Florida (Tampa).

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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