Lehman, Loehmann’s, Ambac, Gulfstream: Bankruptcy

Paulson & Co. Inc. and nine other creditors filed a competing Chapter 11 plan yesterday for Lehman Brothers Holdings Inc. The plan proposes substantive consolidation with most of the Lehman subsidiaries where all assets are thrown into one pot and creditors receive a similar distribution regardless of the Lehman subsidiary that owed the debt.

Paulson’s plan wouldn’t honor claims based on guarantees, claims between the Lehman companies wouldn’t be allowed, and a claim wouldn’t be allowed against more than one Lehman company.

Paulson says its group holds $12 billion in claims, including $9.4 billion of senior unsecured claims against the Lehman holding company. Members of the group include California Public Employees’ Retirement System and Owl Creek Asset Management LP.

Paulson also filed a 102-page disclosure statement explaining its plan.

As an inducement for creditors to accept the plan who would fare better under Lehman’s non-consolidation plan, the Paulson plan provides enhanced treatment for holders of guarantee claims who accept the plan. If they don’t accept the plan, they receive nothing for their guarantees.

The disclosure statement says that holders of senior unsecured claims against the Lehman holding company would recover 24.5 percent if other classes accept the plan. If the guarantee creditors reject, the senior class recovery would rise to 25.5 percent.

General unsecured creditors of the holding company would take home 20.7 percent if other classes accept. If not, it would be 21.6 percent.

Unsecured creditors of Lehman subsidiaries would see 21.1 percent if everyone accepts the plan. If classes reject, the recovery would be 21.6 percent.

Outside creditors would receive 4.6 percent on guarantee claims if they accept the plan. If they reject, the recovery is nothing.

Paulson’s disclosure statement is a detailed exegesis on how Lehman conducted business with subsidiaries. Paulson believes that Lehman qualifies for substantive consolidation under a 1988 decision from the U.S. Court of Appeals in Manhattan known as Augie/Restivo Baking Co. The lynchpin to Paulson’s argument may be the allegation in the disclosure statement that Lehman hadn’t “kept accurate books and records.” Paulson also argues that Lehman didn’t make intercompany transactions at arm’s length.

The disclosure statement makes interesting reading for anyone curious about how Lehman conducted business, as reported by Paulson.

Lehman’s exclusive right to file a plan ended after being in Chapter 11 18 months.

The Lehman holding company and its non-brokerage subsidiaries filed their 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 has been saying that it intends on amending the plan this year and having it approved in a confirmation order by March.

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 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 of New York (Manhattan).

Updates

Loehmanns Has Plan Agreement with Unsecured Committee

Discount retailer Loehmann’s Inc. announced yesterday that it reached agreement with the official committee to increase the pot for unsecured creditors to $2 million. As a result, the committee supports the reorganization plan, the company said.

Previously, unsecured creditors were offered $1.1 million. Loehmann’s disclosure statement said unsecured claims total $26.2 million.

Loehmann’s plan was worked out in principle before the Chapter 11 filing on Nov. 15. It is financed by a new $25 million investment from the current owner, Istithmar World PJSC, and Whippoorwill Associates Inc., the owner of 70 percent of the secured notes. Istithmar, an investment firm owned by the government of Dubai, will provide 64 percent of the $25 million to purchase new convertible preferred stock.

The plan swaps the $80.4 million owing on secured Class A notes for 42.4 percent of the new common equity while Class A noteholders 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 offered a 13.8 percent recovery by receiving 8.6 percent of the new common equity.

The plan is designed to reduce debt by about $115 million. The disclosure statement says the plan has support from holders of 73 percent of the Class A notes and 64 percent of the Class B notes.

This week the bankruptcy court approved $25 million in financing for the reorganization. The court also approved an additional $7 million in financing from Whippoorwill which the company said is for buying spring inventory.

Other debt included $30.5 million outstanding at filing on a $45 million revolving credit with Crystal Financial LLC.

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 loan requires the plan to 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 a 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).

Ambac Settles Class-Action Lawsuits for $27.1 Million

Ambac Financial Group Inc. has an agreement to settle six securities class-action lawsuits for $27.1 million, the company said yesterday in a regulatory filing.

The company itself will pay $2.5 million. The remainder comes from insurance. The settlement must be approved by the bankruptcy court in Manhattan where the insurance holding company filed under Chapter 11 in November.

A state court in Wisconsin is deciding whether to approve the proposed rehabilitation of the insurance subsidiary Ambac Assurance Corp.

Although insurance holding companies can reorganize in bankruptcy court, insurance companies themselves are prohibited from any type of filing in U.S. bankruptcy court.

The Chapter 11 petition by the Ambac parent 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 insurance company stopped paying dividends to the parent in 2007 and stopped writing new business entirely in mid-2008.

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

Platinum Beats Rawlings at Auction for Schutt Helmets

Schutt Sports Inc., a football-helmet manufacturer, conducted a 20-hour auction that resulted in an increase of the sale price by about $8 million. At a hearing yesterday, the bankruptcy judge in Delaware said he would approve the sale to Kranos Intermediate Holding Corp. at a price that should net Schutt about $31.1 million.

There were three bidders at the auction. In addition Kranos, there were offers from Two Point Conversion LLC and Rawlings Sporting Goods Co. Fenton, Missouri-based Rawlings objected unsuccessfully to approval of the sale to Kranos, an affiliate of Platinum Equity LLC. Rawlings argued that Schutt turned down its higher offer because Kranos would close sooner.

To read Bloomberg coverage, click here.

Schutt previously estimated that secured debt at the time of sale would be about $19.8 million, with administrative expenses totaling $3.5 million more.

When Schutt filed under Chapter 11 in September, $34.8 million was owed to 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. 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).

NYC OTB to Seek Dismissal at Jan. 19 Hearing

Off-Track Betting Corp. in New York City filed a motion yesterday to dismiss the Chapter 9 municipal reorganization begun a year ago this month. The hearing on dismissal is scheduled for Jan. 19.

NYC OTB halted operations on Dec. 7 when the state Senate adjourned for the year without adopting legislation required to fund the reorganization plan filed in November.

The bankruptcy judge had approved an explanatory disclosure statement early this month. NYC OTB wasn’t going to solicit votes until and unless the necessary legislation was adopted.

In Chapter 9, no one other than the municipality may propose a plan. Conversion to Chapter 7 or appointment of a trustee isn’t an option. NYC OTB said that creditors “will retain their rights under applicable nonbankruptcy law” after dismissal.

The bankruptcy judge ruled in March that NYC OTC was eligible to reorganize in Chapter 9. The petition, filed in December 2009, said assets were less than $50 million while debt exceeded $100 million. Liabilities included $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).

Gulfstream Airlines Headed for Jan. 4 Auction

Whether airline owner Gulfstream International Group Inc. continues flying beyond the first week of January will depend on the outcome of a Jan. 4 auction for the parent of Gulfstream International Airlines Inc.

Yesterday, the bankruptcy judge in Fort Lauderdale, Florida, approved procedures whereby bids for the airline are due on Jan. 3, in advance of a Jan. 4 auction and a hearing on Jan. 5 to approve the sale.

Absent a buyer, Gulfstream will be in default under an agreement with aircraft owner Raytheon Aircraft Credit. Default would allow Raytheon to repossess the 21 aircraft it provides.

Gulfstream is working on an agreement to sell the airline to Chicago-based Victory Park Capital Advisors LLC, the provider of financing for the Chapter 11 case. Any deal to buy the airline must be acceptable to Waltham, Massachusetts-based Raytheon.

Gulfstream said it won’t accept an offer to purchase only the operating certificate. If a buyer intends to run the business as an airline, it would presumably be required to confirm a Chapter 11 plan to avoid the need for seeking a new operating certificate from the Federal Aviation Administration.

A buyer is eligible to take advantage of an offer from Raytheon to sell the aircraft at a specified price. The price isn’t being made public. Gulfstream said it doesn’t have enough funding to continue operating in Chapter 11 absent a quick sale.

Gulfstream filed for Chapter 11 reorganization on Nov. 4 in Fort Lauderdale, where it is based.

Gulfstream had assets of $13.6 million and $26 million in total liabilities on the June 30 balance sheet. Revenue of $46.3 million for the first half of 2010 resulted in a $1.6 million operating loss and a $2.8 million net loss. Revenue in 2009 was $87.3 million.

On entering Chapter 11, Gulfstream had 23 turboprop aircraft seating 19 passengers each. The company at the outset had more than 150 daily flights from Florida, the Bahamas and Ohio. Gulfstream operates under code-sharing arrangements with Continental Airlines Inc., UAL Corp.’s United Airlines and Copa Airlines.

The case is In re Gulfstream International Group Inc., 10-44131, U.S. Bankruptcy Court, Southern District of Florida (Fort Lauderdale).

Stretch Limo Maker Krystal Koach Schedules Jan. 4 Auction

Krystal Koach Inc., a maker of stretch limousines and shuttle buses, filed for Chapter 11 reorganization on Nov. 17 and was given court approval to sell assets at a Jan. 4 auction. A hearing to approve the sale is set for Jan. 6.

Krystal Infinity LLC is to make the first bid with an offer of $9 million that includes $6.5 million cash. The bankrupt company says it had 30 percent of the stretch limo market.

Krystal, based in Brea, California, said revenue was $150 million at its peak. By 2009, sales declined to $35 million as a result of the recession, court papers say. About 85 percent of work on the limos is performed at a plant in Mexico.

Principal debt includes $7.4 million on a revolving credit. The company is owned by Edward P. Grech. The petition said assets and debt both exceed $10 million.

The case is In re Krystal Koach Inc., 10-26547, U.S. Bankruptcy Court, Central District of California (Santa Ana).

Tousa Selling Regal Oaks in Osceola for $6.8 Million

Homebuilder Tousa Inc. will sell a partially completed development known as Regal Oaks for $6.8 million unless a higher offer turns up before the Jan. 13 approval hearing.

Regal Oaks is short-term rental community in Osceola County, Florida, not far from the Orlando theme parks. The project has 69 completed units and 293 undeveloped lots.

Although Tousa won’t hold a formal auction, higher bids are welcome. If buyer CLC Regal Oaks Inc. doesn’t end up purchasing the project, there won’t be a breakup fee.

Two U.S. district judges heard oral argument in October on the lenders’ appeal from a ruling by the bankruptcy judge in October 2009 that that the bailout and refinancing in mid-2007 of a joint venture in Transeastern Properties Inc. included fraudulent transfers.

Tousa filed a Chapter 11 plan in July. Approval of the plan and explanatory disclosure statement are on ice pending outcome of the appeal. For a summary of the plan, click here for the July 20 Bloomberg bankruptcy report. The plan assumes appellate courts uphold the judgment the creditors’ committee won against the lenders.

Tousa filed for bankruptcy reorganization in January 2008. The Hollywood, Florida-based company listed assets of $2.1 billion against debt totaling $2 billion. At the outset of reorganization, it was 67 percent-owned by Technical Olympic SA.

The case is In re Tousa Inc., 08-10928, U.S. Bankruptcy Court, Southern District of Florida (Fort Lauderdale).

Taylor Bean Selling Office Building for $1.35 Million

Taylor Bean & Whitaker Mortgage Corp., once the largest independent mortgage originator in the U.S., will sell a 24,000 square-foot office building for $1.35 million unless a better offer turns up before the sale-approval hearing on Jan. 7.

The building at 950 Grayson Highway, Lawrenceville, Georgia, stands on an 8.2-acre plot.

On Jan. 19, Taylor Bean has a confirmation hearing for approval of the Chapter 11 plan. For details on the plan, supported by the official creditors’ committee, click here for the Nov. 12 Bloomberg bankruptcy report.

Taylor Bean filed under Chapter 11 in August 2009, three weeks after federal investigators searched the offices of the Ocala, Florida-based company. The day following the search, the Federal Housing Administration, Ginnie Mae and Freddie Mac prohibited the company from issuing new mortgages and terminated servicing rights.

Taylor Bean managed an $80 billion mortgage servicing portfolio. The petition said assets and debt both exceed $1 billion.

The case is Taylor Bean & Whitaker Mortgage Corp., 09-07047, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).

JPMorgan Files Unredacted Version of Lehman Counterclaim

JPMorgan Chase Bank NA filed an unredacted version of the counterclaims it made on Dec. 1 against Lehman Brothers Holdings Inc. The counterclaims were filed in the lawsuit Lehman and its creditors’ committee started against the New York-based bank in May.

Seeking $8.6 billion plus damages, JPMorgan says Lehman and Barclays Plc were guilty of “collusion and fraud” in the “false and misleading” motion they filed with the bankruptcy court for permission to sell the brokerage business to London- based Barclays.

JPMorgan said it had no exposure to Lehman on the morning of Sept. 15 when Lehman filed for bankruptcy. At the urging of the Federal Reserve, JPMorgan says it loaned $70 billion and released $5 billion in margin on the promise that Barclays would buy all of the securities in the Lehman brokerage business.

Instead, JPMorgan explains how Barclays “cherry picked” the assets, leaving the New York bank with a $25 billion loan secured by the “most toxic assets.”

JPMorgan admits it was able to have the loan repaid eventually, in part by using $8.6 billion of collateral Lehman is trying to recover in the lawsuit. For Bloomberg coverage, click here.

Watch List

Harrisburg Admitted into State Act 47 Program

Harrisburg, the capital of Pennsylvania, was accepted into the state’s Act 47 program after being declared “financially distressed.” The city missed payments of $50 million on bonds it guaranteed for an incinerator project. For Bloomberg coverage, click here.

The state Department of Community and Economic Development appoints a coordinator who has 90 days to develop a recovery plan for consideration by the mayor and city council.

Harrisburg guaranteed $282 million in bonds sold to finance an incinerator that converts trash to energy.

The bonds are insured by Assured Guaranty Municipal Corp.

Statistics

Claims Trading Perks Up in November on Lehman Revival

The trading of claims against bankrupt companies perked up in November with an increase in trading of liabilities owing by Lehman Brothers Holdings Inc.

Only three months in the last year had more claim trades than November, based on notices filed in bankruptcy courts, according to data compiled from court records by SecondMarket Inc.

The Lehman holding company was responsible for 285 trades in November representing $2.84 billion face amount of claims. Lehman represented 88 percent in dollar amount of all November trades.

Over the last year, traded claims of Lehman and its brokerage subsidiary totaled $36.25 billion. Casino owner Trump Entertainment Resorts Inc. was in second place with five traded claims for $730 million.

November’s totals were given a $205 million boost when Bank of America NA sold its mortgage against the 49-story Everglades on the Bay condominium in Miami.

New Filing

Tallahassee’s Fallschase Files in Birmingham, Alabama

The owners of the Fallschase mixed-use development in Tallahassee, Florida, filed for Chapter 11 reorganization yesterday in Birmingham, Alabama.

The project, a master-planned community, includes residential, retail and office uses. Anchor tenants include Costco Wholesale Corp., Wal-Mart Stores Inc. and Sportsman’s Warehouse, court papers say.

The filing in Chapter 11 took place on the eve of a hearing on a motion by the lender for summary judgment of foreclosure.

The petition says assets and debt both exceed $50 million.

The ultimate owners of the project are AIG Baker LLC and Alex Baker LP, who own 15 shopping centers and 35 projects, according to court papers. They are based in Birmingham.

The cases are AIG Baker Tallahassee LLC, 10-07353, and AIG Baker Tallahassee Communities LLC, 10-07354, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).

Advance Sheets

Electricity is ‘Goods’ Under Uniform Commercial Code

Court are split on whether electricity qualifies as “goods.” In bankruptcy cases, the outcome is important because companies in reorganization must pay in full for “goods” delivered within 20 days before bankruptcy.

U.S. District Judge Barbara Crabb in Madison, Wisconsin, came down on the side of courts ruling that electricity is a good. She disagreed with a 2009 decision going the other way in the reorganization of chicken producer Pilgrim’s Pride Corp.

Crabb said the outcome turned on “the nature of electricity.” Ultimately, she concluded that electricity is goods under the Uniform Commercial Code because it is “moveable, tangible and consumable” and is “bought and sold in the marketplace.”

Because electricity is goods, Crabb said a bankruptcy judge was correct in requiring payment-in-full for electric service in the 20-day period before bankruptcy.

To read about the Pilgrim’s Pride decision by U.S. Bankruptcy Judge Michael Lynn, click here for the Sept. 22, 2009, Bloomberg bankruptcy report.

The case is GFI Inc. v. Reedsburg Utility Commission, 10-388, U.S. District Court, Western District of Wisconsin (Madison).

Business Owners May Prohibit Chapter 11 Filing

It’s a recognized principle that an agreement with a lender not to file bankruptcy isn’t enforceable. The Bankruptcy Appellate Panel for the 10th Circuit penned an opinion on Dec. 6 saying that the general rule doesn’t apply to an agreement between owners of a business.

There were two owners of a corporation owning a real estate project. They had an agreement giving one of them management responsibility. The manager-part owner filed the project in Chapter 11. The other owner filed a motion to dismiss. The bankruptcy court granted the motion to dismiss and the appellate panel affirmed.

The ruling on appeal rested on two principles. The manager was authorized under the management agreement to run the company in the “ordinary course of business.” The appellate panel said filing in Chapter 11 is not ordinary course.

The provision in the agreement between the two owners prohibiting a bankruptcy filing was enforceable because there was no evidence it was made under duress.

The case is DB Capital Holdings LLC v. Aspen HH Ventures LLC (In re DB Capital Holdings LLC), 10-046, Bankruptcy Appellate Panel for the 10th Circuit (Denver).

Horse Trailer Isn’t a Home, Appellate Judges Rule

A horse trailer where an individual lived part time didn’t qualify for exemption in bankruptcy as a mobile home, the Bankruptcy Appellate Panel for the 8th Circuit ruled yesterday.

The bankrupt testified that he called the trailer his home after his former wife “kicked him out,” the appellate panel said. The bankrupt admitted that he sometimes used the trailer to haul his and his girlfriend’s horses. He also admitted staying most nights at his girlfriend’s home.

The appeals court decided the case by referring to Missouri state law which says that a structure can’t be a mobile home unless it has 320 square feet. The trailer in question was only 120 square feet.

The appellate panel also concluded that the trailer didn’t qualify for exemption as the debtor’s principal residence. If there is an error in the opinion, it’s in not allowing an indigent person to claim residence in a non-traditional dwelling, in this writer’s opinion.

The case is Moon v. Hurd (In re Hurd), 10-6072, Bankruptcy Appellate Panel for the 8th Circuit (St. Louis).

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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