Madoff, Lehman, WaMu, Movie Gallery: Bankruptcy

The estate of Jeffrey M. Picower and his investment funds agreed to give back every cent of the $7,206,157,717 earned in profits over 30 years of investing with Bernard L. Madoff Investment Securities Inc. The settlement, announced Dec. 17, was made with the widow of Picower, who drowned in his swimming pool in Palm Beach, Florida, in October 2009.

All of the money goes to the Madoff firm’s customers with valid customer claims, the trustee said in a statement. With the money in hand, the trustee intends to make an interim distribution “as soon as is practicable.”

Technically speaking, $2.2 billion will go to the U.S. government in a forfeiture suit. The remainder goes to the trustee for the Madoff firm appointed under the Securities Investor Protection Act. Nonetheless, the trustee has been named special master for a distribution to customers of the $2.2 billion forfeited to the government.

Combining the Picower settlement with previous settlements, the trustee says he’s recovered one-third of the principal amount of customers’ losses. This month, the trustee announced a $625 million settlement with philanthropist Carl Shapiro and family and a separate settlement with Union Bancaire Privee, a private Swiss bank, that will bring in from $470 million to $500 million.

In his statement, the trustee said that Picower widow’s action should be an example for others to turn over money they received from Madoff “irrespective of their knowledge of the fraud.” All payments from Madoff, the trustee said, were “other people’s money.” What the trustee recovers can go to customers who “recovered little or none of their original deposits.”

Putting the recoveries together, the trustee said the fund for customers will total more than $7.5 billion. The Securities Investor Protection Corp. has already paid customers more than $760 million from its fund, the government statement said.

In the complaint to recover from Picower, the trustee alleged that he knew or should have known that the Madoff firm was a fraud. In the statement, the trustee said that recovering additional records showed “there is no basis to pursue the complaint.” The trustee apparently meant to say there was no reason to pursue the complaint for recovery of more than fictitious profits.

For other Bloomberg coverage, click here.

The Madoff firm began liquidating on December 11, 2008, with the appointment of the 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, Southern District of New York (Manhattan).

Updates

Lehman-JPMorgan Trial Currently Set for April 2012

Lehman Brothers Holdings Inc. believes it found loopholes in the so-called safe harbor which allows specified types of securities transactions to be terminated even with the automatic stay in bankruptcy that would otherwise preclude the non- bankrupt party from acting.

Lehman’s argument is laid out in papers it filed last week opposing the motion by JPMorgan Chase Bank NA to dismiss the suit Lehman filed in May to recover $8.6 million plus damages. JPMorgan takes the position that the safe-harbor defeats Lehman’s suit. The bank filed counterclaims against Lehman. Click here to read Bloomberg coverage about Lehman’s theory.

Unless JPMorgan wins the motion to dismiss, there won’t be a trial until the end of April 2012, under a scheduling order this month. The parties are to complete fact discovery, including depositions of fact witnesses, by Aug. 19. Depositions of expert witnesses are to be finished by Nov. 23, 2011.

With discovery completed, either side may file a motion for summary judgment by Jan. 13, 2012. The trial is scheduled to begin April 30, 2012.

Lehman was authorized last week to sell the debt it holds against the Heritage Fields master planned community in Irvine, California. The purchaser, an affiliate of State Street Corp., will pay $125 million plus repayment of a $32 million participation interest. Lehman also is entitled to receive contingent payments. Heritage Fields is a 3,723-acre project.

The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008. The Lehman brokerage operations went into liquidation four days later in the same court and are under 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 Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District New York (Manhattan).

Washington Mutual Documents to Remain Confidential

The judge presiding over the reorganization of Washington Mutual Inc. ruled at a hearing on Dec. 17 that she won’t allow public disclosure of confidential information she was given in the course of deciding whether to appointment an examiner. To read Bloomberg coverage, click here.

The bankruptcy judge, Mary F. Walrath, is deciding whether to sign a confirmation order and approve the Chapter 11 plan. The confirmation trial concluded Dec. 7.

If confirmed and implemented, the plan 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 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).

Sprint Sues to Kill Liens on TerreStar FCC Licenses

Sprint Nextel Corp. filed a lawsuit on Dec. 17 asking the bankruptcy court to rule that TerreStar Networks Inc., a satellite-based mobile-phone provider, violated federal law when it gave secured creditors a lien on licenses granted by the Federal Communications Commission.

When the bankruptcy court approved financing in November for TerreStar, the court granted a lien on FCC licenses in favor of holders of the 15 percent senior secured pay-in-kind notes. Although Overland Park, Kansas-based Sprint objected at the time, the bankruptcy judge left the dispute for later determination. The suit, Sprint says, is expressly permitted by the financing.

Sprint contends that federal law prohibits granting a lien on an FCC license. Sprint also argues a lien can’t be given even on proceeds from the licenses.

Sprint is suing because it spent $750 million to reconfigure the spectrum for its benefit and the benefit of other providers. If it succeeds in knocking out the noteholders’ pre- and post-bankruptcy liens on the licenses and proceeds, Sprint says federal communications laws will allow it to recover $100 million from TerreStar, even with the bankruptcy.

In the unsuccessful objection to financing approval, Sprint was joined by Harbinger Capital Partners LLC, Solus Alternative Asset Management LP and Remus Holdings LLC. The $75 million in financing for the Chapter 11 case comes from from EchoStar Corp., the largest secured creditor. Under TerreStar’s proposed reorganization plan, EchoStar would take ownership in a debt- for-equity swap.

TerreStar has a hearing tomorrow for approval of the disclosure statement explaining the reorganization plan. To read about the plan and some creditors’ objections, click here for the Nov. 10 Bloomberg bankruptcy report.

TerreStar, based in Reston, Virginia, provides mobile satellite coverage throughout the U.S. and Canada where traditional mobile networks are unavailable. EchoStar is a television equipment and satellite services company.

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 of $1.4 billion and debt totaling $1.64 billion. In addition to $944 million in 15 percent senior secured pay-in-kind notes and $179 million in 6.5 percent exchangeable pay-in-kind 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).

C-Bass to Sell ‘Equity Investments’ by Dec. 23

Credit-Based Asset Servicing & Securitization LLC, commonly known as C-Bass, was authorized by the bankruptcy judge last week to hold a hearing on Dec. 23 for the sale of what it calls equity investments.

C-Bass estimated that the property is worth $200,000, less than the expense entailed by preparing 2011 tax returns if the property isn’t sold. C-Bass told potential buyers to submit bids by Dec. 21. The winning bidder will be announced on Dec. 21.

The buyer must complete the purchase by Dec. 31 to avoid the need for filing tax returns.

C-Bass already arranged an auction for Jan. 10 to determine if the $2.4 million offer from FIG LLC is the best bid for the collateral management business. Other bids are due Dec. 31.

New York-based C-Bass had been an originator, issuer, servicer, and securitizer of high-yield residential mortgages. It filed to liquidate under Chapter 11 on Nov. 12, saying at the time that $170 million was owing on the senior credit facility with JPMorgan Chase Bank NA as agent. Other debt includes over $800 million on repurchase agreements, more than $365 million on trust preferred securities, and almost $128 million on subordinated debt.

Before the Chapter 11 filing, the secured lenders agreed that C-Bass could use $8.2 million to operate in Chapter 11 and distribute to lower ranking creditors under a reorganization plan. For other provisions that could be included in a Chapter 11 plan, click here for the Nov. 17 Bloomberg bankruptcy report.

C-Bass is 91 percent owned by affiliates of MGIC Investment Corp. and Radian Group Inc.

The case is In re Credit-Based Asset Servicing & Securitization LLC, 10-16040, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Movie Gallery Sells Video Library for $450,000

The Video Library business that belonged to liquidated Movie Gallery Inc., the movie-rental chain, is to be sold for $450,000 to E.T. Video Inc. The money goes to the first-lien lenders under the liquidating Chapter 11 plan that was implemented on Nov. 18.

The Video Library business provides fixtures and products on consignment to convenience store operators in rural areas. The assets included an inventory of 50,000 DVDs at 80 locations plus intellectual property.

The bankruptcy court in Richmond, Virginia, approved the plan in an Oct. 29 confirmation order. For details on the plan, click here for the Sept. 14 Bloomberg bankruptcy report.

Movie Gallery liquidated the last 1,028 movie-rental stores. It had some 2,600 stores in operation on filing under Chapter 11 for a second time in February. The new filing was less than two years after a previous bankruptcy reorganization. Debt when the new case began included $100 million on a secured revolving credit, $394 million on a first-lien facility, and $146 million in claims held by second-lien creditors.

The new case is In re Movie Gallery Inc., 10-30696, U.S. Bankruptcy Court, Eastern District Virginia (Richmond). The prior case is In re Movie Gallery Inc., 07-33849, in the same court.

Daily Podcast

Lehman Substantive Consolidation, Gulfstream: Bankruptcy Audio

Further exploration of whether there should be substantive consolidation for Lehman Brothers Holdings Inc., the chance to buy an airline or a stretch limousine maker, and split decisions by courts on whether electricity is “goods” or a service are discussed by Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist and editor-at-large Bill Rochelle in a bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.

New Filing

Las Vegas’s Twain Condominium Project Files to Halt Foreclosure

A condominium conversion in Las Vegas known as Twain Estates filed for Chapter 11 protection on Dec. 15 to halt foreclosure of an $11.4 million mortgage.

The project was built in 1983 as a rental property and later converted to condominiums. Of 254 units, 192 remain unsold.

The petition says assets and debt both exceed $10 million.

The case is In re Twain Condominiums LLC, 10-33323, U.S. Bankruptcy Court, District of Nevada (Las Vegas).

Bank Failures

Six Bank Failures Bring Year’s Total to 157

Six bank failures on Dec. 17 brought the year’s total to 157. The banks, which had a combined $1.23 billion in assets, were in Georgia, Arkansas, Minnesota and Florida.

The failures last week will cost the Federal Deposit Insurance Corp. $267.6 million.

Bloomberg reported there may be no more bank takeovers this year because regulators rarely put banks into receivership on a holiday week. To read the Bloomberg story, click here.

The 140 bank failures in 2009 were five times more than 2008. The failures in 2009 were the most since 1992 when 179 institutions were taken over by regulators.

Advance Sheets

Circuit Rules on Evidence Used When Plan is Ambiguous

When construing an ambiguous provision in a Chapter 11 plan, the bankruptcy court may consider extrinsic evidence. On appeal, the appellate court may not consider extrinsic evidence and will uphold the ruling of the bankruptcy court if the interpretation as “reasonable,” the U.S. Court of Appeals from Cincinnati ruled on Dec. 17 in an appeal arising from the Dow Corning Corp. breast implant reorganization plan.

In one of the two Dow Corning appeals considered together, the 6th Circuit Court of Appeals concluded that one provision in the plan was ambiguous when the lower court thought it wasn’t. The appeals court remanded the case to consider extrinsic evidence which the lower court hadn’t done in view of the erroneous conclusion that the plan wasn’t ambiguous.

In the second appeal, the court also reversed because the lower court made a grammatical mistake in interpreting a plan provision using the words “none” and “or.”

U.S. Circuit Judge Ray M. Kethledge wrote the majority opinion. Chief U.S. Circuit Judge Alice M. Batchelder concurred in part and dissented in part. Batchelder believes that the majority’s opinion “confuses, rather than clarifies, the standard of review in cases such as these.” This writer agrees.

The case is Dow Corning Corp. v. Claimants’ Advisory Committee, 09-1827, U.S. 10th Circuit Court of Appeals (Cincinnati)

Refiling Defective Plan Justifies $13,000 Sanction

A lawyer was properly sanctioned almost $13,000 for filing an amended Chapter 13 plan that the bankruptcy judge previously found defective, U.S. District Judge Freda Wolfson wrote in a Dec. 16 opinion not to be published officially.

A man and woman, who never married, lived together several years and bought real estate jointly, without specifying each’s percentage interest. After the relationship soured, the woman sued in state court to partition and sell the property. The state judge ordered that the property be sold, with a division of the proceeds to be decided later.

The man sought reorganization in Chapter 13 and filed a plan where he would buy out the woman’s interest in the property. The bankruptcy judge refused confirmation, ruling that the bankrupt man was prohibited from undoing the state court order requiring sale. After the bankrupt’s lawyer filed a revised plan again containing a provision to buy out the woman, the bankruptcy judge again denied confirmation and sanctioned the lawyer almost $13,000.

On appeal, Wolfson said the so-called Rooker-Feldman doctrine precluded filing a plan where the woman would be treated as a creditor as opposed to an owner with the right of sale directed by the state court. Wolfson said that filing the plan a second time with the offending provision was “sufficiently egregious” to warrant sanctions.

Wolfson said the man couldn’t use bankruptcy to contest the state court order. She ruled that the bankrupt’s only recourse would have been to file an appeal in state court. Wolfson also ruled that the woman’s filing a proof of claim asserting ownership didn’t waive her rights under Rooker-Feldman.

Rooker-Feldman, a doctrine derived from two U.S. Supreme Court cases, bars a federal court from modifying a prior state- court ruling involving the same parties. The doctrine applies in all federal cases, not just in bankruptcy.

The case is Dahlgren v. Palone (In re Dahlgren), 10-1988, U.S. District Court, District of New Jersey (Trenton).

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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