General Growth, Innkeepers, Fuddruckers: Bankruptcy

Innkeepers USA Trust, a real estate investment trust, said in court papers filed early this morning that it’s working with Five Mile Capital Partners LLC and a subsidiary of secured lender Lehman Brothers Holdings Inc. on an agreement to fund a reorganization plan. The proposal includes an auction to test whether anyone will top the offer from Five Mile and the Lehman subsidiary Lehman Ali Inc.

This morning’s filing was a motion for a four-month extension of the exclusive right to propose a Chapter 11 plan. If granted at a Jan. 26 hearing, the new deadline would be May 30.

Holders of Innkeepers’ preferred stock are working on a proposal where they would retain an equity interest in five hotels that aren’t subject to the $238 million in floating-rate mortgages held by Lehman on 20 properties and the 45 hotels where Midland Loan Services Inc. was acting as servicer for $825 million in mortgage debt.

The preferred shareholders’ proposal entails using Innkeepers’ available cash and proceeds from a rights offering to raise $15 million while reinstating $160 million in mortgages on the five hotels. The shareholders’ proposal was laid out in a letter obtained by Bloomberg News from someone involved in the discussions who couldn’t be identified because the talks are private.

The preferred shareholders would end up with 40 percent of the stock plus the right to participate in the rights offering for another 40 percent. Preferred shareholders providing a backstop for the offering would be given 20 percent of the stock.

The preferred shareholders are urging the holders of mortgages on the other 65 properties not to propose a plan making it impossible for them to retain what they believe is an equity in the five properties.

Early in the case, the bankruptcy judge refused to approve a proposal where equity in reorganized Innkeepers would have been shared by Lehman and Apollo Investment Corp., the current owner. The original plan was opposed by Midland.

Palm Beach, Florida-based Innkeepers has 72 extended-stay and limited-service properties with 10,000 rooms in 20 states. For details on Innkeepers’ plan the bankruptcy judge rejected, click here for the Aug. 31 Bloomberg bankruptcy report.

Apollo acquired the company in July 2007 in a $1.35 billion transaction. The Innkeepers petition listed assets of $1.5 billion against debt totaling $1.52 billion.

The case is In re Innkeepers USA Trust, 10-13800, U.S. Bankruptcy Court, Southern District of New York Manhattan).

Updates

General Growth May Decide When Default Interest Rate Is Owed

General Growth Properties Inc., the successfully reorganized shopping-mall owner, may be remembered for being the case to decide whether a secured lender is entitled to the default rate of interest if there was no notice of default before the bankruptcy filing. The outcome will determine whether the secured lenders receive another $85.6 million in interest.

The question coming before U.S. Bankruptcy Judge Allan L. Gropper on March 10 involves a loan of almost $2.6 billion made in February 2006 to the top-tier General Growth holding company. The loan was secured by dividends from subsidiaries that owned properties.

In papers filed this week, General Growth contends that Eurohypo AG, New York Branch, as agent for the lenders, decided before bankruptcy that not defaulting the loan was in the lenders’ economic best interest. General Growth pointed out how a default and acceleration could have resulted in default notices by lenders with liens on properties who were “structurally senior creditors.”

General Growth contends that serving a notice of default is required by applicable state law before the interest rate could be increased 2 percent, as the loan agreement provided in the event of default. The mall owner also points to prior court decisions saying there is no entitlement to interest at the default rate absent a declared default before bankruptcy.

General Growth reports that the lenders were repaid all the $2.6 billion principal, plus $143.3 million of interest at the non-default rate, along with other costs and fees. The lenders want another $85.6 million representing the additional 2 percent.

General Growth completed the largest real estate reorganization in history by implementing the Chapter 11 plan for the top-tier companies on Nov. 9. The bankruptcy judge approved the plan in an Oct. 21 confirmation order. General Growth previously had confirmed plans for property-owning subsidiaries. All plans paid every creditor in full.

General Growth began the reorganization by filing under Chapter 11 in April 2009. The books of Chicago-based General Growth had assets of $29.6 billion and total liabilities of $27.3 billion as of Dec. 31, 2008.

The case is In re General Growth Properties Inc., 09-11977, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Luby’s Sues Fuddruckers Licensee for Contempt

Restaurant operator Luby’s Inc., the purchaser of the Fuddruckers chain, wants the bankruptcy court in Delaware to hold a former franchisee in contempt for continuing to operate five stores under the Fuddruckers brand. The dispute is scheduled for hearing in bankruptcy court on Jan. 26.

Houston-based Luby’s bought the Fuddruckers business for $63.45 million in a sale approved by the bankruptcy court in June. Businesses owned by Ralph Flannery operated five stores under franchise agreements. Luby’s didn’t buy the licenses with Flannery.

After the sale to Luby’s, Magic Brands LLC, the bankrupt seller of the Fuddruckers business, terminated the Flannery licenses with permission from the bankruptcy court.

Luby’s wants Flannery held in contempt and directed by the bankruptcy court to stop using the Fuddruckers intellectual property.

Flannery may argue he has the right to continue using the intellectual property under Section 365(n) of the U.S. Bankruptcy Code, which provides protections when licenses for intellectual property are rejected in bankruptcy. Flannery may be required to pay royalties if he succeeds in being allowed to continue using the marks. Flannery already raised the issue at the hearing for approval of the sale.

Magic Brands changed its name to Deel LLC after the sale. At the time of the sale, it said the proceeds “could” result in full payment for unsecured creditors.

After closing stores, Austin, Texas-based Magic Brands had 62 company-owned Fuddruckers locations operating in 11 states. It also owned the Koo Koo Roo restaurant brand, with three stores in California. The petition said assets are less than $10 million while debt is less than $50 million.

The Koo Koo Roo stores were in bankruptcy a second time. Owned by Prandium Inc., they were sold to Magic Brands through Chapter 11 in 2004. The 135 Fuddruckers stores in 32 states owned by franchisees aren’t in bankruptcy.

The case is In re Deel LLC, 10-11310, U.S. Bankruptcy Court, District of Delaware (Wilmington).

California Coastal Confirmation Set for Feb. 16

Homebuilder California Coastal Communities Inc. scheduled a Feb. 16 confirmation hearing for approval of the Chapter 11 plan when the bankruptcy judge approved the explanatory disclosure statement yesterday, the company said in a statement.

The company has three projects in Southern California and an agreement approved by the bankruptcy judge in Santa Ana, California, where secured lenders support the plan.

The lenders take new stock under the plan while the $15 million loan for the Chapter 11 case can remain as a first-lien obligation when the plan is confirmed.

The company previously said that the plan is supported by holders of 81 percent of the revolving credit and 88 percent of the term loan. For details on the plan, click here for the Dec. 23 Bloomberg bankruptcy report.

California Coastal filed under Chapter 11 in October 2009, listing assets of $291 million against debt totaling $231 million. The Irvine, California-based company listed $81.7 million owing 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, Bankruptcy Court, Central District of California (Santa Ana).

Workflow Unsecured Creditors Not on Board with Plan

Workflow Management Inc., a provider of promotional marketing services and printed business documents, resolved some although not all objections when it filed a revised reorganization plan at the end of December. How close the company is to a fully consensual plan may be evident at a hearing today for approval of the explanatory disclosure statement.

The official committee representing unsecured creditors is against the plan.

The revised plan calls for an affiliate of Perseus LLC, the existing owner, to end up with 41.5 percent of the new common stock in return for a $12.5 million investment. The new plan is supported by the agent for second-lien lenders owed $196.5 million.

Credit Suisse AG, Cayman Islands Branch, as agent for the first-lien lenders, filed an objection this week saying that not enough first-lien lenders are officially on board to assure that the plan will command an affirmative vote of the top-tier secured class.

Credit Suisse explained how holders of 36 percent of the first-lien debt recently reached an agreement in principle on the basic economic terms of the revised plan. Still, the minority hadn’t agreed on all details of the plan, including issues about post-emergence interest. The agent says that the minority, if they all vote against the plan, could require Workflow to use the so-called cramdown process for confirmation.

The unsecured committee went on record this week against the plan. They say it unfairly discriminates against unsecured creditors and can’t be confirmed. Unsecured creditors of the operating companies, with claims estimated at $25 million, are slated to recover between 1 percent and 4 percent by sharing $1 million.

The Pension Benefit Guaranty Corp. also objected to the disclosure statement, saying it didn’t tell creditors about the PBGC’s $55.5 million claim. Workflow listed a $32 million claim for termination of the existing pension plans.

For details on the new Workflow plan, click here for the Jan. 6 Bloomberg bankruptcy report. For details on Workflow’s original plan, click here for the Nov. 12 Bloomberg bankruptcy report.

Dayton, Ohio-based Workflow said initially that it owed $146.5 million on first-lien debt, including $30.2 million on a revolving credit, and $111.5 million on a term loan. The second- lien debt was $196.5 million at the outset, papers said.

With 49 offices, 17 distribution centers and nine plants, Workflow had about $600 million revenue in 2009.

The case is Workflow Management Inc., 10-74617, U.S. Bankruptcy Court, Eastern District of Virginia (Norfolk).

Gibraltar Settles $3.23 Million Preference for $2,000

A creditor of Precision Parts International Services Corp. named Gibraltar Industries Inc. escaped from liability for a $3.23 million preference by paying only $2,000. The settlement was approved last week by the U.S. Bankruptcy Court in Delaware.

Gibraltar was able to avoid paying more by using the so- called new value defense. For details on the claim, the settlement, and the new value defense, click here for the Dec. 10 Bloomberg bankruptcy report.

PPI is proposing a liquidating plan where unsecured creditors were told they might see 0.15 percent on their $103 million in claims. PPI filed for reorganization in December 2008 and sold the assets in March 2009, with net proceeds of $16 million. Secured lenders received $9.8 million immediately.

The plan in part results from a settlement with secured lenders where $575,000 was carved out for creditors with lower priorities. In addition to $150,000 cash, unsecured creditors are to receive some recoveries from lawsuits, plus excess cash, if any.

The Rochester Hills, Michigan-based company had six plants in North America making metal formed components for the auto and aerospace industries. It owed more than $85 million on bank loans to Golub Capital and Norwest Mezzanine Partners II LP. Court papers listed other debts as including $184.5 million in secured and unsecured loan obligations plus $30 million owing to trade suppliers. The revolving credit and term loans were $89 million while there was an $88.5 million mezzanine loan. First Atlantic Capital Ltd. acquired control of the company in 2005.

The case is In re PPI Holdings Inc., 08-13289, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filings

Brunschwig, Fabric Distributor, Selling to Kravet

Brunschwig & Fils Inc., a century-old distributor of wall coverings and upholstery fabrics, filed a Chapter 11 petition yesterday in New York to learn if anyone will top the $6.5 million offer for the business from competitor Kravet Inc.

Family owned Brunschwig, based on North White Plains, New York, listed assets of $10.9 million and debt totaling $18.4 million. It blamed bankruptcy on the decrease in consumer spending which caused sales to decline by 35 percent in 2009 and 30 percent in 2010.

Kravet’s offer is $6.5 million cash plus the cost of curing defaults on leases and contracts, less whatever is outstanding on the $4 million credit to finance the Chapter 11 case. Kravet is providing the loan.

Brunschwig wants other offers by March 3, with an auction not more than two days later.

Brunschwig has 17 showrooms in the U.S. and three abroad. It offers 17,000 fabrics and 1,200 wall coverings. Company showrooms are open to the trade only.

The largest unsecured claim, $3.4 million, is owing to the Pension Benefit Guaranty Corp.

The case is In re Brunschwig & Fils Inc., 11-22036, U.S. Bankruptcy Court, Southern District of New York (White Plains).

Brooklyn Property Owner Files Owning 17 Properties

Zurich Associates Ltd., the owner of 17 parcels of real property mostly in Brooklyn, New York, filed for Chapter 11 protection on Jan. 10 in Brooklyn.

The petition says the properties are worth $5.45 million. Secured claims, totaling $5.7 million, are owed to several lenders. Including unsecured claims, debt totals $10.5 million.

Zurich, located in Floral Park, New York, says that individual properties have a value between about $180,000 and $550,000.

The case is In re Zurich Associates Ltd, 11-40145, U.S. Bankruptcy Court, Eastern District of New York (Brooklyn).

Sheridan Office Plaza in Hollywood, Florida, Files

The owner of the Sheridan Office Plaza I & II in Hollywood, Florida, filed for Chapter 11 protection on Jan. 7 in Fort Lauderdale, Florida, when faced with foreclosure by Bank of America NA.

The bank, owed $9.7 million on its mortgage, has an appraisal saying the property is worth $5.7 million, a court filing says.

The property consists of two, three-story office buildings on seven acres. The buildings have 110,000 square feet.

The mortgage has been in payment default since February 2009.

The case is DBSI Sheridan LLC, 11-10384, U.S. Bankruptcy Court, Southern District of Florida (Fort Lauderdale).

Daily Podcast

Supreme Court, Smurfit, Stats, Student Loans: Bankruptcy Audio

The year’s first Supreme Court decision on bankruptcy, the Smurfit-Stone Container Corp. ruling on a perplexing Canadian law issue, when or whether corporate bankruptcy filings in the U.S. will increase, the difficulty in erasing student loan debt, and an overfinanced condominium project on the beach in North Carolina are among the topics discussed in the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist and editor-at-large Bill Rochelle. To listen, click here.

Advance Sheets

Secured Claim Interest May Be Reduced in Chapter 13

The interest rate payable to an over-secured creditor can be cut down below the contract rate under a Chapter 13 plan, according to a Jan. 11 opinion from U.S. District Judge W. Keith Watkins in Montgomery, Alabama.

The case involved a secured lender owed $26,000. Everyone agreed the collateral was worth more than the debt. Consequently, the lender had to be paid in full with interest under the Chapter 13 plan if the bankrupt were to retain the property. The lender and the bankrupt disagreed about the proper rate of interest.

Watkins upheld the bankruptcy court. The lender was entitled to post-petition interest at the 10.5 percent contract rate. On confirmation of the Chapter 13 plan, the bankrupt was entitled to cut the interest rate to 4.25 percent.

The outcome resulted from a clash between two provisions in the Bankruptcy Code. Watkins ruled that Section 506(b) only allowed the lender to collect the higher contract rate between the time of filing the Chapter 13 petition and confirmation of the Chapter 13 plan.

After confirmation, the cramdown provisions in Section 1325(a)(5)(B)(ii) controlled, Watkins said. The more specific provisions in Section 1325 govern post-confirmation interest by saying that the lender need be paid only enough to recover the amount of the claim.

Watkins said the result was supported by dicta from a 2000 opinion from the Circuit Court of Appeals in Atlanta saying that Section 506(b) only covers pre-petition interest. Dicta is a statement by a court not necessary in deciding the case. Dicta is not binding although it can be persuasive to another court.

The case is First United Security Bank v. Garner, 10-795, U.S. District Court, Middle District of Alabama (Montgomery).

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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