Lehman, Madoff, FGIC, Chemtura, Quigley: Bankruptcy

Lehman Brothers Holdings Inc. said in a status report yesterday that a revised reorganization plan will be filed “within days.”

The revised plan will include two compromises, Lehman said. One will entail reallocation of some recovery from “certain of the subsidiary debtors” to senior and unsecured creditors of the holding company. The report didn’t quantify the amount that will be given up by creditors with claims against a subsidiary guaranteed by the holding company.

The second compromise involves what Lehman called a “derivative settlement framework” to resolve the remaining $40 billion in derivative claims. Lehman said the settlement “will require a compromise by many derivative claimants, but the claimants should recognize that the benefits outweigh the compromise required.”

For Bloomberg coverage of yesterday’s hearing, click here.

The status report said that Lehman held $24 billion in cash on Dec. 31 and expects an eventual net recovery of $60.1 billion, including $37 billion in proceeds from future asset sales and foreign receivables. The projected recovery doesn’t include recoveries from lawsuits or the cost of future operations.

The Lehman holding company and its non-brokerage subsidiaries filed a Chapter 11 plan in March and a disclosure statement in April. Last year, Lehman said the plan would be revised during the fourth quarter of 2010 so confirmation could occur around March. Assuming a revised plan is filed shortly, confirmation in March isn’t feasible.

For details on the original plan, click here and here for the April 15 and 16 Bloomberg bankruptcy reports.

Paulson & Co. filed a competing reorganization plan in December. Paulson’s plan would impose substantive consolidation, where guarantee claims wouldn’t be honored.

Lehman’s plan revision likely will be an effort to compromise with the push by Paulson for substantive consolidation.

For a discussion of the Paulson plan and substantive consolidation, click here for the Dec. 16 Bloomberg bankruptcy report.

At yesterday’s hearing, Lehman was authorized to pay $975,000 to settle a $304 million securities-law claim by Northgate Minerals Corp. related to auction-rate securities. The payment will come from providers of Lehman’s directors’ and officers’ insurance. For details of the claim, click here for Dec. 21 Bloomberg bankruptcy report.

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

Updates

Madoff Trustee’s $7.2 Billion Picower Settlement Approved

The trustee for Bernard L. Madoff Investment Securities Inc. won bankruptcy court approval yesterday of a settlement where the estate of Jeffrey M. Picower and his investment funds will pay back every dime of the $7.2 billion in profits received during 30 years of investing with Madoff.

Some Madoff customers unsuccessfully opposed the settlement. They didn’t like terms precluding them from prosecuting certain types of lawsuits against Picower. For Bloomberg coverage of yesterday’s hearing, click here.

Picower drowned in his swimming pool in Palm Beach, Florida, in October 2009 at age 67.

All of the $7.2 billion will go to the Madoff firm’s customers with valid customer claims. The U.S. government will get $2.2 billion in a forfeiture suit and the remainder will be turned over to the Madoff trustee. Under an agreement with the government, the trustee will serve as special master to distribute the $2.2 billion to customers.

Combining the Picower settlement with a previously approved $500 million settlement with Union Bancaire Privee, the Madoff trustee said the fund for customers will total more than $7.5 billion.

The Madoff firm began liquidating on Dec. 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 at a federal prison in North Carolina 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, Southern District of New York (Manhattan).

FGIC Negotiating Plan with Insurance-Policy Holders

FGIC Corp. is working on a new reorganization plan with holders of policies issued by its bond insurance subsidiary, Financial Guaranty Insurance Co., the company said in a motion this week seeking an extension of the exclusive right to propose a reorganization plan.

The hearing to extend exclusivity until April 1 is set for Jan. 25.

FGIC filed for reorganization in August and immediately submitted a plan where creditors in effect would become owners of the insurance subsidiary. The reorganized company would benefit from $4 billion in net tax-loss carryforwards.

Hopes for implementing the plan were shot down with the failure of an exchange offer. As a result, FGIC was concerned that New York insurance regulators would take over and liquidate the insurance subsidiary.

To head off a takeover of the subsidiary, FGIC said in the Jan. 11 motion that it engaged policyholders in discussions about a new plan that would satisfy their claims with cash and “other consideration.”

FGIC said it hopes to file the plan “as soon as practicable.”

FGIC’s assets consist of $10.7 million cash and the opportunity to utilize the $4 billion net operating loss carryforward. The plan worked out in advance of the Chapter 11 filing contemplated dividing the cash and new stock among lenders on the $46 million revolving credit and the $345 million in unsecured notes. The holders of 90 percent of the common stock agreed to go along with the plan and waive their $7.2 million unsecured claim.

FGIC’s petition in August listed $11.5 million in assets and $391.5 million in debt. Wilmington Trust FSB is trustee for the bondholders and JPMorgan Chase Bank is agent for the lenders.

The case is In re FGIC Corp., 10-14215, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Lyondell Opinion Copied to Dismiss Chemtura Claims

U.S. Bankruptcy Judge Robert E. Gerber in Manhattan issued a second opinion this month tossing out environmental contribution claims asserted by companies which hadn’t yet incurred remediation costs.

Gerber’s first opinion, on Jan. 4, was handed down in the completed reorganization of chemical producer Lyondell Chemical Co. Yesterday’s decision stemmed from the similarly completed reorganization of specialty chemical maker Chemtura Corp. The results in both cases were the same.

Gerber copied much of his earlier opinion interpreting Section 502(e)(1)(B) of the U.S. Bankruptcy Code, which disallows a claim for contribution that is contingent at the time of allowance. For a discussion of the issues, click here for the Jan. 5 Bloomberg bankruptcy report.

In the Chemtura case, there originally were 59 non- governmental claims for remediation costs not yet incurred. All except 29 dropped by the wayside through settlement. Gerber knocked out the remaining claims yesterday.

Chemtura implemented the Chapter 11 plan on Nov. 8 that the bankruptcy judge formally confirmed on Nov. 3. The plan reduced debt for borrowed money to about $750 million from $1.3 billion. For details of the plan, click here for the June 18 Bloomberg bankruptcy report.

The Chapter 11 petition in March 2009 by Middlebury, Connecticut-based Chemtura listed assets of $3.06 billion against debt totaling $2.6 billion, including $1.02 billion owing on three issues of notes and debentures. Sales declined to $2.5 billion in 2009 from $3.5 billion a year earlier. The subsidiaries outside of the U.S. didn’t file.

The case is Chemtura Corp., 09-11233, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Point Blank Files Plan for Feb. 14 Disclosure Hearing

Point Blank Solutions Inc., a manufacturer of soft body armor, filed a reorganization plan on Jan. 11 along with an explanatory disclosure statement.

If the bankruptcy judge in Delaware approves the disclosure statement at a Feb. 14 hearing, creditors can begin voting on the plan.

Terms of the plan were announced in December when creditors succeeded in fending off a sale of the company. To keep the business alive, plan sponsors Lonestar Partners LP, Privet Fund Management LLC and Prescott Group Capital Management came up with $25 million in replacement financing.

The lenders are backstopping a $15 million to $25 million equity-rights offering to provide some of the financing for the reorganized business. The offering will be available to unsecured creditors and stockholders. For details of the plan, click here for the Dec. 14 Bloomberg bankruptcy report.

The draft disclosure statement doesn’t tell creditors the percent recovery expected to result from the plan.

Based in Pompano Beach, Florida, Point Blank has two plants. Revenue in 2009 exceeded $153 million. The former chief executive officer and chief operating officer 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).

Majestic Star Casino Heads for Confirmation Hearing

Majestic Star Casino LLC has an approved disclosure statement, bankruptcy court documents show. Creditors can begin voting on the reorganization plan, which has alternative treatments depending on the availability of new financing.

The plan, revised again on Jan. 6, offers senior secured credit facility lenders, owed $65.3 million, full payment by receiving some cash and rolling over remaining debt. If new financing is available, the existing facility will be paid in cash.

Holders of $348.4 million in senior secured notes are in line for a 52 percent recovery from 58 percent of the new equity and $100.6 million in cash. If new financing isn’t available, noteholders will receive new debt instead of cash.

Holders of the senior notes are to be given 42 percent of the new equity for their approximately $233 million in debt, resulting in a 25 percent recovery. General unsecured creditors are being offered 25 percent in cash or a share in $1 million, whichever is less.

Holders of $72.6 million in discount notes are to receive nothing.

Majestic Star’s finances suffered when quick access by customers from Chicago to its Indiana properties was cut off by the indefinite closing of a bridge for structural repairs.

Majestic Star has hotels with 806 rooms serving its two riverboat casinos in Gary, Indiana. The other casinos are in Tunica, Mississippi, and Black Hawk, Colorado.

When the Chapter 11 case began, Majestic Star’s debt was listed as including $79.3 million on the senior secured credit facility, with Wells Fargo Capital Finance Inc. as agent. Senior secured noteholders had a second lien for a $300 million debt.

Majestic Star owed $200 million on unsecured senior notes and $63.5 million on discount notes. Assets were listed at $406 million and debt was $750 million in the quarterly report for the period ended June 30, 2009.

The case is In re Majestic Star Casino LLC, 09-14136, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Pfizer Contribution Leading to Quigley Settlement

Quigley Company Inc., a non-operating subsidiary of Pfizer Inc., is near a settlement with asbestos claimants in a Chapter 11 reorganization more than six years old.

For Bloomberg coverage of how Pfizer is ready to contribute hundreds of millions of dollars more, click here. A lawyer for asbestos claimants said that working out details of the settlement may take another two weeks.

Settlement was reached as Quigley and Pfizer faced a motion by the U.S. Trustee and an ad hoc group of asbestos claimants seeking dismissal of the Chapter 11 case begun in September 2004. The motions to dismiss came on the heels of an opinion from the bankruptcy judge in September refusing to confirm Quigley’s reorganization plan.

The judge found that the plan was filed in bad faith and wasn’t feasible. Objectors argued that Quigley’s bankruptcy was being used improperly to shield Pfizer from liability.

Although Quigley’s plan was accepted by the required majorities of creditors, the bankruptcy judge found that improper incentives were given to some creditors to obtain their “yes” votes. Through the plan, including contributions from Pfizer, $757 million would have been distributed, according to the disclosure statement.

Quigley filed under Chapter 11 to deal with 500,000 asbestos claims.

The case is In re Quigley Co., 04-15739, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

FairPoint Chapter 11 Plan Confirmed in Manhattan

FairPoint Communications Inc. is set to emerge from bankruptcy reorganization by the end of January after the bankruptcy judge signed a confirmation order yesterday approving the Chapter 11 plan.

Although creditors had approved the plan with affirmative votes, the plan couldn’t be confirmed given a lack of agreement with regulators in Vermont, Maine and New Hampshire. Vermont came on board in December after regulators persuaded FairPoint to adopt a business plan based on less optimistic projections.

New Hampshire and Maine settled about six months ago.

Lenders are to own FairPoint after Chapter 11. For details of the company’s reorganization plan, click here for the March 12 Bloomberg bankruptcy report.

FairPoint’s Chapter 11 petition listed assets of $3.24 billion against debt totaling $3.23 billion. Funded debt, totaling $2.7 billion, included $2 billion under a secured credit facility, $575 million in senior unsecured notes, and $88 million on interest-rate swap agreements.

The case is In re FairPoint Communications Inc., 09-16335, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

C-Bass Authorized to Sell Collateral-Management Business

Credit-Based Asset Servicing & Securitization LLC, commonly known as C-Bass, was authorized in bankruptcy court yesterday to sell the collateral-management business for $2.4 million to FIG LLC.

C-Bass, based in New York, was an originator, issuer, servicer and securitizer of high-yield residential mortgages. It filed to liquidate under Chapter 11 in November, saying at the time that $170 million was owing on the senior credit facility with JPMorgan Chase Bank NA as agent. Other debt includes more than $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 may 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 of New York (Manhattan).

Daily Podcast

Anchor Blue, Constar, Vitro, Tamarack Resort: Bankruptcy Audio

The liquidation of retailer Anchor Blue Inc. in its second visit to Chapter 11, bottle maker Constar International Inc. prepacks a second time in two years, the Mexican judge in the reorganization of Vitro SAB avoids a clash with courts in the U.S., and dismissal of the Tamarack Resort LLC reorganization are covered 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

Judge Surveys Law on Post-Confirmation Jurisdiction

Let it never be said that only judges from big cities can parse the subtleties of bankruptcy jurisdiction. U.S. District Judge Amul R. Thapar in London, Kentucky, wrote a tour de force opinion on Jan. 12 surveying the law on post-confirmation jurisdiction.

The case involved a liquidating trust created under a Chapter 11 plan. The trustee for the trust sued company managers and advisers, alleging mismanagement before and during the Chapter 11 case. The suit was in state court.

Defendants removed the suit to federal district court. Although he said other courts believe otherwise, Thapar said it was incumbent on him to decide if there is bankruptcy jurisdiction before referring the case to the bankruptcy judge. He said it wasn’t appropriate for the bankruptcy judge to make the first ruling on the existence or non-existence of bankruptcy jurisdiction.

Thapar didn’t follow district courts that automatically refer removed lawsuits to bankruptcy court.

The opinion, written in an engaging, conversational style, is a “must read” for experts on bankruptcy jurisdiction. It is most notable for its lengthy survey of differing rulings from circuit courts around the country on the question of the extent to which bankruptcy jurisdiction narrows after plan confirmation.

The case is McKinstry v. Sergent, 10-110, U.S. Bankruptcy Court, Eastern District of Kentucky (Pikeville).

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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