Anna Nicole Smith, Vitro, Blockbuster: Bankruptcy

Anna Nicole Smith, the late former Playboy model, may go down in history as the person responsible for what may be the Supreme Court’s most important decision on bankruptcy law in 30 years.

The case argued yesterday gives the high court an opportunity to rule on whether there are defects in the system of bankruptcy court jurisdiction adopted by Congress in 1984.

The narrow issue before the court is whether a compulsory counterclaim is a so-called core proceeding, where the bankruptcy judge has the right to make a final decision, subject only to appeal.

Although Smith died in February 2007, her lawsuit continued against the estate of J. Howard Marshall, a Texas billionaire who died at age 90 in 1995, about 13 months after they married. After the U.S. Appeals Court in San Francisco ruled there was no core jurisdiction on compulsory counterclaims, the Supreme Court took the case to decide an issue that has divided appeals courts.

In the eyes of the San Francisco court, the bankruptcy judge couldn’t issue a final order. Before the ruling of the bankruptcy judge passed through the U.S. district court to become final, a state court in Texas entered judgment against Smith, saying she was entitled to nothing from her deceased husband’s estate. Three judges from the 9th Circuit in San Francisco said she lost the race to judgment because the district court was bound to follow the state court, which was the first to issue a final judgment.

If, on the other hand, the case was within the core jurisdiction of the bankruptcy court, then that court entered the first judgment, and Smith’s estate wins.

The case gives the Supreme Court a chance to rule broadly on the powers of bankruptcy judges, who aren’t the equivalent of federal district judges. Bankruptcy judges aren’t appointed for life, with approval from the Senate, and are referred to as judges under Article I of the Constitution. Federal district judges are appointed for life under Article III.

At one extreme, the Supreme Court could rule that a bankruptcy judge has no power to make a final ruling on any issue involving state law.

Justice Sonia Sotomayor even said the case gives the court its first opportunity to rule on the basis for a bankruptcy judge to pass on the validity of any type of claim against a bankrupt. In the same vein, Justice Samuel Alito inquired about the basis for a bankruptcy court to rule on any claim not created by federal law.

Much of the discussion yesterday between the justices and the attorneys was given over to an analysis of whether it is constitutionally permissible to force a creditor to waive a right to jury trial on a state-law claim in return for having a claim in a bankruptcy case. Sotomayor later seemed to answer the question by saying that a creditor isn’t pressing a state law claim in a bankruptcy case.

Instead, she appeared to characterize bankruptcy law to mean that a creditor has an independent federal claim against the limited assets of a bankrupt, to be shared with other creditors. Even if the claim originally arose in state law, when the creditor makes the claim in a bankruptcy case, it is a claim created by federal law. If it is a federal claim based on equity, then Congress has the right to require the creditor to waive the right to a jury trial.

In 1982, the Supreme Court ruled in a case called Marathon Pipeline that 1978 amendments to federal bankruptcy law impermissibly gave bankruptcy judges powers that could only be exercised by district court judges who are appointed under Article III of the Constitution and have life tenure. Congress revised bankruptcy law in 1984 to remedy the defects.

The case argued yesterday gives the court a chance to examine whether the changes comported with the Constitution. Justice Elena Kagan suggested that the problems were fixed because bankruptcy judges are no longer appointed by the - president and now are supervised by Article III district judges.

To read details about the decision from the San Francisco Court of Appeals, click here to see the Advance Sheets item in the March 22, 2010, Bloomberg bankruptcy report.

Smith’s case was before the Supreme Court once before. The first time, she won on a different issue. Her estate lost when the case was remanded from the Supreme Court.

The case in the Supreme Court is Stern v. Marshall, 10-179, U.S. Supreme Court. The case in the circuit court was Marshall v. Stern (In re Vickie Lynn Marshall), 02-56002, 9th U.S. Circuit Court of Appeals (San Francisco).

Updates

Vitro Attachment Disputes Return to N.Y. State Court

The location of some lawsuits between Vitro SAB and bondholders is changing again, this time in the wake of a decision by a judge in Mexico this month dismissing Vitro’s reorganization proceedings in Mexico.

The Mexican judge threw out the case because the glass manufacturer was relying on the use of $1.9 billion of intercompany debt to vote in favor of the restructuring and overcome the negative vote by bondholders.

In addition to involuntary Chapter 11 petitions that some bondholders filed against Vitro’s U.S. subsidiaries, bondholders had obtained attachments of property through state courts in New York. The attachments were aiming to recover on the $1.2 billion of bonds in default for about two years.

Before the Mexican reorganization was dismissed, Vitro filed a Chapter 15 petition in U.S. Bankruptcy Court in New York where it hoped the judge eventually would help enforce the Mexican reorganization in the U.S. Before the Mexican reorganization was dismissed, Vitro had the attachment suits moved into the bankruptcy court in New York.

With the Mexican reorganization dismissed and the basis for the Chapter 15 petition in doubt, Vitro consented last week to sending the attachments suits back to New York state court.

Vitro contended the attachments were improper and had taken an appeal. Vitro is now free to go ahead with an appeal in New York state courts.

Before Vitro’s Mexican reorganization was dismissed, the bankruptcy judge in Fort Worth, Texas, who was presiding over the involuntary Chapter 11 cases ruled that the New York bankruptcy judge could decide on whether the attachments were proper.

Bondholders opposed the reorganization because it depended on voting $1.9 billion of intercompany claims in favor of the plan. Vitro previously said noteholders would recover as much as 73 percent by exchanging existing debt for cash, new debt and convertible bonds.

Bondholders filed involuntary Chapter 11 petitions in November against U.S. subsidiaries of Vitro. They also filed involuntary petitions in Mexico, some of which have been accepted by the court.

For a summary of Vitro’s proposed reorganization and a summary of the suits between Vitro and the noteholders, click here for the Dec. 15 Bloomberg bankruptcy report.

The first-filed involuntary case is In re Vitro Asset Corp., 10-47470, U.S. Bankruptcy Court, Northern District of Texas (Fort Worth). The Chapter 15 case is In re Vitro SAB, 10-16619, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Blockbuster Again Pushes Back Plan-Filing Deadline

Blockbuster Inc. put off the deadline for filing a reorganization plan and disclosure statement for a third time.

Before the Chapter 11 filing in September, the movie-rental chain had negotiated the structure for a reorganization with holders of 80 percent of the $630 million in 11.75 percent senior-secured notes.

The new deadline for filing a plan with consent from the noteholders is now Feb. 4. That is also the new deadline for submitting a business plan to the noteholders’ liking. In addition, Feb. 4 is when Blockbuster is to name a new chief executive officer acceptable to the noteholders.

The deadlines are contained in the financing agreement for the Chapter 11 case.

The plan was to give new stock to the noteholders. General unsecured creditors were to see warrants for 3 percent of the stock, while holders of the $300 million in 9 percent subordinated notes weren’t to receive anything.

Following the bankruptcy filing, Blockbuster rejected about 220 leases. Blockbuster said it would close 72 stores by the end of 2010 and about 110 more in the first quarter of 2011.

Blockbuster, based in Dallas, began its reorganization with 5,600 stores, including 3,300 in the U.S. Among the U.S. stores, 3,000 were owned and the rest are franchised. About 200 stores closed before bankruptcy.

The petition listed assets of $1.02 billion against debt of $1.47 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 of New York (Manhattan).

Bank America Argues for No Sanctions on Stay Violation

Lehman Brothers Holdings Inc. and Bank of America NA don’t agree about much when it comes to the ruling by the bankruptcy judge in November that the bank violated the so-called automatic stay by confiscating $501.8 million Lehman was holding in an account. They do agree that the bankruptcy judge need hear no more evidence before ruling whether the bank should pay sanctions in addition to returning $595.1 million, representing the $501.8 million plus interest.

The bank argues that Lehman at most is entitled to an additional $1.25 million, the agreed amount that Lehman expended in attorneys’ fees establishing a violation of the automatic stay. The bank says even the $1.25 million isn’t owing because Lehman can’t prove taking the account was malicious.

Lehman counters by saying that the bank blocked discovery into the bank’s deliberations in deciding to take the account without first obtaining permission from the bankruptcy court. Lehman therefore says the bankruptcy judge is entitled to find the bank was acting maliciously.

For other Bloomberg coverage, click here.

Bank of America, based in Charlotte, North Carolina, already signaled it will appeal. Procedural rules in federal court don’t permit the bank to appeal until the bankruptcy judge decides how much in sanctions to impose, if any, for violating the automatic stay.

For details on the controversy about the automatic stay violation, click here for the Dec. 7 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 New York (Manhattan).

Settlement Opens Door for Tronox to Implement Plan

Tronox Inc., the world’s third-largest producer of the white pigment titanium dioxide, is in a position to implement the approved reorganization plan following yesterday’s court approval of an environmental settlement.

The judge confirmed the reorganization plan in November. For Bloomberg coverage, click here. For details of the plan, click here for Nov. 18 Bloomberg bankruptcy report.

The Chapter 11 petition by Tronox in January 2009 listed assets of $1.56 billion against debt totaling $1.22 billion. Debt includes $213 million on a secured term loan and revolving credit, $350 million in 9.5 percent senior notes, and a $40.7 million accounts receivable securitization facility. Tronox’s products are used in paints, coatings, plastics, paper and consumer products. Operations outside of the U.S. didn’t file.

The case is In re Tronox Inc., 09-10156, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Guaranty Financial Has Feb. 16 Disclosure Hearing

Guaranty Financial Group Inc. last week arranged a hearing for Feb. 16 where a bankruptcy judge in Dallas will be asked to approve the disclosure statement explaining the liquidating Chapter 11 plan filed by the bank holding company in December.

GFG’s disclosure statement tells unsecured creditors with $382 million in claims that they stand to recover between 1 percent and 3 percent. They may get more if lawsuits are successful.

GFG said in the disclosure statement that the primary assets at the outset were $21.6 million in cash and claims for tax refunds.

GFG filed for Chapter 11 protection in August 2009, six days after its bank was taken over by regulators. The Federal Deposit Insurance Corp., as receiver for the failed bank, contended it was entitled to the tax refunds and asserted a claim against GFG for $1.98 billion in capital contributions that should have been made to the bank subsidiary.

The plan is based on a settlement hashed out with the FDIC and the indenture trustee for the noteholders. The plan calls for the FDIC to receive some of the remaining cash and all of the tax refunds, which are estimated at $3.49 million.

Unsecured creditors would receive whatever is collected by a liquidating trust. Among the unsecured claims, $318 million stem from trust preferred securities.

Guaranty Bank, based in Austin, Texas, had assets exceeding $16 billion in 2007, with more than 150 branches in Texas and California. At the time of the FDIC takeover, it was the 11th- largest bank failure in U.S. history.

The Dallas-based holding company’s bankruptcy petition listed assets of $24.3 million against debt totaling $323.4 million. Before the bank was taken over, GFG’s balance sheet had $15.4 billion in assets as of Sept. 30, 2008. The failure was estimated to cost the FDIC $3 billion.

Shareholders included Icahn Associations Corp., with 17 percent of the stock, and Robert Rowling’s TRT Financial Holdings, with 20 percent of the equity.

The case is In re Guaranty Financial Group Inc., 09-35582, U.S. Bankruptcy Court, Northern District of Texas (Dallas).

Taylor Bean Seeks to Adjourn Confirmation Hearing

Taylor Bean & Whitaker Mortgage Corp., once the largest independent mortgage originator in the U.S., asked a bankruptcy judge to adjourn a confirmation hearing scheduled for today for approval of the Chapter 11 plan.

The company said in a filing in U.S. Bankruptcy Court in Jacksonville, Florida, that there have been discussions with objecting creditors, and it is “cautiously optimistic” that some objections have been resolved. Taylor Bean didn’t suggest a new date for plan approval in its filing.

For details of Taylor Bean’s plan, click here for the Nov. 12 Bloomberg bankruptcy report. The plan is supported by the creditors’ committee.

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. Assets and debt both exceeded $1 billion, according to the petition.

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

HSH Delaware Confirms Plan Providing Time for Repayment

HSH Delaware GP LLC confirmed a Chapter 11 plan yesterday, providing time to pay its bank lenders for helping finance the purchase of 26 percent of German bank HSH Nordbank AG.

The plan is based on a settlement negotiated in August with lenders owed $550 million. The plan adds the lenders’ unpaid fees and expenses to principal owing on the debt. The maturity is extended to the end of 2014, giving HSH Delaware time to merge or sell the equity or the assets.

If there is a surplus exceeding the debt to the lenders, the excess will be shared between the company and the lenders according to a formula. Unsecured creditors are to be paid in full. For other Bloomberg coverage, click here.

HSH Delaware filed under Chapter 11 in January 2010 to prevent what it called a “firesale” of the HSH Nordbank stock. It was formed in 2006 by J.C. Flowers & Co. LLC to buy the stock.

Court papers say that the 1.25 billion-euro ($1.68 billion) purchase price was financed in part with the bank loan.

The case is In re HSH Delaware GP LLC, 10-10187, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Thompson Publishing Seeks First Exclusivity Extension

Thompson Publishing Holding Co., a publisher of newsletters and loose-leaf services, filed for Chapter 11 protection in September, completed the sale of the assets in December, and for the first time is seeking an extension of the exclusive right to propose a reorganization plan.

If approved by the bankruptcy judge at a Feb. 23 hearing, the new deadline will be March 21.

Thompson was authorized in November to sell the business to the first-lien lenders in exchange for $42 million in secured debt. In the process, $100,000 was set aside for unsecured creditors.

Thompson, which changed its name to TPH Seller Inc. following the sale, said it needs to analyze claims before pursuing confirmation of a plan.

Based in Washington, Thompson had 300 products and 70,000 subscribers producing an estimated $49 million in revenue in 2010. Debt included $122.6 million owing on first-lien debt with PNC Bank NA serving as agent. Ableco Finance LLC served as agent for second-lien creditors owed $43.5 million.

Controlled by Avista Capital Partners LP, Thompson also arranged conferences and employee-training events. It generated 74 percent of income from subscription.

The case is In re TPH Seller Inc, 10-13070, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Tousa Authorized to Sell Regal Oaks Rental Project

Homebuilder Tousa Inc. was given authority from the bankruptcy judge on Jan. 14 to sell a partially completed development known as Regal Oaks for $6.8 million.

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

Two U.S. district judges heard oral argument in October on appeals from a ruling by the bankruptcy judge in October 2009 that the bailout and refinancing in mid-2007 of a joint venture in Transeastern Properties Inc. included fraudulent transfers. Since then, one of the judges dropped out, leaving the other district judge to decide the appeals.

Tousa filed a Chapter 11 plan in July. Confirmation of the plan is on hold until a decision on the appeals. For a summary of the plan, click here for the July 20 Bloomberg bankruptcy report. The plan assumes appeals 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 the 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).

Downgrade

Supervalu Downgraded to B1 on Debt Maturities

Supermarket operator Supervalu Inc. received a downgrade yesterday from Standard & Poor’s matching the action taken in December by Moody’s Investors Service.

The new S&P corporate rating is down one notch to B+.

S&P attributed the downgrade to “declining profitability,” the “intensely competitive nature of the food retailing industry,” and “ineffective promotions and pricing strategies.”

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 $1.6 billion net loss for the first three quarters of the fiscal year on sales of $28.9 billion. The period included a $1.84 billion of goodwill and intangible asset impairment charges.

For the prior fiscal year ended Feb. 27, net income was $393 million on sales of $40.6 billion.

The shares closed yesterday at $7.43 on the New York Stock Exchange, up 4 cents from the previous trading day’s three-year closing low. The three-year high was $35.62 on May 15, 2008.

Daily Podcast

Lehman, Madoff, Quigley-Pfizer, Jurisdiction: Bankruptcy Audio

The Lehman Brothers Holdings Inc. cash hoard exceeding $60 billion, why some customers objected to the $7.2 billion recovery by the trustee for Bernard L. Madoff Investment Securities Inc., the impetus for Pfizer Inc. to contribute more toward the reorganization of subsidiary Quigley Co., and how a small-town judge issued a big-time opinion on bankruptcy jurisdiction are items 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.

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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