Innkeepers, FGIC, Gulfstream, Smurfit: Bankruptcy

The bankruptcy judge supervising the Innkeepers USA Trust reorganization laid down a timetable for the hearing March 8 and 9 to approve agreements outlining a reorganization structure.

The hearing will also set up auction procedures testing whether anyone will make an offer topping the proposal for Lehman Ali Inc. and Five Mile Capital Partners LLC to acquire the new equity.

The first hint of opposition to the Five Mile-Lehman proposal will come on Jan. 26, when preliminary objections are due. Lehman Ali is a subsidiary of Lehman Brothers Holdings Inc. and holds $238 million in floating-rate mortgages on 20 of Innkeepers’ 72 properties.

Documents must be produced by Feb. 8, with examinations of witnesses under oath from Feb. 9 to 18. Final objections are due Feb. 25, with replies by March 3.

Last week, Midland Loan Services Inc., as servicer for $825 million of fixed-rate mortgages on 45 properties, filed an objection to part of the request by Kirkland & Ellis LLP for more than $860,000 in fees and expenses incurred during November. Kirkland serves as Innkeepers’ legal counsel.

Midland said it couldn’t understand why Kirkland ran up $37,600 on a motion for approval of an insurance financing agreement. Midland also questioned $41,800 in fees for monitoring a dispute where Innkeepers wasn’t involved. Midland also thinks $116,000 was too much to spend in one month on a motion to hire counsel to represent a special board committee.

For details on the new plan structure, the topic for the March hearings, click here for the Jan. 18 Bloomberg bankruptcy report.

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

Apollo Investment Corp. acquired Innkeepers 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

RockTenn to Buy Reorganized Smurfit for $35 a Share

Smurfit-Stone Container Corp. filed for Chapter 11 reorganization in January 2009, confirmed a plan in June 2010, and has an agreement where RockTenn Co. will buy the company in a transaction valued at $3.5 billion.

The agreement between the boards of the two companies calls for a price estimated at $35 for each share of Smurfit stock. Half will be cash, and the other half stock of RockTenn. Smurfit is to become a subsidiary of RockTenn.

The price is said to be a 27 percent premium to Smurfit’s Jan. 21 $27.52 closing price on the New York Stock Exchange. For Bloomberg coverage, click here.

On the first day of trading in June, when Smurfit was emerging from Chapter 11, the closing price was $25.55. The shares then traded lower, touching $16.67 on Aug. 26. The new stock didn’t set another high until Dec. 10.

The Smurfit plan was made possible by a settlement in May where common and preferred shareholders kept 4.5 percent of the stock. Holders of as much as $3.1 billion in unsecured claims against the operating companies took new common stock projected at the time to be worth as much as 71 percent of their claims, according to the disclosure statement.

Secured creditors were paid in full in cash or new debt on account of their $969 million in claims. Unsecured creditors of the holding company owed $11.2 million received nothing.

The Chapter 11 petition in January 2009 by Chicago-based Smurfit listed assets of $7.45 billion against debt totaling $5.58 billion as of Sept. 30, 2008. Debt at the time included $1.2 billion under secured revolving-credit and term-loan agreements, five issues of unsecured notes totaling $2.28 billion, $388 million under an accounts receivable securitization facility, and $284 million owing on tax-exempt bonds.

The case is In re Smurfit-Stone Container Corp., 09-10235, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Kirkland & Ellis Fees Flyspecked by U.S. Trustee

After Kirkland & Ellis LLP filed a request for about $550,000 in fees and expenses for representing FGIC Corp. over the four months ended Nov. 30, the U.S. Trustee went through the fee application with a fine-tooth comb.

The bankruptcy watchdog for the U.S. Justice Department objected to $17.78 for secretarial overtime and $135 in reimbursement for buying “binders, tabs, indexes and dividers.”

More significantly, the U.S. Trustee found that $150,000 in time records were too vague. On another $65,000 in time records, the U.S. Trustee found evidence of so-called lumping, where a lawyer puts several chores together in one entry. For the sins of vagueness and lumping, the U.S. Trustee said it wants a 20 percent reduction, or $43,000.

Curtis, Mallet-Prevost, Colt & Mosle LLP, the so-called conflicts counsel for FGIC, is seeking more than $190,000 for the same period. In the opinion of the U.S. Trustee, Curtis Mallet violated the lumping prohibition on $55,000 in time records. The U.S. Trustee said it wants a 20 percent reduction.

The U.S. Trustee said it wants a 30 percent reduction on $157,000 spent on a preference issue. Without further explanation, the U.S. Trustee said the amount of time spent was not reasonable in view of the number of lawyers who worked on the project.

Between the two firms, the U.S. Trustee said it wants fees cut by more than $130,000.

FGIC filed for reorganization in August and immediately submitted a plan where creditors in effect would become owners of Financial Guaranty Insurance Co., the bond insurance subsidiary.

The plan was based on the assumption that the reorganized company would benefit from $4 billion in net tax loss carry forwards. FGIC said this month that it’s working on a new plan with holders of policies issued by the insurance subsidiary.

FGIC’s assets consist of $10.7 million cash and the opportunity to utilize the tax loss carry forward. 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 unsecured notes. The holders of 90 percent of the common stock had 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).

Victory Park Authorized to Buy Gulfstream Airlines

Gulfstream International Group Inc., the owner of a regional airline, was authorized by a bankruptcy judge on Jan. 20 to sell the business to an affiliate of Chicago-based Victory Park Capital Advisors LLC. To keep the airline flying, the judge is allowing the sale to be completed without awaiting the usual 10 days for appeal.

Victory Park is buying Gulfstream in return for financing it provided the Chapter 11 case. In addition, Victory Park is paying Raytheon Aircraft Credit Co. $18.7 million to buy the 21 Beechcraft 1900 D aircraft Gulfstream operates. Raytheon also will be paid arrears on the aircraft leases.

Victory Park will pick up specified expenses of the Chapter 11 case while setting aside a fund of $600,000 to pay professional fees. Victory Park is allowing the creation of another fund of $100,000 to finance lawsuits.

A prior order from the bankruptcy court said there will be a “structured dismissal” of the Chapter 11 case within 30 days of the completion of the sale.

Gulfstream filed for Chapter 11 reorganization on Nov. 4 in Fort Lauderdale, Florida, where it’s based. It listed 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).

National Envelope, Gores Resolve Some Adjustments

National Envelope Corp. and Gores Group LLC, the purchaser of NEC’s business, settled most of their disputes over a working capital adjustment following the sale.

From the $14 million held in escrow from the purchase price, NEC will receive $5.1 million while $5.4 million goes to the buyer. They will try to resolve disputes over the remaining $3.5 million that relates to intellectual property.

If there is no settlement, a bankruptcy judge will rule on whether he or an arbitrator should decide who is entitled to the remainder in the escrow fund.

NEC alleged last month that Gores was attempting to “massively reduce” the purchase price and in the process eliminate a recovery by unsecured creditors. Gores filed a cross-motion saying the dispute should be submitted to arbitration.

The contract had a sticker price of $208 million, including cash of $149.85 million. NEC called itself the largest privately held envelope maker in the U.S. on filing under Chapter 11 in June.

Based in Uniondale, New York, NEC said assets and debt were both less than $500 million. Liabilities included $74.3 million on a secured term loan, $70.6 million on a secured revolving credit, and $89 million owing on unsecured debts to trade suppliers.

The case is In re NEC Holdings Corp., 10-11890, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Charlie Brown’s Sees Remaining Restaurant Sales ‘In Short Order’

The owner of Charlie Brown’s Steakhouse was authorized on Jan. 21 to sell the seven The Office restaurants for $4.67 million to Villa Enterprises Inc.

In papers filed last week, the company said it will submit a motion in “short order” to set up sale procedures for the remaining 32 locations. The $2.5 million loan for the Chapter 11 case established deadlines for selling everything. Originally, there was to be an auction for the other stores by today, with sale approval not later than Feb. 3.

At the outset, the lenders were owed $70.2 million.

In addition to Charlie Brown’s and The Office, the company, controlled by Trimaran Capital Partners, operates under the name Bugaboo Creek.

Thirty-nine restaurants were in operation on the Chapter 11 filing. Before bankruptcy, 47 locations were closed.

In addition to the secured debt, there is $14 million owing on second-lien senior subordinated notes and $30 million on a mezzanine loan.

The senior secured lenders are Ableco Finance LLC, Wells Fargo Capital Finance Inc. and Ally Commercial Finance LLC.

The case is CB Holding Corp., 10-13683, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Cargo Transport Has Loan Plus Restructuring Officer

Cargo Transportation Services Inc., a less-than-truckload carrier from Sunrise, Florida, filed for Chapter 11 protection on Jan. 12 and received interim permission from the bankruptcy judge on Jan. 21 to use cash representing collateral for the $7.9 million claim of the secured lender Comerica Bank.

The bank said it was “marginally” oversecured, meaning that the collateral is worth more than the debt.

In addition to allowing the use of cash, Comerica agreed to make a $2 million loan on the condition that CTS hire a chief restructuring officer acceptable to the bank.

The final hearing on financing will be held Feb. 9.

CTS alleged that the bank used a nonmonetary default to seize accounts, thus precipitating the Chapter 11 filing in Tampa, Florida.

CTS generates $100 million a year in revenue, according to a court filing. Assets exceed $50 million while debt is less than $50 million, the petition says.

The case is In re Cargo Transportation Services Inc., 11-00432, U.S. Bankruptcy Court, Middle District of Florida (Tampa).

New Bankruptcy Judges

Three Vacancies Filled on California Bankruptcy Bench

Three bankruptcy lawyers were named to fill vacancies in the U.S. Bankruptcy Court for the Central District of California. The appointments were announced last week by the U.S. Court of Appeals in San Francisco.

Scott C. Clarkson and Mark S. Wallace were named to fill so-called temporary judgeships. They will have chambers in Santa Ana. Wayne E. Johnson will sit in Riverside. Johnson was appointed to the seat left vacant by the retirement of Samuel Bufford in August.

New Filing

Icop, Video-System Maker for Police, Files to Sell

Icop Digital Inc., the developer of mobile video systems for law enforcement, filed a Chapter 11 petition on Jan. 21 in Kansas City, Kansas, to sell the assets.

The petition listed assets of $1.67 million and debt of $2.74 million. The balance sheet as of Sept. 30 had assets on the books for $6.7 million and total liabilities of $4.3 million.

The petition says there is $635,000 in secured debt.

The proposed buyer of the business, Safety Vision LLC, is offering to provide $500,000 in financing for the Chapter 11 effort. Icop is based in Lenexa, Kansas.

Unless there is a higher offer at auction, Safety Vision will pay $800,000 in cash plus 50 percent of accounts receivable.

The closing high for Icop’s stock was $90.80 on May 11, 2007. The closing price was 20 cents in over-the-counter trading on Jan. 21.

The case is In re Icop Digital Inc., 11-20140, U.S. Bankruptcy Court, District of Kansas (Kansas City).

Bank Failures

Four Banks Taken Over on Jan. 21 by Regulators

Four banks were taken over by regulators on Jan. 21. The cost to the Federal Deposit Insurance Corp. will be $454.9 million.

The failed banks were in Colorado, North Carolina, South Carolina and Georgia. To read Bloomberg coverage, click here.

Seven banks have failed so far this year. Last year, the total was 157. In 2009, there were 140 failures. Last year’s were the most since 1992, when 179 institutions were taken over by regulators.

Daily Podcast

Orchard, WaMu, Judges Barliant and Paine: Bankruptcy Audio

Orchard Brands Corp. as an example of the need for rethinking whether creditors have sufficient protections in prepackaged Chapter 11 cases, whether the equity committee can appeal now from the bankruptcy judge’s opinion approving the global settlement for Washington Mutual Inc., the appointment of former judge Ronald Barliant to mediate disputes between football helmet makers Schutt Sports Inc. and Riddell Inc., and the retirement of George C. Paine after 30 years as a bankruptcy judge in Nashville, Tennessee, are 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

How to Beat the Limit on State Exemptions

A Jan. 21 decision from the U.S. Court of Appeals in New Orleans shows how a literal reading of a poorly drafted statute leads to unexpected results.

The case involved the question of whether someone who recently moved could take advantage of exemptions in the federal Bankruptcy Code as opposed to those in “applicable” state law. The bankruptcy filing came 14 months after the individual moved to Texas from Florida.

Because he hadn’t lived in Texas for two years before bankruptcy, he was eligible to use only Florida exemptions if he elected not to take federal exemptions. Florida law prohibits using federal exemptions, at first blush seeming to mean that the bankrupt could only use Florida exemptions.

The bankruptcy judge ruled that the bankrupt couldn’t use federal exemptions. He appealed and won in the district court. He won a second time in the 5th U.S. Circuit Court of Appeals.

Circuit Judge Edward C. Prado referred to Florida law which said that state’s prohibition on the use of federal exemptions only applies to “residents of this state.” Because the bankrupt was no longer a resident of Florida, the preclusion didn’t apply to him, and he was at liberty to utilize federal exemptions.

Consequently, Florida and federal law together allowed the bankrupt to choose which exemption scheme was most beneficial even though Florida law prohibited its own citizens from using federal exemptions.

The case is Camp v. Ingalls (In re Camp), 09-50852, U.S. 5th Circuit Court of Appeals (New Orleans).

To contact the reporter on this story: William Rochelle in New York at wrochelle@bloomberg.net.

To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net.

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