Vitro, Satmex, Nortel, Workflow, Lehman: Bankruptcy

Vitro SAB, Mexico’s largest glassmaker, agreed to dismiss the Chapter 15 petition it filed in New York in mid-December, according to a document submitted yesterday to the U.S. Bankruptcy Court in Fort Worth, Texas, where bondholders filed involuntary Chapter 11 petitions a month earlier against Vitro’s U.S. subsidiaries.

Vitro was forced into dismissing the Chapter 15 case following a ruling from a court in Mexico this month dismissing Vitro’s attempted reorganization under that country’s version of Chapter 11.

A Chapter 15 case is exclusively to provide support for a bankruptcy case pending abroad. When the Mexican case was dismissed, the necessary predicate for the Chapter 15 petition in New York evaporated. Vitro is appealing the ruling by the judge in Mexico. The company said it believes it’s proper under Mexican law to use intercompany debt when third-party creditors vote down a plan. For Bloomberg coverage, click here.

Bondholders filed the involuntary petitions in Texas attempting to collect on $1.2 billion in bonds in default for about two years. So far, Vitro is opposing the involuntary petitions, saying the subsidiaries are generally paying their debts, although they have not made good on their guarantees of the bonds. They also make technical arguments attempting to undermine the involuntary petitions. The Fort Worth bankruptcy judge will hold a Feb. 10 hearing on the involuntary petitions.

The court in Mexico took sides with bondholders who were opposing the reorganization because it was based on voting $1.9 billion of inter-company debt in favor of the reorganization.

There are also lawsuits in New York state court, where bondholders attached Vitro assets. In addition, involuntary bankruptcies were filed by bondholders in Mexico.

Vitro previously said noteholders would recover as much as 73 percent by exchanging existing debt for cash, new debt and convertible bonds. Bondholders believe Vitro is worth enough to pay them in full. For a summary of Vitro’s dismissed 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 to be dismissed is In re Vitro SAB, 10-16619, U.S. Bankruptcy Court, Southern District of New York Manhattan).

Prepack Coming

Satelites Mexicanos to Redo U.S. Prepack from 2006

Satelites Mexicanos SA, the Mexican satellite operator, will file a prepackaged bankruptcy reorganization in the U.S., less than five years after emerging from a prior U.S. Chapter 11 case.

Holders of more than two-thirds of the $197.9 million in 10.125 percent second-lien notes due 2013 agreed to the plan, the company said in an e-mailed statement. Holders of the $238.2 million in senior-secured floating-rate notes maturing in November are to be paid in full, according to the statement.

Holders of the 2013 bonds can take new equity or 38 cents on the dollar. The company will remain under Mexican control after emerging from reorganization.

The plan will call for issuing $325 million in new debt and selling as much as $96 million of equity to second-lien creditors, Satmex said. Current shareholders are to receive $6.25 million, if conditions are met.

The bonds maturing this year are trading at par while the bonds due in 2013 traded on Jan. 19 for 39.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The new restructuring should be completed by May, Mexico’s Communications and Transportation Ministry said yesterday in a separate statement. The company confirmed a Chapter 11 plan in October 2006 after filing for Chapter 11 reorganization the preceding August.

Litigated disputes began in May 2005, when bondholders filed an involuntary Chapter 11 petition against Satmex. The company responded in June 2005 by filing a concurso mercantil, the Mexican version of reorganization. It later asked the U.S. bankruptcy judge to dismiss the involuntary petition.

A partial settlement was made in mid-2005 entailing a dismissal of the involuntary Chapter 11 petition while Satmex filed a Section 304 ancillary petition in New York, so that the bankruptcy court could assist the Mexican court by enjoining legal actions in the U.S. The Section 304 ancillary petition was the predecessor to what is now Chapter 15 for cross-border insolvencies.

After reaching final agreement with bondholders to restructure $800 million in debt, the company filed a prepackaged Chapter 11 petition in New York. The plan called for swapping $203.4 million of senior secured floating notes for $234.4 million in first-lien senior-secured notes, while $320 million in 10.125 percent unsecured notes became $140 million of second-lien notes and 78 percent of the new common stock.

The prior petition listed assets of $906 million against debts totaling $743.5 million.

In August 2003, Satmex defaulted on $320 million in senior unsecured notes. It was roughly half owned by Loral Space & Communications Ltd., with the remainder split between Mexican shareholders and the Mexican government, which had 23 percent of the stock. Satellite manufacturer Loral underwent its own Chapter 11 reorganization in July 2003.

Updates

Nortel Purchase Price to Be Set by Judge, Not Arbitrator

In the liquidation of Nortel Networks Inc., the bankruptcy judge, not an arbitrator, will determine a disputed price adjustment following the sale of the Internet telephony business to Genband Inc. When the bankruptcy judge in Delaware approved the sale in March 2010, Nortel advertised the price as generating $182 million after adjustments.

The dispute centers on a price adjustment related to an interpretation of the phrase “services to be performed or products to be provided” after the closing date. If Genband is correct in its interpretation, the final price would be $142.9 million. If Nortel is right, it’s $182 million.

U.S. Bankruptcy Judge Kevin Gross wrote an opinion on Jan. 21 concluding that an arbitration provision in the purchase contract doesn’t apply. He said arbitration applies only to accounting disputes. He said the parties agree on the dollar amounts, meaning there is no dispute over accounting. Since the dispute is only over the interpretation of the contract, Gross ruled that he, not the arbitrator, must decide the final sale price.

Once North America’s largest communications equipment provider, Nortel sold most of the businesses. It filed a disclosure statement in September explaining the liquidating Chapter 11 plan filed in July. The plan generally provides for full payment on secured claims with other distributions going in accordance with the priorities in bankruptcy law. There would be no distributions to creditors with subordinated claims.

In the absence of substantive consolidation, recoveries will vary depending on the Nortel company that owes a particular debt.

The Toronto-based Nortel companies filed for bankruptcy reorganization in January 2009 in the U.S., Canada and U.K. The Nortel companies reported $11.6 billion in consolidated assets against debt totaling $11.8 billion as of Sept. 30, 2008. Revenue was $9.7 billion in 2007. For the first nine months of 2008, sales were $6.8 billion.

The Chapter 11 case is In re Nortel Networks Inc., 09- 10138, and the parent’s Chapter 15 case is In re Nortel Networks Corp., 09-10164, both in U.S. Bankruptcy Court, District of Delaware (Wilmington).

Point Blank Reorganization Plan Draws Objection on WaMu Ground

One of the grounds relied on by U.S. Bankruptcy Judge Mary F. Walrath in refusing to confirm the Washington Mutual Inc. reorganization plan is resonating in another Delaware bankruptcy.

In the Chapter 11 case of Point Blank Solutions Inc., a manufacturer of soft body armor, a shareholder named Rodney McFadden filed an objection to the disclosure statement that’s up for approval on Feb. 14.

McFadden said the plan can’t be confirmed because it only allows current shareholders who are so-called accredited investors to buy stock in the rights offering that provides part of the financing for reorganized Point Blank.

McFadden pointed to Walrath’s Jan. 7 WaMu opinion in which she said it was unfair discrimination to give new stock only to creditors holding more than $2 million in one of the creditor classes. She said discrimination wasn’t justified by administrative convenience or economy resulting from having a company with few shareholders not required to report to the U.S. Securities and Exchange Commission.

The Point Blank case is pending before U.S. Bankruptcy Judge Peter J. Walsh, and one bankruptcy judge is not obliged to follow the rulings of another. Until now, it had been common practice for rights offerings to be available only to accredited investors, in part so the reorganized company wouldn’t be a so- called reporting company.

The plan to which McFadden objects is sponsored by Lonestar Partners LP, Privet Fund Management LLC and Prescott Group Capital Management. The investors are supplying $25 million in replacement financing. They are also backstopping a $15 million to $25 million equity rights offering. The offering will be available to specified unsecured creditors and stockholders. For details on the plan, click here for the Dec. 14 Bloomberg bankruptcy report.

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

Innkeepers’ New Restructuring Proposal to Draw Objections

Preliminary objections to the new Innkeepers USA Trust reorganization proposal will be filed tomorrow. For Bloomberg coverage of who is likely to object and why, click here.

The new proposal has ownership going to Lehman Ali Inc. and Five Mile Capital Partners LLC. Lehman Ali, a subsidiary of Lehman Brothers Holdings Inc., holds $238 million in floating- rate mortgages on 20 of Innkeepers’ 72 properties. An auction will determine if there is a better offer.

Midland Loan Services Inc., as servicer for $825 million of fixed-rate mortgages on 45 properties, is to receive mortgages for $622.5 million on revised terms. For details of the new plan structure, click here for the Jan. 18 Bloomberg bankruptcy report.

The bankruptcy court will hold a hearing on March 8-9 to set up auction procedures and approve agreements underlying the new proposal.

Innkeepers, based in Palm Beach, Florida, has 72 extended- stay and limited-service properties with 10,000 rooms in 20 states. For details on the first Innkeepers plan the bankruptcy judge rejected, 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).

Workflow Confirmation Set for Feb. 24 With Unsecureds on Board

Workflow Management Inc., a provider of promotional marketing services and printed business documents, scheduled a Feb. 24 confirmation hearing for approval of a Chapter 11 plan now supported by the official committee representing unsecured creditors. The bankruptcy court approved the disclosure statement on Jan. 21, allowing creditors to vote.

The committee removed its opposition when the pot for unsecured creditors was doubled to $2 million. Before then, unsecured creditors of the operating companies with claims estimated at $25 million were estimated to receive between 1 percent and 4 percent.

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

For details on the revised Workflow plan, click here for the Jan. 6 Bloomberg bankruptcy report. For details on Workflow’s original plan, click here for the Nov. 12 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 9 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).

Tribune Judge Grapples with Secrecy of Mediation Documents

The bankruptcy judge overseeing the reorganization of publisher Tribune Co. heard argument yesterday and said he will issue a written opinion later on whether Aurelius Capital Management LP, one of the proponents of a competing Chapter 11 plan, can compel the production of documents related to supposedly confidential mediation.

The judge said in court he was worried about whether producing documents from mediation would inhibit bankrupt companies and creditors from mediating effectively in future cases. For Bloomberg coverage, click here.

Aurelius is hunting for evidenced in advance of the March 7 confirmation hearing where three competing reorganization plans will be vying for approval.

Tribune is the second-largest newspaper publisher in the U.S. It listed $13 billion in debt for borrowed money and assets of $7.6 billion in the Chapter 11 reorganization begun in December 2008. It owns the Chicago Tribune, Los Angeles Times, six other newspapers and 23 television stations.

The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Oriental Trading Able to Reduce Interest on Exit Loan

Oriental Trading Co., a direct marketer of home decor products, toys and novelties, is reducing the interest rate offered for the $200 million credit needed to finance an emergence from Chapter 11 reorganization. The bankruptcy judge in New York confirmed the Chapter 11 plan on Dec. 16.

OTC is now offering 5.5 percentage points more than the London interbank borrowed rate, rather than 6.5 percentage points as before. The Libor floor is now 1.5 percent, rather than 1.75 percent. To increase the yield, the lenders now would pay 99 percent of par, rather than 98 percent of the face amount, according to a person familiar with the negotiations. For Bloomberg coverage, click here.

OTC confirmed the plan after first- and second-lien lenders reached a settlement. The plan gives the new stock plus cash or a new $200 million second-lien note to senior lenders owed $403 million.

For details of the plan and settlement, click here for the Nov. 26 Bloomberg bankruptcy report. The plan was negotiated with the first-lien lenders before the Aug. 25 bankruptcy filing.

Carlyle Group purchased 68 percent of OTC in July 2006 from private-equity investor Brentwood Associates. Brentwood retained about 24 percent of the equity.

Assets of the Omaha, Nebraska-based company were on the books for $463 million in April. Liabilities totaled $756.6 million. Net sales for the fiscal year were $485.4 million.

The case is In re OTC Holdings Corp., 10-12636, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Accredited Home Settles Overtime Suit for 10% of Claim

Accredited Home Lenders Holding Co., a former home mortgage originator and securitizer, agreed to settle a $96.7 million claim at a discount of about 90 percent. The settlement will come to bankruptcy court for approval on Feb. 24.

When Accredited acquired Aames Home Loan, Aames already had been named in a class action for violating California state labor laws. The plaintiff filed a claim for $96.7 million against Accredited, the largest part representing unpaid overtime.

The parties agreed to settle by allowing a claim for $9.5 million.

Accredited sold the mortgage-servicing business after the Chapter 11 filing in May 2009. Most of the mortgage loans were sold later. The Chapter 11 petition for Accredited Home said assets were less than $50 million while debt exceeded $100 million.

The case is In re Accredited Home Lenders Holding Co., 09- 11516, U.S. Bankruptcy Court, District of Delaware (Wilmington).

FairPoint Consummates Chapter 11 Reorganization Plan

FairPoint Communications Inc., a local exchange carrier, implemented a Chapter 11 reorganization plan yesterday that the bankruptcy court approved with a Jan. 13 confirmation order. Lenders took over ownership.

For details on FairPoint’s reorganization plan, click here for the March 12 Bloomberg bankruptcy report. For other Bloomberg coverage on reorganized FairPoint, click here.

The plan reduced debt by 64 percent, the company said in a statement.

FairPoint’s Chapter 11 petition listed assets of $3.236 billion against debt totaling $3.234 billion. Funded debt, aggregating $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).

Lehman and Paulson Plans Differ on Continuing Management

The Chapter 11 plan by Lehman Brothers Holdings Inc. and a competing plan from Paulson & Co. differ over who can lead management after the reorganization is confirmed.

The Paulson plan provides that creditors may elect a board that can decide who manages affairs day-to-day. The Lehman plan provides for Brian Marsal to continue as chief executive officer. He assumed the position after Lehman’s Chapter 11 filing.

To read Bloomberg coverage on the two plans, click here.

For Bloomberg coverage on additional disclosure given by Lehman with regard to restricted cash, click here.

The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold office buildings and the North American investment banking business to London-based Barclays Plc one week later.

The Lehman brokerage operations went into liquidation on Sept. 19, 2008, 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).

New Filing

Coffee Supplier Javo Beverage Files for Sale to Investor

Javo Beverage Co. Inc., a provider of concentrated coffees and teas for beverage dispensers, filed a Chapter 11 petition yesterday in Delaware together with an agreement on a plan to make current investor Coffee Holdings LLC the sole shareholder.

Unprofitable since its inception, Vista, California-based Javo listed assets of $14.66 million against debt totaling $26.71 million. Sales of $19.64 million for the three quarters ended Sept. 30 resulted in a $3.6 million loss from operations and an $8 million net loss.

Most of the debt is attributable to three note issues. In addition, there is about $2.4 million in accounts payable, a court filing said.

Coffee Holdings owns 23 percent of the existing common stock and $17 million of the notes. Coffee Holdings is to provide $3.15 million in financing for the Chapter 11 case.

In exchange for the financing plus the pre-bankruptcy notes, the plan is to provide for Coffee Holdings to own all the new stock. A term sheet for the plan says that the new stock is to represent full payment on the debt owing to Coffee Holdings. Existing stock will be extinguished.

Except for so-called critical vendors, who are to be paid in full more quickly, other unsecured creditors are to see 100 percent paid over a year.

The case is In re Javo Beverage Co. Inc., 11-10212, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Watch List

United Western May File Bankruptcy After Bank Taken Over

United Western Bancorp Inc., the owner of United Western Bank until it was taken over by regulators on Jan. 21, said it is “exploring its options” and may be required to file for bankruptcy to reorganize or conduct an “orderly liquidation” of the assets.

The regulators’ action was “precipitous” and would cause an “unnecessary loss” for the Federal Deposit Insurance Corp., the Denver-based company said in a statement. United Western said it was near the goal of securing $200 million in new capital demanded by regulators.

The bank subsidiary was sold by the FDIC to First-Citizens Bank & Trust Co. of Raleigh, North Carolina.

Daily Podcast

State Bankruptcy, Lehman Plan, Harry & David: Bankruptcy Audio

An examination of the constitutional issues inherent in a federal law allowing states to reorganize in bankruptcy, the upcoming amendment to the Chapter 11 plan for Lehman Brothers Holdings Inc. and the need for Harry & David Operations Corp. to restructure are items analyzed 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

Corporate Debt Discharged in Officer’s Bankruptcy

Fiduciary duties toward creditors thrust upon officers of an insolvent company don’t mean that a corporate officer can’t discharge a company debt in his own bankruptcy, the U.S. Court of Appeals in Chicago ruled on Jan. 21.

The case involved the head of an advertising agency that went bankrupt. A client paid the agency to buy advertising space. When the agency went bankrupt, some media hadn’t been paid, with the result that the client had to pay twice.

When the agency’s head filed for personal bankruptcy, the client sued in bankruptcy court for a declaration that the debt wasn’t dischargeable.

The client relied on the notion under most state law that officers of an insolvent company assume fiduciary duties to creditors of the company. The client argued that the company officer wasn’t entitled to discharge the debt in his personal bankruptcy because he committed fraud while acting in a fiduciary capacity.

Upholding the bankruptcy court, U.S. Circuit Judge David F. Hamilton ruled that not every fiduciary duty under state law qualifies as the type of fiduciary duty on which a debt can be excepted from discharge. In the process, he agreed with the U.S. Court of Appeals in New Orleans and differed with several district and bankruptcy courts.

Accepting the creditor’s argument in the absence of fraud, Hamilton said, “would go a long way toward imposing non- dischargeable personal liability on corporate officers and directors for general corporate debts of faltering corporations.”

Hamilton cited the familiar rule that exceptions to discharge must be construed narrowly.

The case is Follett Higher Education Group Inv. V. Berman (In re Berman), 10-1882, U.S. 7th Circuit Court of Appeals (Chicago).

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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