Madoff, Kodak, Journal Register, Lehman, H&M: Bankruptcy

Three senior noteholders of K-V Pharmaceutical Co. have the power to control the direction of the Chapter 11 reorganization that began on Aug. 4 in New York.

Silver Point Capital LP, Whitebox Advisors LLC and Pioneer Investment Management Inc. among themselves own $152 million of the $225 million in senior secured notes, according to a court filing by their lawyers on Sept. 14.

Approval of a reorganization plan will require that two- thirds in amount of senior noteholders vote “yes.” The three investors by themselves have 67.6 percent of the debt, or enough to assure that the class accepts a plan assuming half of holders by number agree.

The three investors also own $8.9 million of the convertible subordinated notes, the court filing said. The three noteholders previously had said they held at least a majority of the senior notes.

K-V is a St. Louis-based provider of branded pharmaceuticals. It listed assets of $236.6 million against debt totaling $728 million. It ceased manufacturing and distributing nearly all drugs in January 2009 after discovery that some tablets were oversized. The company’s main business now is the sale of Makena, a drug reducing the risk of premature birth.

Liabilities include $455.6 million in long-term debt including $225 million on the senior secured notes due 2015. The first-lien notes traded on Aug. 8 for 31 cents on the dollar, a 36 percent decline since July 11, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority.

There is $200 million owing on 2.5 percent contingent convertible subordinated notes due 2033. The notes traded on Aug. 29 for 1.9 cents on the dollar, a 47 percent decline since Aug. 13, Trace said. K-V owes $30 million on a mortgage loan.

Hologic Inc. sold the Makena business to K-V in 2008 and is owed $95 million plus royalties. Hologic has a lien on the right to distribute the product.

The case is In re K-V Discovery Solutions Inc., 12-13346, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Updates

Kodak Says It May Retain Technology Rather Than Sell

Eastman Kodak Co. (EKDKQ) won’t be selling digital imaging technology this month. The company said in a Sept. 14 court filing that it’s “exploring alternatives,” including retention of the patents to generate licensing revenue for payment of creditor claims.

The company told creditors in the filing that “it may not reach acceptable terms with parties via the auction process.”

The bankruptcy court in New York had approved sale procedures that were to have culminated in an Aug. 20 hearing to approve sale. Rather than conduct an open auction on a specified day with bids submitted one after another, Kodak believed the price would be higher by requiring the submission of bids and negotiating privately with potential purchasers until arriving at the highest bid in consultation with creditors.

Kodak pushed back the sale-approval hearing three times, most recently to Sept. 19. If an acceptable offer is found, Kodak said it will file a new set of papers in bankruptcy court setting up a hearing to approve sale.

For other Bloomberg coverage, click here.

Kodak’s $400 million in 7 percent convertible notes due in 2017, which sold for 21.055 cents on the dollar on Aug. 9, traded at 10:34 a.m. on Sept. 14 for 13.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The price decline occurred after Kodak announced the first postponement of the technology sale.

Based in Rochester, New York, Kodak filed for Chapter 11 reorganization in January, listing $5.1 billion in assets and $6.75 billion in debt. Liabilities for borrowed money, totaling $1.6 billion, included $100 million on a first-lien revolving credit and $96 million in outstanding letters of credit.

Other liabilities include $750 million in second-lien notes, $406.1 million in convertible notes, and $252.4 million in senior unsecured notes. Trade debt was $425 million.

Kodak’s Chapter 11 case is In re Eastman Kodak Co., 12-10202, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Madoff Trustee Trying to Persuade Rakoff to Change His Mind

The trustee liquidating Bernard L. Madoff Investment Securities LLC filed a 39-page brief seeking to persuade U.S. District Judge Jed Rakoff not to dismiss another 16 lawsuits on grounds where Rakoff previously ruled that suits don’t hold water.

In a suit against HSBC Holdings Plc, Rakoff ruled last year that Madoff trustee Irving Picard can’t bring cases based on common law in the face of a defense known as in pari delicto rule. Rakoff also ruled that the federal Securities Litigation Uniform Standards Act bars some of the claims Picard filed against customers who allegedly received stolen property.

The HSBC appeal is pending in the U.S. Court of Appeals in Manhattan. The briefs have been filed.

Picard’s papers on Sept. 14 argued Rakoff was wrong in his earlier dismissal of similar suits. The defendants in the suits will file another brief on Oct. 5. The dispute is scheduled for hearing in Rakoff’s court on Oct. 15.

Rakoff previously said that the defendants believe it makes sense to wait for a ruling from the Court of Appeals before deciding whether to dismiss the additional suits.

Picard has several appeals pending in the Court of Appeals. Among them, one seeks to revive $10 billion in lawsuits against 635 customers where Rakoff ruled that Picard can sue to recover stolen money only going back two years before bankruptcy, not six.

From 1,000 lawsuits Picard filed, Rakoff’s ruling have meant that the trustee would lose on $11.1 billion in claims against customers. Rakoff left Picard the ability to sue for two-year profits totaling about $8 billion.

Despite the adverse rulings, more than $11 billion has been collected from settlements, recoveries by the trustee, and forfeitures to the U.S. government. Customer claims aggregate about $17 billion.

Picard announced last week that customers will be receiving a distribution of an additional 33.5 percent of their approved claims on Sept. 21. The new distribution will bring customers’ recovery to 38.1 percent.

The Madoff firm began liquidating in December 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 following a guilty plea.

The dispute over common claims is part of Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 12-mc-00115, U.S. District Court, Southern District New York (Manhattan). 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).

AMR Fees of $48.2 Million Negotiated Down by 3 Percent

At the AMR Corp. hearing in bankruptcy court on Sept. 20, 19 professional firms will be asking the bankruptcy judge in New York to approve $47 million in fees for four months of work spanning the period from Nov. 29 when the case began through the end of March.

The fee examiner appointed by the bankruptcy court reviewed the fee requests and negotiated 3 percent in reductions from the combined original requests of $48.2 million. The agreed reductions total $1.47 million.

The largest fee request of $15.3 million was lodged by Weil Gotshal & Manges LLP, the airline’s chief lawyers. Weil agreed to reduce fees by 3.3 percent or $498,000.

AMR, the parent of American Airlines Inc., is closing a call center this month in Tucson, Arizona. No longer needing the 85,000 square-foot building, AMR signed Freeport-McMoRan Corp. to buy the facility for $5.1 million. There will be a hearing in bankruptcy court on Oct. 9 for approval of the sale.

Headquartered at the airport midway between Dallas and Fort Worth, AMR listed assets of $24.7 billion and debt totaling $29.6 billion in the Chapter 11 reorganization begun in November. American Airlines entered bankruptcy with 600 aircraft in the mainline fleet and another 300 with American Eagle, the feeder airline.

The case is In re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District New York (Manhattan).

U.S. Trustee Lobbies Against Patriot Equity Committee

Patriot Coal Corp. (PCXCQ) shareholders aren’t entitled to have an official committee of their own, the U.S. Trustee told the bankruptcy judge in advance of a Sept. 24 hearing to decide if equity can have representatives whose fees would be paid by the company.

The Justice Department’s bankruptcy watchdog recited in her Sept. 14 papers how shareholders carry a “heavy burden” of showing a “substantial likelihood” that equity will have a “meaningful distribution.”

The U.S. Trustee pointed to the July 31 balance sheet where shareholders’ equity was 1.6 percent of book assets. Given that shareholders’ equity plunged more than $530 million in the first half of 2012, the U.S. Trustee said the equity holders haven’t sustained their burden of showing a respectable possibility of solvency.

The bond market implies that Patriot is far short of solvent. The $200 million in 3.25 percent senior convertible notes due 2013 traded at 9:49 a.m. on Sept. 14 for 11 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $250 million in 8.25 percent senior unsecured notes due 2018 traded on 2:54 p.m. on Sept. 14 for 45 cents on the dollar.

Supporting an argument for solvency, the shareholders said that Patriot has $1.4 billion in tax loss carryforwards not carried as an asset on balance sheet. Shareholders seeking a committee include CompassPoint Partners LP.

The bankruptcy judge in New York may never decide whether there should be an equity committee. Last week she heard argument from the U.S. Trustee on a motion to transfer the case out of New York. The judge said she would issue a ruling later. If she sends the case away before ruling on the committee question, the new judge will decide on an equity committee.

Patriot is one of the largest coal producers in the U.S. In the Chapter 11 filing July 9, Patriot listed assets of $3.569 billion and debt of $3.072 billion as of May 31.

The case is In re Patriot Coal Corp., 12-12900, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Pinnacle’s Union-Busting Motions Filed under Seal

Pinnacle Airlines Corp. (PNCLQ), a feeder airline, began the process last week of having the bankruptcy court revise contracts with unions representing pilots and flight attendants.

Both motions are under seal, so the economic basis for the desire to modify the contracts wasn’t disclosed publicly. Pinnacle’s brief explaining the legal rationale for modifying the contracts is also entirely under seal.

When American Airlines Inc. sought court authorization to modify union contracts, the papers were filed publicly, with redactions of sensitive information that would be harmful if known by competitors.

Memphis-based Pinnacle filed for bankruptcy reorganization in April, listing assets of $1.539 billion against debt totaling $1.427 billion. At the outset of bankruptcy, Pinnacle was providing service as Delta Connection, United Express, and US Airways Express. Pinnacle has the exclusive right to propose a reorganization plan until Jan. 25.

Secured debt includes $690 million owing to Export Development Canada and $34 million on a revised loan with an affiliate of CIT Group Inc. (CIT)

For nine months ended Sept. 30, there was an $8.8 million net loss from $938.1 million in operating revenue. Operating income in the period was $23.1 million. There was $12.8 million of net income in 2010 on operating revenue of $1.02 billion.

The case is In re Pinnacle Airlines Corp., 12-11343, U.S. Bankruptcy Court, Southern District New York (Manhattan).

SP Newsprint Sold, Converted to Chapter 7 Liquidation

Newsprint maker SP Newsprint Holdings LLC completed the sale of the business on Sept. 10. The Chapter 11 reorganization was converted three days later to a liquidation in Chapter 7 where a trustee was appointed.

No outside buyer was willing to compete with secured lenders in purchasing the business and the bankruptcy judge in Delaware approved a sale to the lenders on Sept. 7 under a contract with a nominal value of $145 million, composed of some of the secured debt plus about $30 million cash to pay off financing for the Chapter 11 case and professional costs.

The case was switched to liquidation because there was no ability to confirm a Chapter 11 plan.

The sale to the lenders took place while the company was faced with running out of cash from the loan for the reorganization begun in November.

When the bankruptcy reorganization began, SP said the lenders were willing to serve as the stalking horse. Before bankruptcy, SP owed $41 million on a revolving credit and $213 million on a term loan with General Electric Capital Corp. as a lender and agent.

Based in Greenwich, Connecticut, SP filed under Chapter 11 with plants in Georgia and Oregon along with 23 recycling centers in nine states.

The case is In re Holding Liquidating II Holdings LLC, 11-13649, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Clare Oaks Bondholders Recovering 45 Percent under Plan

Clare Oaks, a continuing care community with 317 units and beds, is on track to emerge from the Chapter 11 reorganization begun in December under a reorganization plan sponsored by secured bondholders owed $95.8 million.

An attempt at selling the facility generated an offer of $16 million which the bondholders found insufficient since it would have generated only $10 million for them after paying expenses and the loan financing the bankruptcy.

The bondholders submitted their own plan. The bankruptcy court in Chicago approved the explanatory disclosure statement last week. A confirmation hearing for approval of the plan is set for Oct. 25.

Bondholders are settling aside some cash that could pay as much as 2.7 percent on $1.9 million in unsecured debt.

For a projected 45 percent recovery, bondholders will receive $40 million in new second-lien bonds that will pay interest only at 4 percent for 15 years.

Emergence from Chapter 11 will be financed by a $12 million first-lien secured loan provided by some of the bondholders.

The not-for-profit facility in Bartlett, Illinois, has 164 independent living units, 17 assisted living units, 16 memory care units, and 120 skilled nursing beds. The campus is 41 acres.

The Sisters of St. Joseph of the Third Order of St. Francis developed the project and own the land where it’s situated. The petition listed assets of $107.2 million against debt totaling $136.9 million.

The project was financed with $112.7 million in bonds issued through the Illinois Finance Authority. Construction began in 2006.

The case is In re Clare Oaks, 11-48903, U.S. Bankruptcy Court, Northern District Illinois (Chicago).

Northampton Generating Seeks Fifth Exclusivity Extension

Northampton Generating Co. LP, the owner of a 112-megawatt electric generating plant in Northampton, Pennsylvania, has been receiving extensions of exclusive plan-filing rights in one- month increments from the U.S. Bankruptcy Court in Charlotte, North Carolina.

Undeterred, the company filed papers last week for an 11- week enlargement of so-called exclusivity. If approved by the judge at an Oct. 9 hearing, the deadline would be pushed out to Dec. 28. The new exclusivity motion was Northampton’s fifth.

The company again said it’s analyzing options with regard to a reorganization plan.

Northampton is now a so-called merchant electric generator as a result of terminating a power-purchase agreement with Metropolitan Edison Co. It became part of the PJM Interconnection LLC network. The plant is fueled by waste products such as waste coal, fiber waste, and tires.

The Charlotte, North Carolina-based company defaulted on bonds in 2009. Debt includes $73.4 million owing on senior bonds issued through the Pennsylvania Economic Development Financing Authority. The Authority also issued junior bonds with $21.8 million outstanding, according to a court filing.

Northampton filed for Chapter 11 protection in December and later listed asset of $205 million and debt totaling $121.5 million, including $95.4 million in secured debt.

The case is In re Northampton Generating Co. LP, 11-33095, U.S. Bankruptcy Court, Western District North Carolina (Charlotte).

Podcast & Video

Two Newspapers, Digital Domain, AMR, Rent Control

Newspaper publishers Tribune Co. and Journal Register Co. are covered in the new bankruptcy video with Bloomberg News bankruptcy columnist Bill Rochelle and Bloomberg Law’s Lee Pacchia.

In the new podcast, Rochelle talks about Digital Domain Media Group Inc. (DDMGQ) and its effort at selling the business within 10 days of bankruptcy. Rochelle engages in name dropping by identifying the deep pockets talking about financing a reorganization plan for AMR Corp., the parent of American Airlines Inc. The podcast ends with discussion of a new court opinion that might disincline tenants in rent-controlled and rent-stabilized apartments in New York City from filing bankruptcy.

To see the video, click here. For the podcast, 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: John Pickering at jpickering@bloomberg.net.

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