June 24 (Bloomberg) -- Lehman Brothers Holdings Inc. announced the first step late yesterday in the last round of a process to enable the sale of its non-bankrupt Aurora Bank FSB, the thrift unit formerly known as Lehman Brothers Bank FSB.
Lehman also filed papers yesterday for approval to bring in $125 million by selling the debt it holds against the Heritage Fields master planned community in Irvine, California. In addition, Lehman is selling its interest in a hedge fund called Silver Lake Credit Fund LP.
At a hearing on July 14, Lehman will ask the bankruptcy court to approve transferring servicing rights to Aurora covering 40,000 Fannie Mae insured loans with a principal balance of $8.8 billion. Lehman said a “large number” are delinquent or nearly so.
The transfer of servicing rights is part of an upcoming settlement between Lehman and Aurora that will enable the Office of Thrift Supervisions to remove restrictions on the bank’s operations. Once free of restrictions, Lehman says it will be possible to sell Aurora.
The current equity value of the bank is $642 million, Lehman says.
Once Lehman transfers servicing rights to Aurora, the bank in turn will transfer the rights to Fannie Mae in exchange for $26 million and servicing advances that were made on the loans.
Once the final terms are negotiated and documented, Lehman said it would file another set of papers seeking approval of the settlement with Aurora.
July 14 will also be the date of a hearing where Lehman will seek authority to transfer the debt it holds in the 3,723-acre Heritage Fields project. Lehman, through subsidiaries, was among lenders that made loans to the project before Lehman’s bankruptcy.
The loan will be bought by an affiliate of State Street Corp. for $125 million. Lehman also is to receive additional contingent payments from the project.
With regard to the Silver Lake hedge fund, Lehman at the July 14 hearing will seek authority to sell its $127.5 million capital account back to the fund for 92.5 percent paid in stages. In addition, the fund will withdraw a $25.4 million claim where it says Lehman guaranteed the debt of a European subsidiary.
Lehman disclosed in an operating report yesterday that professionals have been paid $830.6 million since the Chapter 11 petition was filed in September 2008. The report shows Lehman as holding $18.4 billion cash at end of May, up $1 billion over the month. To read Bloomberg coverage, click here.
As part of the trial seeking to prove that Barclays Plc took $11 billion more than it was entitled to receive when it purchased the brokerage business, the parties in the suit yesterday publicly filed over 450 pages of transcripts of examinations taken of witnesses under oath before the trial began in May. To read Bloomberg coverage, click here.
Lehman is near the end of presenting its case at the trial. Barclays will begin presenting its case on Aug. 23.
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 Investors Protection Corp. v. Lehman Brothers Inc., 08-01420, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Luby’s Given Approval to Buy Fuddruckers from Magic Brands
Magic Brands LLC overcame objection from Tavistock Group and was given authority at a hearing yesterday to sell the Fuddruckers stores and franchise business to restaurant operator Luby’s Inc. for $63.45 million.
Tavistock, which was the so-called stalking-horse, made the first bid at auction of $40 million. It charged before the sale-approval hearing that there were irregularities in the auction.
An order formally approving the sale await the judge’s signature.
Houston-based Luby’s operates 96 restaurants, mostly in Texas. Magic Brands said the sale to Luby’s “could” result in full payment for unsecured creditors.
After closing stores, Austin, Texas-based Magic Brands has 62 company-owned Fuddruckers locations operating in 11 states. It also owns the Koo Koo Roo restaurant brand, which has three stores in California. The petition said assets are less than $10 million while debt is less than $50 million.
The Koo Koo Roo stores are in bankruptcy a second time. Owned by Prandium Inc., they were sold to Magic Brands through Chapter 11 in 2004. The 135 Fuddruckers stores in 32 states owned by franchisees aren’t in the bankruptcy.
The case is In re Magic Brands LLC, 10-11310, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Delayed Examiner Report May Slow Tribune Confirmation
Kenneth N. Klee, the examiner for newspaper publisher Tribune Co., told the bankruptcy judge he won’t be able to issue his report by the July 12 deadline.
Since Klee wants the deadline extended to July 27, Tribune said the currently scheduled Aug. 16 confirmation hearing for approval of the reorganization plan may be delayed “for a short period of time.” To read Bloomberg coverage, click here.
Klee is to give his opinion on the strength of arguments that the $13.8 billion leveraged buyout led by Sam Zell in December 2007 included fraudulent transfers. Klee also said he would give his opinion on the remedies or damages creditors might be entitled to receive were he to conclude there were fraudulent transfers as part of the LBO. Klee said he won’t give his opinion on the virtue of the proposed settlement that some creditors oppose.
The bankruptcy judge will hold a hearing by telephone on July 1 to decide whether Klee can have more time.
The plan, filed in April, is opposed by holders of $3.6 billion in pre-bankruptcy debt who announced their opposition even before the settlement was formally disclosed. To read about the plan, the proposed settlement, and the parties’ arguments, click here for the April 13 Bloomberg bankruptcy report.
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 Delaware (Wilmington).
Secured Lenders Appealing Visteon Plan Financing Approval
Secured lenders to auto parts maker Visteon Corp. filed an appeal from approval the bankruptcy judge gave on June 17 for an agreement allowing bondholders will raise $1.25 billion cash needed for confirmation of a reorganization plan. The hearing for approval of the disclosure statement explaining the plan is scheduled for tomorrow. To read Bloomberg coverage of the appeal, click here.
To read about the Visteon’s plan, click here for the June 15 Bloomberg bankruptcy report. The newest plan would give shareholders 1.94 percent of the stock if they vote in favor of the reorganization. The remainder of the plan is much the same as before, although the amount of stock received by other constituencies is changed to account for the shareholders’ piece.
To read about the positions being taken by various parties prior to the hearing for approval of the disclosure statement, click here for the May 25 Bloomberg bankruptcy report.
Visteon filed for reorganization in May 2009, listing assets of $4.6 billion against debt totaling $5.3 billion. Sales in 2008 were $9.5 billion, including $3.1 billion to Ford Motor Co. Visteon was spun off from Ford in 2000. Van Buren Township, Michigan-based Visteon at the outset owed $2.7 billion for borrowed money, including $1.5 billion on a secured term loan, $862 million on unsecured bonds, and $214 million on other debt obligations.
The case is In re Visteon Corp., 09-11786, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Broadstripe Sells Washington Cable Systems for $1,200
Broadstripe LLC, a St. Louis-based broadband cable operator, is seeking court permission to sell several small money-losing cable systems in the Washington, D.C., area for $1,200.
Broadstripe said in court papers last week that the systems are losing money and there were no offers except from buyers wanting to purchase other operations the company doesn’t want to sell.
New Day Broadband LLC offered $1,200, a price Broadstripe wants the bankruptcy judge in Delaware to approve at a July 1 hearing.
If the cable systems aren’t sold, Broadstripe said it would incur $273,000 in costs to tear down the systems in compliance with local regulations.
When Broadstripe completes its 18th month in bankruptcy on July 2, any creditor may file a Chapter 11 plan. The company has been unable to confirm a plan in view of a suit where the unsecured creditors’ committee contends that secured lenders’ claims should be subordinated or recharacterized as equity. In addition, there are two claims by rival cable operators totaling almost $160 million for Broadstripe’s alleged failures to complete asset purchase agreements.
Broadstripe filed a reorganization plan based on an agreement reached before the Chapter 11 filing with holders of the first- and second-lien debt. At the outset of Chapter 11, Broadstripe had 93,000 customers in Maryland, Michigan, Washington State, and Oregon. It was created through four acquisitions in 1998 and 1999 and filed for Chapter 11 reorganization in January 2009.
The case is In re Broadstripe LLC, 09-10006, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Public Company Filings Trail 2009 in Amount, Number
Fifty public companies filed for bankruptcy reorganization or liquidation this year through June 20, compared with 118 in the same period last year, according to BankruptcyData.com.
Assets of the public companies filing in Chapters 7 or 11 so far this year totaled $45 billion, 12 percent of the $376 billion of assets in bankrupt companies filing in the same period of 2009.
The peak public-company filings in dollar amount of assets was $1.16 trillion in 2008. In number of public company filings over the last 10 years, the leader was 2001 with 263 filings, followed by 220 in 2002 and 210 in 2009, BankruptcyData.com said.
The 10-year low was 66 public-company filings in 2006, with $22 billion in assets.
First Foliage, Florida Nursery, Files Chapter 11 in Miami
First Foliage LC, a grower and marketer of tropical plants, filed for Chapter 11 reorganization yesterday in Miami, listing assets of $52 million against liabilities totaling $30.7 million.
The company said it was forced into bankruptcy by the lack of crop insurance coverage and a lender that doesn’t want to be making loans in the nursery business.
Homestead, Florida-based First Foliage owes $24 million to Bank of America NA on a term loan and revolving credit. The company contends it should be allowed to use cash representing security for the bank’s loan because the lender’s collateral is allegedly worth $52 million.
First Foliage says it’s one of the three largest tropical foliage nurseries in the U.S. and one of the 10 largest foliage nurseries. The current owners bought the assets from a bankrupt company in 2000 for $150,000 cash plus the assumption of $38 million in debt.
The business operates on a 446-acre tract, of which 134 acres are owned. Court papers say the customers are so-called Big Box stores like Lowe’s Cos., Home Depot Inc. and Wal-Mart Stores Inc.
The case is In re First Foliage LC, 10-27532, U.S. Bankruptcy Court, Southern District Florida (Miami).
Will Texas Rangers Fight or Settle?: Audio
Will the Texas Rangers settle with secured lenders as the result of an opinion this week where the bankruptcy judge found defects in the reorganization plan? For the answer, listen to the latest bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. We also look at the issues for trial at the July 9 Rangers confirmation hearing and analyze whether the Rangers or the lenders will come out on top. To listen, click here.
Exchange Offer News
American Capital’s Exchange Accepted Without Bankruptcy
American Capital Ltd. won’t be filing Chapter 11.
After modifying the exchange offer on June 10, holders of 98 percent of the public notes accepted the exchange offer. The company said in a statement that it expects to complete the swap on June 28.
American Capital is a Bethesda, Maryland-based publicly traded private-equity investor and asset manager. The exchange offer was originally announced in May.
For details on the exchange offer, click here for the June 10 Bloomberg bankruptcy report. The offer covers all of the company’s $2.35 billion in unsecured, funded debt.
American Capital had an investment grade rating until March 2009. The stock lost 5 cents yesterday, closing at $5.53 in Nasdaq Stock Market trading. The three-year closing high was $35.25 on July 6, 2007.
Tousa’s Cash Declines to $486 Million at May 31
Liquidating homebuilder Tousa Inc. ended May with $485.9 million cash in the bank, a decline of $3.8 million in the month. With assets mostly sold, revenue in the month was only $827,000.
On top of asset sale proceeds, creditors will have additional recoveries if appellate courts uphold the judgment in a lawsuit brought by the official creditors’ committee. The bankruptcy judge ruled that a bailout and refinancing in mid-2007 of a joint venture in Transeastern Properties Inc. resulted in fraudulent transfers. The bankruptcy judge required the banks to post $700 million in bonds to hold up enforcement of the judgment pending appeal. The appeal will be argued in late October in district court.
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).
Point Blank Generates $187,000 Net Income in May
Point Blank Solutions Inc., a manufacturer of soft body armor for the military and law enforcement, reported net income of $187,000 in May on net sales of $10.6 million. Operating income in the month was $924,000.
Point Blank filed under Chapter 11 in April. It has a plant and head office in Pompano Beach, Florida, and a second plant in Jacksboro, Tennessee. Revenue in 2009 was more than $153 million. The petition listed assets of $64 million against debt totaling $68.5 million. Debt included a $10.5 million secured loan to be paid off by financing for the Chapter 11 case. Point Blank said it also owes $28.2 million to trade suppliers. Three former officers were indicted on charges of securities fraud.
The case is In re Point Blank Solutions Inc., 10-11255, U.S. Bankruptcy Court, District of Delaware.
Aircraft Owners’ Tax Indemnity Claims Are Proper
The U.S. Court of Appeals in Manhattan ruled in favor of aircraft owners this week on an issue that has bedeviled bankruptcy courts in recent airline reorganizations such as Delta Air Lines Inc., UAL Corp.’s United Air Lines Inc. and Northwest Airlines Corp.
The issues involved so-called leveraged leases where a bank or financial institution would be the owner of an aircraft leased to an airline that pays all costs of operation and maintenance. For investing 20 percent of the purchase price to buy the aircraft, the owner is entitled under tax law to take depreciation deductions based on the entire value of the aircraft. The remainder of the purchase price is borrowed from lenders who have a security interest in the aircraft.
If the airline goes bankrupt and terminates the lease for the aircraft, the lenders foreclose and wipe out the owner’s equity. In addition, foreclosure results in significant tax payments because forgiveness of indebtedness as a consequence of foreclosure becomes taxable as ordinary income for the owner.
To compensate for the unintended tax consequences, the documents accompanying the leveraged lease include a tax indemnification agreement where the airline agrees to make up the tax losses. In addition, there is a separate agreement where the airline agrees to pay an amount called stipulated loss value.
Stipulated loss value, or SLV as it’s known, is calculated under a formula that equals the value of the aircraft plus the owner’s tax losses.
Delta, Northwest, and UAL all objected to the owners’ tax indemnity claims in their now-completed bankruptcy reorganizations. In the Delta case, the airline won when the bankruptcy judge in substance disallowed the tax claim, because it was duplicated by the SLV claim asserted by the lenders. The district court affirmed the bankruptcy court.
The 2nd Circuit in Manhattan reversed on June 22, saying that the lower courts improperly based their reasoning on “a strained and improbable reading” of the word “paid” as contained in the governing contracts.
The lower courts said that the owners were “paid” even though bankruptcy gave them only a small portion of the damages called for in their contracts. The Circuit Court didn’t buy the theory.
The court, in an opinion by Circuit Judge Pierre N. Leval, said the lower courts gave a “nonsensical and self-defeating” meaning to the word “paid.” Leval said the lower courts instead should have adopted an interpretation of the words that was in accord with the purpose of the provisions in the contracts.
The ruling this week will give the aircraft owners large unsecured claims in the airline’s reorganizations. Even with a smaller aircraft, a tax indemnity claim can be worth several million dollars. On a wide-body aircraft, a tax indemnity claim can amount to tens of millions of dollars.
The case is Northwestern Mutual Life Insurance Co. v. Delta Air Lines Inc. (In re Delta Air Lines Inc.), 08-5002, 2nd U.S. Circuit Court of Appeals (Manhattan).
Negotiations on Prepack Not Privileged, Judge Rules
Documents exchanged between a company and lenders before signing a plan support agreement must be turned over to dissenting creditors in a discovery fight leading up to a plan confirmation hearing, a bankruptcy judge in Manhattan ruled on June 21.
The case involves Almatis BV, a producer of specialty alumina products, and a prepackaged reorganization currently scheduled for approval at a July 19 confirmation hearing. Almatis filed under Chapter 11 on April 30 with a plan negotiated with holders of first-lien debt.
The plan is opposed by second-lien and mezzanine debt holders who would almost be wiped out under the plan.
When the junior lenders demanded production of documents about negotiations leading up to the agreement on the plan, the senior lenders argued to U.S. Bankruptcy Judge Martin Glenn that documents need not be produced under the so-called common interest doctrine.
Glenn rejected the argument, pointing out that agreement on the plan was negotiated at arm’s length between the senior lenders and Almatis. Since he found a “largely adversarial relationship,” Glenn held that the common interest doctrine didn’t apply to documents create before there was consensus on the so-called plan-support agreement.
The decision is important because it requires disclosure of documents created in the give-and-take during negotiations on a bankruptcy reorganization plan. To read the decision, click here.
The upcoming confirmation hearing on the plan entails a dispute over the value of Almatis. To confirm the plan over objection from junior lenders, Glenn must conclude that the dissenters are receiving more under the plan than they would take home through a liquidation in Chapter 7.
The junior lenders believe the company has value “much greater than the $540 million” claimed by the company. They accuse Almatis of walking away from offers by Dubai International Capital LLC that would have paid the first lien in full while giving new debt and equity to junior lenders.
Dubai International bought the Almatis business in 2007 for $1.2 billion.
For details on the Almatis plan and options for first-line lenders, click here for the April 30 Bloomberg bankruptcy report.
Almatis’ revenue in 2009 was $400 million. For 2010, projected revenue is $534 million. Almatis began defaulting on senior debt in June 2009.
Rotterdam-based Almatis listed total debt of $1.3 billion, including $681 million on first-lien obligations, $77.7 million on second-lien debt, and $200.6 million on mezzanine debt. There is junior mezzanine debt of $80.6 million, plus trade debt of $20 million. Assets were listed for assets $1.53 billion.
The case is In re Almatis BV, 10-12308, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Bank Avoids Waiver of Security Interest in Account
A bank that turned over money in a bankrupt’s checking account didn’t waive a security interest, the Bankruptcy Appellate Panel for the 6th Circuit ruled on June 23 in reversing the bankruptcy court.
The bank was a secured creditor with a $1 million claim. When the company filed to liquidate in Chapter 7, the company’s checking account contained almost 500,000 that was the bank’s collateral.
When the bankruptcy trustee demanded the bank turn over the funds, the bank complied. Later, the trustee argued successfully to the bankruptcy judge that the bank waived the security interests by turning over the money.
The Appellate Panel reversed, holding that the bank’s security interest in the money was fixed on the bankruptcy filing date. The opinion, by Bankruptcy Judge Marilyn Shea-Stonum, said the security interest was not lost merely because “the creditor no longer had possession of the collateral.”
She also said that turning over the money at the demand of the trustee “is not a waiver of the underlying claim nor an avoidance of the underlying security interest.”
Shea-Stonum chided the bank for not employing a strategy that would have avoided costly litigation with the trustee, such as placing an administrative freeze on the account rather that turning over the money so easily.
The case is Limor v. First National Bank of Woodbury (In re Cumberland Molded Products LLC), 09-8049, Bankruptcy Appellate Panel, 6th U.S. Circuit Court of Appeals (Cincinnati).
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