Innkeepers USA Trust didn’t properly carry out its duties to creditors, U.S. Bankruptcy Judge Shelley C. Chapman ruled last week. Chapman refused to approve an agreement that would have compelled Innkeepers, a real estate investment trust, to pursue a reorganization plan giving the stock to a subsidiary of Lehman Brothers Holdings Inc.
As shown in the transcript of the Aug. 1 hearing, Chapman honed in on how Innkeepers and Lehman subsidiary Lehman Ali Inc. signed a contract, known as a plan-support agreement, which precluded Innkeepers from “negotiating in good faith with their numerous constituents.” She noted that the so-called PSA “lacks support from nearly the entire capital structure.”
Chapman also said it was “troubling” that Innkeepers didn’t disclose to the largest creditor that it was working on a parallel agreement where Lehman would sell half the stock for $107.5 million to the current owner, Apollo Investment Corp.
Chapman said that the PSA was not a “disinterested business transaction.” After hearing witnesses, she said, “I cannot conclude that the debtors exercised due care.” She said the prohibition against looking for a better reorganization “causes me to question the debtors’ honest interest in exercising due care.”
She also ruled that the “debtors have not shown that they acted in good faith.”
Because the PSA precluded Innkeepers from even negotiating a different plan with creditors, Chapman said it “created contempt” rather than “fostering negotiations.” According to the judge, “This is not what a Chapter 11 is supposed to be about.”
Although Chapman didn’t approve the PSA that would have locked Innkeepers into a plan with Lehman, she said that the company could nonetheless go ahead with the proposal despite opposition from every other secured creditor. The plan would give the new stock to Lehman Ali in exchange for $238 million in secured debt. Lehman in turn would sell half the stock to Apollo.
Midland Loan Services Inc., the servicer for $825 million in mortgage debt, was opposed to the Lehman-Apollo plan. Midland has liens on 45 of Innkeepers’ 72 properties. It has a competing plan that would be financed by selling the new stock for $236 million to Five Mile Capital Partners LLC.
Two lawyers for Innkeepers from Kirkland & Ellis LLP, Anup Sathy and Marc Carmel, both declined to comment.
Midland was represented at the PSA trial by Lenard Parkins and John Penn from Haynes & Boone LLP. A group of preferred shareholders also opposed the PSA. They were represented by Martin Bienenstock from Dewey & LeBoeuf LLP.
For details on Innkeepers’ plan and Midland’s competing plan, click here for the Aug. 31 Bloomberg bankruptcy report. Before Midland can file its plan formally, it must have permission from the bankruptcy judge.
In total, Palm Beach, Florida-based Innkeepers has 72 extended-stay and limited-service properties with 10,000 rooms in 20 states. Apollo acquired the company 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 New York (Manhattan).
Tronox Shareholders File Competing Plan on Schedule
The official shareholders’ committee for Tronox Inc. filed their competing Chapter 11 plan on Sept. 2 to reorganize the world’s third-largest producer of the white pigment titanium dioxide. Shareholders were entitled to propose a reorganization of their own because Tronox has been in bankruptcy court for more than 18 months.
The shareholders’ plan offers existing stockholders warrants and the right to purchase 17.5 percent of the new stock in a $135 million backstopped rights offering. In the company’s plan, shareholders would be limited to warrants that the committee says would be nearly worthless.
To pick up support from unsecured creditors, the equity committee’s plan offers them 62.5 percent of the new stock, compared with 16.9 percent under the company’s plan. In addition, unsecured creditors can purchase 17.5 percent of the new stock through the rights offering. The disclosure statement explaining the equity panel’s proposal says their plan will give 100 percent payment to unsecured creditors, compared with 75 percent to 100 percent under the company plan.
The shareholders’ disclosure statement says the equity plan is worth $2.58 for each existing share, compared with 2 cents to 10 cents in the company plan. The equity plan postulates that the midpoint value of the reorganized company is $1.25 billion.
The backstopped rights offering gives shareholders, unsecured creditors and others the right to purchase 37.5 percent of the new stock for $135 million. The equity committee’s plan would also be financed with up to $520 million in secured credits. The disclosure statement says the equity committee intends on having commitments for the new loans before the confirmation hearing on the plan.
The equity committee is incorporating the settlement made by the company with holders of environmental and personal injury tort claims. The equity plan, however, leaves open the ability to object to the claims.
The disclosure statement for the equity plan will be up for approval in bankruptcy court at the same Sept. 23 hearing when the company’s disclosure statement is scheduled for consideration.
For details on Tronox’s own plan, click here for the Sept. 2 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. The operations outside of the U.S. didn’t file.
Tronox rose 11 cents, or 41 percent, to 38 cents in over-the-counter trading on Sept. 3. Since its Chapter 11 filing, the stock’s closing high was $1.35 on April 26.
The case is In re Tronox Inc., 09-10156, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Secured Lenders Take Most of Brown Publishing Assets
Brown Publishing Co., the publisher of the largest-circulation local newspaper on eastern Long Island, for a second time has approval to sell the remaining businesses.
A group including Roy Brown, the president and chief executive, defaulted on a court-approved contract to buy most of the publications for $22.4 million plus $900,000 in assumption or waiver of debt. The auction rules provided that the business could be sold to the second-place finisher at the auction were the Brown group to default.
The secured lenders, who had the second-best bid at auction, were authorized by the judge on Sept. 3 to buy most of the publications in exchange for $21.75 million in secured debt. PNC Bank NA is agent for the lenders.
The flagship publications on eastern Long Island, Dan’s Papers and Montauk Pioneer, were sold to a different buyer for $1.75 million cash. Dan’s Papers has the largest circulation in the Hamptons, as the area of Long Island is known. Dan’s buyer is affiliated with Isis Venture Partners LLC, a private-equity investor in small- and mid-market media and information companies.
The Delphos Herald Inc. previously purchased three publications in Ohio for $3.59 million cash.
Closely held Brown, based in Cincinnati, listed assets of $94 million against debt totaling $104.6 million. First-lien lenders were owed $70.2 million on a revolving credit and term loan. Second-lien lenders were owed $24.3 million.
Brown had 15 daily, 32 weekly, 11 business and 41 free publications. There were also 51 web sites. Seventy-eight of the publications are in Ohio. The business publications are in seven states.
The case is In re Brown Publishing Co., 10-73295, U.S. Bankruptcy Court, Eastern District New York (Central Islip).
General Growth Judge to Rule on Hughes Investors’ Status
The bankruptcy judge may decide an important issue regarding the General Growth Properties Inc. reorganization this month, before the Oct. 21 confirmation hearing for approval of the Chapter 11 plan. Former investors in Hughes Corp. arranged a Sept. 23 hearing for the bankruptcy judge to decide whether they should be treated like shareholders or similar to creditors.
Hughes Corp. owned a 22,500-acre master-planned community outside Las Vegas named Summerlin. Some of the investors include heirs of the late Howard Hughes. General Growth’s predecessor acquired Hughes Corp. under an agreement that provided for paying the purchase price over 14 years. For the last payment at the end of 2009, the Hughes investors were to be paid approximately half of the fair market value of the remaining assets, plus other items such as excess cash flow.
The last payment wasn’t to be made in cash. Rather, the investors were to receive enough shares of General Growth stock to pay them in full. Given the price for General Growth stock, the distribution to the Hughes investors would have caused significant dilution of the holdings of existing shareholders.
The Hughes investors filed a motion last week asking the bankruptcy judge to treat them as creditors. General Growth has been characterizing the Hughes investors as having a “contingent equity interest.” The dispute is on the bankruptcy court calendar for Sept. 23. In early August the bankruptcy judge required the parties to arbitrate some of the economic issues underlying the claim.
General Growth settled class-action suits by investors in 401(k) plans. If approved by the bankruptcy judge at a Sept. 15 hearing, General Growth’s directors’ and officers’ insurance policy will pay $5.75 million to resolve claims against company’s executives who were accused of violating fiduciary duties under the 401(k) plan. To read other Bloomberg coverage, click here.
The Chapter 11 plan for General Growth’s four top-tier companies provides full payment for creditors while preserving some of the stock for existing shareholders. The plan is financed in part with an $8.55 billion debt and equity commitment from a group led by Brookfield Asset Management Inc. General Growth’s property-owning subsidiaries already have confirmed Chapter 11 plans paying their creditors in full.
General Growth plans on emerging from reorganization in October and remaining the second-largest mall owner in the U.S. with 180 properties in 43 states.
General Growth began the largest real-estate reorganization in history by filing under Chapter 11 in April 2009. The books of Chicago-based General Growth had assets of $29.6 billion and total liabilities of $27.3 billion as of Dec. 31, 2008.
The case is In re General Growth Properties Inc., 09-11977, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Rock & Republic Wrongly Discounting Jeans, Papers Say
Rock & Republic Enterprises Inc., a wholesaler and retailer of what it calls avant-garde apparel, is in a dispute with its exclusive Canadian distributor, Simms Sigal & Co., about which side is violating the agreement.
Simms filed papers in bankruptcy court last week saying that it learned in late 2009 that R&R jeans were being sold in stores in Canada operated by Costco Wholesale Corp. in violation of its exclusivity agreement. According to Simms, R&R said at the time that Costco did not obtain the jeans from an authorized source.
In May, Simms says it found R&R Jeans again were being sold by Costco in Canada at prices lower than Simms could buy the jeans wholesale. Although R&R subsequently issued a statement saying that Costco was not authorized to sell the jeans, Simms says it learned from an R&R representative that R&R was in fact the source of the jeans.
Simms said it sued Issaquah, Washington-based Costco seeking an injunction for violating its exclusive territory. When Simms turned down R&R’s demanded to drop the suit, Simms says R&R responded by filing a motion in the U.S. Bankruptcy Court in Manhattan to reject the exclusive agreement with Simms.
In the motion to reject the contract, R&R says it no longer wants to do business with Simms because sales by Simms have been declining. In its papers, Simms says that R&R consented to canceling Simms’ order for the fourth quarter in view of lower price competition from Costco.
The dispute comes to bankruptcy court for hearing tomorrow.
R&R filed for Chapter 11 reorganization on April 1 in Manhattan, where it’s based. Revenue in 2009 was $97.6 million, a court filing says. Earnings before interest, taxes, depreciation and amortization last year was $9.8 million. The products, according to R&R, are sold through upscale retailers and in three company stores.
Assets were listed with a value of $81.8 million against debt totaling $38.1 million. Debt includes $5.7 million owing on a factoring agreement.
The case is In re Rock & Republic Enterprises Inc., 10-11728, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Taylor Bean’s Farkas Says He Has No Defense Funds
Lee Farkas, former chairman of Taylor Bean & Whitaker Mortgage Corp., filed papers last week imploring the bankruptcy judge to give him access to the directors’ and officers’ insurance policy.
Farkas is facing trial in November on an indictment charging him with concealing mortgage assets that were worthless or losing value and representing them as being securitized and sold into the secondary market. On one hand, the government has frozen his assets, leaving him with nothing to pay his defense lawyer, his court papers say. On the other hand, the bankruptcy judge in the Taylor Bean Chapter 11 case is yet to pass on a motion by National Union Fire Insurance Co. of Pittsburgh for permission to make payments for legal fees incurred by company managers.
The bankruptcy judge is scheduled to hold a preliminary hearing on Sept. 10 on National Union’s motion. Farkas said that the judge in his criminal case won’t push back the trial.
Taylor Bean and the creditors’ committee don’t want the policy depleted by former executives because they say the company too has claims for reimbursement under the policy. National Union, a subsidiary of American International Group Inc., provided $5 million in coverage for directors and officers.
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. After the Chapter 11 filing, it sold 1,046 parcels of repossessed real estate for $81.2 million. The petition said assets and debt both exceed $1 billion.
The case is Taylor Bean & Whitaker Mortgage Corp., 09-07047, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).
Point Blank Reports $3 Million Net Loss in July
Point Blank Solutions Inc., a manufacturer of soft body armor for the military and law enforcement, filed an operating report for July showing a gross loss of $320,000 on net revenue of $7.94 million. The months’ net loss was $3.05 million. Reorganization costs in the month were $2.75 million.
Point Blank ended July with cash of $914,000. Net accounts receivable are $9.3 million.
There is an official committee representing shareholders.
Point Blank 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 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.
Houston’s Vintage Park Files to Halt Foreclosure
The owner of the Vintage Park Apartment Homes on Cutten Road in northwest Houston filed a Chapter 11 petition on Sept. 2 to forestall foreclosure that otherwise would have taken place.
The project, built in 2007, has 324 units situated on a 13-acre plot. Rents are as high as $1,567 a month.
The $41 million mortgage from Capmark Bank matured in July. The bank already installed a receiver. The bank declined to refinance the mortgage.
The project also has a $2.6 million mezzanine loan held by Wrightwood Capital Lender LP.
The case is In re IRH Vintage Park Partners, 10-37503, U.S. Bankruptcy Court, Southern District Texas (Houston).
Spanish Palms Condos in Las Vegas File Chapter 11
The Spanish Palms Condominiums, a 188-unit project in Las Vegas, filed for Chapter 11 relief in its hometown on Sept. 1.
The project is listed in court papers as having a value of $12.8 million. The mortgage, held by Corus Construction Inc., is $25.7 million.
The case is In re The Reserve Development LLC, 10-26715, U.S. Bankruptcy Court, District of Nevada (Las Vegas).
Fresh From Victory, Colonial’s Exclusivity Extended
Bank holding company Colonial BancGroup Inc. was granted its request and received an extension until Nov. 18 of the exclusive right to propose a Chapter 11 plan. Colonial scored an important win last week over the Federal Deposit Insurance Corp. when the bankruptcy judge in Montgomery, Alabama, ruled that the holding company hadn’t made an enforceable agreement to make up a $1 billion capital deficiency at the bank subsidiary.
Other disputes remain unresolved, including disagreement over the validity of three secured claims. The FDIC claims a security interest in several bank accounts at Branch Banking & Trust Co. that hold $38.4 million that the holding company had on deposit when the bank was taken over. Wilson, North Carolina-based BB&T believes it also has a security interest in the same accounts. Alabama taxing authorities are claiming $7 million.
Colonial sought Chapter 11 relief in August 2009 after the bank subsidiary was taken over by regulators. The Colonial holding company, based in Montgomery, Alabama, listed assets of $45 million against debt of $380 million.
Colonial provided loans to mortgage loan originators to tide them over until mortgages could be packaged and sold to investors in securitizations. The holding company was being investigated with regard to accounting practices and the warehouse loan operation.
The case is In re Colonial BancGroup Inc, 09-32303, U.S. Bankruptcy Court, Middle District of Alabama (Montgomery).
Innkeepers, Lehman Banks, Bankruptcy Filings: Audio
The criticism that Innkeepers USA Trust received from the bankruptcy judge for refusing to negotiate another plan with creditors, the new $1 billion investment that Lehman Brothers Holdings Inc. will make in its two bank subsidiaries, and the decline in corporate bankruptcies are discussed in the latest bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.