Philly Papers, Lehman, Tribune, Abitibi: Bankruptcy

Philadelphia Newspapers LLC is aiming to put the company up for auction again next week after the Teamsters union blocked a court-approved sale of the publisher of the Philadelphia Inquirer and Philadelphia Daily News to secured lenders.

The lenders, which had a $139 million contract to buy the business, were unable to hash out a new agreement with the Teamsters. The purchase contract automatically terminated when the sale wasn’t completed by yesterday’s deadline. The lenders had reached agreements with all of the other unions.

The company wants the bankruptcy court to require new bids by Sept. 22, followed by an auction in court on Sept. 23. The lenders won the prior auction in April. The bankruptcy court will hold a hearing tomorrow afternoon to consider approval of the newspapers’ proposal for a new auction.

As with the prior sale, the buyer must pay all cash. Appellate courts ruled that the lenders weren’t entitled to swap their secured claims for the assets.

The publisher also wants the bankruptcy judge to require that bidders use a form of contract the company prepared. It would contain few conditions to closing and wouldn’t allow the successful bidder to walk away, even if there is no new contract with the Teamsters.

The company wants the bankruptcy judge in Philadelphia to hold a confirmation hearing on Sept. 26 to approve the Chapter 11 plan that was amended a fifth time yesterday.

The bankruptcy judge confirmed the reorganization plan in late June calling for the sale to the lenders. The judge at the time rejected the unions’ arguments by ruling that the newspaper’s buyers weren’t required to assume liability on existing pension plans. For details of the previous plan, click here for the May 20 Bloomberg bankruptcy report.

The newspapers began a bankruptcy reorganization in February 2009 in their hometown after defaulting on a term loan and revolving credit totaling $296.6 million and on $98.5 million in subordinated notes.

The case in bankruptcy court is In re Philadelphia Newspapers LLC, 09-11204, U.S. Bankruptcy Court, Eastern District of Pennsylvania (Philadelphia).


Lehman, Two Years in Bankruptcy, Sues on Flip Clauses

Lehman Brothers Holdings Inc. marks two years in Chapter 11 today. Click here for a Bloomberg story on how Lehman today is operating like a large business, with almost $20 billion in cash, 500 employees and a $45 million monthly payroll.

Lehman subsidiaries filed six lawsuits yesterday involving so-called flip clauses in swap agreements where collateral ordinarily would go first to a Lehman unit as the swap counterparty.

In the event of the bankruptcy of the Lehman subsidiary or an affiliate, the flip clauses called for the collateral to go first to noteholders and only to Lehman after the noteholders were fully paid. In many cases, enforcement of the agreements resulted in losses for Lehman on swaps where it otherwise would have made profits.

The bankruptcy judge ruled in favor of Lehman in January, saying that in one of the transactions the flip clause violates a provision in bankruptcy law prohibiting so-called ipso facto clauses, where someone loses rights simply for filing in bankruptcy or becoming insolvent.

The new suits are designed recover the fruits of the January ruling in dozens of other derivatives transactions. Defendants in the new suits include Bank of America NA, Bank of New York Mellon Trust Co., U.S. Bank NA and Deutsche Bank Trust Co of America. To read other Bloomberg coverage, click here.

To read about the January decision regarding flip transactions, click here and look for the Advance Sheets item in the Feb. 1 Bloomberg bankruptcy report.

The Lehman holding company and its non-brokerage subsidiaries filed a revised Chapter 11 plan and disclosure statement in April. For details, click here and here for the April 15 and April 16 Bloomberg bankruptcy reports. 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 New York (Manhattan).

Aurelius Wants Tribune Chapter 11 Trustee Appointed

Aurelius Capital Management LP filed motions yesterday to appoint a Chapter 11 trustee for Tribune Co. and to disqualify primary counsel for the newspaper publisher’s official creditors’ committee.

Calling itself the largest holder of bonds predating the 2007 leveraged buyout, Aurelius bases its motions on what it calls “corrupt and conflicted individuals managing the debtors’ affairs” and “conflict-ridden counsel advising the committee.” Aurelius says that attorneys from Chadbourne & Parke LLP, the counsel for the committee, currently represent “numerous” lenders, agents and other parties that were involved in the LBO.

Aurelius says there is an urgent need for a trustee in view of the Dec. 8 deadline for commencing many of the lawsuits arising from the LBO. Even if mediation succeeds in bringing agreement on a plan, Aurelius says the plan will call for prosecuting suits after confirmation. In addition, appointing a trustee will provide an automatic one-year extension on the deadline for filing some suits.

Aurelius wants the motion considered at a hearing as soon after Oct. 1 as possible. It said it doesn’t believe that granting the recently filed motion by the creditors’ committee to prosecute suits will suffice given the committee’s counsel’s conflicts.

Many of the allegations in Aurelius’s motion are redacted because the underlying information was obtained under confidentiality agreements.

Tribune last month withdrew a Chapter 11 plan that was designed to force through a settlement of claims resulting from the 2007 LBO. Tribune abandoned the plan following the report of the examiner, Kenneth N. Klee, who concluded that there was some likelihood that the second phase of the leveraged buyout in December 2007 could be attacked successfully as a constructively fraudulent transfer.

Klee found less likelihood that the first phase of the transaction, in May 2007, could be unraveled as a fraudulent transfer. For a summary of some of the examiner’s conclusions, click here for the July 27 Bloomberg bankruptcy report.

The plan would have settled fraudulent transfer claims resulting from the $13.7 billion leveraged buyout led by Sam Zell in 2007. The plan was opposed by holders of $3.6 billion in debt. For details on the withdrawn 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 of Delaware (Wilmington).

Penn Traffic Chapter 11 Plan Has Oct. 27 Confirmation

Former supermarket operator Penn Traffic Co. scheduled an Oct. 27 confirmation hearing for approval of the liquidating Chapter 11 plan when the bankruptcy judge approved the explanatory disclosure statement yesterday.

Penn Traffic’s liquidation is expected to bring a 6 percent to 17 percent recovery for unsecured creditors, according to the disclosure statement. Claims filed by unsecured creditors totaled $185 million, the disclosure statement says.

The plan was originally filed in June, with support from the official creditors’ committee.

Tops Markets LLC purchased almost all of Penn Traffic’s stores as a going concern by paying $85 million cash. The sale was structured so Penn Traffic avoided a $72 million claim for pension plan termination and a $27 million claim by the principal supplier.

Penn Traffic filed under Chapter 11 again in November to sell the business. The petition listed assets of $150 million against debt totaling $137 million. Based in Syracuse, New York, Penn Traffic was in Chapter 11 twice before. Debt at the outset of the newest bankruptcy included $63.2 million owing to secured creditors, including $41.8 million to General Electric Capital Corp. on a senior secured facility and $10 million on a supplemental real estate credit with Kimco Capital Corp. serving as agent.

Penn Traffic operated stores in Pennsylvania, upstate New York, Vermont and New Hampshire using the names BiLo, P&C and Quality.

The case is In re Penn Traffic Co., 09-14078, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Madoff Trustee, Lawyers Receive $34.6 Million Award

The trustee for Bernard L. Madoff Investment Securities Inc. overcame creditor opposition and was given approval by the bankruptcy judge at hearing yesterday for an interim award of $34.6 million in fees for himself and his lawyers. The award covered February through May.

Irving Picard, the trustee, was awarded $511,000 for the four-month period. His primary counsel, Baker & Hostetler LLP, received $28.9 million. Both payments represented 85 percent of their total charges for the interim period. The remaining 15 percent, called a “holdback,” is typically paid at the conclusion of the case.

The remainder of the approved fees were for the trustee’s special counsel.

The fees are paid by the Securities Investor Protection Corp. and don’t reduce payments to customers, the trustee said. To read other Bloomberg coverage, click here.

The Madoff firm began liquidating in December 2008 with the appointment of a 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 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 for the Southern District of New York (Manhattan).

Colonial, FDIC Schedule Nov. 4 Courtroom Showdown

Bank holding company Colonial BancGroup Inc. and the Federal Deposit Insurance Corp. have a new schedule for deciding who owns tax refunds.

The FDIC, meanwhile, is appealing a ruling made at the end of August by the bankruptcy judge in Montgomery, Alabama, who concluded that Colonial hadn’t made an enforceable agreement to make up a $1 billion capital deficiency at the bank subsidiary.

Ownership of the tax refund is to be decided based on a new motion the FDIC can file by Sept. 27. Briefs are due Oct. 25. Oral argument before the bankruptcy judge will take place Nov.


Under an arrangement approved this month, both the Colonial holding company and the FDIC can apply for tax refunds. The money will be held in escrow until there’s a final ruling on whether the holding company or the FDIC, as receiver for the failed bank subsidiary, is entitled to the refunds.

Colonial filed under Chapter 11 in August 2009 after the bank subsidiary was taken over by regulators. The Colonial holding company, based in Montgomery, listed assets of $45 million and 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).

AbitibiBowater’s Canadian Plan Accepted by Creditors

AbitibiBowater Inc., the largest newsprint maker in North America, reported that creditors on the Canadian side of the reorganization voted in favor of the plan, except with regard to Bowater Canada Finance Corp.

The company said it doesn’t expect the “no” vote for BCFC to slow down or block approval of the plan for the remainder of the companies.

The Canadian side of the reorganization goes to the Quebec Superior Court for approval on Sept. 20, the same day that voting results are expected to be published with regard to the U.S. Chapter 11 plan. The U.S. plan is scheduled for approval at a Sept. 24 confirmation hearing.

The bankruptcy judge yesterday scheduled a hearing to decide if a Chapter 11 trustee should be appointed for BCFC. The hearing will take place along with the plan confirmation hearing on Sept. 24.

Aurelius Capital Management LP and Contrarian Capital Management LLC, two BCFC noteholders, have been arguing that BCFC has a contribution claim against Bowater under a provision of the Nova Scotia Companies Act. The noteholders say the companies’ managers have been derelict in their duties by not ascribing more value to the contribution claim and thereby enhancing recoveries by creditors of BCFC.

Abitibi has an extension until Oct. 16 of the exclusive right to propose a reorganization in case the bankruptcy judge doesn’t approve the Chapter 11 plan at the currently scheduled Sept. 24 confirmation hearing.

The exclusivity motion was granted at a hearing yesterday.

At yesterday’s hearing, the judge also approved as settlement with the government of Canada over what the company called the expropriation of water and timber rights canceled after the closing of a plant in Newfoundland. The settlement calls for the Canadian government pay C$130 million ($126.5 million). The company was making a claim for C$500 million under the North American Free Trade Agreement.

For details of Abitibi’s plan and disclosure statement, click here to read the July 29 Bloomberg bankruptcy report.

The company was formed in October 2007 through a merger between Montreal-based Abitibi-Consolidated Inc. and Greenville, South Carolina-based Bowater Inc. Abitibi is a producer of newsprint, uncoated mechanical paper and lumber. Bowater also makes newsprint along with papers, bleached kraft pulp and lumber.

The Montreal-based company began reorganizing with 24 pulp and paper mills plus 30 wood-product plants. Revenue in 2008 was $6.8 billion. In Chapter 11 petitions filed in April 2009, the combined AbitibiBowater companies listed assets of $9.9 billion and debt totaling $8.8 billion as of September 2008.

The case is AbitibiBowater Inc., 09-11296, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Kerr-McGee, Anadarko Oppose Tronox Disclosure Statement

Kerr-McGee Corp and its parent Anadarko Petroleum Corp. are opposing approval of the Tronox Inc. disclosure statement unless it is revised to include more information about the two companies’ claims.

Kerr-McGee and Anadarko are targets of a lawsuit contending they committed fraudulent transfers when Tronox was spun off and left with environmental liabilities. Kerr-McGee, which Anadarko acquired after the Tronox spinoff, said the disclosure statement should discuss the $72 million in claims filed as a result of rejection of the master agreement between the companies.

Kerr-McGee and Anadarko also want the disclosure statement to explain that losing the lawsuit may give them unsecured claims for what they pay in damages, thus diluting the recovery by unsecured creditors. A disclosure statement is intended to be a plain-English explanation of the Chapter 11 reorganization plan.

The official Tronox equity committee has a competing Chapter 11 plan for the world’s third-largest producer of the white pigment titanium dioxide. To read about the committee’s plan and Tronox’s plan, click here for the Sept. 7 Bloomberg bankruptcy report. The disclosure statements for both plans are up for approval on Sept. 23. For details of 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.

The case is In re Tronox Inc., 09-10156, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Chemtura Allowed by Judge to Settle More Diacetyl Claims

Chemtura Corp. was authorized by the bankruptcy judge yesterday to settle another two among 22 remaining personal-injury lawsuits related to the chemical diacetyl. Assuming all of the plaintiffs accept the proposal, the settlement will cost Chemtura $2.2 million.

The economics of the new settlement are the same as those that were previously settled for $50 million. The settlements give releases to Chemtura and a Canadian affiliate. The suits now being settled might have cost as much as $6.5 million, according to Chemtura’s expert.

The confirmation hearing for approval of Chemtura’s reorganization plan will be held tomorrow. The plan, supported by the creditors’ committee and an ad hoc bondholder group, is intended to pay creditors in full while possibly preserving some value for existing shareholders. The plan reduces debt for borrowed money to about $750 million from $1.3 billion. For details, click here for the June 18 Bloomberg bankruptcy report.

The Chapter 11 petition in March 2009 by Middlebury, Connecticut-based Chemtura listed assets of $3.06 billion against debt totaling $2.6 billion, including $1.02 billion owing on three issues of notes and debentures. Sales in 2008 of $3.5 billion declined to $2.5 billion in 2009. The subsidiaries outside of the U.S. didn’t file.

The case is Chemtura Corp., 09-11233, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Point Blank’s Brooks, Hatfield Convicted by Jury

David Brooks, founder and former chief executive officer of the company now named Point Blank Solutions Inc., was convicted yesterday by a federal jury in Central Islip, New York, for orchestrating a $185 million fraud. The jury deliberated for six weeks following a six-month trial.

Sandra Hatfield, the former chief operating officer, was also convicted. For Bloomberg coverage, click here.

Point Blank, a manufacturer of soft body armor for the military and law enforcement, 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 (Wilmington).

New Filing

Victorville Hospital Files in Riverside, California

Victor Valley Community Hospital, a 101-bed nonprofit hospital in Victorville, California, filed a Chapter 11 petition on Sept. 13 in Riverside, saying assets and debt both exceed $10 million.

The hospital said it has been generating about $100,000 a day in revenue, with 65 beds filled on a normal day. The hospital needs $150,000 to $200,000 a day in revenue to cover operating costs, according to a court filing.

The hospital blamed financial problems on the cost of providing uncompensated indigent care. The cost has risen along with unemployment in California’s High Desert, where the hospital serves a population exceeding 300,000.

Debt includes $4.5 million owed to the bank lender. Unsecured creditors are owed $16.5 million, a court filing says.

The case is In re Victor Valley Community Hospital, 10-39537, U.S. Bankruptcy Court, Central District of California (Riverside).

Watch List

HD Supply Net Quarterly Loss Grows to $115 Million

HD Supply Inc., the wholesale supply business sold by Home Depot Inc. to private investors for $8.5 billion in August 2007, reported a $115 million net loss for the quarter ended Aug. 1 on sales of $1.97 billion. Revenue was up $1 million from the second quarter last year.

The net loss in the quarter last year was $89 million.

Operating income for the quarter increased to $26 million from $19 million in last year’s quarter. For the first six months, sales were $3.79 billion, down 2.8 percent from a year earlier.

Moody’s Investors Service said in April that HD Supply has a “a long-term untenable debt structure.” Moody’s currently gives the company a Caa2 corporate rating.

Although the company obtained a 19-month extension on the maturity of $2.6 billion of debt, Moody’s noted that HD Supply has $5 billion of obligations maturing in 2014.

HD Supply had a $514 million net loss in the Jan. 31 fiscal year on sales of $7.42 billion. Sales for the fiscal ended in January fell 24 percent from the previous year.

HD Supply has about 800 locations throughout the U.S. and Canada. The purchasers in the leveraged buyout were Carlyle Group, Bain Capital LLC and Clayton, Dubilier & Rice.

Briefly Noted

WaMu Allows Creditors to Bring More Than 215 Lawsuits

The Washington Mutual Inc. creditors’ committee was given authorization this week by the bankruptcy judge to bring more than 215 lawsuits on behalf of the bank holding company, mostly against individuals who received payments in advance of the Chapter 11 filing. WaMu agreed that the committee may prosecute and settle the suits.

WaMu’s reorganization plan is based on a proposed settlement with the Federal Deposit Insurance Corp. and JPMorgan Chase & Co. The plan would distribute more than $7 billion to creditors. To read about the settlement, click here for the May 24 Bloomberg bankruptcy report. Click here to read the May 18 Bloomberg bankruptcy report for a summary of WaMu’s plan.

The report by WaMu’s examiner on the merits of the settlement is due Nov. 1. The confirmation hearing for approval of WaMu’s Chapter 11 plan is currently set for Dec. 1. For a description of subjects being investigated, click here for the Sept. 8 Bloomberg bankruptcy report.

The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank, which had been the sixth-largest depository and credit-card issuer in the U.S., was the largest bank failure in the country’s history. The holding company filed formal lists of assets and debt showing property with a total value of $4.49 billion against liabilities of $7.83 billion.

The holding company Chapter 11 case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Rock & Republic May Dump Exclusive Canada Distributor

Rock & Republic Enterprises Inc., a wholesaler and retailer of what it calls “avant-garde” apparel, was authorized by the bankruptcy judge on Sept. 13 to terminate the contract with Simms Sigal & Co., the exclusive Canadian distributor. Simms ultimately withdrew its opposition to the rejection motion. To read about the dispute, click here for the Sept. 7 Bloomberg bankruptcy report.

R&R filed for Chapter 11 reorganization on April 1 in Manhattan, where it is based. Revenue in 2009 was $97.6 million. Earnings before interest, taxes, depreciation and amortization last year were $9.8 million. The products are sold through upscale retailers and in three company stores.

Assets were listed for $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 of New York (Manhattan).

Advance Sheets

Liability Policy Proceeds Not Estate Property, Judge Rules

Proceeds of an insurance policy designed to provide compensation to injured third parties aren’t property of a bankrupt estate, U.S. District Judge John Rainey in Houston ruled on Sept. 2. As a result, it wasn’t proper for the bankruptcy judge to approve a settlement with the insurance company.

The case involved a lawsuit by a third party against an individual who was an officer of a company. Both the company and the officer later went into bankruptcy. The suit alleged that the officer made negligent misrepresentations when signing a contract for the company.

The insurance company was on the hook for $1 million policy that covered “wrongful acts” by the company and its officers.

The bankruptcy judge approved a settlement between the trustee for the company and the insurance company. In return for paying $650,000, the insurance company was given a release from any claims that could be made by third parties.

Rainey reversed the bankruptcy court after concluding that proceeds from the policy weren’t property of the bankrupt estate. Consequently, the bankruptcy court lacked power to strip the third-party lawsuit plaintiff of the right to sue under the policy for damages.

Rainey differentiated between a fire or collision policy and a liability policy designed to pay third parties for damages inflicted by the insured. In a liability policy, Rainey said policy proceeds aren’t property of the bankrupt estate even though the policy itself is estate property.

The case spawned an important opinion last year from the U.S. Court of Appeals in New Orleans. Click here for the July 20, 2009, Bloomberg bankruptcy report on the 5th Circuit opinion where carrying out the settlement didn’t make the appeal moot.

The case is Technology Lending Partners LLC v. San Patricio Community Action Agency, 07-237, U.S. Bankruptcy Court, Southern District of Texas (Houston).

Specific Performance Order Found to Stop Contract Rejection

A bankruptcy trustee must carry out a pre-bankruptcy order from a state court requiring specific performance of a real estate contract, U.S. Bankruptcy Judge Arthur Gonzalez in Manhattan ruled on Sept. 10.

The case involved an individual who was under contract to sell real property. Before bankruptcy, the buyer obtained a final order from the state appellate court requiring specific performance. The order of specific performance commanded the seller to transfer title in return for payment of the remainder of the purchase price.

The seller later filed bankruptcy and found another buyer willing to pay several times more for the property. Gonzalez concluded that the sale to the original purchaser had to be completed, even in light of the higher offer.

To reach the result, Gonzalez first ruled that the contract was no longer a so-called executory contract when the state court entered an order calling for specific performance. Citing four bankruptcy court decisions and a treatise by late Professor Vernon Countryman from Harvard, Gonzalez said that the specific performance order made it an executed contract, not an executory contract that could be rejected.

In the second leg of the opinion, Gonzalez ruled that the buyer didn’t have a claim in the bankruptcy case because a claim exists only when the creditor has a right to payment. There was no right to monetary payment, and therefore no claim, because the state court only commanded specific performance.

Had the state court awarded monetary damages as an alternative, the buyer would have had a claim that would have been paid in cash like other creditors, Gonzalez said.

The case is In re Acevedo, 07-11702, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

(This report contains items about companies both in bankruptcy and not in bankruptcy. Corrects quarterly operating income for HD Supply.)
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