Blockbuster, Gas City, Awal, Tousa: Bankruptcy

Blockbuster Inc. faces off in court today against a creditor who claims the movie-rental chain’s bankruptcy lawyers, Weil Gotshal & Manges LLP, are disqualified to serve as company counsel.

The creditor, Lyme Regis Partners LLC, contends that New York-based Weil fails the so-called disinterestedness test because the firm simultaneously represents movie companies in unrelated matters. Lyme calculates that Weil represents almost 370 Blockbuster creditors in unrelated matters.

In addition to countering Lyme’s argument, Weil responded by saying that the “deeply subordinated” creditor is embarking on a “scorched-earth strategy.” The papers filed by Weil called Lyme a “distressed debt trader” that “made a bad investment by purchasing not only unsecured but also contractually subordinated debt.”

The dispute will be resolved today in court by U.S. Bankruptcy Judge Burton R. Lifland. The most senior bankruptcy judge in Manhattan, Lifland has encountered cases before when a bankrupt company’s lawyers represent creditors in unrelated matters.

At today’s hearing, Blockbuster will be looking for final approval of financing and final authorization to pay movie companies for debt owed before the Chapter 11 filing.

Before the Sept. 23 Chapter 11 filing, Blockbuster negotiated a reorganization plan with holders of 80 percent of the senior notes. The plan would give the new stock to holders of the $630 million in 11.75 percent senior-secured notes. General unsecured creditors would have warrants for 3 percent of the stock. Holders of the $300 million in 9 percent subordinated notes wouldn’t receive anything.

Dallas-based Blockbuster has 5,600 stores, including 3,300 in the U.S., with the remainder abroad. Among the U.S. stores, 3,000 are owned and the rest are franchised.

The petition listed assets of $1.02 billion against debt of $1.47 billion. Blockbuster estimated that it owes $57 million in accounts payable in addition to the secured and subordinated notes.

The case is In re Blockbuster Inc., 10-14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

New Filings

Truck-Stop Operator Gas City Files for January Sale

Gas City Ltd., the owner and operator of 51 gasoline stations, truck stops and convenience stores, filed a Chapter 11 petition late yesterday in Chicago intending to auction the business on Jan. 21.

Gas City’s stores, which include 10 large truck stops, are in Illinois, Indiana, Florida and Arizona. Most are owned by an affiliated trust that also filed in Chapter 11. The trust leases the stores to Gas City.

Gas City, based in Frankfort, Illinois, owes $29.6 million to secured lender Bank of America NA. The trust owes another $225 million on mortgages. Gas City guaranteed $145 million of the mortgage debt, court papers say.

Bank of American accelerated the secured debt before the Chapter 11 filing, and the mortgages were in default. The trust is the William J. McEnery Revocable Trust.

Gas City filed a motion asking the bankruptcy judge to set up auction and sale procedures calling for the initial submission of bids by Jan. 14, followed by an auction on Jan. 21 and a hearing on Jan. 31 to approve the sale. Gas City said it would sell the business to one or more buyers.

Gas City says it owes $10 million for fuel plus $2.5 million to suppliers of the convenience stores. In addition, $2.5 million is owing to creditors who delivered goods within 20 days of bankruptcy and are therefore entitled to full payment.

The petition says assets are less than $100 million while debt exceeds $100 million.

The case is In re Gas City Ltd., 10-47879, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

Houston Affordable Housing Complexes File Chapter 11

Two so-called affordable-housing projects filed for Chapter 11 protection in their hometown of Houston to forestall the appointment of receivers on their loans.

The Mansions Family Apartment Housing Community has 230 units with monthly rents as high as $900. The Mansions Senior Living Apartment Housing Community, a complex for residents aged 55 and older, has 252 units and rents as high as $775 a month. They are located beyond the Interstate 10 beltway in northwest Houston. Both were finished in mid-2009 and are 95 percent rented, according to court papers.

Wells Fargo Bank NA, the lender, declined to extend the maturities of a $14 million construction loan for the Mansions Family complex and a $13.2 million mortgage for the Mansions Senior Living project, court papers show. The owners were unable to secure permanent financing to repay the loans.

The cases are In re Mansions at Hastings Green LP, 10-39474, and In re Mansions at Hasting Green Senior LP, 10-39476, U.S. Bankruptcy Court, Southern District of Texas (Houston).


Tousa Expanding Mediation Amid Outstanding Appeal

The bankruptcy judge overseeing the liquidation of homebuilder Tousa Inc. directed the warring factions to expand the scope of the mediation that began Oct. 12.

Originally, Tousa and the creditors’ committee were in mediation with lenders who were on the losing end of a decision in October 2009 that secured loans were infected by fraudulent transfers. This week, the bankruptcy judge directed that the mediation be expanded in scope to include officers and directors who also are being sued. Early this month, the bankruptcy judge denied a motion by the officers and directors to dismiss the suit.

Although the mediation is under way, two U.S. district judges held arguments last week on appeals taken by the lenders from the fraudulent transfer judgment.

The bankruptcy judge appointed New York bankruptcy lawyer Peter L. Borowitz to serve as mediator. The mediation will continue until Borowitz declares an impasse. The objective of the mediation is to craft a settlement of the fraudulent transfer suits and thereby enable confirmation of a consensual Chapter 11 plan.

The bankruptcy judge, John K. Olson in Fort Lauderdale, Florida, ruled last year that the bailout and refinancing in mid-2007 of a joint venture in Transeastern Properties Inc. included fraudulent transfers.

A hearing was to have been held today for approval of the disclosure statement explaining the Chapter 11 plan filed in July. In view of the mediation and the appeal, Olson pushed the disclosure statement hearing back to Dec. 6.

For a summary of the plan, click here for the July 20 Bloomberg bankruptcy report. The plan assumes appellate courts uphold the judgment the creditors’ committee won in October 2009 against the lenders.

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).

Awal to be Test Case for Limited Chapter 11 Use

Awal Bank BSC, which filed a petition in Chapter 11 on Oct. 21 to complement a Chapter 15 case begun in September 2009, may become a test case for companies in bankruptcy simultaneously in several countries.

The bank began bankruptcy administration proceedings in Bahrain in July 2009. In the Chapter 15 case in New York, the bankruptcy judge recognized Bahrain as the home of the so-called foreign main proceeding, which meant that the foreign court would be largely responsible for collecting assets and making distributions to creditors.

Awal filed the Chapter 11 petition this month in New York because the ability to bring lawsuits is limited in Chapter 15. Awal said it needs Chapter 11 powers so that its administrator can sue in the U.S. to recover preferences and fraudulent transfers.

The bank therefore wanted U.S. Bankruptcy Judge Allan Gropper to rule that the Chapter 11 case may have “very limited scope.” At a hearing yesterday, Awal’s administrator asked Gropper to rule that there should be no creditors’ committee and no filing of lists of creditors.

The bank also wanted to remove the requirement that lawyers and other professionals be retained with approval of the bankruptcy court. The bank believes professionals should be paid in the foreign proceeding without U.S. bankruptcy court approval.

Awal’s administrators want the assets collected in the U.S. to be distributed by the court in Bahrain under foreign law.

Gropper said yesterday, “I don’t think I’m going to grant you very much today--though I might let you apply for it with more notice.”

Awal’s petition said assets are less than $100 million while debt exceeds $1 billion.

Domestic banks are precluded from filing any form of bankruptcy in the U.S. The preclusion doesn’t apply to foreign banks like Awal.

The new Chapter 11 case is In re Awal Bank BSC, 10-15518, U.S. Bankruptcy Court, Southern District New York (Manhattan). The Chapter 15 case is In re Awal Bank BSC, 09-15923, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Arrowgrass Wants Trico Subsidiaries in Chapter 11 Too

Two funds affiliated with Arrowgrass Capital Partners expanded on prior allegations about fraudulent transfers by Trico Marine Services Inc., filing a motion yesterday asking the bankruptcy court in Delaware to force the provider of support vessels for the offshore oil and gas industry to put its foreign subsidiaries into Chapter 11.

Alternatively, Arrowgrass wants the bankruptcy judge to appoint a Chapter 11 trustee to take over management of the Trico parent.

Before the parent’s Chapter 11 filing in August, Arrowgrass says Trico made a “substantial amount” of fraudulent transfers to subsidiaries known as Trico Supply Group, which operates mostly in Norway. The Supply Group subsidiaries aren’t in Chapter 11, although they are managed from the U.S. and have their principal lending relationships with U.S. lenders, Arrowgrass says.

Arrowgrass, which says it owns 3 percent senior convertible debentures, doesn’t want the parent to “restructure the Trico Supply Group outside the purview” of the U.S. bankruptcy court. The creditor says the restructuring of the Supply Group is “inevitable.” For other Bloomberg coverage, click here.

In papers filed Oct. 19, Arrowgrass alleged that Trico committed fraudulent transfers in a two-step transaction between May and October 2009 involving 8.125 percent second-lien debentures that were issued in the first stage. The new debentures paid off the then-outstanding 6.5 percent debentures. The allegations were made in opposition to final approval of $35 million of secured credit from Tennenbaum Capital Partners LLC.

The Chapter 11 filing in August was the second by The Woodlands, Texas-based Trico. It completed a so-called prepackaged reorganization in early 2005 by exchanging $250 million in debt for equity. Shareholders received warrants.

Other than a Cayman Islands holding company, none of the foreign subsidiaries are in bankruptcy this time. The consolidated balance sheet for June listed assets of $904 million against liabilities totaling $1.03 billion. The bankruptcy petition listed liabilities of $354 million for Trico Marine.

Liabilities include $202.8 million on secured convertible debentures and $150 million owing on unsecured convertible debentures. Non-bankrupt Trico Shipping owes $400 million on the 11.875 percent senior secured notes.

The case is In re Trico Marine Services Inc., 10-12653, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Truvo Confirms Reorganization Plan After Settlement

Truvo Luxemburg Sarl, a Belgium-based international publisher of directories, has an approved reorganization plan given the signature of the bankruptcy judge yesterday on a confirmation order.

The plan originally was scheduled for a contested confirmation hearing on Oct. 6. A fight was headed off by a settlement with the creditors’ committee and holders of high-yield notes. The plan eliminates debt on European-based subsidiaries that aren’t themselves in bankruptcy in the U.S. or abroad.

Before the settlement, holders of the 778 million euros ($1.08 billion) of first-priority senior debt were to have a recovery of 67.2 percent to 87.5 percent by receiving the new equity plus debt. As a result of what they give up to lower-ranking creditors, their recovery will decline by 0.6 percentage point to 1.7 percentage points.

Under the original plan, the junior noteholders, owed 595 million euros, were to get 15 million euros in cash plus warrants for 14 percent of the equity. The settlement increases the cash by 5 million euros and the warrants to 20 percent. The recovery for junior creditors is estimated to increase by 1 percentage point to 2.4 percentage points, for a recovery of 3.8 percent to 7.8 percent.

For a summary of the prior plan, click here for the Aug. 30 Bloomberg bankruptcy report.

The revised plan reduces Truvo’s debt to 475 million euros from 1.4 billion euros, the company said in a statement.

Truvo’s petition listed assets for 1.04 billion euros against liabilities totaling 1.67 billion euros. It is the leading directory publisher in Belgium, Ireland and Romania. Through a joint venture, Truvo is the leading directory publisher in Portugal.

The case is In re Truvo USA LLC, 10-13513, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Gordon Brothers Wins Day-Long Auction for Ashley Stewart

Urban Brands Inc., the owner of the Ashley Stewart brand of women’s clothing, concluded a 21-hour auction for the assets when an affiliate of Gordon Brothers Group LLC came out on top over three other bidders.

The company said there was “spirited bidding.” The price wasn’t disclosed. The bankruptcy court in Delaware will hold a hearing today for approval of the sale. For Bloomberg coverage, click here.

Urban Brands appeals to what it calls “plus sized urban women.” The company filed under Chapter 11 on Sept. 21 expressly to sell the business. Based in Secaucus, New Jersey, Urban Brands posted losses of $44.3 million in 2008 and $28.6 million in 2009.

The company has 210 stores in 26 states, including the flagship store on 125th Street in the Harlem neighborhood of Manhattan. Sales declined from $179.6 million to $174.6 million between 2008 and 2009.

Funds affiliated with Trimaran Capital Partners are the largest shareholders, court papers say. Trimaran is owed $81.2 million on senior unsecured notes. UBI Holding Corp. is the other principal shareholder. Bank of America NA, a secured lender, is owed $2.3 million.

The petition said assets are less than $50 million while debt exceeds $100 million.

The case is In re Urban Brands Inc., 10-13005, U.S. Bankruptcy Court, District of Delaware (Wilmington).

South Carolina Toll Road Files Chapter 9 Reorganization Plan

Connector 2000 Association Inc., the not-for-profit owner of a 16-mile (26-kilometer) toll road in South Carolina, filed for a municipal reorganization under Chapter 9 in June and submitted a reorganization plan and explanatory disclosure statement on Oct. 22.

Before the plan can be confirmed, Connector must survive an effort by the South Carolina Department of Transportation to have the Chapter 9 case dismissed. The department claims Connector isn’t a municipality and therefore isn’t eligible for Chapter 9 reorganization.

The proposed plan deals with $224 million in senior bonds and $88 million in subordinated bonds. There is another $20 million in other liabilities, according to the disclosure statement.

The senior bondholders are in line to receive about $202 million in Tier 1 and Tier 2 bonds. The subordinated debt holders, if they vote for the plan, would receive $4.2 million in Tier 3 bonds.

The disclosure statement says that the Tier 1 bonds will eat up 83.5 percent of projected net revenue.

The Transportation Department filed papers in July aiming to have the Chapter 9 case dismissed.

Discovery in the dispute will end this week. Pre-trial briefs are to be filed by Nov. 17 and the trial over Chapter 9 eligibility will begin Dec. 6.

Connector 2000 is a public benefit corporation under South Carolina law. A court filing said toll revenue from the outset trailed projections and wasn’t sufficient to service about $316 million in tax-exempt bonds.

The case is In re Connector 2000 Association Inc., 10-04467, U.S. Bankruptcy Court, District of South Carolina (Spartanburg).

Tender Offer News

Icahn Supplements MGM Put Offer with Tender Offer

Carl Icahn unveiled another weapon in his fight to take control of Metro-Goldwyn-Mayer Inc. by offering to purchase senior secured bonds for 53 cents on the dollar.

The tender offer is in addition to the put offer Icahn announced last week where he guaranteed holders of the bonds that they won’t recover less than 45 percent if they join with him in voting against MGM’s proposed prepackaged reorganization. MGM’s plan would have secured lenders exchange $4 billion in debt for 95.3 percent of the new stock.

By combining the put offer, the tender offer, and debt the he already owns, Icahn intends to assume ownership or voting rights on $1.6 billion in bonds, representing about 51 percent of the senior debt.

Although Icahn’s new offer is open until Oct. 29, he said in his statement that he may elect to purchase debt as it is tendered.

Icahn’s put offer and the Los Angeles-based company’s proposal also expire on Oct. 29, unless extended. For other Bloomberg coverage, click here.

Under Icahn’s put offer, debt holders can retain the upside, allowing them to take home more than 45 percent if the new stock trades high enough after bankruptcy.

The MGM prepackaged plan would have Spyglass Entertainment Group acquire the remainder of the new equity in exchange for contributing assets including Cypress Entertainment Group Inc. and Garoge Inc.

MGM was acquired in April 2005 in a $4.8 billion transaction by a group including Credit Suisse Group AG, Providence Equity Partners Inc., Sony Corp. and TPG Capital.

Daily Podcast

Texas Rangers, Tribune Examiner, ‘Plain Meaning’ Case: Audio

Opposition to reimbursing Mark Cuban and James Crane for expenses in their unsuccessful pursuit of the Texas Rangers baseball club, the $12 million cost of the Tribune Co. examiner’s report, the failure of the auction for Daufuskie Island Resort & Breathe Spa, and analysis of a “plain meaning” opinion are subjects covered in the new bankruptcy podcast on the Bloomberg terminal and To listen, click here.

Advance Sheets

Bankruptcy Jurisdiction Limited After Plan Confirmed

After a reorganization plan is confirmed and the Chapter 11 case is closed, the bankruptcy court has no jurisdiction to enforce an order approving the sale of property, the U.S. Court of Appeals in San Francisco ruled on Oct. 25.

The case involved a sale of property approved by an order of the bankruptcy judge. The order became final, the Chapter 11 plan was confirmed, creditors were paid, and the bankruptcy case was closed.

A creditor who had notice of the sale proceedings later filed a lawsuit in state court based on alleged breach of a contract providing a right of first refusal on the property sold during bankruptcy. The suit was brought to bankruptcy court, where the bankruptcy judge dismissed it as being in violation of the sale-approval order.

The bankruptcy appellate panel affirmed the lower court. The 9th Circuit in San Francisco reversed in an opinion where Circuit Judge Michael D. Hawkins said “reopening of the bankruptcy claim is rare, and only used when necessary to resolve bankruptcy issues, and not to adjudicate state law claims that can be adjudicated in state court.” Hawkins cited a 1993 decision from the 9th Circuit saying a “debtor is usually without protection of the bankruptcy court” after a plan is confirmed.

The opinion by Hawkins analyzed why there was neither “arising under,” “arising in,” nor “related to” jurisdiction since the bankruptcy case had been closed and the plan confirmed.

Hawkins also said there was no “ancillary” jurisdiction because the post-bankruptcy dispute didn’t have a “close nexus” to the reorganization plan or proceedings.

Hawkins explained the court’s thinking near the end of the opinion in quoting from the Wright & Miller federal practice treatise, which says that “the first court does not get to dictate to other courts the preclusion consequences of its own judgment.” Hawkins said the suit in state court was nothing more than a “run-of-the-mill collateral attack.”

The case is Battle Ground Plaza LLC v. Ray (In re Ray), 09-60005, U.S. 9th Circuit Court of Appeals (San Francisco).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE