Ernst & Young LLP, in its role as former auditors for Lehman Brothers Holdings Inc., was sued for civil fraud yesterday by New York Attorney General Andrew Cuomo, who becomes the state’s governor Jan. 1.
The complaint in New York state court accuses the accounting firm of helping Lehman to issue financial statements showing the investment bank as less leveraged through the use of so-called Rule 105 repurchase agreements.
Before the end of a quarter, Lehman would receive cash and “temporarily park highly liquid, income producing securities with European banks,” according to the complaint. The financial statements didn’t disclose that Lehman had an obligation to repurchase the securities a few days later at a higher price, Cuomo said in the lawsuit.
The suit seeks to recover more than $150 million that Ernst & Young charged Lehman in fees for the seven years through 2008, plus unspecified “investor damages and equitable relief.”
For Bloomberg coverage of the complaint, click here.
Yesterday, Lehman filed reports summarizing real estate settlements for the quarter ended Nov. 30. Lehman disposed of 88 real-estate investments at a discount, with an estimated recovery just short of $10 million.
Lehman accepted less than the full amount owing on 22 residential and commercial loans with a market value of less than $40 million. In addition, Lehman modified almost 50 residential mortgages with a combined market value of $2.6 million.
The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008. The brokerage operations went into liquidation four days later 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).
Minority Lenders Seek GSC Group Chapter 11 Trustee
The disputed sale of GSC Group Inc. became more complicated with a motion for appointment of a Chapter 11 trustee filed by a group calling themselves non-controlling lenders. The motion for a trustee is on the calendar for a hearing today in U.S. Bankruptcy Court in Manhattan.
The objecting lenders argue that the two top executive of GSC, which calls itself a “diversified alternative investment manager,” became “quasi agents” of Black Diamond Capital Finance LLC, whose funds hold a majority of the $206.6 million owing to secured lenders. Black Diamond won an auction for GSC with a bid of $235 million.
The minority lenders say they discovered details about how Alfred Eckert and Peter Frank, top GSC executives, negotiated a compensation package valued at $6 million, most of which would be contingent on a purchase by Black Diamond. They also said one executive would receive an additional $500,000 as part of a transaction where excess value would go to Black Diamond and bypass the dissenting lenders.
The objecting lenders include Credit Agricole Corporate & Investment Bank and General Electric Capital Corp.
GSC filed under Chapter 11 at the end of August and held an auction at the end of October. The bankruptcy judge allowed Black Diamond to bid the secured claim rather than cash. Black Diamond is also agent for the lenders.
Originally named Greenwich Street Capital Partners Inc. when it was a subsidiary of Travelers Group Inc., GSC became independent in 1998 and at one time had $28 billion of assets under management. Market reverses, termination of some funds, and withdrawals of customers’ investments reduced funds under management at the time of bankruptcy to $8.4 billion.
Based in Florham Park, New Jersey, GSC listed assets of $119.8 million against debt totaling $313.6 million. GSC also owes $10.2 million to Calyon New York Branch on an interest rate swap agreement.
The case is In re GSC Group Inc., 10-14653, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Lipstick Building Set for Confirmation Today
The so-called Lipstick Building on Third Avenue in Manhattan should have an approved Chapter 11 plan at a confirmation hearing today given the absence of objections. The plan was accepted by the only two classes of affected creditors before the Chapter 11 filing on Nov. 16.
With unanimous support for the restructuring, the transaction likely could have been implemented without a Chapter 11 filing. Bankruptcy had the advantage of allowing the parties to avoid paying real estate transfer taxes that would have been owing were the transaction completed outside of Chapter 11.
The Bankruptcy Code includes an exemption from transfer taxes for transactions completed under a confirmed Chapter 11 plan.
The plan reduces the $210 million mortgage to $115 million. For details of the plan, click here for the Nov. 17 Bloomberg bankruptcy report.
Built in 1986, the 34-story property is on the East Side of Manhattan, between 53rd and 54th Streets. The nickname resulted from the building’s dark pink color and elliptical shape.
The case is In re Metropolitan 885 Third Avenue Leasehold LLC, 10-16103, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Wrangler Maker VF to Buy Rock & Republic Brands
VF Corp., the manufacturer of Lee and Wrangler jeans, has a contract to buy the brand name and intellectual property for $57 million cash from Rock & Republic Enterprises Inc., a wholesaler and retailer of what it calls “avant-garde” apparel.
Along with signing the contract with Greensboro, North Carolina-based VF, Rock & Republic and its official unsecured creditors’ committee filed a liquidating Chapter 11 plan and explanatory disclosure statement. They scheduled a Jan. 26 hearing for approval of the disclosure statement.
VF isn’t buying the inventory, stores and other assets, which will be transferred to a liquidating trust under the plan. The Chapter 11 plan calls for distributing proceeds from the assets in the order of priority laid out in bankruptcy law. Aside from secured creditors who are to be paid in full, the disclosure statement has blanks where unsecured creditors later will be told the percentage distribution to expect.
The liquidation analysis attached to the disclosure statement contains a breakdown on the assets and debt providing some clue about what unsecured creditors could expect.
According to the disclosure statement, there are expected to be $20.1 million in secured claims as of Dec. 31, plus as much as $13.7 million in priority claims and expenses of the Chapter 11 case. Unsecured claims are listed on the liquidation analysis at $34.9 million on the high side and $18.5 million on the low end.
Other VF brands include North Face, JanSport and Riders.
Rock & Republic filed for Chapter 11 reorganization in April in Manhattan, where it’s based. Revenue in 2009 was $97.6 million. Earnings before interest, taxes, depreciation and amortization last year were $9.8 million. The products were sold through upscale retailers and 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).
Ambac Talking Settlement with Creditors, Commissioner
A lawyer for Ambac Financial Group Inc. told the bankruptcy judge at a hearing yesterday that the company is in discussions with the creditors’ committee and the Wisconsin insurance commissioner.
The talks may result in a revised rehabilitation plan for Ambac’s insurance subsidiary and a new term sheet for Ambac’s own Chapter 11 reorganization.
For Bloomberg coverage, click here.
A trial was held in state court in Wisconsin over whether to approve the proposed rehabilitation of the insurance subsidiary, Ambac Assurance Corp. A bone of contention has been how to allocate more than $7 billion in tax-loss carryforwards. Some policyholders object to the proposed rehabilitation, contending that giving up tax losses to the holding company shortchanges holders of policies issued by the insurance subsidiary.
The Chapter 11 petition in November by the Ambac parent listed liabilities on a non-consolidated basis of $1.69 billion, including $1.22 billion on six issues of senior unsecured notes and $400 million in subordinated notes. The insurance company stopped paying dividends to the parent in 2007 and stopped writing new business entirely in mid-2008.
The case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Examiner to Report on Crystal Cathedral’s Salaries
Crystal Cathedral Ministries, the mega-church in Garden Grove, California, founded by Robert H. Schuller, agreed to the appointment of an examiner with a portfolio limited to investigating proposed compensation for church officials.
The official unsecured creditors’ committee and the U.S. Trustee jointly sought the examiner. It was agreed that the examiner’s budget won’t exceed $25,000.
The church filed under Chapter 11 in mid-October in Santa Ana, California, saying assets and debt both exceed $50 million.
Schuller retired from his role as senior pastor in 2006. His daughter Sheila Schuller Coleman has been senior pastor since July 2009. A court filing said contributions declined 24 percent in 2009, in part on account of “unsettled leadership.”
The case is In re Crystal Cathedral Ministries, 10-24771, U.S. Bankruptcy Court, Central District of California (Santa Ana).
Tousa’s Cash Declines to $508 Million as of Nov. 30
Homebuilder Tousa Inc. reported that the cash balance at the end of November was $508.4 million, a decline of $2.8 million from October. Revenue in the month was $917,500 from the sale of land.
Two U.S. district judges heard oral arguments in October on the lenders’ appeal of a ruling by the bankruptcy judge in October 2009 that that the bailout and refinancing in mid-2007 of a joint venture in Transeastern Properties Inc. included fraudulent transfers.
Tousa filed a Chapter 11 plan in July. Progress toward confirmation is being held up pending a ruling on the appeal. 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 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).
Sawgrass Marriott Makes November Profit Without Interest
The owner of the Sawgrass Marriott Resort in Ponte Vedra Beach, Florida, reported a net loss of $71,131 in November on total revenue of $3.54 million. Net operating income for the month was $828,000.
For November, earnings before interest, taxes, depreciation and amortization were $530,000. The net loss didn’t include an accrual for interest expense. Depreciation and amortization was $601,000.
The resort’s owner and secured lender Goldman Sachs Mortgage Co. are disputing the value of the property. Goldman, owed $193 million, previously said it believes the property is worth $135.3 million. The owner has said the value was $90 million.
The resort filed under Chapter 11 on March 1 in Jacksonville, Florida, saying assets and debt both exceed $100 million.
The case is In re RQB Resort LP, 10-01596, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).
Baltimore Jewish Times Confirms Reorganization Plan
Alter Communications Inc., the publisher of the Baltimore Jewish Times, filed for Chapter 11 protection in April and secured the signature of the bankruptcy judge on a confirmation order yesterday approving the reorganization plan.
The plan leaves the largest secured claims in place while paying 50 percent to unsecured creditors with claims of less than $2,500. Unsecured creditors with larger claims are estimated to recover 16 percent by receiving 85 percent of free cash flow through 2015.
Although existing owners will have their stock canceled, they can purchase the new stock for $14,000. Unsecured creditors have the option of buying 15 percent of the new stock.
Alter was forced to file in Chapter 11 following a $362,000 judgment in favor of a former printer.
Alter said assets and debt are both less than $10 million. Debt included $641,000 owing to a secured lender.
In addition to the newspaper, publications include the magazine Style, with 90,000 circulation, and Chesapeake Life, with a circulation of 57,000.
The case is In re Alter Communications Inc., 10-18241, U.S. Bankruptcy Court, District of Maryland (Baltimore).
Point Blank Reports November Net Loss of $1.26 Million
Point Blank Solutions Inc., a manufacturer of soft body armor, reported a $1.26 million net loss in November on sales of $5.66 million. Before tax benefits, the loss was $2.08 million.
By obtaining replacement financing, the two official committees evidently succeeded in preventing the company from being sold. The new loan came from Lonestar Partners LP, Privet Fund Management LLC and Prescott Group Capital Management.
The three investors are willing to backstop an equity offering of $15 million to $25 million to help finance a Chapter 11 plan. The offering would be open to unsecured creditors and stockholders. For details of the plan, click here for the Dec. 14 Bloomberg bankruptcy report.
Based in Pompano Beach, Florida, Point Blank has two plants. Revenue in 2009 exceeded $153 million. The former chief executive officer and chief operating officer were convicted in September of orchestrating a $185 million fraud.
The Chapter 11 petition in April 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.
The case is In re Point Blank Solutions Inc., 10-11255, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Jeweler Shane Consummates Full-Payment Reorganization Plan
Shane Co., a jewelry retailer based in Centennial, Colorado, implemented the reorganization plan yesterday that the bankruptcy judge approved by signing a confirmation order in November. The plan pays secured and unsecured creditors in full, over time.
For details of the plan, click here for the Sept. 30 Bloomberg bankruptcy report.
Shane had 23 jewelry stores on filing under Chapter 11 in January 2009 and currently operates 20 in 13 states.
The company filed formal lists showing assets of $130 million and debt totaling $103 million, including $31.4 million owing on secured claims.
The case is Shane Co., 09-10367, U.S. Bankruptcy Court, District of Colorado (Denver).
Golden Gate’s Orchard Brands May Prepack This Month
Retailer Orchard Brands Corp. may begin a prepackaged Chapter 11 reorganization by the end of the year, according to three people with knowledge of the plans.
Orchard, controlled by private-equity investor Golden Gate Capital Corp., was unable to find a buyer and hasn’t paid some vendors this month, said the people, who asked not to be identified because the talks are private.
Brands of Beverly, Massachusetts-based Orchard include Appleseed’s, Draper’s & Damon’s, Gold Violin, Haband and Norm Thompson. Annual revenue is more than $1.1 billion, according to the website. The stores sell clothing, footwear and household goods.
First-lien debt was $325 million, a person familiar with the matter said in October. For Bloomberg coverage, click here.
Sprint Sues TerreStar, Sanctions, Evidence: Bankruptcy Audio
A Sprint Nextel Corp. suit against TerreStar Networks Inc. over liens on FCC licenses, sanctions on a lawyer for resubmitting a defective plan, and using extrinsic evidence in interpreting ambiguous reorganization plans are topics discussed in the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist and editor-at-large Bill Rochelle. To listen, click here.
NCI Building Systems Lowered to B Corporate on Competition
NCI Building Systems Inc. received a one-notch downgrade yesterday from Standard & Poor’s that gave the producer of metal products for non-residential construction a B corporate grade.
Operating performance has been weaker than expected because of “intense price competition,” S&P said.
S&P projects “commercial construction to decline by about 15 percent in 2010 and another 7 percent in 2011.” On the positive side, S&P said liquidity is “strong,” with $77 million cash and $80 million available on the revolving credit.
The Houston-based company reported a $21.4 million net loss on sales of $629.1 million for the first nine months of 2010. The loss from operations was $20.8 million for the three quarters. Tax benefits amounted to $11.5 million.