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Vitro, Lehman, Constar, Anchor Blue, RHI: Bankruptcy

The U.S. Supreme Court decided the first of this year’s two bankruptcy cases by coming down on the side of creditors, with Justice Antonin Scalia the lone dissenter.

The majority opinion in Ransom v. MBNA, by Justice Elena Kagan, said that the result was influenced by the “core purpose” of 2005 amendments in bankruptcy law intended to ensure “that debtors devote their full disposable income to repaying creditors.”

Yesterday’s opinion answered the question of whether an individual in Chapter 13 who owns a car free-and-clear is entitled to take an auto ownership expense deduction. If the deduction could be taken in the absence of an auto loan, the individual would have less disposable income and could thereby discharge debt while paying less to unsecured creditors under a Chapter 13 debt-repayment plan. U.S. appeals courts split 3-1 on the answer.

Kagan came down on the side of the U.S. Circuit Court in San Francisco, the only appeals court to deny the deduction. The case was the first that Kagan heard in October after being appointed to the high court.

The outcome turned on the meaning of the word “applicable.” Kagan said that the dictionary definition of “applicable” was in accord with the purpose of the 2005 amendments to the Bankruptcy Code generally making it more difficult for individuals to discharge debt in bankruptcy. She said that the auto ownership expense deduction isn’t “applicable” to someone who doesn’t have an auto loan.

She said that the ownership deduction only covers a car loan or lease payment. Maintenance expenses are covered by the operating cost deduction, she said.

Kagan said that someone who files in Chapter 13 with only a few auto payments left is entitled to the deduction. “But this kind of oddity is the inevitable result of a standardized formula like the means test,” she said. “Congress chose to tolerate the occasional peculiarity that a brighter-line test produces.”

The end of the majority opinion was devoted to identifying an escape hatch for situations with changed circumstances. If someone buys a car and takes on a loan after confirming a plan, Kagan said, the Chapter 13 debtor could modify the plan and pay less to creditors.

Conversely, if a car loan is paid off, creditors could petition the court to amend the plan and increase payment.

The majority opinion seems a small movement way from the so-called plain meaning doctrine espoused by Scalia, whose dissent is closer to the literal meaning of the statue.

The decision went against rulings in U.S. courts of appeal in St. Louis, New Orleans and Chicago.

For additional discussion of the issue, click here and read the June 17 Bloomberg bankruptcy report under the heading “Advance Sheets.”

The case in the Supreme Court is Ransom v. MBNA, 09-907, U.S. Supreme Court. The decision in the 9th Circuit was Ransom v. MBNA America Bank NA (In re Ransom), U.S. 9th Circuit Court of Appeals (San Francisco). The 8th Circuit case is eCast Settlement Corp. v. Washburn (In re Washburn), 08-2023, 8th U.S. Circuit Court of Appeals (St. Louis). Prior circuit court cases allowing the deduction are Tate v. Bolen (In re Tate), 08-60953, 5th Circuit (New Orleans), and Ross-Tousey v. Neary (In re Ross-Tousey), 07-2503, 7th Circuit (Chicago).

New Filings

Bottle Maker Constar Files Another Prepackaged Chapter 11

Constar International Inc., a maker of blow-molded plastic beverage containers, is back in Chapter 11 less than two years after emerging from a prior prepackaged reorganization that swapped $175 million of 11 percent subordinated notes for all the new stock.

The new venture into bankruptcy court, also in Delaware, is another so-called prepack supported by holders of 75 percent of the $220 million in senior secured floating-rate notes that survived the prior bankruptcy. Noteholders will convert their existing debt into a new $70 million term loan and $30 million of convertible preferred stock.

Unsecured creditors are to receive all of the new common stock. Shareholders get nothing. The new plan will reduce debt by $135 million, the company said in a statement.

Constar’s debt includes $15.8 million owing on a revolving credit provided by General Electric Capital Corp. The GECC loan is to be repaid using the $55 million in financing for the Chapter 11 case being provided by some of the noteholders.

The new loan includes $15 million of new availability. That portion of the loan can be converted into new notes on confirmation of the plan. On an interim basis, $38 million is to be available from the new loan.

Constar blamed new financial problems on a shift by customers to self-manufacturing.

The previous reorganization began on Dec. 30, 2008, and concluded with a confirmed plan in May 2009. Other than the subordinated noteholders, all other secured and unsecured creditors were to be paid in full or reinstated under the plan, including the $220 million in floating-rate notes.

Solus Alternative Asset Management LP held the largest block of the subordinated notes in the prior reorganization. Solus is among the noteholders supporting the new plan. Other supporting noteholders include funds affiliated with Black Diamond Capital Management.

Constar’s Sept. 30 balance sheet listed assets of $325 million and total liabilities of $321 million. The new petition said assets are $418 million and debt $414 million. The prior Chapter 11 petition listed assets of $420 million against debt of $538 million, including $220 million in secured obligations.

The Philadelphia-based company reported a $14.3 million operating loss and a $24.4 million net loss in the September quarter on sales of $147 million. For the nine months ended in September, there was a $56.8 million operating loss and a $73.7 million net loss on sales of $439 million.

For about eight months in 2009 after emergence from the prior reorganization, the net loss was $21.1 million.

The new case is In re Constar International Inc., 11-10109, U.S. Bankruptcy Court, District of Delaware (Wilmington). The prior reorganization was In re Constar International Inc., 08-13432, in the same court.

Sun Capital’s Anchor Blue Returns for Liquidation

Anchor Blue Inc., a 117-store youth-oriented clothing retailer, returned to bankruptcy court, this time to liquidate.

Controlled by an affiliate of Sun Capital Partners Inc. as it was before its prior trip through bankruptcy court, Anchor Blue already began going-out-of-business sales at all stores in nine western and southwestern states.

The Chapter 11 petition says assets are $24.7 million with debt of $38.5 million. Liabilities include $3.5 million owing to the first-lien lender PNC Bank NA. Ableco Finance LLC is owed $16.5 million on a second-lien loan. A Sun Capital affiliate has a $3.25 million subordinated secured note.

Last year’s revenue of $112.6 million resulted in a pretax loss of $23.9 million.

After being sold in the prior Chapter 11 case in August 2009, Anchor Blue continued incurring losses because of the “ongoing downturn in national economy,” a court filing said. In a statement, Anchor Blue said problems were the result of competition and “unusually disruptive weather conditions in Southern California.”

Anchor Blue, once with 251 stores, originally filed under Chapter 11 in May 2009. It sold the last 113 stores for $16.8 million to management and Ableco Finance LLC, the agent for the term-loan lenders in the prior Chapter 11 case. The purchase price was paid by a credit against secured debt plus the cost of curing defaults on contracts.

An affiliate of Sun Capital, a private-equity investor based in Boca Raton, Florida, subsequently purchased control of the business. Anchor Blue was controlled by an affiliate of Sun Capital at the time of the first Chapter 11 filing.

In the previous reorganization, Anchor Blue’s liabilities included $90.5 million owing on a secured term loan and revolving credit.

The new case is In re Anchor Blue Holding Corp., 11-10110, U.S. Bankruptcy Court, District of Delaware (Wilmington). The prior case was In re Anchor Blue Retail Group Inc., 09-11770, in the same court.


Vitro Mexican Reorganization Faulted on Insider Vote

Vitro SAB, Mexico’s largest glass maker, had its Mexican reorganization proceedings dismissed because the company was relying on the use of $1.9 billion of intercompany debt to vote in favor of the restructuring.

Click here to read a Bloomberg News story reporting how the judge in Mexico said the use of intercompany debt to obtain a creditor majority “would result completely contrary” to the intent of Mexico’s bankruptcy law, according to a Federal Judicial Counsel statement.

Leaders among the holders of $1.2 billion in defaulted bonds are willing to negotiate now with Vitro, Bloomberg News’ Thomas Black reported. Bondholders claim Vitro is worth enough to pay them in full.

Bondholders have been opposing the reorganization because it depended on voting $1.9 billion of intercompany claims in favor of the plan. Vitro previously said noteholders would recover as much as 73 percent by exchanging existing debt for cash, new debt and convertible bonds.

Bondholders filed involuntary Chapter 11 petitions in November in Fort Worth, Texas, against Vitro U.S. subsidiaries. They also filed involuntary petitions in Mexico, some of which were accepted by the court.

Vitro filed for reorganization in Mexico under that country’s reorganization law, called concurso mercantile. At the same time in December, Vitro filed a Chapter 15 case in New York. Dismissal of the Mexican reorganization raises questions about whether the Chapter 15 case can survive.

Vitro and the bondholders were disputing whether the U.S. proceedings should be in New York or Texas.

For summaries of Vitro’s proposed reorganization and the suits between Vitro and the noteholders, click here for the Dec. 15 Bloomberg bankruptcy report.

The first-filed involuntary case is In re Vitro Asset Corp., 10-47470, U.S. Bankruptcy Court, Northern District of Texas (Fort Worth). The Chapter 15 case is In re Vitro SAB, 10-16619, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Wilmington Diocese Files New Plan with Options for Victims

Catholic Diocese of Wilmington Inc. filed a revised reorganization plan this week, increasing the offer to victims of sexual abuse. A lawyer for victims said it was an old offer and was rejected. For Bloomberg coverage, click here.

If claimants agree to release the parishes, religious orders, and other Catholic institutions not in bankruptcy, the pot will be $74 million. If the global settlement is rejected, the diocese alone will contribute what could be as little as $15 million, the revised disclosure statement says.

The global settlement is in substance a proposal to settle following a ruling from the bankruptcy judge in June when he concluded that $75 million wasn’t held in trust for the parishes and parochial schools. An appeal is outstanding.

If the global settlement is accepted, the dioceses says that victims will recover between 78.5 percent and 100 percent on claims estimated range from $34.6 million to $94.3 million.

If the diocese-only plan is confirmed, the disclosure statement says that the recovery by victims would range from 9.6 percent to 16.2 percent, although victims would retain the right to sue non-bankrupt Catholic organizations.

The non-bankrupt organizations will provide more than $60 million to the pot if the global settlement is accepted. The diocese will give up all but $3 million of its unrestricted assets to use as working capital, according to the disclosure statement.

Under the global plan, the recovery by individual victims would range from $75,000 to $3 million, with the average being $750,000, according to the revised disclosure statement.

The amount of each victim’s claim would be determined through arbitration, litigation, or what it calls the “convenience procedure.”

The diocese originally filed a plan in September. Its Chapter 11 filing in October 2009 automatically stopped 136 abuse suits involving 147 plaintiffs, according to court filings.

The Delaware diocese was the seventh of eight Roman Catholic dioceses to file for Chapter 11 protection to deal with lawsuits for sexual abuse. Previous filings were by the dioceses in Spokane, Washington; Portland, Oregon; Tucson, Arizona; Davenport, Iowa; Fairbanks, Alaska; and San Diego. The Archdiocese of Milwaukee filed in Chapter 11 this month.

The case is In re Catholic Diocese of Wilmington, 09-13560, U.S. Bankruptcy Court, District of Delaware, (Wilmington).

Bank of Nova Scotia Wants Comfort Order on Lehman

Bank of Nova Scotia, as the holder of a $449 million construction loan on the Town Square Mall in Las Vegas, needs a comfort order from the U.S. Bankruptcy Court in New York saying that foreclosure won’t violate the so-called automatic stay in the bankruptcy of Lehman Brothers Holdings Inc.

The issue is scheduled to go to bankruptcy court for hearing on Feb. 16.

Lehman isn’t a lender to the mall. Rather, Lehman is making a claim for unjust enrichment against the corporate owner of the mall as a counterclaim to claims made by Jeffrey and Jacquelyn Soffer, who are investors in the mall. The Soffers are trying to avoid repayment of a $72 million loan Lehman made to help finance their investment in the mall.

Bank of Nova Scotia was unsuccessful in workout negotiations on its matured mortgage on the mall, the bank said in a court filing. In making arrangements to foreclose, the prospective title insurance company said it wouldn’t insure against a claim for alleged violation of the Lehman automatic stay.

The bank therefore needs the bankruptcy judge to declare that foreclosing won’t violate the stay.

The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008. The Lehman 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).

Tamarack Ski Resort Chapter 11 Case Dismissed by Boise Judge

The Chapter 11 reorganization of Tamarack Resort LLC, a golf and ski resort in Valley County, Idaho, was dismissed yesterday by the bankruptcy judge in Boise, Idaho.

After the bankruptcy judge refused to approve $2 million in secured financing, the secured lender Credit Suisse AG, Cayman Islands Branch, moved to dismiss the Chapter 11 reorganization or convert to a liquidation in Chapter 7. A hearing was held in early December.

With the dismissal, Goldman Sachs Group Inc. and other secured lenders are now free to foreclose. The court also allowed a different secured lender to repossess two ski lifts.

The Tamarack case began with an involuntary petition in Chapter 7, which the company opposed. Tamarack lost, was put into a Chapter 7 liquidation and later converted the case to Chapter 11, even though a Chapter 7 trustee had been named in March.

The new case is In re Tamarack Resort LLC, 09-03911, U.S. Bankruptcy Court, District of Idaho (Boise).

Wells Fargo Moves to Dismiss ‘New Debtor’ Filing

Wells Fargo Capital Finance Inc. moved on Jan. 10 to dismiss the Chapter 11 petition filed in Dallas six days earlier by FRE Real Estate Inc. The bank wants the motion heard in bankruptcy court the week of Jan. 17.

The affiliate of San Francisco-based Wells Fargo & Co. said the filing was in bad faith given numerous transfers made within two weeks of bankruptcy.

Wells Fargo said it made a $8.2 million mortgage loan to TCI Texas Properties LLC. Just before bankruptcy, TCI transferred 10 properties securing the Wells Fargo loan to FRE. Around the same time, other affiliates of TCI transferred properties to FRE.

By yesterday afternoon, FRE had filed no papers in bankruptcy court aside from the Chapter 11 petition, which said assets and debt both exceed $100 million.

Wells Fargo said FRE was intended to be a “mega-debtor with a roll-up of all of the collateral from various lenders.” In bankruptcy parlance, this is known as the “new debtor syndrome.” The bank named other mortgage lenders owed more than $72 million.

Wells Fargo said it recognized that if the properties are retransferred, TCI could then file in Chapter 11 to block foreclosure. The bank said it hadn’t begun foreclosure proceedings and was in workout discussions with the borrower.

The case is In re FRE Real Estate Inc., 11-30210, U.S. Bankruptcy Court, Northern District of Texas (Dallas).

RHI Entertainment Gets Final Loan Approval for Prepack

RHI Entertainment Inc., a producer and distributor of television programming, received final approval yesterday for a $15 million loan supporting what is intended to be a quickly completed bankruptcy reorganization.

RHI filed the prepackaged reorganization petition on Dec. 10. The plan already was accepted by holders of all of the second-lien debt and 94 percent of the first-lien obligations. For details of the plan, click here for the Dec. 13 Bloomberg bankruptcy report.

The confirmation hearing for approval of the plan is set for Feb. 17. To approve the plan, the judge must also find that the disclosure statement used to solicit votes contained adequate information.

The petition listed assets for $524.7 million and debt of $834.1 million. New York-based RHI said the assets include 1,000 titles for more than 3,500 broadcast hours of long-form programming. RHI specializes in made-for-television movies and miniseries.

The case is In re RHI Entertainment Inc., 10-16536, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Daily Podcast

WaMu, Trico, Vitro, Sawgrass Marriott: Bankruptcy Audio

The significance of the opinion denying confirmation of the Washington Mutual Inc. reorganization plan, a setback in the Mexican reorganization of Vitro SAB, the ability to purchase the Sawgrass Marriott Resort, whether Trico Marine Services Inc. is proposing a settlement or a disguised plan, a questionable circuit court decision taking a narrow view of the automatic stay, a refinement on the “mere conduit” defense for a fraudulent transfer, the ability of non-lawyers to make valid liens on autos, and the requirement for an individual to stop payment on checks after filing for bankruptcy are covered in bankruptcy podcasts with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist and editor-at-large Bill Rochelle. To listen, click here and here.


Overseas Shipholding Downgraded by S&P on Tanker Rates

Overseas Shipholding Group Inc., a specialist in ocean transportation of crude oil and petroleum products, received a two-notch downgrade yesterday from Standard & Poor’s that lowered the corporate credit to B.

S&P based its action on “prolonged low tanker rates” and what it called a “high debt burden.”

On the plus side, New York-based OSG has “sufficient liquidity” and will “benefit from a recovery in tanker rates over the next several years,” S&P said.

OSG stock closed yesterday at $35.89, a decline of 87 cents in trading on the New York Stock Exchange. The three-year closing high was $86.83 on June 20, 2008. The low was $21.02 on March 6, 2009.

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