Jan. 18 (Bloomberg) -- After Lehman Brothers Holdings Inc. summarized the revised reorganization plan to be filed in the next few days, U.S. Bankruptcy Judge James M. Peck said it would carry “something close to prima facie validity” if supported by the official creditors’ committee.
The comment from the judge, made near the end of the hearing on Jan. 13, followed a statement by a lawyer for dissenting creditors who proposed a competing plan that would result in so-called substantive consolidation. The dissenting group includes Paulson & Co. Inc.
Harvey Miller, the head lawyer for Lehman, said the objective is to win approval of the plan “well before the end of this year,” even if there is opposition. Miller said he’s trying to cobble together a plan containing enough compromises so the confirmation hearing won’t “consume this court and the parties for months.”
Miller said that the new plan will contain giveups “in one form or the other” from all creditor groups. The original plan, according to Miller, “did not seek compromises from all stakeholders.”
The judge was told about provisions in the forthcoming plan for fixing the amount of claims based on derivatives. Rather than litigating the amount of each derivative claim individually, the plan will include a possibly unprecedented mechanism where the amount of a derivative claim will be determined by a formula.
The Lehman representative said the judge correctly understood that, if the derivative class accepts the plan by the requisite percentages, “even dissenting holders within the class will be bound by the vote.”
For other Bloomberg coverage of issues raised at the Jan. 13 hearing, click here.
The Lehman holding company and its non-brokerage subsidiaries filed a Chapter 11 plan in March and a disclosure statement in April. To read about other aspects of Lehman’s status report last week, click here for the Jan. 14 Bloomberg bankruptcy report. For details about Lehman’s original plan, click here and here for the April 15 and 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 Investors Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Five Mile and Lehman May Own Innkeepers Under New Plan
Innkeepers USA Trust, a real estate investment trust, disclosed the details of a reorganization structure where Lehman Ali Inc. and Five Mile Capital Partners LLC will acquire the new equity, assuming no better bid appears at auction. There will be a Feb. 8 hearing to set up auction procedures and approve agreements underlying the upcoming reorganization plan.
Five Mile and Lehman Ali, a subsidiary of Lehman Brothers Holdings Inc., together will provide $174.1 million of equity capital and convert $200.3 million of debt into equity. Five Mile is the provider of $53 million in secured financing for the Chapter 11 case, and Lehman is the holder of $238 million in floating-rate mortgages on 20 of Innkeepers’ 72 properties.
Midland Loan Services Inc., as servicer for $825 million of fixed-rate mortgage debt on 45 properties, will emerge from Chapter 11 with mortgages for $622.5 million on revised terms.
Lehman is to receive 50 percent of the new equity plus $26.2 million cash in exchange for all its debt. The $70.5 million in secured loans for the Chapter 11 case will be paid in full. Midland is supplying debt financing for Lehman’s commitment.
Unsecured creditors are being offered $2.5 million cash if the class votes for the plan. Secured lenders’ deficiency claims will not participate in the distribution to unsecured creditors. Also, preference suits against unsecured creditors will be waived.
Holders of the 8 percent preferred stock are offered $5.9 million cash plus the right to be co-investors for 2 percent of the new equity.
Holders of mortgages on 69 of 72 properties will be paid in full or have the mortgages modified consensually.
Releases are an integral part of the plan outlined in the agreements filed in bankruptcy court Jan. 14. Innkeepers’ directors and officers, Midland, Five Mile, Lehman, and Apollo Investment Corp., Innkeepers’ current owner, are to receive releases of claims from the company and creditors.
Assuming no other bids at auction, the plan will reduce debt by $400 million. Innkeepers says that the transaction proposed by Lehman, Midland and Five Mile has a value of $1.14 billion covering all of the REIT’s properties. With Lehman and Midland, the plan is supported by holders of more than $1 billion of $1.29 billion of pre-bankruptcy secured debt.
Anyone else who makes bid at the auction allowing Innkeepers to retain all the properties can take advantage of the same financing that Midland is offering Lehman, so long as financial conditions are met. To use the Midland financing, Lehman must be paid $200.3 million cash for its debt.
The auction is to be 45 days after the hearing for approval of bidding procedures. The commitments from Lehman and Midland have a March 31 deadline for bankruptcy court approval. June 30 is the deadline for confirmation of the reorganization plan.
If secured lenders like the Lehman-Midland bid at the auction, they must bid cash, not their existing debt.
Any competing bid must be at least $362.2 million cash, to cover all the items in the Lehman-Midland sponsored plan, plus an overbid.
Innkeepers strongly urges all third parties to bid for all the hotels. Innkeepers has a so-called fiduciary out if piecemeal bids end up being the best offer. However, the Midland financing isn’t available for a piecemeal bid, and neither Midland nor Lehman is required to support the winner of an auction whose bid doesn’t encompass the entire enterprise.
The motion describes negotiations with a bidder referred to only as Bidder D, whose identity is being kept secret. In December, Innkeepers originally picked Bidder D as having the best offer. Midland, Five Mile, and Lehman then improved their offer and supplanted Bidder D to become the so-called stalking horse.
Early in the case, the bankruptcy judge refused to approve a proposal where equity in reorganized Innkeepers would have been shared by Lehman and Apollo. The original plan was opposed by Midland.
Palm Beach, Florida-based Innkeepers has 72 extended-stay and limited-service properties with 10,000 rooms in 20 states. For details on Innkeepers’ plan the bankruptcy judge rejected, click here for the Aug. 31 Bloomberg bankruptcy report.
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 of New York (Manhattan).
Trust-Preferred Holders Appeal From WaMu Ruling
Holders of trust-preferred securities filed an appeal from one of the rulings by the bankruptcy court on Jan. 7 refusing to confirm the reorganization of Washington Mutual Inc.
The security holders are appealing from a 20-page opinion where U.S. Bankruptcy Judge Mary F. Walrath ruled that they no longer have an interest in the securities because they were automatically converted into preferred stock of the holding company when the bank subsidiary was taken over by regulators.
The security holders may attempt to expedite the appeal so it doesn’t become moot when WaMu revises and confirms an amended plan.
For details on the Walrath’s Jan. 7 rulings, including the defects she found in WaMu’s plan, click here for the Jan. 10 Bloomberg bankruptcy report.
Assuming WaMu can remedy defects, the plan calls for distributing $7.5 billion based on a global settlement including the Federal Deposit Insurance Corp. and JPMorgan Chase & Co.
It is clear from Walrath’s opinion some creditors must be given the right to opt in or opt out of releases in favor of third parties. Until WaMu makes followup court filings, it is unclear whether any creditor classes will be allowed to vote again or when a revised plan may be ready for court approval.
Click here to read the May 18 Bloomberg bankruptcy report for a summary of WaMu’s original plan. To read about the settlement before it was modified, click here for the May 24 Bloomberg bankruptcy report. For a summary of changes WaMu made to its plan in October, click here for the Oct. 7 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, once 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).
A&P Reports $181 Million Operating Loss in Quarter
Great Atlantic & Pacific Tea Co., the supermarket operator, reported a $181 million loss from continuing operations for the fiscal third quarter ended Dec. 4.
The regulatory report last week said comparable-store sales were down 4.9 percent compared with the same period in the year before. Sales in the quarter were $1.793 billion.
The net loss for the quarter was $199.4 million. The loss before interest, taxes, depreciation and amortization was $94 million. A&P’s statement said the quarter represented “modest improvement in some of our third-quarter financial results.”
Last week A&P secured final approval for $800 million in financing to support the reorganization begun Dec. 12.
Montvale, New Jersey-based A&P filed for reorganization with 395 supermarkets, mostly in New York, New Jersey and Pennsylvania. It listed assets of $2.531 billion and debt totaling $3.211 billion. Along with A&P, store brands include Pathmark, Food Emporium and Waldbaum’s.
In addition to the pre-bankruptcy secured debt that was repaid with financing for the reorganization, liabilities include $260 million on 11.375 percent second-lien notes and $632.8 million on four issues of unsecured notes. A&P has $175 million in convertible preferred stock.
For the fiscal year ended in February 2010, the net loss was $876 million on sales of $8.81 billion. The loss from continuing operations was $802 million.
The case is In re Great Atlantic & Pacific Tea Co. Inc., 10-24549, U.S. Bankruptcy Court, Southern District of New York (White Plains).
U.S. Trustee Uses WaMu for Objection to HSH Plan
HSH Delaware GP LLC has a confirmation hearing today where the only objection comes from the U.S. Trustee. It was forced into Chapter 11 by debt used to buy 26 percent of German bank HSH Nordbank AG.
Citing a Jan. 7 opinion in Washington Mutual Inc. reorganization as precedent, the bankruptcy watchdog for the U.S. Justice Department says the plan can’t release a creditor’s claim against a third party absent affirmative consent by the creditor.
The U.S. Trustee also cites the WaMu opinion to mean that freedom from suit can only be given to directors, officers and professionals who worked in the Chapter 11 case.
U.S. Bankruptcy Judge Mary F. Walrath, who wrote the opinion denying confirmation of WaMu’s plan, is the judge presiding over HSH Delaware.
The company negotiated a settlement in August with lenders owed $550 million. The plan will convert the lenders’ unpaid fees and expenses into principal owing on the debt. The maturity will be extended to the end of 2014. The plan gives the company time to sell the equity or the assets.
The plan was amended last week to permit a merger.
If there is a surplus above the debt to the lenders, the plan contains an agreed sharing of the excess between the company and the lenders. Unsecured creditors are to be paid in full.
HSH filed under Chapter 11 in January 2010 to prevent what it called a “fire sale” of the HSH Nordbank stock. It was formed in 2006 by J.C. Flowers & Co. LLC to buy the stock.
Court papers say that the 1.25 billion euros ($1.67 billion) purchase price was financed in part with the bank loan.
The case is In re HSH Delaware GP LLC, 10-10187, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Corus Bankruptcy Court Suit against FDIC Held Up
A lawsuit by Corus Bankshares Inc. against the Federal Deposit Insurance Corp. has been frozen by the bankruptcy judge until a district judge rules whether claims by the bank holding company should be heard in district court.
Corus, whose bank subsidiary was taken over by regulators in September 2009, filed a complaint in bankruptcy court against the FDIC in June contending that it owns $258 million in tax refunds also sought by the FDIC.
The FDIC responded by arguing that the lawsuit and another by Corus are nothing more than disguised appeals from the FDIC’s denial of Corus’s claims in the failed bank’s receivership.
The bankruptcy judge in Chicago ruled last week that the lawsuit shouldn’t proceed until the district judge decides which court should hear and decide the disputes. The last papers on so-called withdrawal of the references will be filed in February.
In the lawsuit against the FDIC, which is the receiver for the failed bank subsidiary, Corus describes how it paid taxes for all affiliated companies under a tax-sharing agreement. Corus contends that the agreement gives the FDIC, as the bank’s receiver, nothing more than an unsecured claim for the bank’s share of refunds. Corus argues that the agreement didn’t create a trust relationship with the result that all tax refunds are part of the holding company’s bankrupt estate.
Corus’s Chapter 11 petition filed in Chicago listed assets of $314.1 million against debt totaling $532.9 million.
The Corus bank had 80 branches and $7 billion in deposits that were transferred to MB Financial Inc. in a transaction estimated at the time of the takeover to cost the FDIC $1.7 billion.
The case is In re Corus Bankshares Inc., 10-26881, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).
Constar Receives Interim Approval of $38 Million Loan
Constar International Inc., a manufacturer of blow-molded plastic beverage containers, received interim approval on Jan. 13 for $38 million from a promised $55 million loan. The hearing for final approval of financing will take place Feb. 1.
Final approval of the loan will give Constar $15 million in new availability.
The prepackaged reorganization that Constar began Jan. 11 was the second in as many years. This time, holders of 75 percent of the $220 million in senior secured floating-rate notes that survived the prior bankruptcy will convert their debt into a new $70 million term loan and $30 million of convertible preferred stock.
In the prior Chapter 11 case, $175 million of 11 percent subordinated notes swapped their debt for all the new stock which is being extinguished this time around.
For details on Constar’s new plan, click here for the Jan. 12 Bloomberg bankruptcy report.
Solus Alternative Asset Management LP was the holder of the largest block of the subordinated notes in the prior reorganization. Solus is among the noteholders supporting the new reorganization. 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 with debt of $414 million.
For nine months ended in September, the Philadelphia-based company reported a $56.8 million operating loss and a $73.7 million net loss on net sales of $439 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.
National Envelope Dispute May Go to Arbitration
National Envelope Corp. can’t use the bankruptcy court to decide a dispute over an adjustment in the sale price for the assets, the buyer Gores Group LLC said in a court filing last week.
Instead, the buyer said the dispute must be decided in arbitration, as the asset purchase agreement provides. Gores cites the contract as naming Grant Thornton LLP as the “neutral arbitrator.”
NEC filed a motion in bankruptcy court at the end of December contending that Gores was attempting to “massively reduce” the purchase price and in the process eliminate a recovery by unsecured creditors. Gores filed a cross motion saying the dispute should be submitted to arbitration.
The contract valued the sale at $208 million, including cash of $149.85 million. The acquisition price included an adjustment for working capital. At closing in September, NEC estimated working capital was $123 million. NEC said the buyer believes working capital turned out to be $112 million. The buyer wants a $12 million refund from a $14 million escrow.
NEC called itself the largest closely held envelope manufacturing company in the U.S. when it filed under Chapter 11 in June.
Based in Uniondale, New York, NEC said assets and debt were both less than $500 million. Liabilities included $74.3 million on a secured term loan, $70.6 million on a secured revolving credit, and $89 million owing on unsecured debts to trade suppliers.
The case is In re NEC Holdings Corp., 10-11890, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Verizon Appealing FairPoint Communications Plan Approval
Verizon Communications Inc. is appealing the order last week confirming the Chapter 11 plan for FairPoint Communications Inc., a local exchange carrier that bought Verizon’s fixed-line business in part of New England.
New York-based Verizon tried unsuccessfully at last week’s confirmation hearing to block approval of the reorganization. It contended that the plan exceeded the bankruptcy court’s powers by precluding a lawsuit Verizon might bring against Capgemini U.S. LLC based on claims having nothing to do with FairPoint.
FairPoint said it intends to implement the plan by the end of the month.
Lenders are to own FairPoint after Chapter 11. For details on FairPoint’s reorganization plan, click here for the March 12 Bloomberg bankruptcy report.
FairPoint’s Chapter 11 petition listed assets of $3.236 billion against debt totaling $3.234 billion. Funded debt, aggregating $2.7 billion, included $2 billion under a secured credit facility, $575 million in senior unsecured notes, and $88 million on interest rate swap agreements.
The case is In re FairPoint Communications Inc., 09-16335, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Jennifer Reports $3.36 Million Loss in Quarter Ended in November
Jennifer Convertibles Inc., the furniture retailer with a confirmation hearing set for Jan. 25, reported a $3.36 million net loss for the fiscal first quarter ended in November. Revenue from continuing operations increased 3.6 percent in the quarter to $18.52 million, compared with the same period the year before.
Operating margins from continuing operations declined in the quarter to 24.7 percent from 28 percent in the same period the year before. Ten stores were closed in the quarter.
Jennifer filed for Chapter 11 reorganization in July. If the plan is approved at the confirmation hearing, the principal supplier Haining Mengnu Group Co. from China will end up owning 90.1 percent of the stock in exchange for $14.9 million in debt.
Existing stock will be extinguished.
For $15.8 million in claims, unsecured creditors are in line for 9.9 percent of the new stock plus a $1.4 million first-lien note maturing in one year, a $950,000 first-lien note maturing in three years, and 70 percent of recoveries from a liquidating trust. The disclosure statement estimates the recovery by unsecured creditors at 22.7 percent.
Haining Mengnu also will receive a $1.9 million subordinated note due in four years plus 30 percent of the liquidating trust. For its unsecured claim, the recovery is estimated at 87.7 percent. Most is attributable to the speculative value of the new stock, according to the disclosure statement.
Haining Mengnu receives a $2.6 million first-lien note maturing in two years in exchange for merchandise shipped just before bankruptcy. The creditors’ committee supports the plan.
Woodbury, New York-based Jennifer listed assets of $26 million and debt totaling $46.4 million.
When the reorganization began, the company had 130 Jennifer locations and seven Ashley HomeStores Ltd. stores operated under license. Ashley is a full-line furniture retailer. This month, the store count was down to 63 Jennifer locations and six Ashley stores.
Haining was listed as the largest unsecured creditor with a claim of $16.7 million, the company said at the outset.
The case is In re Jennifer Convertibles Inc., 10-13779, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Tasty Baking Wins Reprieve from Banks until June 30
Tasty Baking Co. won a reprieve from its banks where the producer of baked goods under the Tastykake brand won’t have to repay principal or reduce the line of credit until June 30. Under the agreement, June 30 is also the deadline for the company to sell the business or find a merger partner.
In a statement on Jan. 14, Tasty said it would attempt to avoid a sale or merger by trying to refinance the existing debt or arrange for an injection of new capital.
Tasty surprised investors on Jan. 5 by announcing it had “extremely tight liquidity” resulting from “certain production difficulties” at the new plant in Philadelphia where the company is based. It was also hurt by the Chapter 11 filing by customer Great Atlantic & Pacific Tea Co.
In the statement, the company said the landlords for the Philadelphia bakery and home office also agreed to defer “certain payments” until June 30.
Tasty Baking reported a $12.2 million net loss for 39 weeks ended Sept. 25 on net sales of $127 million. Net income in the same period of 2009 was $1.7 million. Revenue in the period declined 7.1 percent from the same quarter in 2009.
The stock fell 13 cents to $3.87 on Jan. 14 in Nasdaq Stock Market trading. The three-year high for Tasty Baking stock was $11.28 on July 2, 2007. The low was $2.78 on Nov. 21, 2008.
The company produces snack cakes, pies, cookies, and donuts. Both plants are in Pennsylvania.
Trucker Cargo Transportation Files when Bank Seizes
Cargo Transportation Services Inc., a less-than-truckload carrier based in Sunrise, Florida, filed for Chapter 11 protection on Jan. 12 in Tampa, Florida, after the secured lender seized bank accounts.
Comerica Bank, the secured lender, is owed $7.9 million according to a court filing. CTS says the bank relied on a non-monetary default to seize bank accounts. As a result, CTS said drivers weren’t able to purchase fuel, leaving 200 trucks unable to deliver 1,100 shipments.
CTS generates $100 million a year in revenue, according to a court filing. Assets exceed $50 million while debt is less than $50 million, the petition says.
The case is In re Cargo Transportation Services Inc., 11-00432, U.S. Bankruptcy Court, Middle District of Florida (Tampa).
Vacant Land at Scottsdale Airport Files Bare-Bones
Gilbert 3600 LLC, the owner of a vacant parcel of land adjacent to the runway at the Scottsdale Municipal Airport, filed a bare-bones Chapter 11 petition on Jan. 12 in Phoenix.
The petition lists two secured claims, one for $10.15 million and another for $2.11 million. The property is worth $5.2 million, according to the filing.
The case is In re Gilbert 3600 LLC, 11-00872, U.S. Bankruptcy Court, District of Arizona (Phoenix.)
Lehman, General Growth, Fuddruckers: Bankruptcy Audio
Initial reactions to the upcoming amendment of the Lehman Brothers Holdings Inc. reorganization plan, General Growth Properties Inc. as precedent saying when default interest is payable, Fuddruckers showing protections afforded licensees of intellectual property, the chance to buy wall covering and fabric distributor Brunschwig & Fils Inc., and the use of Chapter 13 to cut down the interest rate on secured claims 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.
Georgia Bank Taken Over; Arkansas Bank Takes Branches
Oglethorpe Bank of Brunswick, Georgia, was taken over by regulators on Jan. 14. The branches were taken over by Bank of the Ozarks Inc. from Little Rock, Arkansas.
For Bloomberg coverage, click here.
Three banks have failed this year. Last year, the total was 157. In 2009, it was 140. The failures last year were the most since 1992 when 179 institutions were taken over by regulators.
To contact the reporter on this story: Bill Rochelle in New York at email@example.com.
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