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WaMu, Blockbuster, Mesa, Orchard, Ambac,: Bankruptcy

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Jan. 21 (Bloomberg) -- Washington Mutual Inc. told a bankruptcy judge yesterday that a revised Chapter 11 plan for the bank holding company probably will be filed by the end of this month.

Feb. 25 may be the date to consider approving revised election forms and other documents to be given creditors, WaMu said. A confirmation hearing to approve the plan could take place on March 28, WaMu’s lawyer said.

The official shareholders’ committee filed papers this week seeking authority to investigate whether some noteholders traded in securities of the company based on non-public information. The committee referred to the judge’s Jan. 7 opinion denying WaMu’s plan.

The judge mentioned that allegations were made at the confirmation hearing that some creditors traded on confidential information. The allegations against four hedge funds are “unproven,” the committee said.

The committee said an investigation would relate to whether the noteholders should be given releases, whether their claims should be subordinated, and the interest rates that should be paid on their claims.

The noteholders own so-called PIERS securities and would become stockholders under WaMu’s plan. The bankruptcy judge found the plan defective in part because only the four noteholders could receive new stock for their claims. The plan unfairly discriminated against creditors holding less than $2 million of the PIERS securities, the judge said.

For Bloomberg coverage of yesterday’s hearing, click here. For details of the Jan. 7 opinion denying confirmation, click here for the Jan. 10 Bloomberg bankruptcy report.

Assuming WaMu can remedy defects, the plan would distribute $7.5 billion based on a global settlement that the judge said passed muster.

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).

Retirement

George Paine to Retire From Nashville Bankruptcy Bench

George C. Paine, a bankruptcy judge in Nashville, Tennessee, is retiring after 30 years on the bench.

Paine, 63, has been chief bankruptcy judge for his district since 1984. He will step down at the end of the year, providing time for the U.S. Court of Appeals in Cincinnati to name a successor.

Asked in an interview what he will do next, Paine said, “I am open to about anything.” Being a bankruptcy judge is “probably the most fun job in the country,” he said.

In his letter to the circuit court announcing his resignation, Paine said the “federal judiciary is grossly underappreciated in regards to salary.” He noted that federal judges haven’t had a salary increase since 1989 and were denied cost of living increases five times.

Paine said that after a son graduates from law school, “the day he starts work knowing nothing about the practical aspects of the law, he will be making more than I do.” Paine said it is “impossible for federal judges at any level to educate their offspring on our salaries.”

Paine served as president of the National Conference of Bankruptcy Judges and is a fellow of the American College of Bankruptcy. He was a lieutenant in the U.S. Army, serving in Vietnam.

Watch List

Harry & David’s Capital Structure ‘Unsustainable,’ S&P Says

Harry & David Operations Corp., the specialty-food retailer and direct marketer based in Medford, Oregon, “will not be able to finance its operations without restructuring its debt obligations and securing new capital,” Standard & Poor’s said yesterday in a report.

S&P was reacting to Harry & David’s announcement that it will violate covenants in its bank credit for the second quarter. The company retained financial and legal advisers to work on restructuring, S&P said. Violating covenants may shut off access to the $105 million revolving credit, S&P said.

S&P now gives the company a CC corporate rating, the result of two-notch downgrade. The $175 million in unsecured fixed-rate notes and $70 million of senior floating-rate notes dropped to C.

Harry & David has an “unsustainable capital structure and weak liquidity position,” S&P said. Moody’s Investors Service made the same assessment almost two years ago.

The company is controlled by Wasserstein & Co., according to Bloomberg data.

Updates

Bankruptcy Judge Skeptical that Blockbuster is Solvent

Yesterday’s hearing in the reorganization of Blockbuster Inc., the movie-rental chain, exemplified how bankruptcy court can be inhospitable to shareholders and class-action plaintiffs.

Landlords, experienced in dealing with bankrupt tenants, demonstrated yesterday that it’s better to settle than to fight in court.

Landlords objected to the manner in which Blockbuster intended to conduct store-closing sales. They negotiated with Blockbuster on modified store-closing rules, allowing the judge to approve going-out-of business sales yesterday.

An ad hoc group of 35 individuals owning more than 27.5 million Blockbuster shares wanted permission to conduct discovery, intending to prove the company is solvent. U.S. Bankruptcy Judge Burton R. Lifland was incredulous, saying, “It’s hard to say this debtor is anything but insolvent.” He denied the motion to allow discovery.

The shareholder group said they could prove the Dallas-based movie-rental chain is worth “considerably more” than the $1.2 billion necessary to pay claims in full.

In a six-page opinion, Lifland also denied a motion seeking to allow the filing of a class claim on behalf of customers who paid late fees.

Lifland’s job was made easy by a state court in Illinois that ruled a class action wasn’t appropriate for Blockbuster. If it wasn’t proper outside bankruptcy, there was even less reason in Chapter 11, Lifland said. He went on to cite numerous cases showing that class actions aren’t favored in bankruptcy cases.

Lifland granted Blockbuster’s motion to extend the exclusive right to file a Chapter 11 plan until March 21. For Bloomberg coverage of yesterday’s hearing, click here.

Although Blockbuster filed under Chapter 11 after negotiating the outline of a reorganization with noteholders, the deadline for filing the plan and disclosure statement has been pushed back to Feb. 4. The plan was to give new stock to the noteholders, with general unsecured creditors receiving warrants for 3 percent. Holders of the $300 million in 9 percent subordinated debt were to receive nothing.

Following the bankruptcy filing, Blockbuster rejected about 220 leases. Blockbuster said it was closing 72 stores by the end of 2010 and would shutter about 110 more in the first quarter of 2011.

Blockbuster began reorganization with 5,600 stores, including 3,300 in the U.S. About 3,000 of the U.S. stores were owned and the rest were franchised. About 200 stores closed before bankruptcy.

The Chapter 11 petition listed assets of $1.02 billion against debt of $1.47 billion. Blockbuster estimated 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).

Mesa Air to Leave Chapter 11 Bankruptcy in February

Mesa Air Group Inc. expects to exit Chapter 11 next month after the bankruptcy judge in New York signed a confirmation order yesterday approving the reorganization plan.

The judge also wrote a 23-page opinion overruling objections to the plan that were argued at the Jan. 14 confirmation hearing.

U.S. Bankruptcy Judge Martin Glenn ruled that the objector, BF Claims Holding I LLC, didn’t have the right to object to the plan because it hadn’t filed a timely notice about claims it purchased. Even though BF Claims didn’t have standing, Glenn said he had an independent obligation to review the plan to insure it complies with bankruptcy law.

The objection was based on changes made to corporate governance documents after creditors voted. Glenn said the changes weren’t material and adverse to creditors, and no new vote was required. He said the changes only affected about 100 “sophisticated” creditors with large holdings.

He also said the changes would have little practical effect on voting rights. The changes mostly would impose administrative burdens on the company.

As for BF Claims, Glenn said it didn’t comply with an order requiring someone who purchases a claim to file notice. The notice procedure is designed to prevent transfers of large blocks of claims that could result in loss of tax-loss carryforwards.

For details on Mesa’s plan and how it treats creditors of each of the Mesa companies, click here for the Sept. 21 Bloomberg bankruptcy report.

Mesa, based in Phoenix, filed under Chapter 11 in January 2010 with a fleet of 178 aircraft. At the time, 130 were operating to provide 700 daily departures serving 127 cities in 41 states, Canada and Mexico.

After rejecting aircraft leases, Mesa now operates 76, making 450 departures a day to 94 cities. Mesa used Chapter 11 to reject leases or escape from financing on 100 aircraft.

Mesa listed assets of $976 million against debt totaling $869 million. Liabilities included $393 million on loans secured by 24 owned aircraft, $26 million on three note issues, and $33.6 million secured by 20 other aircraft.

In addition, there was $1.62 billion in potential liability on aircraft leases. Mesa operates regional aircraft under code-sharing agreements with US Airways Group Inc. and UAL Corp.’s United Airlines.

The case is In re Mesa Air Group Inc., 10-10018, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Orchard Stores Have $135 Million in Interim Loans

Subsidiaries of Orchard Brands Corp., which operate 55 retail stores, received interim authority yesterday to borrow $135 million from a secured credit for the reorganization, an amount that may rise to $140 million.

A final hearing for approval of financing was set for Feb. 11.

Along with the Chapter 11 petition filed on Jan. 19, Orchard filed a proposed reorganization plan supported by holders of 80 percent of the first-lien debt and all of the second-lien obligations. The plan would give the stock and new debt to the secured creditors.

Unsecured creditors other than a selected group of trade suppliers are to receive nothing. For details of the plan, which would reduce debt by $420 million, click here for the Jan. 20 Bloomberg bankruptcy report.

Debt includes $115 million owing to trade suppliers and $725.1 million for borrowed money.

Sales in 2010 were $881 million, down 7.7 percent from 2009. Orchard, a holding company which isn’t itself in bankruptcy, is controlled by private-equity investor Golden Gate Capital Corp.

Orchard, based in Beverly, Massachusetts, has 17 brands, including Appleseed’s, Draper’s & Damon’s, Gold Violin, Haband and Norm Thompson. The stores sell clothing, footwear and household goods, appealing to shoppers over age 55. Orchard also sells through catalogues and the Internet.

The case is In re Appleseed’s Intermediate Holdings LLC, 11-10160, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Toll Road Connector 2000 Set for Confirmation Hearing

Connector 2000 Association Inc., the nonprofit owner of a 16-mile toll road in South Carolina, can begin soliciting votes on the Chapter 9 municipal reorganization plan following the bankruptcy court’s approval of the disclosure statement on Jan. 19. The court is yet to formally fix the date for the confirmation hearing to approve the plan.

Approval of the disclosure statement was made possible by a settlement with the South Carolina Transportation Department.

After the toll road filed for reorganization in June, the Department argued that it wasn’t a municipality and was thus ineligible for Chapter 9, which is reserved for the reorganization of municipalities. The settlement avoided holding trial on eligibility for Chapter 9.

For details of the plan, click here for the Dec. 1 Bloomberg bankruptcy report.

Connector 2000 is a public benefit corporation under South Carolina law. A court filing said toll revenue never met projections and was insufficient 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).

Ambac Aims to Stop Suit Against Directors, Officers

Ambac Financial Group Inc., the reorganizing insurance holding company, asked a bankruptcy judge to halt a purported class-action lawsuit brought by a former employee who accused officers and directors of violating their fiduciary duties with regard to Ambac’s savings incentive plan.

In the lawsuit pending in U.S. District Court in New York, the ex-employee says the plan continued to offer investments in Ambac stock when it was imprudent to do so. The plan also retained investments in Ambac stock when it was improper, according to the complaint.

The officers and directors are protected by a $5 million insurance policy, Ambac said. Nonetheless, Ambac wants the suit stopped because a recovery would deplete funds available for other creditors. The company also argues that permitting discovery would be unduly burdensome and distract management from the reorganization effort.

The reorganization of the holding company is being held up pending negotiations with the Wisconsin insurance commissioner on how to split up tax refunds. The commissioner is rehabilitating insurance subsidiary Ambac Assurance Corp.

The subsidiary stopped paying dividends to the parent in 2007 and stopped writing new business entirely in mid-2008. The parent filed under Chapter 11 in November, listing assets of $90.7 million and liabilities totaling $1.62 billion, virtually all unsecured and stemming from seven note issues. One issue for $400 million is subordinated.

The case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Taylor Bean’s Confirmation Now Set for March 4

Taylor Bean & Whitaker Mortgage Corp., once the largest independent mortgage originator in the U.S., was authorized by the bankruptcy judge this week to sell a 24,000-square-foot office building in Lawrenceville, Georgia, for $1.35 million.

Taylor Bean had been scheduled for a contested confirmation hearing to begin Jan. 19. The hearing was pushed back to March 4 at the company’s request.

Taylor Bean said in a court filing that discussions with objecting creditors made the company “cautiously optimistic” that a consensual plan could be worked out.

For details of Taylor Bean’s plan, click here for the Nov. 12 Bloomberg bankruptcy report. The existing plan is supported by the creditors’ committee.

Taylor Bean filed under Chapter 11 in August 2009, three weeks after federal investigators searched the offices of the Ocala, Florida-based company. The day following the search, the Federal Housing Administration, Ginnie Mae and Freddie Mac prohibited the company from issuing new mortgages and terminated servicing rights.

Taylor Bean managed an $80 billion mortgage-servicing portfolio. Assets and debt both exceeded $1 billion, according to the petition.

The case is Taylor Bean & Whitaker Mortgage Corp., 09-07047, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).

Villa Raises Bid for Charlie Brown’s The Office

The owner of Charlie Brown’s Steakhouse is in court today seeking approval for the sale of the seven The Office restaurants for $4.68 million to Villa Enterprises Inc.

Before the auction this week, Villa was named the so-called stalking horse with a bid of $3.4 million.

The $2.5 million loan for the Chapter 11 case has deadlines for selling everything. For the remainder of the stores, the secured lenders, owed $70.2 million, wanted an auction by Jan. 24 and a sale-approval hearing by Feb. 3.

In addition to Charlie Brown’s and The Office, the company operates under the name Bugaboo Creek. Trimaran Capital Partners controls the company.

Thirty-nine restaurants were operating at the time of the Chapter 11 filing. Before bankruptcy, 47 locations were closed.

In addition to the secured debt, there is $14 million owing on second-lien senior subordinated notes and $30 million on a mezzanine loan. The senior secured lenders are Ableco Finance LLC, Wells Fargo Capital Finance Inc. and Ally Commercial Finance LLC.

The case is CB Holding Corp., 10-13683, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Empire One Authorized to Sell Business to Media 3

Empire One Telecommunications Inc., a local exchange carrier operating in New York, was authorized by the bankruptcy judge on Jan. 19 to sell the business to Media 3 Communications Inc., which was described in court papers as the designee for Lexicon United Inc.

The price is $800,000, plus the assumption of as much as $600,000 in liabilities. The sale was contemplated in the Chapter 11 plan filed in September.

Empire One listed assets of $5.2 million against debt of $3.7 million after the Chapter 11 filing in February 2009.

The case is Empire One Telecommunications Inc., 10-10987, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

New Filings

Office Building at LAX Airport Files for Chapter 11

LAX Royal Airport Center LP, the owner of an office building adjacent to the airport in Los Angeles, filed for Chapter 11 protection on Jan. 19, saying the property is valued at $16 million.

There are $8 million in mortgages on the building, located at 5933 West Century Boulevard, according to the petition.

The case is In re LAX Royal Airport Center LP, 11-12333, U.S. Bankruptcy Court, Central District of California (Los Angeles).

McDonagh, New Jersey Chrysler Dealer, Files to Reorganize

McDonagh Chrysler Jeep Inc., an auto dealer in East Brunswick, New Jersey, filed for Chapter 11 reorganization on Jan. 18 in Trenton, New Jersey.

The dealership owes $5.2 million to Ally Bank, which provides financing for the auto inventory. Ally’s collateral is valued at $4.9 million, leaving a $200,000 deficiency, according to court papers.

Chrysler Financial Corp. has a $2.36 million first lien on the assets other than autos. There is little collateral, leaving Chrysler Financial with a $1.95 million unsecured claim, according to court papers.

Although TD Bank has a second lien, there is no value in the security interest, leaving the bank with a $6.12 million unsecured claim, a court filing says.

Assets are less than $10 million while debt exceeds $10 million, according to the petition.

The case is In re McDonagh Chrysler Jeep Inc., 11-11397, U.S. Bankruptcy Court, District of New Jersey (Trenton).

New Jersey Medical Office Files after Receiver Appointed

Bedminster Medical Plaza LLC, the owner of a medical office building in Bedminster, New Jersey, filed under Chapter 11 on Jan. 18, 15 days after a New Jersey state court appointed a receiver to collect rent.

Although the $8.48 million mortgage is in default, the owner of the building claims the property is worth more than the debt.

Monthly income is $97,000 while operating expenses are $27,000, the owner said. To regain control of the property, the owner wants to supplant the receiver while paying the lender excess cash after operating expenses.

The mortgage is collateral for mortgage-backed securities. The trustee is Bank of America NA.

There is also a $1.8 million disputed judgment in favor of JPMorgan Chase Bank NA, according to court papers. Assets are less than $10 million while debt exceeds $10 million, according to the petition.

The case is In re Bedminster Medical Plaza LLC, 11-11395, U.S. Bankruptcy Court, District of New Jersey (Newark).

Downgrade

Phibro Animal Health Downgraded on Leveraged Dividend

Phibro Animal Health Corp. has a B- corporate rating as the result of yesterday’s one-notch downgrade by Standard & Poor’s.

S&P pinned its action on “competitive and cost pressures and higher interest expense, following the refinance and leveraged dividend.” S&P also gives the $300 million in 9.25 percent senior unsecured notes a B- grade.

Phibro, based in Ridgefield Park, New Jersey, makes, develops and markets health and nutrition products for the poultry, swine, cattle and aquaculture industries.

Daily Podcast

Anna Nicole Smith, Innkeepers, Tasty Baking: Bankruptcy Audio

How former Playboy model Anna Nicole Smith may be responsible for the most important bankruptcy decision in 30 years from the U.S. Supreme Court, the upcoming auction for the 72 hotel properties belonging to Innkeepers USA Trust, and the opportunity to buy or invest in Tasty Baking Co., the producer of Tastykake brand snack cakes, are covered 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.

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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