MSR Resorts Say Hilton Dispute Holding Up Reorganization

The four bankrupt resorts still owned by Paulson & Co. and Winthrop Realty Trust said the dispute with Hilton Worldwide Inc. is the “single-greatest driver” of reorganization value and a “gating issue to a meaningful exit process.”

Translated into plain English, the resorts are saying they can’t emerge from bankruptcy before the Hilton litigation is resolved. The statements were contained in court papers filed last week for an extension until Aug. 1 of the exclusive right to proffer a Chapter 11 plan. A hearing on the so-called exclusivity motion will take place June 27.

The resort owners were dealt a defeat in May when the bankruptcy judge in Manhattan ruled that they can’t escape from management agreements with Hilton on three properties without giving rise to damages that would cut down on the owners’ recovery in Chapter 11. Beating Hilton down to nothing is important because the resorts intend to pay creditors in full, with money left over for Paulson and Winthrop. For details on the ruling, click here for the May 14 Bloomberg bankruptcy report.

The resorts said in the exclusivity motion that they are negotiating more lucrative contracts with other hotel managers if they can escape from the Hilton agreements at the right price. The resorts reiterated their promise to pay all creditors in full.

The schedule calls for trial to begin on June 27 where the bankruptcy court will decide how much in damages Hilton is entitled to be paid for termination of existing management agreements. Both sides are to file their pre-trial briefs today.

The court-approved sale of the Doral Golf Resort and Spa in Miami to Donald Trump has been completed, resulting in the reduction of mortgage debt by at least $140 million, according to the court filing.

The remaining resorts are the Grand Wailea Resort Hotel and Spa in Hawaii; the La Quinta Resort and Club and the PGA West golf course in La Quinta, California; the Arizona Biltmore Resort and Spa in Phoenix; and the Claremont Resort & Spa in Berkeley, California.

After foreclosing last year, Paulson and Winthrop put all five resorts into bankruptcy in February 2011 to prevent foreclosure of $1 billion in mortgages and $525 million in maturing mezzanine debt.

The properties listed assets of $2.2 billion and liabilities of $1.9 billion. An affiliate of Morgan Stanley purchased the five resorts in 2007 for $4 billion. Revenue in 2010 was $465 million.

The case is In re MSR Resort Golf Course LLC, 11-10372, U.S. Bankruptcy Court, Southern District of New York (Manhattan).


Dynegy Parent Makes Arrangements for Its Own Chapter 11 Filing

Bankrupt subsidiaries of power producer Dynegy Inc. filed papers this week to deal with the vagaries of when and whether the parent company will file its own Chapter 11 petition and join the subsidiaries in bankruptcy to carry out the global settlement approved by the court early this month.

Bankrupt subsidiary Dynegy Holdings LLC filed another iteration of the reorganization plan on June 18 along with proposed procedures so the parent can scoot through Chapter 11 quickly, in the process diluting if not extinguishing the equity currently held by shareholders.

The newest version of the plan includes further refinements necessitated by the settlement where Dynegy Holdings will merge into the parent, with the parent being the surviving entity. Court papers say the parent “will file a petition with this court for Chapter 11 relief,” although no decision has been made yet by the board as to whether or when the filing will occur.

The merger is tricky, because the settlement calls for the Dynegy parent to have an approved claim against Dynegy Holdings that must be paid in full. In the papers filed this week, Dynegy wants the bankruptcy court to insure that the so-called administrative claim won’t be extinguished by the merger.

The papers also deal with the issue of allowing creditors of the Dynegy parent to vote on the plan. To solve the issue, Dynegy wants the bankruptcy court to allow unsecured creditors of the parent to cast provisional votes on the plan. Dynegy does not believe the amount of the parent’s unsecured debt is material.

Dynegy doesn’t plan for shareholders of the parent to vote on the plan. They will be deemed to have voted against the plan.

The papers recite how there are shareholder suits outstanding against the parent. Dynegy believes the suits have no merit and therefore won’t harm creditors of the subsidiary in terms of what they receive under the plan.

There will be a hearing in bankruptcy court on July 2 for approval of disclosure materials, enabling creditors to vote on the plan. At the hearing, the judge will set down the date for the confirmation hearing to approve the plan.

There will be a separate hearing on July 9 for the bankruptcy court to approve procedures enabling the merger.

Subsidiary Dynegy Holdings put itself into bankruptcy with a plan previously negotiated with holders of some of the senior debt. Other creditors objected. The judge appointed an examiner who issued a report in March concluding that a restructuring last year involved fraudulent transfers with actual intent to hinder and delay creditors. The report was followed by the first of two settlements. A second settlement, implemented on June 5 following court approval, resolved objections to the first settlement.

For details on the second settlement, click here for the June 1 Bloomberg bankruptcy report. For details on the original settlement, click here for the April 5 Bloomberg bankruptcy report.

The plan gives $200 million cash and 99 percent of the merged companies’ stock to holders of $4.2 billion of unsecured claims against Dynegy Holdings.

The claims include about $3.5 billion on six issues of notes, $110 million for a tax-indemnity claim, $540 million on lease guaranty claims, and $55 million to holders of $222 million in subordinated debt.

The other 1 percent of the merged companies’ stock plus warrants for 13.5 percent more will go to a trust for what the papers vaguely refer to as “stakeholders” in the Dynegy parent. The five-year warrants will have an exercise price based on a $4 billion net equity value for the reorganized company.

The companies in Chapter 11 are Dynegy Holdings LLC, a direct subsidiary of Dynegy Inc., and four of Dynegy Holding’s units. The Dynegy parent, not itself in bankruptcy, listed assets of $11.1 billion and total liabilities of $8.6 billion on the Sept. 30 balance sheet.

The $1.05 billion in 8.375 percent senior unsecured notes of Dynegy Holdings LLC traded at 3:29 p.m. yesterday for 65 cents on the dollar, after trading most of the day around 62 or 63 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

As a result of the examiner’s March 9 report, the Dynegy stock lost almost 60 percent of its value in two days’ trading. The stock closed yesterday at 58.27 cents, down less than 1 cent in New York Stock Exchange trading.

Following the subsidiaries’ bankruptcy, the Dynegy parent’s balance sheet for Dec. 31 had assets of $4.13 billion and liabilities of $3.02 billion. Dynegy reported a net loss of $1.65 billion in 2011 on revenue of $1.56 billion. The net loss included a $1.66 billion “loss on deconsolidation.”

The Dynegy companies in bankruptcy listed assets of $7.56 billion and debt totaling $6.74 billion.

The Chapter 11 case is In re Dynegy Holdings LLC, 11-38111, U.S. Bankruptcy Court, Southern District of New York (Poughkeepsie).

RG Steel Committee Opposes Quick Sale and Financing

RG Steel LLC is intent on selling the business in a “fire sale” that benefits no one other than the owners, who have “questionable junior secured claims,” the newly appointed creditors’ committee said in court papers.

The committee submitted the papers yesterday in advance of a hearing tomorrow in U.S. Bankruptcy Court in Delaware where RG will ask the bankruptcy judge to approve auction and sale procedures for the three main plants in Sparrows Point, Maryland; Warren, Ohio; and Wheeling, West Virginia. No buyer is yet under contract. RG filed under Chapter 11 on May 31.

The committee is urging the judge to postpone approval of sale procedures until July 10. The company said that a quick sale is mandated by financing provided by first-lien lenders.

In response, the committee contends that the first-lien lenders are fully secured. A quick sale, in the view of the committee, would benefit the owners by allowing them to use their junior liens to retain control while receiving broad releases and liens on lawsuits.

The hearing tomorrow is also scheduled for final approval of financing. The committee has seven members, including trade suppliers, the United Steelworkers’ union and the Pension Benefit Guaranty Corp.

RG is majority owned by Renco Group Inc. While there is no committed buyer yet for the main plants, a purchaser has signed a $15 million contract for the non-operating plant in Steubenville, Ohio.

RG has the capacity to produce 8.2 million tons a year. It is the fourth-largest flat-rolled steel producer in the U.S. Renco acquired the business from U.S. subsidiaries of OAO Severstal in March 2011.

Assets and debt both exceed $1 billion, according to the petition. Liabilities include $440 million on a senior revolving credit with Wells Fargo Capital Finance LLC as agent.

There is $218.7 million outstanding on a second-lien revolving credit with Cerberus Finance LLC as agent. A Cerberus affiliate is a minority shareholder. Parent Renco is owed $130.5 million on subordinated notes.

Severstal is owed $100 million on a note dating from the acquisition. RG claims Severstal owes $82 million for a working capital shortfall when the business was sold.

The case is In re WP Steel Venture LLC, 12-11661, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Vitro Appeals Decision Nixing Mexican Reorganization

Vitro SAB yesterday appealed last week’s ruling by the U.S. Bankruptcy Court in Dallas refusing to enforce the Mexican glassmaker’s reorganization plan in the U.S.

The bankruptcy judge previously said he will allow a direct appeal to the U.S. Court of Appeals in New Orleans, avoiding an intermediate appeal to a U.S. district judge.

Concern that Vitro’s reorganization plan would be enforced in the U.S. was causing Mexican companies to pay higher interest rates than companies in other Latin American countries. For a Bloomberg story on the reaction of market observers to the Vitro ruling, click here.

The bankruptcy judge refused to enforce the Vitro reorganization in the U.S. because it reduced the debt of subsidiaries on $1.2 billion in defaulted bonds even though they weren’t in bankruptcy in any country. For a discussion of the bankruptcy court’s June 13 opinion, click here for the June 14 Bloomberg bankruptcy report.

After being rebuffed in courts in Mexico, holders of 60 percent of the bonds scored their victory in the Vitro parent’s Chapter 15 case in Dallas. Chapter 15 isn’t a full-blown reorganization like Chapter 11. It allows a foreign company in bankruptcy abroad to enlist assistance from the U.S. court to enforce rulings from the home country.

The suit in bankruptcy court to decide if the Mexican reorganization will be enforced in the U.S. is Vitro SAB de CV v. ACP Master Ltd. (In re Vitro SAB de CV), 12-03027, U.S. Bankruptcy Court, Northern District of Texas (Dallas). The bondholders’ appeal in the circuit court is Ad Hoc Group of Vitro Noteholders v. Vitro SAB de CV (In re Vitro SAB de CV), 11-11239, U.S. Court of Appeals for the Fifth Circuit (New Orleans). The bondholders’ appeal of Chapter 15 recognition in district court is Ad Hoc Group of Vitro Noteholders v. Vitro SAB de CV (In re Vitro SAB de CV), 11-02888, U.S. District Court, Northern District of Texas (Dallas). The Chapter 11 cases for U.S. subsidiaries is In re Vitro Asset Corp., 11-32600, U.S. Bankruptcy Court, Northern District of Texas (Dallas). The Chapter 15 case for the parent is Vitro SAB de CV, 11-33335, in the same court.

Fortress, Berkshire Are Dual Stalking Horses for ResCap

Residential Capital LLC, the bankrupt mortgage-servicing subsidiary of non-bankrupt Ally Financial Inc., will have two stalking horses at the upcoming auction for the two facets of the business.

At a hearing yesterday, Fortress Investment Group LLC was tapped to make the first bid for the mortgage-servicing business after raising the initial offer by $125 million and beating out Berkshire Hathaway Inc.

As a consolation prize, Berkshire will be the stalking horse for the remaining portfolio of mortgages with a first bid of $1.45 billion. For the Bloomberg story on yesterday’s hearing and the selection of the stalking horses, click here.

Before Berkshire’s offer surfaced, ResCap had intended for parent Ally to make the initial bid for the mortgage portfolio. Earlier this week, the bankruptcy judge called for an examiner to investigate claims ResCap has against Ally. For details on the sales ResCap was proposing with Ally and Fortress when the bankruptcy began, click here for the May 17 Bloomberg bankruptcy report.

Berkshire said it owns about $900 million, or about 40 percent, of ResCap’s junior secured bonds. Before they were sold this month, Berkshire owned about half of the unsecured bonds.

The $473.4 million of senior unsecured notes due April 2013 last traded yesterday for 24 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $2.1 billion in third-lien 9.625 percent secured notes due 2015 last traded yesterday for 95.75 cents on the dollar, according to Trace.

The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Northstar to Test Wynnchurch Offer at July 17 Auction

Northstar Aerospace (USA) Inc., a manufacturer of gears and gearboxes for military helicopters, began a Chapter 11 reorganization on June 14 and filed papers this week to auction the business on July 17.

Unless a better offer turns up, Northstar intends on selling the operation for $70 million cash to private-equity investor Wynnchurch Capital Ltd.

There will be a June 27 hearing in U.S. Bankruptcy Court in Delaware for approval of auction and sale procedures. If the judge goes along, competing bids will be due July 13, in advance of a July 17 auction and a hearing by July 24 to approve the sale.

Northstar’s principal lender is Fifth Third Bank, owed $39.5 million on a revolving credit and $18.9 million on a term loan. Fifth Third is providing the senior loan that will increase to a maximum of $22 million at a final financing hearing on July 3. There is a junior loan from Boeing Co. scheduled for increase to $7 million at the final financing hearing.

Northstar, with U.S. operations based in Bedford Park, Illinois, makes components and assemblies for Chinook, Apache and Blackhawk helicopters as well as the F-22 Raptor fighter. The company has six facilities in the U.S. and Canada. Revenue in 2011 was $189.6 million. The two largest customers are the U.S. military and Boeing.

Northstar said book assets are $165.1 million, with liabilities totaling $147.5 million. Trade suppliers are owed $21.7 million. The Canadian companies filed for reorganization in Canada under the Companies’ Creditors Arrangement Act.

The case is In re Northstar Aerospace (USA) Inc., 12-11817, U.S. Bankruptcy Court, District of Delaware (Wilmington).

LandAmerica Trustee Negotiates $39 Million Settlement

Creditors of LandAmerica Financial Group Inc. are in for an additional $39 million payday.

A trust, created under the liquidating Chapter 11 plan implemented in late 2009, sued directors and officers in 2011, alleging breaches of fiduciary duty. The district judge denied a motion to dismiss the suit in March and sent the parties to mediation.

The mediator brought the parties together on a settlement where providers of directors’ and officers’ liability insurance will pay $36 million. In addition, the insurance companies waive their claims, freeing up an additional $3 million being held in reserve in case the claims were held valid.

The bankruptcy court in Richmond arranged a hearing on July 9 for approval of the settlement.

In April the trust brought home a settlement with other insurance companies, generating $37.9 million.

LandAmerica owned what had been the third-largest group of title insurance companies in the U.S.

It filed for Chapter 11 protection in November 2008 and confirmed a plan one year later. The plan created a trust designed to bring lawsuits.

For details on the Chapter 11 plan, click here for the Nov. 20, 2009 Bloomberg bankruptcy report.

After the Chapter 11 filing, LandAmerica sold the title companies to Fidelity National in December 2008. The title companies weren’t themselves in bankruptcy at the time of the sales.

The petition listed $3.3 billion in assets against debt totaling $2.9 billion, including assets and liabilities of the insurance companies not in bankruptcy. Glen Allen, Virginia-based LandAmerica said its own liabilities exceeded $650 million and included $100 million on a revolving credit plus $375 million in senior and convertible notes.

The case is LandAmerica Financial Group, 08-35994, U.S. Bankruptcy Court, Eastern District Virginia (Richmond).

Daily Podcast

ResCap-Berkshire Hathaway, Vitro, New Rulings: Bankruptcy Audio

The offer that Berkshire Hathaway Inc. made for Residential Capital LLC, along with related issues, is the first topic for discussion on the bankruptcy podcast with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. The loss given last week to Mexican glassmaker Vitro SAB became an even more stinging defeat when the bankruptcy judge at the end of the week clarified his ruling and explicitly said that the Vitro parent’s reorganization won’t be enforced in the U.S. at all. The podcast wraps up with discussion of two new bankruptcy opinions. One explains what false statements result in non-dischargeable debts and the other lays out conditions when a secured debt can ride through Chapter 11 unaffected. To listen, click here.

Advance Sheets

Police Powers May Be Enforced by Private Companies

A telecommunications provider named Halo Wireless Inc. filed in Chapter 11 to stop 20 proceedings commenced by local telephone companies in 10 state public utilities commissions. The effort failed as the result of a June 18 opinion from the U.S. Court of Appeals in New Orleans construing a provision in bankruptcy law that allows exercise of governmental police or regulator powers even after bankruptcy.

Halo argued unsuccessfully in the bankruptcy court that the automatic stay should stop the regulatory proceedings because they were initiated by telephone companies, not by the regulators themselves. The bankruptcy judge rejected the argument, as did Circuit Judge Fortunato P. Benavides, writing the 26-page opinion for the 5th Circuit in New Orleans.

The telephone companies argued that Halo was violating local laws and regulations by the manner in which it conducted business. Benavides ruled that regulators for all intents and purposes were parties to the regulatory proceedings, even though they were begun by private parties.

He said that if Halo were “permitted to stay all of the PUC proceedings, it will have used its bankruptcy filing to avoid the potential consequences of a business model it freely chose and pursued.”

The circuit court upheld the ruling by the bankruptcy judge who allowed the regulatory proceedings to go forward. The appeals court also upheld the lower court which prevented the regulatory proceedings from determining the amount of any claim that the telephone companies would have against the bankrupt company.

The appeal was taken directly to the Court of Appeals without an intermediate appeal in the district court.

The case is Halo Wireless Inc. v. Alenco Communications Inc. (In re Halo Wireless Inc.), 12-40122, U.S. 5th Circuit Court of Appeals (New Orleans).

Pre-Bankruptcy Claim No Disqualification for Lawyer

A law firm owed $128,000 isn’t disqualified from representing a company in Chapter 11 if the firm agrees the pre-bankruptcy claim will be paid only after unsecured creditors are paid in full.

The case involved a shuttered hospital where the law firm was owed $128,000 for pre-bankruptcy services. The U.S. Trustee opposed approval of the firm’s retention when the proposal entailed paying the pre-bankruptcy claim from the owner’s recovery after all creditors are paid in full.

U.S. Bankruptcy Judge Jeff Bohm in Houston approved the engagement this week in a 24-page opinion.

Bohm said he agreed with a decision from September 2010 by U.S. Bankruptcy Judge D. Michael Lynn in Fort Worth, Texas, ruling that the existence of a pre-bankruptcy claim isn’t an automatic disqualification from representing a bankrupt in Chapter 11. For a discussion of Lynn’s decision in the Talsma case, click here for the Sept. 21, 2010, Bloomberg bankruptcy report.

To decide whether the claim is a disqualification, Bohm used a “totality of the circumstances approach.” He concluded that 11 of 14 factors favored allowing the engagement and payment arrangement.

The case is SBMC Healthcare LLC, 12-33299, U.S. Bankruptcy Court, Southern District of Texas (Houston).

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