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Vitro Appeal, Madoff, Kodak, Philly Orchestra: Bankruptcy

The trustee for Bernard L. Madoff Investment Securities Inc. won an appeal yesterday afternoon that could free $1.025 billion for distribution to creditors within four months, if there’s no further appeal.

The Madoff trustee sued Tremont Group Holdings Inc., Oppenheimer Acquisition Corp., Massachusetts Mutual Life Insurance Co. and affiliates for $2.1 billion in funds received directly from the Madoff firm. Oppenheimer owns the Tremont hedge fund.

The settlement authorized the trustee to recover $1.025 billion cash from the second-largest group of feeder funds that funneled money into the Madoff Ponzi scheme. In return for the $1.025 billion payment into escrow, the foreign and domestic investment funds will receive about $3 billion in approved customer claims. The settlement was structured so distributions on the funds’ claims will be paid directly to the funds’ customers.

Investors in other Tremont funds appealed the settlement. Those funds were so-called net winners which managed to take more out of the Madoff firm than they invested. Consequently, they don’t have customer claims against the Madoff firm under a ruling by the U.S. Court of Appeals upheld this week by the U.S. Supreme Court. In the appeal decided yesterday, they wanted the settlement set aside so they too could have claims against the Madoff firm.

Madoff trustee Irving Picard, Tremont and Mass Mutual all joined together requesting dismissal of the appeal. U.S. District Judge George B. Daniels agreed and threw out the appeal yesterday afternoon.

Daniels said in his 5-page opinion that the other funds weren’t customers, weren’t even creditors of the Madoff firm, weren’t aggrieved by the settlement and thus lacked standing, or the right to appeal.

The funds on the losing side have 30 days to appeal. If they don’t seek further review in the U.S. Court of Appeals, the settlement agreement requires holding the $1.025 billion in escrow for an additional 90 days before it can be distributed to customers.

Coupled with a decision by the U.S. Supreme Court this week not to allow an appeal on the method of claim calculation, yesterday’s victory means Madoff customers are in for significant distributions in upcoming months.

Appeals have been preventing Picard from distributing most of about $11 billion collected for the benefit of customers. About $7.2 billion is being held up because other customers have a right of appeal until July 16 from court approval of a forfeiture by the late Jeffry M. Picower.

Picard said he will make distributions in the “near future.” He didn’t say exactly when or how much.

Peter Madoff, Bernie Madoff’s brother, will plead guilty tomorrow in federal court, agree to a 10-year prison sentence, and consent to the forfeiture of $143.1 billion and all his personal assets. For the Bloomberg story, click here.

The Madoff firm began liquidating in December 2008, with the appointment of the trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009. His bankruptcy case was consolidated with the firm’s liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.

The Tremont appeal is Picard v. Tremont Group Holdings Inc., 11-cv-07330, U.S. District Court, Southern District of New York (Manhattan). The Madoff liquidation in bankruptcy court is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court, Southern District of New York (Manhattan).


Vitro Must Have Stay Today or Tomorrow to Halt Asset Seizures

Vitro SAB will be able to appeal directly to the U.S. Court of Appeals in New Orleans from a ruling on June 13 by a U.S. bankruptcy judge in Dallas refusing to enforce the glassmaker’s Mexican reorganization plan in the U.S.

Unless Vitro convinces the appeals court to impose a stay pending appeal in the next two days, bondholders will be able to begin seizing assets of the company and subsidiaries after tomorrow.

Vitro is appealing because a bankruptcy judge in Dallas ruled that the Mexican reorganization was “manifestly contrary” to U.S. law and public policy. In the opinion of the bankruptcy judge, the Mexican plan improperly allowed Vitro subsidiaries to chop down their guarantees on $1.2 billion in defaulted bonds without having been in bankruptcy themselves.

Yesterday, the 5th Circuit in New Orleans granted a direct appeal, allowing the parties to skip an intermediate appeal to a federal district judge. Vitro came up short because the circuit court, in the same order yesterday, refused to accelerate the appeal.

Carolyn King, one of the three circuit judges who made yesterday’s ruling, would have held oral argument quickly after the last brief was filed. She also would have called on the bankruptcy judge “to decide promptly” on additional “strong objections” the bankruptcy judge said he didn’t reach because he already found the Mexican reorganization defective.

Until the circuit court accepted the appeal, there was a watershed hearing scheduled for today in Dallas where Vitro would have asked District Judge Royal Furgeson to enjoin the bondholders from attaching assets. The bankruptcy judge refused to stop attachment of assets after June 29.

On learning that the circuit court granted the direct appeal, Furgeson canceled today’s hearing, thus requiring Vitro to move quickly in the circuit court for a stay pending appeal.

Before Furgeson canceled the stay hearing, holders of 60 percent of the defaulted bonds filed papers urging the district court not to impose a stay. The subsidiaries could fend off asset seizure by filing their own bankruptcies, the bondholders argued.

The bondholders urge the courts to follow the general rule that special circumstances are required before one company’s bankruptcy becomes reason for halting legal action against a non-bankrupt affiliate. The bondholders also contend the subsidiaries could obtain a stay by filing bonds in the lawsuits in New York State court where the creditors are obtaining judgments on the defaulted bonds.

Vitro characterized the bankruptcy court’s ruling as “unprecedented and erroneous.” The bondholders fault the Mexican plan because it gives them only 40 cents on the dollar while Vitro’s shareholders retain stock worth $500 million.

For a summary of the bankruptcy court’s June 13 opinion, click here for the June 14 Bloomberg bankruptcy report.

After defeats in courts in Mexico, the bondholders won their victory in the Vitro parent’s Chapter 15 case in Dallas. Chapter 15 isn’t a full-blown reorganization like Chapter 11. It permits a foreign company in bankruptcy abroad to enlist assistance from the U.S. court to enforce rulings from the home country.

The appeal in the Circuit Court is Vitro SAB de CV v. Ad Hoc Group of Vitro Noteholders (In re Vitro SAB de CV), 12-90055, 5th U.S. Circuit Court of Appeals (New Orleans). Vitro’s motion in district court for a stay pending appeal was In re Vitro SAB de CV, 11-3554, U.S. District Court, Northern District of Texas (Dallas). The suit in bankruptcy court where the judge decided not to enforce the Mexican reorganization 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’ previous 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, 5th U.S. Circuit Court of Appeals (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 case 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.

AMR Judge to Decide if Hotel Deal Is a ‘Forward Contract’

Is a long-term contract to provide hotel rooms for airline crews a “forward contract” that the hotel owner may cancel despite bankruptcy? That’s a question the bankruptcy judge will decide in the Chapter 11 reorganization of AMR Corp., the parent of American Airlines Inc.

Hotel operator HTL Operating LLC, sometimes known as MCM Elegante Hotel, has a five-year contract to provide hotel rooms for air crews at the rate of $69 a night. HTL, from Odessa, Texas, claims the right to terminate the contract, arguing it’s a forward contract that can be terminated under an exception to the so-called automatic stay in bankruptcy.

HTL contends it falls within the protection of Section 556 of the U.S. Bankruptcy Code, claiming to be a forward contract merchant because it agrees to provide hotel services in the future.

AMR will have a chance to respond prior to a hearing on July 19. If HTL wins, the case could set a precedent where bankrupt companies may be unable to enforce many contracts to supply goods or services.

AMR can make several arguments in response. It can point to the definition of “forward contract merchant” by contending that hotel rooms aren’t “the subject of dealing in the forward contract trade.”

Leaders of the pilots’ union agreed to send the company’s revised offer to the membership for a vote. To accommodate the time necessary for voting, the bankruptcy judge agreed not to issue a ruling until Aug. 8 on whether the airline can modify union contracts with pilots, flight attendants and mechanics.

The proposal will give pilots a 14.8 percent pay increase over six years along with 13.5 percent of the reorganized airline. For the Bloomberg story, click here.

Fort Worth, Texas-based AMR listed assets of $24.7 billion and debt totaling $29.6 billion in the Chapter 11 reorganization begun in November. American Airlines entered bankruptcy with 600 aircraft in the mainline fleet and another 300 with American Eagle, the feeder airline.

The case is In re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Rakoff Tips His Hand on Upcoming Safe-Harbor Case

In footnotes to two recent rulings on other subjects, U.S. District Judge Jed Rakoff may have tipped his hand that he will rule in the next few weeks in favor of financial institutions by expanding the sweep of the so-called safe harbor protecting swaps from attack in bankruptcy cases.

Rakoff first ruled in September that the safe harbor contained in Section 546(e) of the U.S. Bankruptcy Code precludes trustee Irving Picard from suing to recover fictitious profits taken out of Bernard L. Madoff Investment Securities LLC more than two years before bankruptcy. Picard is taking the ruling up on appeal to the U.S. Court of Appeals in Manhattan, seeking reversal and the right to sue going back six years.

An affiliate of ABN Amro Bank NV persuaded Rakoff to take a lawsuit out of bankruptcy court dealing with a similar safe harbor for swaps. In a brief filed this month, the bank wants Rakoff to dismiss the suit because the money that originally emanated from Madoff came into its hands as part of a swap transaction with a so-called feeder fund. The bank argues that the safe harbor for swaps in Section 546(g) bars the suit because the money came from a swap.

Although the trustee will file his opposition papers later, the trustee has already argued that the safe harbor doesn’t apply because he’s not attempting to void the transaction between the feeder fund and the bank. Picard says the swap safe harbor doesn’t apply because he’s going after the bank as a subsequent recipient of funds fraudulently transferred from the Madoff firm to the feeder fund.

Picard’s argument is based on the notion that the recovery he seeks against the bank as a subsequent transferee is made possible by Section 550. That section isn’t one of the enumerated sections covered by the safe harbors in Section 546, the trustee says.

That’s where Rakoff’s footnotes come into play.

In substantially identical language in footnotes in two short opinions on June 25 and May 15, Rakoff said he “rejects” the argument that the safe harbor doesn’t apply just because the trustee isn’t attempting to recover from a swap party on a fraudulent transfer theory. Without citing authority, Rakoff said in his footnotes that the safe harbor applies any time the original transfer would invoke the safe harbor.

In the dispute with AMB Amro, the bank will file a reply brief on July 25. No date has been set as yet for oral argument in Rakoff’s court.

The Madoff firm began liquidating in December 2008, with the appointment of the trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009. His bankruptcy case was consolidated with the firm’s liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.

The case involving ABN Amro and swaps is part of Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 12-mc-00115, U.S. District Court, Southern District of New York (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court, Southern District of New York (Manhattan).

Kodak to Hold July 26 Hearing to Name Court for Patent Issues

When Eastman Kodak Co. holds a hearing in bankruptcy court on July 2 for approval of procedures for selling digital imaging technology, the bankruptcy judge won’t know yet whether a federal district judge will take away the right to make decisions regarding patent disputes.

When Kodak sued Apple Inc. this month for a declaration about ownership of 10 patents, Apple responded by filing a request for a federal district judge to take the dispute out of bankruptcy court. Yesterday, U.S. District Judge George B. Daniels called for a hearing on July 26 to decide if making a patent decision is beyond the competence of the bankruptcy court.

When the bankruptcy court in New York conducts the hearing on July 2, there will be objections from high-technology companies contending he doesn’t have the right to rule on issues involving technology ownership. The ruling Daniels will make after the July 26 hearing may decide the extent to which the bankruptcy court can make rulings on disputes regarding patent rights in the course of selling Kodak technology.

Companies objecting to having decisions made in bankruptcy court include Intel Corp., Ricoh Co. Ltd., Nikon Corp., Motorola Solutions Inc., and Apple.

Kodak’s $400 million in 7 percent convertible notes due 2017 traded at 2:36 p.m. on June 27 for 14.179 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Rochester, New York-based Kodak filed for Chapter 11 reorganization in January, listing $5.1 billion in assets and $6.75 billion in debt. Liabilities for borrowed money, totaling $1.6 billion, included $100 million on a first-lien revolving credit and $96 million in outstanding letters of credit. Other liabilities include $750 million in second-lien notes, $406.1 million in convertible notes, and $252.4 million in senior unsecured notes. Kodak said trade debt is $425 million.

Kodak’s case is In re Eastman Kodak Co., 12-10202, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

MF Global, Canadian Settlement Brings $60.6 Million

The trustee liquidating MF Global Inc., the defunct commodity broker, filed papers yesterday for approval of a settlement to generate $60.6 million for customer with foreign accounts.

The trustee for the Canadian affiliate was making a $43 million claim against the U.S. broker for funds held for its customers. At the same time, the U.S. broker was seeking $103.6 million which the Canadian trustee admitted were segregated for customers.

The two claims will be offset, generating $60.6 million for distribution to customers of the U.S. brokerage if the bankruptcy judge in New York approves the settlement at a July 11 hearing. For a Bloomberg story, click here.

The MF Global Holdings Ltd. parent and the commodity brokerage subsidiary went into separate bankruptcies on Oct. 31. The holding-company parent is under control a Chapter 11 trustee, while the broker is under control of a separate trustee selected by the Securities Investor Protection Corp.

The holding company’s Chapter 11 case is In re MF Global Holdings Ltd., 11-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-02790, in the same court.

No Creditors Vote Against Philadelphia Orchestra Plan

When the Philadelphia Orchestra opens tomorrow’s confirmation hearing, the ensemble will report to the judge that not a single creditor voted against approval of the Chapter 11 reorganization plan. If the judge approves the plan by signing a confirmation order, it will allow the orchestra to exit from bankruptcy begun in April 2011.

The plan is based on settlements with the musicians’ union, the musicians’ pension plan, the Pension Benefit Guaranty Corp., and the Kimmel Center, where the orchestra performs.

Donations from the orchestra’s board will cover the $5.49 million cost of the plan that extinguishes $100 million in debt. The orchestra incurred $8.9 million in professional fees and other costs while in Chapter 11.

The orchestra has almost no secured debt. For the $35.5 million claim resulting from termination of the existing musicians’ pension plan, the pension fund will receive a $1.75 million cash payment under a settlement agreement. The PBGC receives $1.3 million in installments.

General unsecured creditors are to receive 50 percent in cash on claims totaling about $555,000.

The orchestra’s Chapter 11 petition stated that assets and debt were both less than $50 million.

The case is In re The Philadelphia Orchestra Association, 11-13098, U.S. Bankruptcy Court, Eastern District of Pennsylvania (Philadelphia).

Blue Raven to Be Sold July 25 Without Formal Auction

Blue Raven Technology Inc., a provider of parts and repair services for consumer electronics and computers, will return to bankruptcy court in Boston on July 25 for authority to sell the business for $1.4 million to private-equity investor Leading Ridge Capital Partners LLC from Rockville, Maryland. Blue Raven filed for Chapter 11 protection on May 30.

Although there won’t be a formal auction before the sale-approval hearing, other prospective buyers are invited to make offers. If Leading Ridge loses out, the bankruptcy judge said he will award a $50,000 breakup fee.

Based in Wilmington, Massachusetts, Blue Raven had $17.7 million of revenue in 2011.

The petition listed assets of $2.1 million and debt totaling $8.3 million, including $950,000 in secured claims.

The case is In re Blue Raven Technology Inc., 12-14693, U.S. Bankruptcy Court, District of Massachusetts (Boston).

Northampton Generating’s Exclusivity Less Than Sought

Northampton Generating Co. LP, the owner of a 112-megawatt electric generating plant in Northampton, Pennsylvania, persuaded the bankruptcy judge again to enlarge the time within which the company has exclusive right to propose a reorganization plan.

Where Northampton wanted an enlargement of exclusivity by three months to Sept. 30, the court in Charlotte, North Carolina, only pushed the deadline out to Aug. 17.

Northampton is now a so-called merchant electric generator as a result of the termination of a power-purchase agreement with Metropolitan Edison Co. It is now part of the PJM Interconnection LLC network. The plant is fueled by waste products such as waste coal, fiber waste, and tires.

The Charlotte, North Carolina-based company defaulted on bonds in 2009. Debt includes $73.4 million owing on senior bonds issued through the Pennsylvania Economic Development Financing Authority. The Authority also issued junior bonds on which $21.8 million is owing, according to a court filing.

Filed in December, the petition lists assets and debt both in excess of $100 million. Later, the company filed official lists showing assets of $205 million and debt totaling $121.5 million, including $95.4 million in secured debt.

The case is In re Northampton Generating Co. LP, 11-33095, U.S. Bankruptcy Court, Western District of North Carolina (Charlotte).

Plum TV Sells Business, Converts Case to Chapter 7

The Chapter 11 reorganization of Plum TV Inc. was converted at the end of last week to a liquidation in Chapter 7 where a trustee was appointed. The operator of television stations in resort markets sold the business in April to Media Greenhouse LLC for $1.17 million cash and debt assumption.

The company said that the remaining $100,000 isn’t sufficient to pay the costs of the reorganization case and permit confirming a Chapter 11 plan. There are as much as $3 million in unsecured claims, according to court papers.

Plum filed under Chapter 11 on in January. The television stations were in Colorado, eastern Long Island, New York; Martha’s Vineyard and Nantucket, Massachusetts; Miami and Idaho. The Bronx, New York-based company said assets are $8.6 million, with liabilities totaling $19 million.

Revenue for 2011 was $6.4 million, producing an $8.4 million net loss, a court filing said.

The case is In re Plum TV Inc., 12-10017, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Daily Podcast

Madoff, Nortel, Apple-Kodak, Coal Mining: Bankruptcy Audio

The U.S. Supreme Court declined to hear appeals arising from the bankruptcy liquidations of Bernard L. Madoff Investment Securities LLC and Nortel Networks Inc. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle discuss how the Madoff decision is significant for the Ponzi scheme’s customers while the Nortel decision is an important precedent explaining when a government’s regulatory proceedings aren’t halted automatically by bankruptcy. The podcast continues by laying out the significance of the latest skirmish between Apple Inc. and Eastman Kodak Co. The podcast closes by using James River Coal Co. as the focal point for an analysis of the coal industry and whether there may be a string of bankruptcies in coming years. To listen, click here.


Arch Coal Downgraded by Moody’s Second Time Since May

Although Arch Coal Inc. was downgraded in early May by Moody’s Investors Service, the producer of thermal and metallurgical coal from both the Appalachians and the western U.S. received another strike yesterday from Moody’s.

The new Moody’s corporate grade of B2 is one level below the downgrade issued in May by Standard & Poor’s.

Moody’s now gives Arch’s senior unsecured debt a rating of B3.

St. Louis-based Arch faces the same problems as everyone else in the coal industry, low prices for natural gas and a warm winter.

Although Arch’s liquidity will deteriorate, Moody’s predicts cash will be “sufficient” in the next 12 to 18 months.

Arch is the second-largest U.S. coal producer.

Gas Producer Quicksilver Downgraded to B- by S&P

Quicksilver Resources Inc., a natural gas exploration and production company, was downgraded again yesterday by Standard & Poor’s despite a drop issued in early May.

The corporate rating fell another level to B- while the senior unsecured debt now has a CCC+ rating. The subordinated debt became CCC.

S&P said that “liquidity could deteriorate materially over the next 12-18 months” as a consequence of “lower natural gas liquids pricing assumptions and our lower production estimate.”

The $350 million in 7.125 percent senior subordinated notes due 2016 last traded yesterday for 79.25 cents on the dollar, to yield 14.483 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Fort Worth, Texas-based Quicksilver rose 16.3 percent yesterday to $5.06 in New York Stock Exchange composite trading.

Advance Sheets

Multiple Bankruptcies Add Only 90 Days for Tax Claims

The Internal Revenue Service can tag on only one 90-day extension under Section 507(a)(8) of the U.S. Bankruptcy Code when deciding if a tax debt is entitled to priority, U.S. District Judge Carlos Murguia ruled on June 26 in Kansas City.

The case involved individuals who had been in Chapter 7 or Chapter 13 on four occasions. Although the fourth bankruptcy culminated in a confirmed Chapter 13 plan, there was a question about whether a tax debt was entitled to priority. The bankruptcy judged decided it wasn’t, and Murguia agreed.

The case turned on Section 507(a)(8) where a tax debt has priority if it was due within three years of bankruptcy. The three-year look back is extended during a prior bankruptcy, “plus 90 days.”

The IRS contended 180 days should be added on in view of two of the prior bankruptcies.

Although other court rulings are sparse, Murguia concluded that the statute permits adding only 90 days, regardless of the number of prior bankruptcies.

The case is U.S. v. Montgomery, 11-2107, U.S. District Court, District of Kansas (Kansas City).

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