Claims for so-called soft dollar accounts against the brokerage unit of Lehman Brothers Holdings Inc. don’t qualify as customer claims and thus aren’t eligible for payments of as much as $500,000 each from the fund maintained by the Securities Investor Protection Corp., a bankruptcy judge ruled.
Soft dollar accounts are a creature of the so-called safe harbor established by Section 28(e) of the Securities Exchange Act of 1934. It protects a money manager by providing that there is no breach of fiduciary duty for paying a higher commission than another broker-dealer would have charged, so long as conditions are met.
Under the section, part of commissions, known as soft dollar commission credits, may be used only as the law permits. Among other things, the credits can be used to pay for research and other services provided to the customer by the broker.
Originally, there were 113 claims for soft dollar credits asserted to have status as customer claims against the Lehman broker, Lehman Brothers Inc. If they were valid customer claims, SIPC would be obliged to pay as much as $500,000 for each account even if the liquidation of the Lehman brokerage didn’t generate enough to cover the claims in that amount.
James Giddens, the trustee liquidating the Lehman brokerage under the Securities Investor Protection Act, objected to all the soft dollar claims. Originally, 24 customers disagreed with Giddens’ determination. Ultimately, about 15 went to court asking U.S. Bankruptcy Judge James M. Peck in Manhattan to decide if the soft dollar claims qualify as customer claims.
In yesterday’s 18-page opinion, Peck ruled that soft dollar claims aren’t customer claims and are only permissible as general unsecured claims. As general claims, the soft dollar claims will only be paid after customer claims are satisfied from the pool of customer property and expenses of the Lehman brokerage’s liquidation are paid. Giddens has made no distributions so far on general unsecured claims.
Peck said that they don’t qualify as customer claims because the soft dollars are prohibited from being used to purchase securities.
Peck issued his decision after briefs were filed and the parties argued in his court on May 17.
Creditors with soft dollar claims include funds affiliated with BlackRock Inc., Janus Capital Group Inc. and Oppenheimer Funds Inc.
The Lehman holding company and the brokerage subsidiary began their bankruptcies in New York in September 2008. The Chapter 11 plan for the Lehman companies other than the broker was confirmed in December and implemented in March, with a first distribution in April. The Lehman brokerage is yet to make a first distribution to non-customers.
The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding for the brokerage operation is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Futures Merchant Peregrine Enjoined by CTFC, Files Chapter 7
Peregrine Financial Group Inc., a registered futures commission merchant, filed a liquidating Chapter 7 bankruptcy petition yesterday in Chicago. A U.S. district judge appointed a receiver and froze the firm’s assets the same day.
Earlier yesterday, the U.S. Commodity Futures Trading Commission sued Peregrine, saying that more than $200 million of supposedly segregated customer funds had been “misappropriated.”
On July 9, Peregrine’s Chief Executive Officer Russell R. Wasendorf Sr. unsuccessfully attempted suicide outside a firm office in Cedar Falls, Iowa, according to the local sheriff. The bankruptcy petition was signed in his place by Russell R. Wasendorf Jr., the firm’s chief operating officer.
The bankruptcy papers consisted of nothing more than a three-page printed form petition and a two-page board resolution authorizing bankruptcy.
The resolution stated that Wasendorf Jr. was given a power of attorney on July 3 to exercise if Wasendorf Sr. became incapacitated.
Peregrine’s Chapter 7 petition stated that assets are more than $500 million while liabilities are more than $100 million. For other Bloomberg coverage, click here.
The bankruptcy case is Peregrine Financial Group Inc., 12-27488, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The CFTC case is U.S. Commodity Futures Trading Commission v. Peregrine Financial Group Inc., 12-cv-5383, U.S. District Court, Northern District of Illinois (Chicago).
Taylor Bean’s Ocala Funding Files to Sue Freddie Mac
Ocala Funding LLC, a subsidiary of previously bankrupt and fraud-ridden Taylor Bean & Whitaker Mortgage Corp., filed a Chapter 11 petition yesterday in Jacksonville, Florida, to mount a lawsuit against Federal Home Loan Mortgage Corp., known as Freddie Mac.
The bankruptcy is designed to recover $805 million in transfers by Ocala to Freddie Mac that were allegedly fraudulent conveyances.
Ocala’s principal creditors -- Deutsche Bank, BNP Paribas Mortgage Corp. and the Federal Deposit Insurance Corp. -- have an agreement to carve up the assets and future lawsuit recoveries under a liquidating Chapter 11 plan that is to be court approved in about five months.
Although wholly owned by Taylor Bean, Ocala was intended to be a bankruptcy-remote entity that would purchase mortgage loans made by Taylor Bean and in turn sell the loans to Freddie Mac. According to a court filing by Ocala, Taylor Bean’s former Chairman Lee Farkas caused Ocala to make $805 million in improper transfers to Freddie Mac to cover up a fraud he was conducting at Taylor Bean.
Last year, Farkas was sentenced to 30 years in federal prison after being convicted on 14 counts of conspiracy and bank, wire and securities fraud in what prosecutors said was a $3 billion scheme involving fake mortgage assets.
Ocala contends the $805 million in transfers were fraudulent and can be recovered in bankruptcy. Ocala also intends to sue Deloitte & Touche LLP, which was the outside auditor for what was once the largest independent mortgage originator in the U.S. The trust for Taylor Bean’s creditors already sued Deloitte.
Deutsche Bank and BNP are owed $1.75 billion while FDIC is owed $900 million, according to a filing in bankruptcy court.
In addition to the lawsuits, Ocala’s assets include real estate plus about $140 million in several accounts subject to claims. Ocala also has a $1.6 billion claim against Taylor Bean.
Taylor Bean filed for Chapter 11 protection in August 2009 and implemented a liquidating Chapter 11 plan in August 2011. Taylor Bean’s bankruptcy came three weeks after federal investigators searched the offices of the Ocala, Florida-based company, which managed an $80 billion mortgage-servicing portfolio.
The Taylor Bean petition said assets and debt both exceed $1 billion. Ocala’s petition likewise states that assets and debt are both more than $1 billion.
For details on the Taylor Bean plan, click here for the July 15, 2011, Bloomberg bankruptcy report.
The Ocala bankruptcy is In re Ocala Funding LLC, 12-04524, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville). The parent’s case is Taylor Bean & Whitaker Mortgage Corp., 09-07047, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).
Cocopah Nurseries Files Bankruptcy to Buy Water for Plants
Cocopah Nurseries of Arizona Inc., a grower of palm trees, citrus, dates and other crops, filed a Chapter 11 petition on July 9 in Yuma, Arizona, to keep the water flowing.
The nursery was at loggerheads with its two secured lenders about debt restructuring. Running out of cash to buy electricity and water needed to keep the plants alive, Cocopah filed for bankruptcy protection owing $70 million to RaboBank NA and $65 million to Wells Fargo NA.
The company blamed bankruptcy on the decline in retail and commercial construction. Sales dropped to $23 million in 2011 from $53 million in 2006.
Cocopah, based in Indio, California, has 14,000 noncontinguous acres in Arizona and 9,000 noncontiguous acres in California. The acreage contains about 250,000 palm trees under cultivation.
The company filed the Chapter 11 petition on learning that RaboBank was going to state court to seek the appointment of a receiver. Cocopah blamed some of its difficulties on disagreements between the two lenders, which have separate collateral.
The case is In re Cocopah Nurseries of Arizona Inc., 12-15292, U.S. Bankruptcy Court, District of Arizona (Yuma).
MF Global Customer Claims Worth Minimum of 93 Percent
The demand for customer claims against MF Global Inc. is so strong that at least one buyer is willing to guarantee that auctioning off a claim will bring no less than a 93 percent recovery.
CRT Capital Group LLC, which has been buying and selling customer claims against the defunct futures broker, is setting up weekly auctions. For a domestic customer of $100,000 or less, CRT will buy the claim for 93 cents on the dollar if the auction fails to bring more.
Joe Sarachek, Managing Director of Special Situations at CRT, said that the price reflects investors’ desire to make investments “with a limited downside.” MF Global claims are attracting buyers, Sarachek said, because “other markets are scary.”
For domestic customer claims of more than $100,000, Stamford, Connecticut-based CRT will pay 94.5 percent, absent a higher price at auction. For claims of more than $100,000 resulting from MF Global accounts held in the U.K. branch, the guarantee at auction is 75 percent.
The MF Global Holdings Ltd. parent and the commodity brokerage subsidiary, MF Global Inc., went into separate bankruptcies on Oct. 31. The holding-company parent is under control of 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.
Dynegy Merger Has Formal Approval by Bankruptcy Judge
Power producer Dynegy Holdings LLC was given formal authority from the bankruptcy judge yesterday to merge with parent Dynegy Inc. around the time the two companies implement their Chapter 11 reorganization plan.
The Dynegy parent filed its own Chapter 11 petition on July 6 to assist in implementing the settlement hammered out with creditors of Dynegy Holdings in the subsidiary’s bankruptcy begun in November. Through the merger and reorganization plan, creditors of Dynegy Holdings will own 99 percent of the combined companies’ stock. The Dynegy parent will be the surviving entity in the merger.
As part of the settlement already approved by the U.S. Bankruptcy Court in Poughkeepsie, New York, the Dynegy parent is to receive 1 percent of the merged companies’ stock and warrants for another 13.5 percent. The stock and warrants will go into a trust, which Dynegy intends to benefit the parent company’s existing stockholders.
The order signed by the judge yesterday sets down rules under which the Dynegy parent can change who receives property from the trust. For details about the parent’s bankruptcy, click here for the July 6 Bloomberg bankruptcy report.
The plan approval process is going ahead, now that the court has approved the explanatory disclosure statement. The confirmation hearing for approval of the plan is set for Sept. 5. The disclosure statement tells unsecured creditors of Dynegy Holdings with claims totaling about $4.2 billion why they can expect a recovery between 59 percent and 89 percent. For details on the newest version of the Dynegy plan, click here for the June 20 Bloomberg bankruptcy report.
The plan going out for approval by creditors is the latest version of a reorganization originally worked out before the Dynegy Holdings Chapter 11 filing in November. Creditor objections resulted in appointment of an examiner, who issued report saying a restructuring last year involved fraudulent transfers with actual intent to hinder and delay creditors.
Two settlements followed before there was global agreement on a new plan structure, which required the Dynegy parent to place itself into bankruptcy as well.
The Dynegy parent’s petition listed assets of $11.4 billion and liabilities of $5.1 billion. None of Dynegy’s operating subsidiaries not already in bankruptcy filed bankruptcy along with the parent.
The $1.05 billion in 8.375 percent senior unsecured notes of Dynegy Holdings LLC traded yesterday for 66.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
In addition to the Dynegy parent, the companies in Chapter 11 are Dynegy Holdings and four of its units. The subsidiaries of Dynegy Holdings aren’t being reorganized under the plan.
The existing Chapter 11 case is In re Dynegy Holdings LLC, 11-38111, U.S. Bankruptcy Court, Southern District of New York (Poughkeepsie). The new case for the parent is In re Dynegy Inc., 12-36728, same court.
Assured Guaranty Wants Deadline for Jefferson County Plan
Jefferson County, Alabama, should file a debt-adjustment plan by Sept. 28, or the Chapter 9 municipal bankruptcy begun in November should be dismissed, Assured Guaranty Municipal Corp. said in a court filing yesterday.
Assured Guaranty, which guaranteed some of the county’s sewer bonds, said the county has “not taken any concrete steps toward proposing a plan” since the Chapter 9 filing eight months ago. The bond insurer said there have been no negotiations with creditors and no term sheet circulated.
The county is waiting for the state legislature to allow it to raise taxes, although the legislature doesn’t meet again until February after failing to authorize new revenue in the session this year, Assured Guaranty said in the court filing.
A receiver was proposing a 25 percent sewer rate increase. Since he was ousted by the bankruptcy filing, the county has taken no steps to raise rates other than to plan on holding hearings to discuss procedures for raising rates, Assured Guaranty argued.
Other bankruptcy judges have set deadlines for municipalities to file plans, Assured Guaranty said. The proper remedy for failure to file a plan on time is dismissal of the case, the insurer said. For other Bloomberg coverage, click here.
Jefferson County began the country’s all-time largest Chapter 9 municipal bankruptcy in November, saying long-term debt is $4.23 billion, including about $3.1 billion in defaulted sewer debt where the debt holders can look only to the sewer system for payment.
The Chapter 9 case is In re Jefferson County, Alabama, 11-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham). The lawsuit over control of the sewers and revenue is Bank of New York Mellon v. Jefferson County, Alabama (In re Jefferson County, Alabama), 12-00016, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
Kodak Retirees Fight Proposal to End Health Benefits
Eastman Kodak Co. retirees started a lawsuit so the bankruptcy court can decide whether the company has the unilateral right to end unvested retiree health benefits.
Kodak filed for Chapter 11 reorganization in January and submitted papers in February to end health benefits for former employees who retired after 1991. The company contended that it had the unilateral right to terminate the benefits because they were voluntary and not vested.
When several employees objected, the bankruptcy judge called for a separate official committee to represent the 56,000 retirees. In the lawsuit begun on July 9, the committee asked the U.S. Bankruptcy Court in Manhattan to decide if the company must abide by the process in the Bankruptcy Code for terminating retiree health benefits, whether vested or not.
According to the committee, Kodak has said throughout that it intends to terminate retiree health benefits, even though it withdrew the request filed in February to end the benefits immediately.
The dispute with retirees comes amid Kodak’s program to sell digital-imaging technology by August.
Kodak’s $400 million in 7 percent convertible notes due in 2017 traded yesterday for 17.3 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Kodak, based in Rochester, New York, 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. Trade debt was $425 million.
The lawsuit in bankruptcy court with retirees is Official Committee of Retired Employees (In re Eastman Kodak Co.), 12-01747, U.S. Bankruptcy Court, Southern District of New York (Manhattan). Kodak’s Chapter 11 case is In re Eastman Kodak Co., 12-10202, same court.
San Bernardino Votes to File Chapter 9 Municipal Bankruptcy
The San Bernardino, California, city council voted yesterday to authorize a Chapter 9 municipal bankruptcy filing. The city manager said the city, population 209,000, can’t make an Aug. 15 payroll for municipal workers.
The city has a $45 million budget shortfall.
State law requires 60 days of mediation with creditors before a municipality files in Chapter 9, absent financial emergency. It’s unclear whether the city will attempt mediation.
For Bloomberg coverage, click here.
Two California cities began municipal bankruptcies in the past two weeks. Stockton filed its petition on June 28, followed by Mammoth Lakes on July 3.
Patriot Wins Interim Loan, May Stick Sellers with Costs
Patriot Coal Corp. filed for bankruptcy reorganization on July 9 and was given interim approval yesterday to borrow $677 million from what ultimately is to be an $802 million credit for financing the Chapter 11 case.
The loan was originally designed to replace a $377 million existing debt and provide $425 million in additional borrowing power.
The bankruptcy may end up imposing expenses on Peabody Energy Corp. and Arch Coal Inc. that Patriot was supposed to shoulder in purchasing businesses from them.
For Bloomberg coverage, click here and here.
Patriot is one of the largest coal producers in the U.S. It listed assets of $3.57 billion and debt of $3.07 billion as of May 31.
The case is In re Patriot Coal Corp., 12-12900, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
AMR Shops the Airline, Reaches Agreement with Mechanics
AMR Corp., the parent of American Airlines Inc., told its workers yesterday that the company will begin to evaluate mergers and other restructuring options.
The statement may be an implementation of an agreement with the official creditors’ committee under which the company committed to undertake a “complete a fair, balanced, and transparent strategic alternatives assessment.”
The airline reached an agreement with the union representing mechanics and stock clerks. Only the flight attendants’ union is yet to agree on concessions.
For the Bloomberg stories, click here and here.
AMR, based at the airport midway between Dallas and Fort Worth, Texas, 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).
Jefferson County, Indian Casino, Tax Returns: Bankruptcy Audio
Jefferson County, Alabama, in effect gave itself more time to decide whether to appeal a decision by the bankruptcy judge cutting off its ability to divert sewer revenue away from bondholders, as Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle discuss on their podcast. The Indian-owned Santa Ysabel Resort & Casino near San Diego may face a challenge to its right to bankruptcy reorganization, for reasons Rochelle explains. The podcast ends with discussion of two important new bankruptcy decisions. One counsels those contemplating bankruptcy to ensure tax returns are filed on time. The second finds a loophole in the automatic stay permitting lawsuits blocking trademark infringement to proceed. To listen, click here.