Dissident unsecured creditors of Syms Corp. laid out a theory yesterday of why the bankruptcy court can’t approve the Chapter 11 reorganization plan coming up for approval at an Aug. 29 confirmation hearing in U.S. Bankruptcy Court in Delaware.
Through mediation in June, liquidated retailers Syms and subsidiary Filene’s Basement LLC reached settlement with the two official committees representing shareholders and creditors. The plan allows existing shareholders to retain their stock while unsecured creditors of Syms are paid in full over time without interest on their $54 million in claims. The plan calls for Marcy Syms, who owns about 54.7 percent of the existing stock, to sell her holding to the company for $2.49 a share, or a total of $19.5 million.
The dissident creditors fault the plan for not paying interest on their claims from the date of bankruptcy in November until their claims are paid in full years from now. If the dissidents prevail, shareholders’ recoveries would diminish and Marcy Syms might not be permitted to receive payment for her stock so soon.
There are two prongs to the dissidents’ argument.
Around the time the bankruptcy court was approving disclosure materials, the creditors claimed they would have enough votes to defeat the plan by the class of Syms unsecured creditors. If that occurs, they previously contended rules regarding so-called cramdown don’t permit shareholders to retain a dime until their claims are paid in full with interest.
In papers filed yesterday, the creditors made no predictions about the vote that will be tallied and reported Aug. 28.
In yesterday’s filing, the shareholders contend the plan is fatally defective even if the class votes “yes” because it still violates the so-called best-interests test that’s included in bankruptcy law to protect dissident creditors in classes where the required majorities vote in favor of a plan. The best-interests test requires the company to show that dissident creditors will receive more in Chapter 11 than through a Chapter 7 liquidation.
The dissidents contend they come out better in Chapter 7 because Syms has consistently said the parent company is solvent and able to pay claims in full. The dissidents argue that the company’s own admissions mean the best interests test can’t be satisfied.
Syms can counter the argument at the Aug. 29 confirmation hearing by attempting to persuade the judge that conversion to Chapter 7 would entail higher costs and lower asset realizations, making Syms insolvent and paying creditors less than through the plan.
In case the bankruptcy judge buys into the idea that unsecured creditors are due interest, Syms reserved the right to modify the plan to provide interest in whatever amount the bankruptcy judge requires.
Objecting creditors include ASM Capital LP, CRT Special Investments LLC, Scoggin Worldwide Fund Ltd. and Spectrum Master Fund Ltd.
The plan provides that interest will only begin to accrue on unsecured creditors’ claims if they haven’t been paid full by October 2015. For other details of Syms’s plan, click here for the July 13 Bloomberg bankruptcy report.
The disclosure statement told shareholders they could expect the stock they retain in the reorganized company to be worth $1.50 to $2 a share, assuming the real estate in lower Manhattan is valued at $147 million. If the property is developed and sold four or five years later, the value may rise as much as $120 million, increasing the value of equity by $7.22 a share, the disclosure statement shows.
The Syms stock lost 48 percent of its value on July 12 when the revised disclosure statement was filed, closing that day at $4.05 in over-the counter-trading. The stock has declined since then, closing yesterday at $2.90. During bankruptcy, the stock’s closing peak was $12.65 on Dec. 12.
Syms, based in Secaucus, New Jersey, purchased Filene’s through a bankruptcy auction in June 2009 in Filene’s second Chapter 11 reorganization. At the outset of Chapter 11 case in November, there were 25 Syms stores and 21 Filene’s locations.
The stores were closed and inventory sold. Leases were terminated, leaving Syms with owned real estate.
Assets were listed in the Chapter 11 petition for $236 million, including real estate on the books for $97.7 million. Liabilities were listed at $94 million, including $31.1 million owing on a revolving credit with Bank of America NA as agent. In addition, there were $11.1 million in letters of credit outstanding on the revolver.
The case is In re Filene’s Basement LLC, 11-13511, U.S. Bankruptcy Court, District of Delaware (Wilmington).
ATP Oil Wins Interim Approval for New Secured Financing
ATP Oil & Gas Corp., a producer and developer of oil and gas wells mostly in the Gulf of Mexico, secured interim approval of secured financing at the conclusion of a hearing that ran all day yesterday and into the night.
After changes are made, U.S. Bankruptcy Judge Marvin Isgur in Houston will grant interim approval for a portion of the financing intended ultimately to include $250 million in new borrowing power plus conversion of about $365 million in pre-bankruptcy secured debt into a post-bankruptcy obligation.
For Bloomberg coverage of the hearing, click here.
ATP filed under Chapter 11 on Aug. 17 in its Houston hometown with cash down to $10 million. ATP listed assets of $3.6 billion and liabilities of $3.5 billion on the March 31 balance sheet.
The new financing is being provided some of the same lenders owed $365 million on a first-lien loan where Credit Suisse Group AG serves as agent. There is $1.5 billion on second-lien notes with Bank of New York Mellon Trust Co. as agent.
ATP’s other debt includes $35 million on convertible notes and $23.4 million owing to third parties for their shares of production revenue. Trade suppliers have claims for $147 million, ATP said in a court filing.
The second-lien notes traded today for 30 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
ATP reported a net loss of $145.1 million in the first quarter on revenue of $146.6 million. Income from operations in the quarter was $11.8 million. For 2011, the net loss was $210.5 million on revenue of $687.2 million. The year’s operating income was $152.7 million.
The case is In re ATP Oil & Gas Corp., 12-36187, U.S. Bankruptcy Court, Southern District of Texas (Houston).
Dewey Reports $16.3 Million in July Net Collections
Dewey & LeBoeuf LLP, the defunct law firm, collected $20.6 million in accounts receivable in July, bringing the total to $39.9 million since the bankruptcy began on May 28.
The firm spent $4.3 million in July, bringing net recoveries in the month to $16.3 million, according to an operating report filed yesterday with the U.S. Bankruptcy Court in New York.
Given net collections and $23.6 million already on hand, Dewey was able to pay $25.7 million to the secured lender JPMorgan Chase Bank NA during July.
The operating report doesn’t lay out unbilled fees or accounts receivable. The balance sheet shows a receivable of $16.4 million representing disbursements and expenses incurred for clients.
Dewey has two official committees, one for unsecured creditors and the other for former partners. The firm once had 1,300 lawyers before liquidation began under Chapter 11 in May.
There was secured debt of about $225 million and accounts receivable of $217.4 million at the outset of bankruptcy, the firm said. The petition listed assets of $193 million and liabilities of $245.4 million as of April 30.
The case is In re Dewey & LeBoeuf LLP, 12-12321, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Santa Ysabel Indian Casino Argues for Chapter 11 Eligibility
The American Indian-owned Santa Ysabel Resort & Casino on Lake Henshaw in North San Diego County filed papers this week arguing that the casino’s status as an unincorporated company makes it eligible for bankruptcy reorganization in Chapter 11.
The filing was in opposition to a motion by the Yavapai Apache Nation, a secured creditor, contending that the case must be dismissed because the casino is actually a tribe ineligible for bankruptcy.
The casino is owned by the Iipay Nation of Santa Ysabel, a federally recognized tribe. The tribe admitted that if the casino and the tribe are one and the same, it’s not eligible for bankruptcy because a tribe is a governmental unit that can’t be in bankruptcy.
The casino’s papers this week argue that the business is an unincorporated company that’s eligible for bankruptcy. An unincorporated company “is an enterprise of numerous people joined in a common business,” the casino said.
The casino cited cases allowing involuntary bankruptcies to be filed against unincorporated businesses. The bankruptcy court in San Diego will hold a hearing on Sept. 4 to decide whether the casino is eligible for Chapter 11 reorganization.
The casino’s argument could end up being a double-edged sword. If the casino establishes itself as an independent business entity, that fact that it’s not incorporated opens the door to arguments that individuals involved with the business have personal liability for the casino’s debt.
The U.S. Trustee filed a companion motion to dismiss the bankruptcy, also arguing that the unincorporated casino is ineligible as a government unit.
The 37,000-square-foot casino opened in 2007 with 349 slot machines, four poker tables and six table games. An accompanying hotel and resort never were built.
The facility was built with a $26 million loan which the Apaches took over as the result of a guarantee of bank debt. The Apaches also made a $7 million loan.
The Apaches say they obtained an $8.8 million judgment from a tribal court in February that was recognized in California as a foreign judgment in May. There is a separate $34.6 million judgment from an Arizona court on the bank loan, according to the Apaches.
After filing under Chapter 11 in early July, the casino listed assets of $1.5 million and debt totaling $54.8 million, including $53.1 million in secured claims.
The case is Santa Ysabel Resort & Casino, 12-09415, U.S. Bankruptcy Court, Southern District of California (San Diego).
Cliffs Clubs From the Carolinas Confirms Sale Plan
Cliffs Club & Hospitality Group Inc., the owner of eight high-end golf and tennis clubs in North Carolina and South Carolina, conducted a confirmation hearing this month and received approval of the Chapter 11 plan on Aug. 17.
Confirmation of the plan doubled as approval of a sale to Carlile Development Group. Competing bidders dropped out before a court-authorized auction. Carlile is buying the projects along with a group including SunTx Urbana GP I LLP and Arendale Holdings Corp.
In exchange for $73.5 million in secured notes, the plan gives secured lenders $64 million, paid over 20 years without interest. The lenders will receive the greater of $1 million a year or half of cash flow. The outstanding balance comes due at maturity.
Unsecured creditors with an estimated $3.9 million in claims were told in the disclosure statement to expect a 75 percent recovery. Contractors with $1.5 million in so-called mechanics liens are being paid in full without interest.
Club members are invited to join the newly reorganized club. Those who accept the offer will have a recovery between 35 percent and 75 percent. Members not accepting will have a projected recovery of 4 percent to 10 percent.
Carlile provided $7.5 million in financing for the Chapter 11 process. The petition listed assets of $175 million with debt totaling $333 million, including potential membership refund claims. Revenue in 2011 was $29 million.
Debt included the secured notes with Wells Fargo Bank NA as indenture trustee.
Affiliates owning real property for development didn’t file for bankruptcy. Among the eight clubs, six are “largely complete” while two aren’t, according to a court filing.
The case is In re Cliffs Club & Hospitality Group Inc., 12-01220, U.S. Bankruptcy Court, District of South Carolina (Spartanburg).
Benada Aluminum Has Interim OK for $6.25 Million Loan
Benada Aluminum Products LLC from Sanford, Florida, which filed a petition for Chapter 11 reorganization early this month, has interim approval for $6.25 million in loans.
The company owns a plant for casting, extruding, painting, and fabricating aluminum products such as patio screens and window frames. The current owners purchased the business in a bankruptcy sale, with loans representing the largest debts in the new bankruptcy.
Wells Fargo Bank NA is owed $7 million on a revolving credit and term loan. FLT Capital LLC, a part owner of the business, is owed $2 million on a secured obligation. There is $3.4 million owing to trade suppliers.
Benada filed formal lists showing assets of $22 million and debt totaling $11.7 million. Assets include $3.6 million in accounts receivable and $1.25 million in inventory.
The court granted interim approval for loans, where $5 million is provided by Wells Fargo and the remainder from FLT. A final financing hearing is set for Sept. 4.
The case is In re Benada Aluminum Products LLC, 12-10518, U.S. Bankruptcy Court, Middle District of Florida (Orlando).
Retailer Mark Shale Returns to Chapter 11 for Liquidation
Chicago retailer Mark Shale is back in Chapter 11 for a second time since 2009, this time to liquidate inventory in going-out-of-business sales.
Mark Shale filed for Chapter 11 reorganization in Chicago in March 2009 while operating eight high-end men’s and women’s apparel stores. The existing owners, along with others, bought the business in a bankruptcy sale. When the new bankruptcy was filed yesterday, three stores remained, one in Chicago and two in the city’s suburbs.
The new bankruptcy resulted from what the company said was a “significant decrease in sale of women’s clothing in the fall of 2010.” A lack of cash precluded buying fall inventory this year. As a result, the company negotiated an agreement before bankruptcy for Gordon Brothers Retail Partners LLC to serve as agent liquidating the inventory in GOB sales.
Assuming the bankruptcy court agrees with the arrangement, Gordon Brothers guarantees the retailer will receive 49 percent of the retail value of inventory. After Gordon Brothers recovers expenses of the sale, the guaranteed amount, and $500,000 in fees, the retailer will receive 60 percent of excess proceeds from the inventory.
The owners of the company are also the lenders, according to a court filing. They are owed $1 million on a revolving credit and $4.1 million on a secured loan agreement.
Sales for the 83-year-old company were $15.9 million in 2011. So far this year, revenue has been $6.4 million, according to a court filing.
To read about the 2009 bankruptcy filing, click here for the March 25, 2009, Bloomberg bankruptcy report.
Assets are listed at $3.2 million, with debt totaling $5.6 million, including about $4 million owing to secured lenders.
The new case is In re MS Mark Shale LLC, 12-33041, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).
Advanced Molecular Files for Sale in California
Advanced Molecular Imaging LLC filed a Chapter 11 petition on Aug. 20 in Woodland Hills, California, with plans to sell the business within four months.
Based in Northridge, California, AMI develops imaging equipment for pre-clinical research and diagnosis of disease. Another unit makes industrial radiation detections systems. The clinical imaging business is a so-called startup with “no current revenue,” according to a court filing.
The Chapter 11 petition listed more than $10 million in debt, including $3 million on a senior secured revolving credit acquired by Capital Resource Partners V LP. Capital Resource also holds most of an $8.9 million subordinated secured loan.
About $12.6 million is owing to unsecured creditors, mostly to SII NanoTechnology USA Inc.
The companies “have been undercapitalized for a while,” according to a court filing. Capital Resource is providing $1.5 million in financing to tide the company over until a sale can be completed in about four months.
The case is In re Gamma Medica-Ideas (USA) Inc., 12-17469, U.S. Bankruptcy Court, Central District of California (Woodland Hills).
New York Soybean Oil Plant Files to Halt Foreclosure
Ag Pro Ltd., the owner of a non-operating soybean oil processing plant, filed for Chapter 11 protection on Aug. 20 in Utica, New York, to halt foreclosure the next day.
The plant in Massena, New York, ceased operating in 2008. The owner has a letter of intent to sell the plant. According to a court filing, the buyer experienced delays in transferring money from India to the U.S.
The petition listed assets of $1 million and liabilities totaling $12.3 million, including $2 million owing to secured creditor HSBC Bank USA NA.
The case is Ag Pro Ltd., 12-61549, U.S. Bankruptcy Court, Northern District of New York (Utica).
Thirty-One Companies Now at Risk of Second Default
Thirty-one companies that previously defaulted at least once have a “material repeat default risk,” Fitch Ratings said in an Aug. 20 report.
Fitch judges a company at risk of another default if it sports a rating of B- or lower. Fifty companies already defaulted twice or more on debt. The record goes to Strauss Discount Auto with five Chapter 11 filings, albeit with different owners under different names.
Fitch calculates that 34 months is the average time between defaults. So-called distressed debt exchanges were responsible for 48 percent of initial defaults, Fitch said. Bankruptcy was most often the cause of second defaults.
According to Fitch, second defaults result from the failure to reduce debt or operating costs sufficiently in connection with the initial failure. A Chapter 11 filing typically brings a larger return to creditors following a second default than a liquidation in Chapter 7, Fitch said.
Allen Systems Covenant Violation Leads to Downgrades
Allen Systems Group Inc., a closely held software developer, violated loan covenants and received downgrades yesterday from Moody’s Investors Service and Standard & Poor’s. The new corporate grade from Moody’s is Caa1 while S&P’s peg is two steps lower at CCC-.
Where S&P said the company has “minimal cash balances,” Moody’s referred to “very weak liquidity.”
Moody’s said that the company took on more debt to fund eight acquisitions during the past year. Moody’s previously downgraded in May.
Based in Naples, Florida, Allen had revenue of $302 million for the year ended in June, Moody’s said. Debt includes $300 million in 10.5 percent second-lien notes due in 2016.
Windpoint’s Vertellus Demoted to Caa1 by Moody’s
Chemical maker Vertellus Specialties Inc. experienced a 24 percent decline in operating income during the first half of the year, prompting Moody’s Investors Service to issue a two-level downgrade to Caa1 yesterday.
The new Moody’s rating is one level below the ding issued in April by Standard & Poor’s. S&P was reacting to oversupply in some of the Indianapolis-based company’s products, particularly in China.
Vertellus is the largest producer of crop-protection chemicals known as pyridine and picolines. It is the second-largest maker of vitamin B-3 used for animals and humans.
The other major line of business is producing castor-oil based additives used in coatings and insect repellants. Revenue in the last year was $550 million, Moody’s said.
Vertellus is controlled by private-equity investor Wind Point Partners.
Patriot Coal Venue, Elpida, Paulson Resorts: Bankruptcy Audio
With the bankruptcy podcast back from vacation, Bloomberg Law’s Lee Pacchia asks bankruptcy columnist Bill Rochelle whether the judge in Manhattan will send the Patriot Coal Corp. reorganization to West Virginia because the company may have incorporated two subsidiaries in New York explicitly for the purpose of establishing venue for the Chapter 11 case outside of the state of principal operations. The U.S. side of the Elpida Memory Inc. Japanese bankruptcy may not end up resembling the Mexican reorganization of Vitro SAB, for reasons Rochelle explains. The podcast ends by explaining why the inability of Paulson & Co. and Winthrop Realty Trust to retain ownership of four flagship resorts doesn’t speak well for the health of the real estate market. To listen, click here.
Creditor Raises Specter of Collusive Bidding for Kodak Patents
An Eastman Kodak Co. creditor said in a letter to the U.S. Trustee that there may be collusive bidding for the bankrupt company’s portfolio of digital-imaging technology.
For the Bloomberg story, click here.
Originally, the non-public auction process was to have ended last week. Although Kodak said the slow-motion auction continues, the company also warned that it “may retain all or parts of it as a source of creditor recoveries in lieu of a sale.”
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.
JetBlue Not Interested in Merger with American Airlines
JetBlue Airways Corp. isn’t interested in merging with AMR Corp., the parent of American Airlines Inc., JetBlue Chief Executive Officer Dave Barger said in an interview at Bloomberg headquarters.
For the Bloomberg story, click here.
Brokerage Audits Consistently Found Deficient
A survey of 10 smaller auditing firms found they all performed deficient work in auditing the books of 23 brokers.
For the Bloomberg story on the report by the Public Company Accounting Oversight Board, click here.
Bloomberg Story Looks at Symphony Orchestras’ Finances
Five symphony orchestras filed for bankruptcy in recent years, including the Philadelphia Orchestra.
A Bloomberg feature story looks at challenges facing orchestras in the U.S. To read it, click here.
LightSquared Promotes Doug Smith to Chief Executive
Doug Smith, who had been the co-chief operating officer of LightSquared Inc., was promoted to chief executive officer and chairman. For the Bloomberg story, click here.
LightSquared spent $4 billion developing a wireless communications systems using earth-based and satellite technology. It filed under Chapter 11 in May.
Another Split Decision on 523(a)(19) Dischargeability
Two federal circuit courts of appeal have now ruled in split decisions that a bankrupt must have been saddled with a judgment for personally violating securities laws before the debt is nondischargeable under Section 523(a)(19) of the U.S. Bankruptcy Code.
The U.S. Court of Appeals in Denver joined an appeals court from San Francisco, which reached the same result in September 2010.
The case decided on Aug. 20 by the Denver court involved individuals successfully sued in state court for unjust enrichment by receiving payments from a Ponzi scheme where the perpetrator was convicted and went to jail.
Faced with the judgments, the individuals filed for bankruptcy, and the Oklahoma Department of Securities sued seeking a declaration that the debts weren’t dischargeable under Section 523(a)(19) as judgments for violation of state securities law.
On summary judgment, the bankruptcy court declared the debts nondischargeable, and the district court affirmed. On appeal, the 10th Circuit in Denver reversed in a 2-1 decision where the 10-page majority opinion was written by Circuit Judge Terrence L. O’Brien.
O’Brien framed the question as whether the judgment was “for violation” of securities laws. He said it wasn’t because “they never have been charged with such violation.”
For the majority, he said the “plain language of the statute” makes the judgment dischargeable, because it was for unjust enrichment from someone else’s violation of securities law.
Chief Circuit Judge Mary B. Briscoe dissented in a six-page opinion. She said that nothing in the plain language of the statute requires that the bankrupt must have committed the securities law violation. She pointed to other subsections in Section 523 where debts are nondischargeable only for actions “by the debtor.”
Briscoe also interpreted the state court judgments as finding that the bankrupts violated state securities laws.
To read about the 2011 case from the Ninth Circuit in San Francisco called Sherman v. SEC, click here for the Sept. 22, 2011, Bloomberg bankruptcy report.
The case is Oklahoma Department of Securities v. Wilcox, 10-6056, U.S. Court of Appeals for the 10th Circuit (Denver).