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ResCap, San Bernardino, NewPage, Madoff: Bankruptcy

Residential Capital LLC can’t use the pending examiner’s report to justify a nine-month expansion of the exclusive right to propose a reorganization plan, Aurelius Capital Management LP argued in papers filed yesterday in bankruptcy court.

Owning 8 percent of the 9.625 percent junior secured notes due in 2015, Aurelius calls itself the third-largest holder of the secured notes. Aurelius contends that three more months of so-called exclusivity is sufficient. A bankruptcy judge in Manhattan will decide how much is too much at a Sept. 11 hearing.

ResCap filed under Chapter 11 in May, having already negotiated a reorganization plan that would give non-bankrupt parent Ally Financial Inc. a release of all claims. Aurelius calculates that Ally is willing to pay $950 million for freedom from claims that it has liability for selling bonds secured by defective home mortgages.

ResCap wants nine more months of exclusivity based on the bankruptcy judge’s decision to bar creditors from voting on a reorganization plan until after an examiner completes his report in February.

Aurelius contends that ResCap’s request for nine months of exclusivity “incorrectly presupposes that their Chapter 11 plan must release Ally.” The bankruptcy judge should force ResCap to negotiate with creditors on a plan not entailing an immediate release for Ally, Aurelius said.

Aurelius said it doesn’t want “Ally to hold hostage the large amount of cash that soon will be available for distribution.”

To facilitate immediate talks on a plan, Aurelius also urged the bankruptcy judge to eliminate a provision in the pre-bankruptcy agreement that prevents major creditors from negotiating with one another on an alternative plan. Although many creditors aren’t bound by the agreement, the inability to negotiate with the largest claim holders makes plan discussion fruitless at this time, according to Aurelius.

ResCap is the bankrupt mortgage-servicing subsidiary of non-bankrupt Ally. In June, the bankruptcy court scheduled auctions for Oct. 23 where Fortress Investment Group LLC will make the first bid for the mortgage-servicing business. Berkshire Hathaway Inc. is to be the stalking horse for the remaining portfolio of mortgages. A hearing to approve the sales is set for Nov. 5.

The $473.4 million of ResCap senior unsecured notes due in April 2013 traded yesterday for 24.375 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 in 2015 traded for 98 cents, Trace reported.

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


San Bernardino Says Emergency Justified Bankruptcy

San Bernardino, California, explained to the bankruptcy court why the city was entitled to file municipal bankruptcy without undergoing mediation as required by state law.

The city provided details to U.S. Bankruptcy Judge Meredith A. Jury in Riverside, California, about the Aug. 1 Chapter 9 bankruptcy filing on an “emergency basis.” Jury required the city to lay out its case for Chapter 9 eligibility in preparation for a trial to decide if San Bernardino can remain in bankruptcy court.

The city said it only learned in “late June” that the general fund had a negative balance of $18.2 million coupled with a projected $45.8 million deficit for the fiscal year beginning July 1. Having depleted the general fund to cover prior years’ deficits, the city said it would have been unable to cover payroll within two months absent the bankruptcy filing.

The city said in its Aug. 31 court filings that it was already not paying debts when they came due “so that it could make the August payroll.”

Federal bankruptcy law and California state law both require a municipality to negotiate with creditors before filing bankruptcy. San Bernardino said negotiations were “impracticable” because there are so many creditors and there was so little time to talk before missing payroll.

The city ascribed financial problems to several sources. For one, so-called Proposition 13 precluded the city from raising taxes. The recession cut property tax and sales tax revenue by as much as $16 million annually. Retirement costs almost tripled since 2001 for public-safety workers and more than tripled for everyone else.

The city contends it’s insolvent because it was unable to pay debts when they mature. The city also said it has a $143.3 million book value deficit in pension liabilities provided by California Public Employees’ Retirement System. The market value deficit with Calpers is $319.5 million, the city said.

The firefighters’ union is among creditor groups that may challenge the city’s right to bankruptcy relief. Jury directed opposing creditors to file their papers by Oct. 24 in advance of a status conference on Nov. 5. There also will be a Sept. 21 hearing to resolve disputes if creditors contend the city failed to turn over relevant documents and information.

Unlike a Chapter 11 reorganization for companies, Chapter 9 requires the judge to make a threshold determination of eligibility.

San Bernardino filed for Chapter 9 debt adjustment on Aug. 1, making it the third California city to have sought bankruptcy protection in less than five weeks.

The case is In re City of San Bernardino, California, 12-28006, U.S. Bankruptcy Court, Central District California (Riverside).

NewPage Seeks More Exclusivity as Creditors Mediate

NewPage Corp., stuck between conflicting demands from secured and unsecured creditors, is seeking a third expansion of the exclusive right to propose a Chapter 11 plan.

The paper maker and creditors will no longer be distracted with a buyout offer from Verso Paper Corp., the second-largest coated-paper maker in the U.S.

NewPage filed a plan last month that satisfied neither the secured nor the unsecured faction. The bankruptcy judge responded by appointing a mediator. Mediation was scheduled to begin yesterday.

The company said in a court filing last week that arriving at a “consensual plan” will be “no easy task.”

There will be an Oct. 16 hearing on the so-called exclusivity motion. If approved by the U.S. bankruptcy judge in Delaware, the deadline will be pushed out by four months to Jan. 2.

Verso said yesterday that it will no longer attempt to negotiate an acquisition with NewPage and its creditors. In early July, NewPage and first-lien lenders rebuffed Verso’s $1.43 billion offer. For details on Verso’s offer, click here for the July 3 Bloomberg bankruptcy report.

The plan NewPage filed in August contains an option under which there would be settlement of claims by the unsecured creditors’ committee challenging the validity of liens held by first-lien lenders. Alternatively, the plan would forgo settlement, allowing a lawsuit on lien validity to continue after the company exits Chapter 11.

NewPage has consistently said that unsecured creditors are “hopelessly out of the money” and there is no theory under which success in a suit would bring them a dividend under a Chapter 11 plan. For a rundown on the company’s proposed plan, click here for the Aug. 14 Bloomberg bankruptcy report.

The official committee contends that the lenders financed an acquisition in 2007 and a refinancing two years later that included fraudulent transfers. For details on the creditors’ claims, click here for the May 9 Bloomberg bankruptcy report.

NewPage, 80 percent-owned by Cerberus Capital Management LP, listed assets of $3.4 billion and debt totaling $4.2 billion in the Chapter 11 reorganization begun in September. Liabilities included $232 million on a revolving credit plus $1.77 billion on 11.375 percent senior secured first-lien notes.

Second-lien obligations include $802 million in 10 percent secured notes and $225 million in floating-rate notes. In addition to $200 million in 12 percent senior unsecured notes, $498 million is owing on two issues of floating-rate pay-in-kind notes.

NewPage, based in Miamisburg, Ohio, has 16 paper-making machines operating in seven plants in the U.S. and Nova Scotia. The Canadian affiliate filed for reorganization in Nova Scotia. The company reported a net loss of $229 million in the first half of 2011 on revenue of $1.79 billion, following a $674 million net loss in 2010 on revenue of $3.6 billion.

The case is In re NewPage Corp., 11-12804, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Madoff Suit ‘Fallacious,’ Schneiderman Argues

New York Attorney General Eric Schneiderman filed papers explaining why a U.S. district court is the proper court to decide whether the trustee for Bernard L. Madoff Investment Securities LLC can halt a $410 million settlement with Madoff investor J. Ezra Merkin.

Madoff trustee Irving Picard sued Schneiderman in bankruptcy court on Aug. 1 contending that New York State’s top lawyer is recovering on claims that belong to all Madoff customers and that only the trustee can pursue. Schneiderman and Picard reached an interim agreement where the attorney general committed to file papers last week to remove the lawsuit to federal district court.

Reduced to fundamentals, Picard contends that money Merkin took out of the Madoff firm represents money stolen from all customers and should be paid to all victims of the Ponzi scheme. Schneiderman said Picard’s theory is “fallacious.” He argued that most of the settlement should go to Merkin’s own clients, who weren’t customers of the Madoff firm and won’t receive distributions authorized by the bankruptcy court.

Schneiderman also agreed that he won’t take any steps to carry out the settlement or transfer any of the $410 million while the dispute over venue percolates. In return, Picard agreed not to go ahead with a hearing for a preliminary injunction preventing Schneiderman from completing the settlement. For other Bloomberg coverage, 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 lawsuit with Schneiderman is Picard v. Schneiderman, 12-01778, U.S. Bankruptcy 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).

SEC Appeals Denial of SIPC Funds for Stanford Victims

The U.S. Securities and Exchange Commission is appealing a ruling from early July that investors defrauded in the R. Allen Stanford Ponzi scheme aren’t entitled to have their claims paid by the Securities Investor Protection Corp.

The SEC sued in December, asking a U.S. district judge in Washington to force SIPC to take over the liquidation of Stanford’s brokerage firm, Stanford Group Co. Had the SEC won, SIPC would have been required to cover customer’s claim for as much as $500,000 each.

U.S. District Judge Robert L. Wilkins ruled against the SEC on July 3. The SEC appealed Aug. 31. Unless the SEC wins on appeal to the U.S. Court of Appeals in Washington, investors in the $7 billion fraud will be repaid from recoveries in a receivership pending in a federal court in Texas.

For a discussion of the July opinion explaining why customers have no protection from the SIPC fund, click here for the July 5 Bloomberg bankruptcy report.

Stanford was sentenced in June to a 110-year prison sentence.

The case is Securities and Exchange Commission v. Securities Investor Protection Corp., 11-mc-00678, U.S. District Court, District of Columbia (Washington).

Hostess Reports $15.4 Million July Operating Loss

Hostess Brands Inc. reported an operating loss of $15.4 million for the four weeks ended July 28. Net revenue in the period was $174.8 million.

The baker of Wonder bread generated a gross profit of $85.2 million, according to the operating report filed Aug. 31 with the U.S. Bankruptcy Court in White Plains, New York. The loss before interest, taxes, depreciation and amortization was $8.7 million.

Net loss for the month was $17.6 million. Contributing to the loss were $4.1 million in reorganization costs and $2.5 million in depreciation and amortization.

Hostess’s union workers are voting on contracts with 8 percent in concessions. Workers have been told that rejecting the contracts would lead to the liquidation of Hostess and the loss of jobs.

For details on the offer to the unions, click here and here for the Aug. 21 and Aug. 24 Bloomberg bankruptcy reports.

Hostess filed under Chapter 11 for a second time in January, listing assets of $982 million against liabilities totaling $1.43 billion. Brand names included Wonder, Hostess, Merita, Dolly Madison, Drake’s and Butternut. The Irving, Texas-based company has 36 bakeries, 565 distribution centers and 570 outlets.

The new case is In re Hostess Brands Inc., 12-22052, U.S. Bankruptcy Court, Southern District of New York (White Plains). The prior bankruptcy was In re Interstate Bakeries Corp., 04-45814, U.S. Bankruptcy Court, Western District of Missouri (Kansas City).

Xanadoo Subsidiaries File Plan Along With Disclosures

Bankrupt subsidiaries of Xanadoo Co. filed a revised reorganization plan bearing little resemblance to the prediction the company made early this year that all secured and unsecured creditors would be paid in full, with interest.

The accompanying disclosure statement, also filed Aug. 31, tells unsecured creditors why they will receive nothing under the plan. Sales of the frequency spectrum didn’t attract outside bidders at hoped-for prices.

Rhino Communications Inc. paid $3 million for some licenses in the 2.5-gigahertz spectrum. Secured lender Beach Point Capital Management LP last month bought assets in the 700-megahertz spectrum in exchange for $30 million in debt. The lenders were the so-called stalking horse for the Aug. 20 auction.

The assets included 23 licenses in the 700-megahertz frequency band that were purchased in 2000 and 2001 for $96 million. Four buyers also paid a total of $614,000 for licenses leased in the 2.5-gigahertz spectrum that weren’t purchased by Rhino.

The secured lender will receive proceeds under a settlement negotiated at the time of the sale of the 700-megahertz assets. After payment of priority claims that must be paid in full, nothing will remain for unsecured creditors.

The plan will give stock of the reorganized companies to the parent Xanadoo in exchange for loans made to support the Chapter 11 effort.

The Chapter 11 plan the companies filed in February was based on a prediction the sale of licenses in the 700-megahertz spectrum would pay all secured and unsecured creditors in full, with interest. For details on the original plan filed in February, click here for the Feb. 9 Bloomberg bankruptcy report.

The Chapter 11 filing in June 2011 followed the maturity in May 2011 of almost $60 million in secured notes owing to Beach Point.

The Bala Cynwyd, Pennsylvania-based companies previously said their total current liabilities were $66.3 million. The parent isn’t in Chapter 11. One of the petitions says assets and debt both exceed $100 million.

The case is In re Pegasus Rural Broadband LLC, 11-11772, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Solyndra Modifies Disclosures with Summary of Tax Losses

Objections from the U.S. Energy Department and the Internal Revenue Service prompted Solyndra LLC, the liquidating solar panel maker, to modify disclosure materials by adding a few paragraphs summarizing tax losses that might be utilized in future years by the reorganized company.

The changes were disclosed in a filing yesterday with the U.S. Bankruptcy Court in Delaware in anticipation of the Sept. 7 hearing for approval of disclosure materials explaining the company’s Chapter 11 plan. Once the disclosure statement receives the court’s imprimatur, creditors can begin voting on the plan.

Solyndra said that net operating tax-loss carryforwards will range between $875 million and $975 million when the company emerges from reorganization. To utilize the tax losses in offsetting future income, the company’s owners will be required to acquire business that generate profits. As yet, the prospective owners haven’t identified businesses to be combined with Solyndra.

Assuming net income in future years is as much as $975 million before the ability to use tax losses expire, and also assuming a 35 percent federal tax rate, Solyndra’s revised disclosure statement says the owners will be able to save $306 million to $341 million in taxes.

Objecting to the disclosure statement in August, the government said that plan sponsors Argonaut Ventures I LLC and Madrone Partners LP would be able to use the losses “to avoid hundreds of millions of dollars in future income taxes that they would owe on business ventures wholly unrelated” to Solyndra. The government said the two plan sponsors are existing shareholders.

Assuming shortcomings in the disclosure statement have been remedied, it remains to be seen whether the government will object to approval of the plan by contending it’s primarily meant to avoid taxes. Should the government raise the confirmation objection, Solyndra might respond by saying that the plan complies with IRS regulations.

The Energy Department has a claim for $528 million resulting from a guarantee of debt.

Solyndra filed a liquidating Chapter 11 plan at the end of July. The revised disclosure statement shows unsecured creditors with claims totaling as much as $135 million recovering 2.2 percent to 3.3 percent. Unsecured creditors with $27 million in claims against the holding company are projected to have 3 percent dividend. For details on the plan, click here for the Aug. 8 Bloomberg bankruptcy report.

The company, based in Fremont, California, filed definitive lists showing property with a claimed value of $854.1 million against $867.1 million in debt. Liabilities include $783.8 million in secured claims and $74.1 million of unsecured debt.

In addition to a $535 million government-guaranteed loan, financing came from $709 million in eight issues of preferred stock, plus $179 million in convertible notes.

The case is In re Solyndra LLC, 11-12799, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Peregrine Trustee Sticks by $20,000 Raise for Lawyer

The trustee for commodity broker Peregrine Financial Group Inc. filed more papers yesterday supporting his proposal to give a $20,000 raise to inside General Counsel Rebecca Wing, increasing her salary to $400,000. The bankruptcy judge in Chicago will hold a hearing today to consider the request.

Responding to the trustee’s most recent request for authority to continue operating the business, the bankruptcy judge bowed to objection from some creditors and gave trustee Ira Bodenstein an opportunity to proffer additional support for his proposal to raise Wing’s salary.

In a court filing yesterday, the trustee said Wing’s salary was on track to exceed $400,000 this year until the scandal surfaced and Peregrine went into liquidation. The trustee said Wing already turned down an offer to become a partner at a Chicago law firm.

Trustee Bodenstein called Wing “extremely valuable” in the liquidation and someone who has “important knowledge” about lawsuits he plans on filing.

Wing had been Peregrine’s general counsel since 1997. The papers filed yesterday didn’t say anything about what Wing knew concerning the fraud.

The U.S. Commodity Futures Trading Commission started a receivership on July 10 in U.S. District Court in Chicago, where the judge appointed a receiver and froze the assets the same day. The company itself filed a liquidating Chapter 7 petition later that day, leading to Bodenstein’s appointment.

The fraud surfaced when Russell R. Wasendorf Sr., the founder and former chief executive officer, unsuccessfully attempted suicide on July 9. He left a note disclosing the fraud, according to a Federal Bureau of Investigation affidavit. The CFTC alleged that more than $200 million in supposedly segregated customer funds was misappropriated.

On indictment in August, Wasendorf didn’t object to being held without bail. He pleaded not guilty.

The criminal case is U.S. v. Wasendorf, 12-cr-2021, U.S. District Court, Northern District Iowa (Eastern Waterloo). The bankruptcy case is Peregrine Financial Group Inc., 12-27488, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The CFTC receivership 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).

Judge Allows AMR to Impose Contract Concessions on Pilots

U.S. Bankruptcy Judge Sean Lane was loaded and ready for bear when the pilots’ union from American Airlines Inc. appeared in court yesterday urging him to reject the company’s attempt to impose $370 million in annual contract savings on cockpit crews.

Alternatively, the union wanted Lane to recommence the lengthy trial process. After arguments from lawyers concluded, Lane ruled in favor of AMR Corp., the airline’s parent. Lane read his lengthy opinion into the record, complete with citations to case-law precedent.

Eight of AMR’s nine unions voted to accept the company’s offer, which included 17 percent in contract concessions. The pilots voted down that offer, forcing AMR to return to court seeking 20 percent in concessions. AMR had said it would take lower concessions only in return for “labor peace.”

By early today, an order formally allowing changes in the pilots’ contract wasn’t yet the court docket. For Bloomberg coverage of yesterday’s hearing, click 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).

Watch List

Reader’s Digest Demoted to CCC- on Covenant Violation

Reader’s Digest Association received a second downgrade in five weeks from Standard & Poor’s after the publisher and direct marketer said there may be a loan covenant violation in the company’s future.

S&P lowered the corporate rating by two spaces to CCC-. The senior secured notes went to CC, coupled with a guess the holders won’t recover more than 30 percent following a covenant default.

The new S&P grade is two levels lower than the downgrade issued in mid-August by Moody’s Investors Service.

S&P referred to the company’s “declining businesses and ongoing restructuring requirements,” with adjusted sales down 18.7 percent in the June quarter.

The $522.6 million in secured floating-rate notes due in 2017 last traded on Aug. 16 for 62 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Reader’s Digest emerged from Chapter 11 reorganization in February 2010. Bankruptcy reduced funded debt by 75 percent while providing a maximum 63 percent recovery to first-lien lenders owed $1.65 billion. They received a new $300 million second-lien loan and all of the new stock.

General unsecured creditors were predicted to have a maximum 3.6 percent recovery by spreading $4 million in cash among claims totaling as much as $120 million. For details on Reader’s Digest plan, click here for the Nov. 25, 2009, Bloomberg bankruptcy report.

Daily Podcast

Kodak Losses, Jefferson County, Student Loans: Bankruptcy Audio

Eastman Kodak Co.’s cash declined $72 million in July, leading Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle to ask whether potential buyers of the digital-imaging portfolio are holding out, hoping the erosion of cash will compel Kodak to accept lower prices for intellectual property. The bankruptcy judge overseeing the municipal bankruptcy of Jefferson County, Alabama, will be deciding two unresolved questions under Chapter 9 that Rochelle describes. Rochelle wraps up the podcast talking about a new decision from the U.S. Court of Appeals in Manhattan finding debt collectors violated federal law in stating that student loans can’t be shed in bankruptcy. To listen, click here.

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