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K-V, Kodak, Madoff, Hostess, LightSquared: Bankruptcy

Three senior noteholders of K-V Pharmaceutical Co. have the power to control the direction of the Chapter 11 reorganization that began on Aug. 4 in New York.

Silver Point Capital LP, Whitebox Advisors LLC and Pioneer Investment Management Inc. among themselves own $152 million of the $225 million in senior secured notes, according to a court filing by their lawyers on Sept. 14.

Approval of a reorganization plan will require that two-thirds in amount of senior noteholders vote “yes.” The three investors by themselves have 67.6 percent of the debt, or enough to assure that the class accepts a plan assuming half of holders by number agree.

The three investors also own $8.9 million of the convertible subordinated notes, according to the court filing. The three noteholders previously said they held at least a majority of the senior notes.

K-V received final authorization from the bankruptcy court at a Sept. 14 hearing to use cash representing collateral for $225 million in senior notes. At the outset of bankruptcy, K-V had $40.1 million in cash, including $8.7 million in restricted cash, according to court papers.

The so-called cash collateral order gives the creditors’ committee 75 days to lodge an objection to the validity of secured creditors’ liens.

K-V, a St. Louis-based provider of branded pharmaceuticals, listed assets of $236.6 million against debt totaling $728 million. It ceased manufacturing and distributing nearly all drugs in January 2009 after discovery that some tablets were oversized. The company’s main business now is the sale of Makena, a drug reducing the risk of premature birth.

Liabilities include $455.6 million in long-term debt, including $225 million on the senior secured notes due 2015. The first-lien notes traded on Aug. 8 for 31 cents on the dollar, a 36 percent decline since July 11, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

There is $200 million owing on 2.5 percent contingent convertible subordinated notes due 2033. The notes traded on Aug. 29 for 1.9 cents on the dollar, a 47 percent decline since Aug. 13, Trace said. K-V owes $30 million on a mortgage loan.

Hologic Inc. sold the Makena business to K-V in 2008 and is owed $95 million plus royalties. Hologic has a lien on the right to distribute the product.

The case is In re K-V Discovery Solutions Inc., 12-13346, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Updates

Bakery Workers Turn Down Hostess Contract Concessions

Teamsters union members at Hostess Brands Inc. voted to accept a new contract with 8 percent in concessions while bakery workers rejected the offer, Chief Executive Officer Gregory F. Rayburn said.

Hostess previously said it would liquidate unless all of its unions accepted the concessions. The company will file papers by Sept. 19 reinstituting procedures to have the bankruptcy judge in White Plains, New York, impose the contract on bakery workers at an Oct. 3 hearing, Rayburn said.

The bakery union “incorrectly informed members that a white knight would step in to buy the company and save their jobs.” Rayburn said Sept. 14 in an interview. “There is no white knight.”

The Teamsters didn’t advise members how to vote on the contract, Rayburn said. Each union represents about 7,000 workers, he said. For details on Hostess’s offer, click here and here for the Aug. 21 and 24 Bloomberg bankruptcy reports.

Hostess, based in Irving, Texas, filed under Chapter 11 for a second time in January, listing assets of $982 million and liabilities totaling $1.43 billion. Brand names included Wonder, Hostess, Merita, Dolly Madison, Drake’s and Butternut.

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).

Dewey’s Leaders Seek Changes in Settlement Proposal

The top three former executives at Dewey & LeBoeuf LLP, the defunct law firm, filed objections to aspects of the proposed settlements with about 400 partners designed to bring in $71 million.

Steven Davis, the former chairman; Stephen DiCarmine, the former executive director, and Joel Sanders, the ex-chief financial officer, said last week that it’s improper that releases under the settlements end up making them solely liable for the firm’s failure.

The law doesn’t permit the settlements to eliminate their rights to have liability for only their “proportionate share” of damages, the three ex-executives said in a filing in U.S. Bankruptcy Court in Manhattan. They also object to making secret the identities of the settling partners, saying they need to know who settled in preparing their defenses.

The firm’s former leaders also want the bankruptcy judge to strike a provision that would prevent settling partners from helping them fight lawsuits. The settlements come up for approval at a Sept. 20 hearing.

Several former partners have a motion scheduled for hearing that day asking the judge to appoint a Chapter 11 trustee. The official committee representing partners instead advocates having an examiner perform an investigation before settlements are approved.

Dewey once had 1,300 lawyers before liquidation began under Chapter 11 in May. 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 New York (Manhattan).

LightSquared Lenders Seek Permission to Sue Harbinger

Sept. 17 (Bloomberg) -- LightSquared Inc. received a faulty $263.8 million loan last year, according to papers filed by holders of $1.08 billion in secured debt in LightSquared LP.

The July 2011 loan should be recharacterized as an equity investment by Harbinger Capital Partners LLC, which contributed $183.8 million of the total, the so-called LP lenders said. Affiliates committed fraudulent transfers when they guaranteed the loan without receiving anything of value in return, the lenders contend.

The LP lenders made the filing on Sept. 15 to beat a Sept. 28 deadline for challenging the validity of secured claims. The lenders arranged a Sept. 26 hearing to ask the U.S. Bankruptcy Court in Manhattan for permission to sue Harbinger and its co-lender, UBS AG Stamford Branch.

The loan, unsecured when it was made, was given security interests in late August 2011, the LP lenders said. The almost two-month delay in giving liens amounted a so-called preference the bankruptcy court can set aside, they said.

The transactions “diverted massive value” from other creditors, the lenders said.

LightSquared, based in Reston, Virginia, filed for bankruptcy in May after the Federal Communications Commission denied permission to build out the company’s wireless communications system on concern it would interfere with reception by global positioning devices.

LightSquared listed assets of $4.48 billion and liabilities totaling $2.29 billion. Philip Falcone’s Harbinger acquired LightSquared in March 2010 for $1.05 billion in cash.

The case is In re LightSquared Inc., 12-12080, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Kodak Says It May Retain Technology Rather Than Sell

Eastman Kodak Co. won’t be selling digital imaging technology this month. The company said in a Sept. 14 court filing that it’s “exploring alternatives,” including retention of the patents to generate licensing revenue for payment of creditor claims.

The company told creditors in the filing that “it may not reach acceptable terms with parties via the auction process.”

The bankruptcy court in New York had approved sale procedures that were to have culminated in an Aug. 20 hearing to approve sale. Rather than conduct an open auction on a specified day with bids submitted one after another, Kodak believed the price would be higher by requiring the submission of bids and negotiating privately with potential purchasers until arriving at the highest bid in consultation with creditors.

Kodak pushed back the sale-approval hearing three times, most recently to Sept. 19. If an acceptable offer is found, Kodak said it will file a new set of papers in bankruptcy court setting up a to approve sale.

For other Bloomberg coverage, click here.

Kodak’s $400 million in 7 percent convertible notes due in 2017, which sold for 21.055 cents on the dollar on Aug. 9, traded at 10:34 a.m. on Sept. 14 for 13.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The price decline occurred after Kodak announced the first postponement of the technology sale.

Based in Rochester, New York, 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. Trade debt was $425 million.

Kodak’s Chapter 11 case is In re Eastman Kodak Co., 12-10202, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Madoff Trustee Trying to Persuade Rakoff to Change His Mind

The trustee liquidating Bernard L. Madoff Investment Securities LLC filed a 39-page brief seeking to persuade U.S. District Judge Jed Rakoff not to dismiss another 16 lawsuits on grounds where Rakoff previously ruled that suits don’t hold water.

In a suit against HSBC Holdings Plc, Rakoff ruled last year that Madoff trustee Irving Picard can’t bring cases based on common law in the face of a defense known as in pari delicto rule. Rakoff also ruled that the federal Securities Litigation Uniform Standards Act bars some of the claims Picard filed against customers who allegedly received stolen property.

The HSBC appeal is pending in the U.S. Court of Appeals in Manhattan. The briefs have been filed.

Picard’s papers on Sept. 14 argued Rakoff was wrong in his earlier dismissal of similar suits. The defendants in the suits will file another brief on Oct. 5. The dispute is scheduled for hearing in Rakoff’s court on Oct. 15.

Rakoff previously said that the defendants believe it makes sense to wait for a ruling from the Court of Appeals before deciding whether to dismiss the additional suits.

Picard has several appeals pending in the Court of Appeals. Among them, one seeks to revive $10 billion in lawsuits against 635 customers where Rakoff ruled that Picard can sue to recover stolen money only going back two years before bankruptcy, not six.

From 1,000 lawsuits Picard filed, Rakoff’s rulings have meant that the trustee would lose on $11.1 billion in claims against customers. Rakoff left Picard the ability to sue for two-year profits totaling about $8 billion.

Despite the adverse rulings, more than $11 billion has been collected from settlements, recoveries by the trustee, and forfeitures to the U.S. government. Customer claims aggregate about $17 billion.

Picard announced last week that customers will be receiving a distribution of an additional 33.5 percent of their approved claims on Sept. 21. The new distribution will bring customers’ recovery to 38.1 percent.

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 dispute over common claims is part of Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 12-mc-00115, U.S. District Court, Southern District 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).

AMR Fees of $48.2 Million Negotiated Down by 3 Percent

At the AMR Corp. hearing in bankruptcy court on Sept. 20, 19 professional firms will be asking the bankruptcy judge in New York to approve $47 million in fees for four months of work spanning the period from Nov. 29 when the case began through the end of March.

The fee examiner appointed by the bankruptcy court reviewed the fee requests and negotiated 3 percent in reductions from the combined original requests of $48.2 million. The agreed reductions total $1.47 million.

The largest fee request of $15.3 million was lodged by Weil Gotshal & Manges LLP, the airline’s chief lawyers. Weil agreed to reduce fees by 3.3 percent or $498,000.

AMR, the parent of American Airlines Inc., is closing a call center this month in Tucson, Arizona. No longer needing the 85,000 square-foot building, AMR signed Freeport-McMoRan Corp. to buy the facility for $5.1 million. There will be a hearing in bankruptcy court on Oct. 9 for approval of the sale.

The pilots’ union filed an appeal on Sept. 14 from the bankruptcy judge’s Sept. 4 ruling allowing the airline to impose contract concession. AMR’s other other unions accepted contracts with fewer concessions than the contract imposed by the court on the pilots. For a Bloomberg story on the appeal, click here.

Headquartered at the airport midway between Dallas and Fort Worth, 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 New York (Manhattan).

Global Aviation Union Deals Not Binding on Creditors

Global Aviation Holdings Inc., the parent of World Airways Inc. and North American Airlines Inc., negotiated new contracts with pilots, flight attendants and dispatchers to save $100 million over the five-year term of the agreements.

The revised contracts were tentatively approved last week by the U.S. bankruptcy judge in Brooklyn, New York.

The company, which describes itself as the largest provider of passenger air transport for the U.S. military, said it achieved 90 percent of the savings it was requesting when negotiations began with the unions.

The agreements require Global to win court approval of a reorganization plan giving the unions 25 percent of the new stock. The agreement also puts limits on debt of the reorganized company.

There can be no more than $95 million in first-lien debt and $40 million of second-lien debt. No more than half of cash flow may be paid to creditors, and there must be a revolving credit of at least $20 million.

Global said it’s drafting a Chapter 11 plan to comply with the new union agreements. If a plan isn’t implemented as the contracts require, the prior contract will snap back into effect. In addition, the unions will make claims as expenses of the Chapter 11 case for the value of the concession realized during bankruptcy.

Although the new agreements were approved by the judge, they weren’t “assumed,” a technical term giving rise to damages if later breached.

The company’s willingness to grant equity to the unions isn’t binding on creditors who may oppose a plan with provisions required in the labor agreements.

Global filed for Chapter 11 reorganization in February to shed 16 of 30 aircraft. Global said the union agreements were above market. New contracts were negotiated without requiring the company to initiate proceedings in bankruptcy court to abrogate collective-bargaining agreements.

The petition listed $589.8 million in assets against debt totaling $493.2 million. Liabilities include $146.5 million on 14 percent first-lien secured notes and $98.1 million on a second-lien term loan. Wells Fargo Bank NA is agent for both. There is $109 million in trade debt, according to a court filing.

Global, based in Peachtree City, Georgia, is 92.5 percent-owned by an affiliate of MatlinPatterson Global Advisers LLC.

The case is In re Global Aviation Holdings Inc., 12-40783, U.S. Bankruptcy Court, Eastern District of New York (Brooklyn).

U.S. Trustee Lobbies Against Patriot Equity Committee

Patriot Coal Corp. shareholders aren’t entitled to have an official committee of their own, the U.S. Trustee told the bankruptcy judge in advance of a Sept. 24 hearing to decide if equity can have representatives whose fees would be paid by the company.

The Justice Department’s bankruptcy watchdog recited in her Sept. 14 papers how shareholders carry a “heavy burden” of showing a “substantial likelihood” that equity will have a “meaningful distribution.”

The U.S. Trustee pointed to the July 31 balance sheet where shareholders’ equity was 1.6 percent of book assets. Given that shareholders’ equity plunged more than $530 million in the first half of 2012, the U.S. Trustee said the equity holders haven’t sustained their burden of showing a respectable possibility of solvency.

The bond market implies that Patriot is far short of solvent. The $200 million in 3.25 percent senior convertible notes due 2013 traded at 9:49 a.m. on Sept. 14 for 11 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $250 million in 8.25 percent senior unsecured notes due 2018 traded on 2:54 p.m. on Sept. 14 for 45 cents on the dollar.

Supporting an argument for solvency, the shareholders said that Patriot has $1.4 billion in tax loss carryforwards not carried as an asset on balance sheet. Shareholders seeking a committee include CompassPoint Partners LP.

The bankruptcy judge in New York may never decide whether there should be an equity committee. Last week she heard argument from the U.S. Trustee on a motion to transfer the case out of New York. The judge said she would issue a ruling later. If she sends the case away before ruling on the committee question, the new judge will decide on an equity committee.

The company announced on Sept. 14 that it will cut production of metallurgical coal by 85,000 tons a month. Metallurgical coal is used in making steel. For the Bloomberg story, click here.

Patriot is one of the largest coal producers in the U.S. In the Chapter 11 filing July 9, Patriot listed assets of $3.569 billion and debt of $3.072 billion as of May 31.

The case is In re Patriot Coal Corp., 12-12900, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Pinnacle’s Union-Busting Motions Filed under Seal

Pinnacle Airlines Corp., a feeder airline, began the process last week of having the bankruptcy court revise contracts with unions representing pilots and flight attendants.

Both motions are under seal, so the economic basis for the desire to modify the contracts wasn’t disclosed publicly. Pinnacle’s brief explaining the legal rationale for modifying the contracts is also entirely under seal.

The company told workers in a letter that it needs $76 million a year in savings from pilots and flight attendants, “bringing our labor costs down to industry levels.”

The pilots’ union said the courtroom attempt at imposing concession was “ill-advised.” The cockpit crews said the requested cuts would set a “new floor” for regional airlines and give Pinnacle “an overwhelming and unfair competitive advantage in the industry.”

When American Airlines Inc. sought court authorization to modify union contracts, the papers were filed publicly, with redactions of sensitive information that would be harmful if known by competitors.

Memphis-based Pinnacle filed for bankruptcy reorganization in April, listing assets of $1.539 billion against debt totaling $1.427 billion. At the outset of bankruptcy, Pinnacle was providing service as Delta Connection, United Express, and US Airways Express. Pinnacle has the exclusive right to propose a reorganization plan until Jan. 25.

Secured debt includes $690 million owing to Export Development Canada and $34 million on a revised loan with an affiliate of CIT Group Inc.

For nine months ended Sept. 30, there was an $8.8 million net loss from $938.1 million in operating revenue. Operating income in the period was $23.1 million. There was $12.8 million of net income in 2010 on operating revenue of $1.02 billion.

The case is In re Pinnacle Airlines Corp., 12-11343, U.S. Bankruptcy Court, Southern District New York (Manhattan).

SP Newsprint Sold, Converted to Chapter 7 Liquidation

Newsprint maker SP Newsprint Holdings LLC completed the sale of the business on Sept. 10. The Chapter 11 reorganization was converted three days later to a liquidation in Chapter 7 where a trustee was appointed.

No outside buyer was willing to compete with secured lenders in purchasing the business and the bankruptcy judge in Delaware approved a sale to the lenders on Sept. 7 under a contract with a nominal value of $145 million, composed of some of the secured debt plus about $30 million cash to pay off financing for the Chapter 11 case and professional costs.

The case was switched to liquidation because there was no ability to confirm a Chapter 11 plan.

The sale to the lenders took place while the company was faced with running out of cash from the loan for the reorganization begun in November.

When the bankruptcy reorganization began, SP said the lenders were willing to serve as the stalking horse. Before bankruptcy, SP owed $41 million on a revolving credit and $213 million on a term loan with General Electric Capital Corp. as a lender and agent.

Based in Greenwich, Connecticut, SP filed under Chapter 11 with plants in Georgia and Oregon along with 23 recycling centers in nine states.

The case is In re Holding Liquidating II Holdings LLC, 11-13649, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Clare Oaks Bondholders Recovering 45 Percent under Plan

Clare Oaks, a continuing care community with 317 units and beds, is on track to emerge from the Chapter 11 reorganization begun in December under a reorganization plan sponsored by secured bondholders owed $95.8 million.

An attempt at selling the facility generated an offer of $16 million which the bondholders found insufficient since it would have generated only $10 million for them after paying expenses and the loan financing the bankruptcy.

The bondholders submitted their own plan. The bankruptcy court in Chicago approved the explanatory disclosure statement last week. A confirmation hearing for approval of the plan is set for Oct. 25.

Bondholders are setting aside some cash that could pay as much as 2.7 percent on $1.9 million in unsecured debt.

For a projected 45 percent recovery, bondholders will receive $40 million in new second-lien bonds that will pay interest only at 4 percent for 15 years.

Emergence from Chapter 11 will be financed by a $12 million first-lien secured loan provided by some of the bondholders.

The not-for-profit facility in Bartlett, Illinois, has 164 independent living units, 17 assisted living units, 16 memory care units, and 120 skilled nursing beds. The campus is 41 acres.

The Sisters of St. Joseph of the Third Order of St. Francis developed the project and own the land where it’s situated. The petition listed assets of $107.2 million against debt totaling $136.9 million.

The project was financed with $112.7 million in bonds issued through the Illinois Finance Authority. Construction began in 2006.

The case is In re Clare Oaks, 11-48903, U.S. Bankruptcy Court, Northern District Illinois (Chicago).

Lowenstein Sandler Selected by Journal Register Panel

The newly appointed Journal Register Co. creditor’s committee selected Lowenstein Sandler PC from Roseland, New Jersey, to serve as legal counsel.

The newspaper publisher filed for bankruptcy reorganization a second time on Sept. 5. Committee members are the Pension Benefit Guaranty Corp., the Communications Workers of America union, and three trade suppliers, including International Paper Co.

Journal Register already has interim approval to borrow $22.5 million from the existing revolving credit lender Wells Fargo Bank NA until a final Sept. 27 hearing when the loan will increase to $25 million. The loan pays off pre-bankruptcy debt owing to the bank.

Journal Register emerged from bankruptcy reorganization three years ago, giving ownership to secured lenders in exchange for debt. Current lender and owner Alden Global Capital Ltd. intends to retain ownership in another debt swap.

The New York-based company listed assets of $235 million and liabilities totaling $268.6 million. Debt includes about $13.2 million on a revolving credit owing to Wells Fargo.

Alden holds two term loans totaling $152.3 million. Alden acquired the stock and the term loans from lenders in the prior bankruptcy. To read about the prior bankruptcy plan, click here for the July 8, 2009, Bloomberg bankruptcy report.

Journal Register has daily publications with a circulation of 410,000 on weekdays and 475,000 on Sundays. The newspapers are around Philadelphia, Detroit, Cleveland and in upstate New York. In addition, the company publishes free non-daily publications with a distribution of 1.7 million. The publications have accompanying websites.

The new case is In re Journal Register Co., 12-13774, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The previous case was In re Journal Register Co., 09-10769, in the same court.

Northampton Generating Seeks Fifth Exclusivity Extension

Northampton Generating Co. LP, the owner of a 112-megawatt electric generating plant in Northampton, Pennsylvania, has been receiving extensions of exclusive plan-filing rights in one-month increments from the U.S. Bankruptcy Court in Charlotte, North Carolina.

Undeterred, the company filed papers last week for an 11-week enlargement of so-called exclusivity. If approved by the judge at an Oct. 9 hearing, the deadline would be pushed out to Dec. 28. The new exclusivity motion was Northampton’s fifth.

The company again said it’s analyzing options with regard to a reorganization plan.

Northampton is now a so-called merchant electric generator as a result of terminating a power-purchase agreement with Metropolitan Edison Co. It became 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 with $21.8 million outstanding, according to a court filing.

Northampton filed for Chapter 11 protection in December and later listed 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 North Carolina (Charlotte).

Exchange Offer News

Marsico Capital Affiliate Completes Another Exchange

Marsico Holdings LLC, a finance affiliate of mutual fund manager Marsico Capital Management, completed another exchange offer, this time reducing a $977 million first-lien term loan to $500 million. The lenders in return received 25 percent of the equity.

In addition, the $604 million in senior unsecured notes were reduced to $200 million.

In a prior exchange offer in November 2010, about $1 billion in junior notes was converted to equity.

Marsico, based in Denver, specializes in investing in large-capitalization growth stocks, according to Standard & Poor’s.

Downgrade

Reorganized American Media Downgraded to B- by S&P

Publisher American Media Inc., a veteran of Chapter 11 reorganization, is “highly leveraged” and has sustained “continued declines in revenue.” The result was a downgrade issued on Sept. 14 by Standard & Poor’s lowering the corporate credit by one grade to B-.

The $105 million in 13.5 percent second-lien notes were lowered one step to CCC, coupled with S&P’s guess that holders won’t recover more than 10 percent following payment default. Buyer were bidding 78 cents on the dollar to purchase the notes on Sept. 14, according to data compiled by Bloomberg.

American Media publishes supermarket tabloids Star and National Enquirer. The company reported a $1.3 million net loss in the quarter ended June 30 on operating revenue of $87.2 million. The balance sheet was upside down, with assets of $643.8 million and liabilities totaling $663.4 million.

American Media implemented a prepackaged reorganization plan in December 2010. For details on the plan, click here for the Nov. 18, 2010, Bloomberg bankruptcy report.

The Chapter 11 case was American Media Inc., 10-16140, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Bank Failure

Failed St. Louis Bank Bring Year’s Total to 42

The four-branch Truman Bank from St. Louis was taken over by regulators on Sept. 14. It was the 42nd bank to fail this year.

The bank had $245.7 million in deposits. The failure cost the Federal Deposit Insurance Corp. an estimated $34 million. The deposits and branches were transferred to Simmons First National Bank of Pine Bluff, Arkansas.

In 2011, there were 92 bank failures, compared with 157 in 2010. The failures in 2010 were the most since 1992, when 179 institutions were taken over by regulators.

Podcast & Video

Two Newspapers, Digital Domain, AMR, Rent Control

Newspaper publishers Tribune Co. and Journal Register Co. are covered in the new bankruptcy video with Bloomberg News bankruptcy columnist Bill Rochelle and Bloomberg Law’s Lee Pacchia.

In the new podcast, Rochelle talks about Digital Domain Media Group Inc. and its effort at selling the business within 10 days of bankruptcy. Rochelle engages in name dropping by identifying the deep pockets talking about financing a reorganization plan for AMR Corp., the parent of American Airlines Inc. The podcast ends with discussion of a new court opinion that might disincline tenants in rent-controlled and rent-stabilized apartments in New York City from filing bankruptcy.

To see the video, click here. For the podcast, click here.

Advance Sheets

Circuit Says Bankruptcy Court OK for Final Judgment

When a creditor filed a proof of claim, the bankruptcy court had power even after Stern v. Marshall to enter a final fraudulent transfer judgment against the creditor, the U.S. Court of Appeals in Cincinnati ruled on Sept. 13.

A business was sold based on what turned out to be faulty financial information. The sale price was paid in cash and partly with a note.

The company filed for bankruptcy, and the seller filed a proof of claim for the remainder of the purchase price based on the note.

The bankrupt company sued, contending the sale was a fraudulent transfer because the amount paid was more than the value of the company.

The bankruptcy court agreed and granted a $6 million final judgment after trial, representing the amount of the overpayment. The bankruptcy court denied the claim on the note in full. The judgment was upheld in the district court.

On appeal, U.S. Circuit Judge Danny J. Boggs relied on the Supreme Court’s Granfinanciera decision and upheld the ability of the bankruptcy judge to enter judgment for fraudulent transfer because the creditor had voluntarily filed a proof of claim.

The case is Onkyo Malaysia SDN BHD v. Global Technovations Inc. (In re Global Technovations Inc.), 11-1582, U.S. Sixth Circuit Court of Appeals (Cincinnati).

Default Judgment No Basis for Later Summary Judgment

Before bankruptcy, an individual was sued in Michigan state court for embezzlement. Not responding, he was saddled with a default judgment.

The individual filed for bankruptcy and was met with a contention by the plaintiff that the judgment was nondischargeable embezzlement under Section 523(a)(4) of the Bankruptcy Code. The bankruptcy court granted summary judgment, ruling that the state court judgment had preclusive effect in the later dischargeability litigation.

The Bankruptcy Appellate Panel for the Sixth Circuit in Cincinnati in a Sept. 13 opinion pointed to Michigan law where default judgments aren’t accorded preclusive effect in later litigation. It was therefore error for the bankruptcy court to rest nondischargeability on the default judgment alone.

The case is Dantone v. Dantone (In re Dantone), 12-8006, U.S. Sixth Circuit Bankruptcy Appellate Panel (Cincinnati).

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