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Study Finds 2005 Code Reform Cut Recoveries: Bankruptcy

Nov. 27 (Bloomberg) -- “Creditors have done worse” since the bankruptcy law was amended in 2005 to enhance recoveries, according to a study by Lois R. Lupica, a University of Maine School of Law professor.

In her study, funded by the American Bankruptcy Institute, Lupica said the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was intended to prevent “the discharge of debt consumers could afford to pay.”

“The theory that there are can-pay debtors lurking in the shadows was not confirmed by the data,” Lupica said in an interview.

The 2005 law was designed to compel individual bankrupts to pay more by restricting access to Chapter 7, where creditors typically get nothing, she said. The theory, according to Lupica, was that more consumers would be forced into Chapter 13, where creditors are often paid a portion of their debts through payment programs spread over about five years.

Lupica found that recoveries by unsecured creditors after the 2005 law was enacted fell by “statistically significant” amounts under both Chapters 13 and 7.

“There were no winners,” Lupica said.

Creditor recoveries were lower in part because “administrative expenses increased significantly,” according to the study. Lupica said there wasn’t even the expected increase in recoveries by secured creditors.

“I would be really surprised if her findings weren’t correct because the structure of the statute was to increase costs of administration in all Chapter 7 cases whether or not there are any assets in the estates,” Ronald J. Mann, a professor at Columbia Law School, said in an interview.

Lupica cited a study showing that Chapter 7 costs increased for each bankrupt by an inflation-adjusted $488 after the 2005 amendments and by $667 in Chapter 13. The average fee for a Chapter 7 filing rose 38 percent after the amendments and 63 percent for Chapter 13, she said.

“It turns out that people in the bankruptcy system don’t have much money,” Mann said. Consequently, some individuals who might previously have filed for bankruptcy don’t now, with the result that their creditors recover nothing, he said.

“Some scholars have claimed that the credit lobby knew” recoveries would decline in bankruptcy despite the changes, Lupica said, citing Mann.

Rather than increase recoveries, the intention was to create a “sweat box” by keeping individuals out of bankruptcy “to receive the robust recoveries that seem to elude them once a consumer files for bankruptcy relief,” she said.

Lupica said she wasn’t surprised by the findings.

“The data confirmed my intuition developed from speaking with hundreds of bankruptcy trustees and judges,” she said.

Supreme Court

Supreme Court Takes on Third Bankruptcy Case This Term

The U.S. Supreme Court will decide next year whether an inherited individual retirement account is protected from the claims of creditors in bankruptcy.

The Supreme Court yesterday said it will resolve a split between two federal courts of appeal on the question of whether an inherited IRA is an exempt asset that an individual can retain despite filing bankruptcy.

Including the new case, Clark v. Rameker, the Supreme Court will rule on three bankruptcy issues in the current term.

One of the other cases deals with whether someone can waive the right to have certain disputes decided on a final basis by a life-tenured federal district judge. The third concerns whether bankruptcy judges have equity power to take property away that an individual bankrupt otherwise would be entitled to retain as exempt. These cases will be argued on Jan. 13 and Jan. 14.

The dispute involving inherited IRAs should be argued around late March.

The split arose in April when the U.S. Court of Appeals in Chicago ruled that inherited IRAs aren’t exempt in bankruptcy and thus belong to creditors. Last year, the federal appeals court in New Orleans concluded that the “plain meaning” of the statutes made inherited IRA’s exempt.

While an IRA funded by the debtor’s own contributions is immune from creditor claims in bankruptcy, the case going to the Supreme Court involves a bankrupt woman who inherited her deceased mother’s $300,000 account. After the daughter filed for bankruptcy, the bankruptcy judge ruled that the IRA wasn’t exempt. The appeals court in Chicago concluded that the account should go to creditors because it represented money the bankrupt could spend readily.

For a discussion of the Chicago court’s opinion, click here for the April 24 Bloomberg bankruptcy report. To read about the New Orleans case, click here for the March 14, 2012, Bloomberg bankruptcy report. For a discussion of decisions by other courts finding inherited IRAs exempt, click here for the Dec. 16, 2011, Bloomberg bankruptcy report.

The case on IRAs is Clark v. Rameker, 13-299, U.S. Supreme Court, (Washington).

The case on waiver is Executive Benefits Insurance Agency v. Arkison, 12-01200, U.S. Supreme Court. The case on equity powers is Law v. Siegel, 12-5196, U.S. Supreme Court (Washington).

New Filing

Fuel Distributor Pettit Files Chapter 11 in Washington State

Pettit Oil Co., a distributor of bulk fuel and lubricants, filed a petition for Chapter 11 protection on Nov. 25 in Tacoma, Washington.

Based in Lakewood, Washington, Pettit supplies customers in the western part of the state. Assets are on the books for $18.7 million, against debt of $22.5 million.

Two bank creditors are owed a total of about $20.2 million. The lenders are KeyBank NA and U.S. Bank NA.

Last year, Pettit generated revenue of $319.1 million, with $1.3 million in cash flow. So far this year, revenue is $172.2 million, with $6.1 million in cash flow.

Pettit asked the bankruptcy court for authority to pay pre-bankruptcy debt to four main suppliers. Otherwise, Pettit said, supplies will be cut off, resulting in the immediate loss of customers.

The case is In re Pettit Oil Co. Inc., 13-bk-47285, U.S. Bankruptcy Court, Western District of Washington (Tacoma).


Excel Files Revised Plan with Committee Support

Excel Maritime Carriers Ltd., the operator of 38 dry-bulk vessels, today filed an amended reorganization plan supported by the official committee of unsecured creditors and holders of 83 percent of the senior secured notes.

The new plan replaces a reorganization proposal worked out before the Chapter 11 filing in July. There will be a Dec. 6 hearing to approve revised disclosure materials required before creditors can vote.

For their $765 million in claims, senior lenders will receive a new $300 million five-year secured term loan and 83.3 percent of the new stock.

The amended disclosure statement pegs the midpoint enterprise value of the reorganized company at $630 million, or less than senior secured debt.

As a result of negotiations, unsecured creditors of the parent Excel with claims totaling $163.4 million will receive 8 percent of the new stock, along with the right to purchase 2.9 percent more for $10 million, at prices ranging from $16.25 to $17.25 a share.

Assuming unsecured creditors vote for the plan, senior lenders will waive their unsecured deficiency claim of almost $180 million. Consequently, the predicted recovery for other unsecured creditors is 15.9 percent. Unsecured claims are composed largely of $150 million in convertible notes.

The company’s controlling shareholder Gabriel Panayotides will continue to run the company after bankruptcy. He, family members and related companies are to have 7.1 percent to 10.1 percent of the new stock in return for a new investment of $5 million to $15 million. In addition, Panayotides will allow the company to use $20 million held in escrow.

Assuming the disclosure statement is approved on schedule, the confirmation hearing for approval of the plan will occur Feb. 17.

U.S. Bankruptcy Judge Robert Drain appointed a mediator after saying in a September ruling that the initially proposed plan might never receive his approval. For details on Drain’s ruling, click here for the Sept. 17 Bloomberg bankruptcy report.

The original plan for the Athens-based company would have given ownership to secured lenders, although the lenders agreed to allow Panayotides to maintain control at least initially and buy back the company later. For details on the original plan, click here for the July 17 Bloomberg bankruptcy report.

Excel’s balance sheet for December 2011 showed assets of $2.72 billion and liabilities totaling $1.16 billion. Revenue of $356.9 million in 2011 resulted in a $161.5 million operating loss and a $211.6 million net loss. The operating loss included a $146.7 million asset-impairment charge.

The case is In re Excel Maritime Carriers Ltd., 13-bk-23060, U.S. Bankruptcy Court, Southern District of New York (White Plains).

Detroit Bond Insurers Want Committee to Sell Art Museum

Detroit’s municipal bond insurers, workers and retirees are asking the bankruptcy judge to form an ad hoc committee that will study how best to “monetize” art in the Detroit Institute of Arts.

Containing works by Bellini, Rembrandt, van Gogh and Picasso, the museum is one of Detroit’s most valuable assets because the city effectively can’t raise taxes, the creditors said in their court filing yesterday.

The bankruptcy judge is scheduled to hand down his decision Dec. 3 saying whether Detroit is eligible to remain in the Chapter 9 municipal bankruptcy begun in July.

For Detroit to secure court approval of a debt-adjustment plan, the creditor group believes the “city must prove that such plan maximizes the value of the art to enhance creditor recoveries.” The creditor group is concerned that failing to sell the art will “engender lengthy and contentious litigation due to a failure to provide for the monetization of its non-essential assets, including the art.”

The creditors want the court to form an ad hoc committee to explore options for selling the art while maintaining the museum as a “culturally relevant institution.”

The creditors hope to avoid a repetition of events in October when the state took over the expense of operating Belle Isle Park rather than explore options to “maximize value of the park.”

On top of authorizing formation of an ad hoc committee to agree with the city on how to “monetize the art,” the committee wants the judge to give them power to compel Detroit to “turn over all information responsive to any reasonable request” for information about the art.

Creditors seeking the art committee include Financial Guaranty Insurance Co., Syncora Guarantee Inc., Ambac Assurance Corp., the American Federation of State, County and Municipal Employees, and retiree representatives. They want the committee appointed by the court to include five bondholder representatives and five representatives of unions and retirees.

Detroit began the country’s largest-ever Chapter 9 municipal bankruptcy in July with $18 billion in debt, including $5.85 billion in special revenue obligations, $6.4 billion in post-employment benefits, $3.5 billion for underfunded pensions, $1.13 billion on secured and unsecured general obligations, and $1.43 billion on pension-related debt, according to a court filing. Debt service consumes 42.5 percent of revenue.

The city has 100,000 creditors and 20,000 retirees.

The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

Cengage Disclosure Approval Sets Stage for Feb. 24 Confirmation

Cengage Learning Inc. scheduled a confirmation hearing for Feb. 24 after a bankruptcy judge in Brooklyn, New York, approved disclosure materials allowing creditors to vote on the revised Chapter 11 reorganization plan.

Cengage, a college textbook publisher, and the creditors’ committee said lenders don’t have liens on $273.9 million held in a money-market account. Consequently, the revised plan creates an escrow fund to be distributed once the court determines whether first-lien lenders’ liens are valid against the cash and 15,500 copyrights.

The lenders will nonetheless receive an initial distribution of almost $40 million on account of their unsecured claims, based on the company’s assumptions about the invalidity of secured claims.

Even if the liens are invalid, first-lien lenders said they are still entitled to benefit from subordination agreements and participate alongside unsecured creditors by virtue of their deficiency claims.

The revised plan is designed to reduce debt for borrowed money by $4.3 billion. Assuming their liens are all valid, senior secured creditors will take the new equity and a $1.5 billion term loan.

The revised disclosure statement shows the senior secured lenders with a recovery of 72.8 percent on $3.38 billion in claims, while second-lien debt holders see 5.5 percent on $41.5 million in claims.

Senior noteholders are told in the disclosure statement to expect a 9 percent recovery on claims of $27.6 million. General unsecured creditors could see 4.1 percent on claims of $3.1 million. Holders of subordinated notes receive nothing.

After bankruptcy, the company will be financed with a revolving credit ranging from $250 million to $400 million provided by third parties.

Cengage commenced a Chapter 11 reorganization in July after negotiating an agreement with holders of $2 billion in first-lien debt to eliminate more than $4 billion of $5.8 billion in debt. Second-lien creditors and holders of unsecured notes were not part of the agreement.

The company first submitted a plan in August, with amendments later. For details on the original plan where first-lien lenders would receive the new stock plus a $1.5 billion term loan, click here for the July 3 Bloomberg bankruptcy report.

Cengage’s debt includes $3.87 billion on five first-lien term loans and revolving credits plus $725 million outstanding on first-lien notes and $710 million on second-lien notes. Cengage owes some $490 million on three issues of unsecured senior and subordinated notes.

Financial statements for the quarter ended March 31 showed assets of $4.68 billion against liabilities of $6.47 billion, following a $2.76 billion goodwill impairment charge.

Apax Partners LLP bought Cengage in 2007 from Thomson Reuters Corp. in a $7.75 billion transaction. The acquisition was funded in part with $5.6 billion in new debt financing.

First-lien lenders who signed the so-called plan-support agreement include funds affiliated with BlackRock Inc., Franklin Mutual Advisers LLC., KKR & Co. and Oaktree Capital Management LP.

The case is In re Cengage Learning Inc., 13-bk-44106, U.S. Bankruptcy Court, Eastern District of New York (Brooklyn).

Dish Moves to Toss Newest Lawsuit by LightSquared

Charles Ergen’s Dish Networks Corp. filed papers yesterday seeking dismissal of the latest lawsuit by LightSquared Inc. or its controlling shareholder Harbinger Capital Partners LLC.

In yesterday’s papers, Dish argues that the new suit by LightSquared, the developer of a satellite-based wireless communications system, suffers from the same defects that promoted the bankruptcy judge to throw out an almost identical suit by Philip Falcone’s Harbinger.

Moreover, Dish says the new complaint fails to make out a case for interference with contract, just like the prior suit. Dish points to corporate documents saying that Dish subsidiaries were precluded from buying LightSquared debt and that affiliates weren’t.

The lawsuit is calculated to preclude Ergen and Dish from taking over LightSquared’s spectrum licenses by paying $2.2 billion through a competing reorganization plan in LightSquared’s Chapter 11 case. LightSquared says Ergen-controlled companies bought $1 billion in debt in violation of contract.

There will be a Dec. 10 hearing on Dish’s new dismissal effort.

Dec. 10 is also the date for a confirmation hearing to approve one of the four competing reorganization plans, one each from LightSquared, Harbinger, a group of secured lenders, and Mast Capital Management LLC.

LightSquared, based in Reston, Virginia, filed for bankruptcy in May 2012, listing assets of $4.48 billion and debt of $2.29 billion. U.S. regulators blocked the service after makers and users of global positioning system devices, including the U.S. military and commercial airlines, said LightSquared’s signals would disrupt navigation systems.

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

Fisker Plans to Sell and Confirm Plan by January 3

Fisker Automotive Inc., the electric-car maker that filed for bankruptcy protection on Nov. 22, is pushing ahead to sell the business and win court approval of a Chapter 11 plan by Jan. 3.

Founded in 2007, Fisker sold only 1,800 of its Karma plug-in hybrid electric sedans before production halted last year. The bankruptcy filing came immediately after Hybrid Tech Holdings LLC bought the $165.5 million secured loan made by the U.S. Department of Energy.

The plan calls for holding an auction Jan. 3 to determine if Hybrid Tech has the best offer to buy the business. The bankruptcy court in Delaware approved auction and sale procedures yesterday. Objections to the sale are due Dec. 27.

Yesterday, the bankruptcy court also gave interim approval for a $1.7 million loan, scheduled for increase to $8.1 million at a final financing hearing on Dec. 16.

Fisker doesn’t intend to hold an auction, on the theory that no one could outbid Hybrid Tech since it could pay with the entire amount of the government loan.

Hybrid Tech is offering to buy the assets in exchange for $75 million of that loan. It will also supply $725,000 in cash for distribution to creditors under the liquidating Chapter 11 plan filed last week. In addition, the buyer will waive the $8 million loan to finance bankruptcy.

The plan provides that unsecured creditors with about $280 million in claims will share $500,000 from the cash supplied by Hybrid Tech, although only if the class votes for the plan. Similarly, Hybrid Tech will waive its unsecured deficiency claim only if the class votes “yes.”

The disclosure statement currently has a blank where unsecured creditors later will be told their predicted percentage recovery.

Similarly, the draft disclosure statement is blank where the percentage recovery for Hybrid Tech will be stated.

Fisker wants the bankruptcy court to hold a hearing on Dec. 10 for approval of disclosure materials, so creditors can vote on the plan.

Secured creditor Silicon Valley Bank, with a claim of $6.6 million, is slated to take home $225,000 from the cash supplied by Hybrid Tech. The bank’s percentage recovery is blank for the time being.

Yesterday, a former worked filed a lawsuit in bankruptcy on behalf of himself and about 160 other employees fired in April without the 60-day notice required by federal and California law. If successful, the suit would give each worker a claim for as much as $12,500, assuming there is cash available to pay priority claims.

Financial problems for Anaheim, California-based Fisker started with a two-year delay in bringing the Karma to market, at prices ranging from $100,000 and $120,000. Production halted last year, never to resume, following the bankruptcy of A123 Systems Inc., the sole supplier of the cars’ lithium-ion batteries. Hurricane Sandy in October 2012 destroyed the entire U.S. inventory of 338 unsold vehicles.

Fisker said total debt is $500 million. It listed the assets as being worth more than $100 million.

The case is In re Fisker Automotive Holdings Inc., 13-bk-13087, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Miami Jai-Alai Fronton Looks Toward March 25 Auction

The Miami Jai-Alai fronton and casino will be sold at auction on March 25, if the bankruptcy judge goes along with suggested sale procedures.

This week, the facility’s owner filed papers to set up a hearing in the Miami bankruptcy court on Dec. 11 for approval of sale procedures. If the judge agrees, bids would be due March 19, with a hearing to approve a sale on March 26.

Before the sale-procedure hearing, the casino owner said it expects to have a signed contract where Silvermark LLC will commit to pay $115 million in cash plus debt assumption. Before bankruptcy, Silvermark was under contract for the same price, plus $14 million in debt assumption.

The sale process results from an interim settlement with secured lenders requiring a sale of the facility by March 31.

A crucial issue in the case is whether the lenders are entitled to a premium of $26.8 million in addition to $90 million in principal. This month, the casino sued to invalidate the premium. For details on the dispute, click here for the Nov. 12 Bloomberg bankruptcy report.

Lenders include Summit Partners LP and Canyon Value Realization Fund LP. The casino contends they are trying to take ownership through a “loan to own” scheme. The lenders are allowed to pay for the casino in exchange for debt, according to a court filing.

Formally named Florida Gaming Centers Inc., the Miami-based company said at the outset of bankruptcy in August that it had a sale lined up to pay off debt in full, with as much as $50 million left over for shareholders.

The casino opened in early 2012 with 60,000 square feet for 1,058 slot machines, a poker room, and electronic table games. The business also owns a fronton in Fort Pierce, Florida, that has inter-track wagering.

Debt totals $138.3 million, according to a court filing.

The case is In re Florida Gaming Centers Inc., 13-bk-29597, U.S. Bankruptcy Court, Southern District of Florida (Miami).

Century Aluminum Buying Carbon Anodes from Ormet

Ormet Corp., the primary aluminum producer forced to liquidate, will sell 42,000 metric tons of carbon anodes to Century Aluminum Co. for $5.57 million, assuming there are no objections.

Under streamlined procedures for selling surplus assets, creditors must object by Dec. 4 or the sale will be approved by the U.S. Bankruptcy Court in Delaware.

The anodes are on the books for $8.2 million under the borrowing-base formula with bank lenders.

At the end of last week, the court approved the sale of 32,000 metric tons of alumina to Glencore AG. Previously, Ormet was authorized to sell the Burnside alumina smelter to Almatis Inc. for $39.4 million without an auction.

A court-approved sale of the business to lender and part owner Wayzata Investment Partners LLC fell apart because Ohio utility regulators refused in October to grant reductions in electricity prices. Wayzata would have acquired the business largely in exchange for debt.

The regulatory ruling forced Ormet to halt operations at the smelter in Hannibal, Ohio, and put the Burnside facility into a “hot-idle” status. The Burnside facility could produce 540,000 tons of smelter-grade alumina a year. The Hannibal smelter has a capacity of 270,000 tons of primary aluminum annually.

Ormet, based in Hannibal, emerged from a prior bankruptcy reorganization in April 2005. In the new bankruptcy, Ormet listed assets of $406.8 million and liabilities totaling $416 million. Secured debt of about $180 million includes $139.5 million on a secured term loan and $39.3 million on a revolving credit.

The case is In re Ormet Corp., 13-bk-10334, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Vertis Gets Plan-Filing Exclusivity Extended to Feb. 3

Although Vertis Inc. sold its assets in January and has yet to propose a Chapter 11 plan, the Baltimore-based advertising and marketing services provider drew no objection from creditors for a fourth enlargement of exclusive plan-filing rights.

The bankruptcy court in Delaware extended exclusivity until Feb. 3, some two months short of the maximum permitted by the Bankruptcy Code.

Quad/Graphics Inc. said it bought the business for a net price of about $170 million. The sale created a $20 million fund to wind down the remainder of the bankruptcy. About $10 million was left earlier this month.

The current bankruptcy is Vertis’s third. The prior case, in late 2010, required less than a month to complete, eliminating $700 million in debt.

In the latest case, Vertis listed assets of $837.8 million and debt of $814 million. Liabilities included $68.6 million on a revolving credit and $427.7 million on a secured term loan.

Through the first bankruptcy in 2008, Vertis merged with American Color Graphics Inc., also in Chapter 11 at the same time. The first reorganizations reduced combined debt by almost $1 billion.

The new Chapter 11 case is In re Vertis Holdings Inc., 12-bk-12821, U.S. Bankruptcy Court, District of Delaware (Wilmington). The 2010 bankruptcy was In re Vertis Holdings Inc., 10-bk-16170, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The first bankruptcies were In re ACG Holdings Inc., 08-bk-11467, and In re Vertis Holdings Inc., 08-bk-11460, both in U.S. Bankruptcy Court, District of Delaware (Wilmington).

GMX Resources Tallies $4.7 Million Net Loss in October

GMX Resources Inc., an oil and gas exploration and production company, reported a $4.7 million net loss in October on revenue of $2 million.

The month’s operating loss was $823,000, according to a report filed with the U.S. Bankruptcy Court in Oklahoma City, where the company is based. Interest expense for the month was $3.7 million.

GMX has a Dec. 3 hearing in bankruptcy court for approval of disclosure materials explaining a revised reorganization plan based on a settlement between senior secured noteholders and unsecured creditors.

The lenders are to assume ownership in exchange for $338 million of the $402.4 million they are owed. For details, click here for the Oct. 25 Bloomberg bankruptcy report.

GMX filed for Chapter 11 protection in April after negotiating a debt-swap agreement with secured lenders. The company has 160 wells in North Dakota, Montana, Wyoming, Texas and Louisiana. It listed assets of $281.1 million and liabilities totaling $458.5 million.

The $51 million in 9 percent second-lien notes last traded on Nov. 21 for less than 1 cent on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $48.3 million in senior unsecured notes due 2015 traded on Nov. 20 for less than 1 cent, according to Trace.

For the nine months ended Sept. 30, 2012, GMX reported sales of $48.3 million and a net loss of $206.7 million, including $166.2 million in asset-impairment charges.

The case is In re GMX Resources Inc., 13-bk-11456, U.S. Bankruptcy Court, Western District of Oklahoma (Oklahoma City).

GateHouse Consummates Prepackaged Reorganization Plan

Newspaper publisher GateHouse Media Inc. yesterday implemented the reorganization plan that was approved when the bankruptcy judge in Delaware signed a confirmation order on Nov. 6.

GateHouse commenced the prepackaged bankruptcy on Sept. 27 with the plan already worked out.

Fortress Investment Group LLC assembled a chain of more than 430 daily, weekly and community newspapers in part through the GateHouse plan. GateHouse has 78 daily and 235 weekly newspapers, plus 343 associated websites.

In companion transactions, Newcastle Investment Corp. paid $87 million to buy Dow Jones Local Media Group Inc. from News Corp. The acquired company has eight daily and 15 weekly newspapers in seven states. Local Media will manage GateHouse.

For details on the GateHouse plan, click here for the Nov. 7 Bloomberg bankruptcy report.

The case is In re GateHouse Media Inc., 13-bk-12503, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Park Cities Bank Auction Scheduled for Dec. 9

Park Cities Bank in Dallas will be sold at auction on Dec. 9, under procedures approved by the U.S. Bankruptcy Court in Delaware.

The bank’s owner, North Texas Bancshares Inc., filed for Chapter 11 protection on Oct. 16.

Absent a better offer, Park Cities Financial Group Inc. will buy the bank from North Texas Bancshares for about $7.4 million in cash while making a capital contribution of as much as $40 million.

Competing bids are due Dec. 4. The sale-approval hearing is Dec. 13.

The bank had more than $396 million in deposits, four branches and 71 employees as of Sept. 30, according to a court filing. The holding company listed debt of $39.3 million, including about $34 million on trust preferred securities. North Texas Bancshares owes Providence Bank about $5.2 million in secured debt.

The case is In re North Texas Bancshares of Delaware Inc., 13-bk-12699, U.S. Bankruptcy Court, District of Delaware (Wilmington).


Foreign Companies Push Defaults Higher This Year

Defaults worldwide through October by 31 issuers reached $17.4 billion, more than at the same time last year, as a result of more defaults outside the U.S., according to a report this week from Fitch Ratings.

In the same period last year, there were 25 defaults on $13.4 billion in debt. The increase is attributable to $4.8 billion more in defaults abroad, Fitch reported.

Except for senior secured debt, where the recovery rate this year is up fractionally to 65.5 percent, recoveries on lower-ranking debt are lower this year compared with 2012.

For senior unsecured debt, this year’s 28.3 percent recovery is down 34 percent from 2012. The 29.4 percent recovery on subordinated debt this year is off 23 percent from last year.

Watch List

Defense Contractor Sotera Lowered to CCC on Revenue Drop

Military supplier Sotera Defense Solutions Inc. violated loan covenants in the September quarter, the second time the financial sponsor has been called on to infuse equity to cure the default.

The loan agreement precludes making another equity contribution in the next two quarters, even though Standard & Poor’s said yesterday that Sotera may violate a covenant again this quarter.

S&P issued a downgrade yesterday, lowering the corporate rating by one grade to CCC, matching the action taken in late August by Moody’s Investors Service. S&P previously downgraded in June.

S&P said that revenue will probably continue to decline “over the next few quarters” given government cutbacks in defense funding.

Herndon, Virginia-based Sotera had revenue of $356 million in 2012, Moody’s said. The company was acquired in April 2011 by Ares Management LLC in a $300 million transaction.

Advance Sheets

Filing Lis Pendens Isn’t Voidable as Preference, Court Says

The filing of a lis pendens isn’t a transfer of property and therefore can’t be voided as a preference, the U.S. Court of Appeals in Denver ruled.

A bank listed the wrong name in recording a mortgage, making the mortgage possibly invalid as lien on the property. Before bankruptcy, the bank initiated a lawsuit to reform the mortgage and filed a lis pendens, the technical name for a filing in land records asserting an interest in the property.

The owner filed for bankruptcy and failed to persuade the bankruptcy judge that the lis pendens should be voided as a preferential transfer occurring within 90 days of bankruptcy. The district court agreed, and the case went up to the U.S. Court of Appeals for the 10th Circuit.

Citing Colorado law, Circuit Judge Paul J. Kelly Jr. agreed with the lower courts. A lis pendens, he said, doesn’t transfer property even though it may render the property unmarketable.

Kelly rejected the argument that there must have been a transfer because the owner’s rights in the property were diminished by the lis pends.

“We do not see how clouding title constitutes ‘disposing of or parting with’ an interest in property,” he said. He didn’t address whether the mortgage itself was invalid or what the bank’s interest in the property should be.

The case is Ute Mesa Lot 1 LLC v. First-Citizens Bank & Trust Co. (In re Ute Mesa Lot 1 LLC), 12-1134, U.S. Court of Appeals for the 10th Circuit (Denver.)

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To contact the reporter on this story: Bill Rochelle in New York at

To contact the editor responsible for this story: Andrew Dunn at

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