Razor, Rangers, Visteon, Station, Lehman: Bankruptcy
American Safety Razor Co., the fourth-largest maker of wet-shaving blades, filed a Chapter 11 petition yesterday where the company will be sold to first-lien lenders in exchange for debt unless second-lien creditors make arrangements to pay off the senior creditors within seven weeks.
ASR owes $244.4 million on the first-lien revolving credit and term loan. There is $178.1 million outstanding on the second-lien credit. In addition, mezzanine lenders are owed $60 million on an obligation that pays in kind.
There is a contract with the first-lien lenders where they will be the so-called stalking-horse at an auction to test whether there is a better deal than exchanging the senior secured debt for ownership. The agreement doesn’t give the senior lenders a breakup fee if someone else wins the auction.
The second-lien lenders were proposing an alternative reorganization where they would pay off the first lien with debt financing and exchange the junior secured credit for the new equity. A court filing says that the junior lenders haven’t yet been able to obtain necessary commitments to pay off the senior debt.
The purchase agreement with the senior lenders gives the junior creditors seven weeks to raise the financing. ASR said that the proposal from the junior lenders “may become the basis of the company’s reorganization.”
The reorganization is to be financed with a $25 million secured loan where the agent for the lenders will be UBS AG (UBSN), the agent for the existing first-lien creditors.
Revenue of $351 million in 2008 slipped to $330 million in 2009. Sales will continue to fall, court papers say, because ASR this year lost its largest customer that was responsible for 15 percent of revenue.
Cedar Knolls, New Jersey-based ASR has U.S. plants in Virginia and Tennessee. Affiliates abroad aren’t in bankruptcy. It was acquired for $625 million in July 2006 by London-based Lion Capital LLP.
Although ASR has the largest market share for private-label blades, it has only 8 percent of the market when branded goods are included, according to Moody’s Investors Service. The leader, with 66 percent of the market, is Procter & Gamble Co. (PG)’s Gillette products.
Rangers Lenders Protest Releases to Hicks in Plan
The secured lenders to the Texas Rangers baseball club filed papers yesterday explaining their theories why the bankruptcy judge shouldn’t approve a reorganization plan and sell the team to a group including current President Nolan Ryan and sports lawyer Chuck Greenberg.
Owed $525 million not including interest, the lenders principally contend that bankruptcy judges in Texas are precluded from giving releases to non-bankrupt third parties such as affiliates of the Rangers and individuals like the team’s current owner, Thomas O. Hicks.
The lenders point to a decision last year from the 5th U.S. Circuit Court of Appeals in New Orleans which is sometimes interpreted as barring third-party releases. To read about the case, known as Pacific Lumber, click here for the Sept. 30 Bloomberg bankruptcy report.
The lenders also contend that they have rights that are being impaired by the plan, thus giving them the right to vote. The team, on the other hand, believes they are unimpaired because the plan will give them $75 million, the limit of the team’s monetary liability to the lenders.
The lenders argue that a plan must not impair non-monetary rights as well. They point to how the releases and exculpations built into the plan infringe on their ability to sue third parties and therefore give them the right to vote.
If they have the right to vote, the lenders point to how the two classes for their claims are both voting against the plan. With “no” votes from the only two impaired classes, the lenders argue that bankruptcy law doesn’t allow confirmation of the plan. The lenders rely on provisions in bankruptcy law that require acceptance by at least one voting class before a plan can be crammed down.
The lenders in addition point to how their loan agreement gave them the right to approve sale. Because the sale contract was made before bankruptcy, the lenders submit to the judge that their right to sue for the loan violation can’t be cut off in bankruptcy if their rights are to be unimpaired.
Alex Rodriquez, now third baseman for the New York Yankees, filed a limited objection to the plan. Rodriguez cites a provision in the collective bargaining agreement that requires a club to maintain a fund to “secure deferred compensation,” such as the almost $25 million he’s still owed by the Rangers.
Rodriguez says “no monies are currently being held in escrow by the debtor for this purpose.” The plan is intended to have the buyer pay the remainder of Rodriguez’s contract.
Bids for the team are due Aug. 3. The auction is set for Aug. 4 in the courthouse, to be followed immediately by a hearing either to approve the sale or confirm the Chapter 11 plan.
The Rangers filed under Chapter 11 on May 24 with a sale contract and a plan that claims to be paying all creditors in full. The original contract price, $304 million, was later increased to $306.7 million. Secured lenders would recover $256 million, according to the team’s disclosure statement based on the original contract for $304 million.
The Rangers moved from Washington to Texas in 1972. The team defaulted on payments owing to the lenders in March 2009. Michael “Buzz” Rochelle, a brother of Bloomberg reporter Bill Rochelle, is a lawyer for an agent for the lenders. The partnership that owns the team is Texas Rangers Baseball Partners.
The case is In re Texas Rangers Baseball Partners, 10-43400, U.S. Bankruptcy Court, Northern District of Texas (Fort Worth).
Visteon Wins Lender Support by Raising Interest Rate
Auto-parts maker Visteon Corp. (VC) sweetened the reorganization plan for the $1.5 billion term loan and in return won agreement from holders of 55 percent of the credit to vote “yes” and support confirmation.
Visteon agreed to give the lenders interest since bankruptcy at the default rate and to support reimbursing the lenders for their professional fees. In return, the lenders will withdraw objections and the appeal taken from approval of the so-called plan-support agreement.
The lenders who negotiated the plan changes agreed to recommend that holders of the remainder of the loan also vote “yes.”
The confirmation hearing for approval of Visteon’s reorganization plan is scheduled to begin Sept. 28 and to continue for nine additional days if necessary. In addition to shareholders and some creditors who are opposed, a group of trade suppliers said they have enough “no” votes to block approval by the unsecured creditor class.
For details on Visteon’s plan, click here for the June 15 Bloomberg bankruptcy report. For a summary of the positions by various parties before the judge approved the disclosure statement, click here for the May 25 Bloomberg bankruptcy report.
Visteon filed for reorganization in May 2009, listing assets of $4.6 billion against debt totaling $5.3 billion. Sales in 2008 were $9.5 billion, including $3.1 billion to Ford Motor Co. (F) Visteon was spun off from Ford in 2000. Van Buren Township, Michigan-based Visteon at the outset owed $2.7 billion for borrowed money, including $1.5 billion on a secured term loan, $862 million on unsecured bonds, and $214 million on other debt obligations.
The case is In re Visteon Corp., 09-11786, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Station Casinos, Unsecured Creditors Settle on Plan
The creditors’ committee reached a settlement with Station Casinos Inc. and as a result turned opposition to the Chapter 11 plan into support. The casino operator filed a revised reorganization plan and explanatory disclosure statement yesterday.
At a hearing on July 15 when the bankruptcy judge tentatively approved the disclosure statement, the company’s lawyer told the judge there were negotiations that could convert contested confirmation turn into consensual confirmation.
The revised plan provides that general unsecured creditors and holders of $1.28 billion in senior notes now are in line to receive warrants and investment rights in connection with implementation of the plan plus the ability to invest again in the future. Previously, they were to receive nothing.
The revised disclosure statement doesn’t make a guess about a predicted recovery for the noteholders.
The holders of $1.56 billion in subordinated notes are also to receive a share of the same warrants and investment rights, although how much if anything they actually receive is a function of the existing subordination agreement and elections that senior creditors make in accepting the plan.
The confirmation hearing, currently set for Aug. 27, will be preceded by an auction on Aug. 6 for some although not all of the casinos. The first bid of $772 million will come from a group including current owners Frank and Lorenzo Fertitta.
The plan incorporates an agreement built around the auction. For details on the auction, the appeal being taken by unsecured creditors, and the Station Casinos reorganization plan, click here for the June 11 Bloomberg bankruptcy report. Assuming the settlement with unsecured creditors is approved as part of the plan, the committee will drop the appeal.
Station Casinos filed under Chapter 11 in July 2009. It has 13 properties in Las Vegas plus five joint ventures. It also operates casinos for American Indian tribes. Station’s debt was the result of a leveraged buyout in November 2007 by Fertitta Colony Partners LLC.
The case is In Re Station Casinos Inc., 09-52477, U.S. Bankruptcy Court, District of Nevada (Reno).
Lehman Seeking Approval for Innkeepers Plan Support
Lehman Brothers Holdings Inc. filed a motion in its own Chapter 11 case for authorization to carry out a commitment to reorganize Innkeepers USA Trust, a real estate investment trust owned by Apollo Investment Corp. (AINV)
Worked out before Innkeepers filed under Chapter 11 on July 19, the so-called plan support agreement calls for Lehman subsidiary Lehman ALI Inc. to exchange its $238 million in mortgage debt for all the new Innkeepers equity. The Lehman subsidiary has floating-rate mortgages on 20 of Innkeepers 72 extended-stay and limited-service properties.
In the motion that will have an Aug. 18 hearing in the Lehman bankruptcy court, Lehman also wants permission to sell half the new stock it receives to Apollo for not less than $107.5 million. In addition, Lehman needs authorization from the bankruptcy judge to make a $17.5 million loan to refurbish the Innkeepers properties on which it has mortgages.
Innkeepers owes Lehman an additional $118 million on a floating-rate mezzanine debt not destined to have a recovery under the plan.
Lehman filed another motion, also to be in court on Aug. 18, to pay fees for its investment banker, Lazard Freres & Co., if Innkeepers doesn’t. Under the plan-support agreement, Innkeepers is supposed to pay Lazard’s fees.
Lazard is to receive $150,000 a month plus a restructuring fee of $1.5 million. Some of the monthly fee will be credited against the restructuring fee. Innkeepers disclosed at the outset of its Chapter 11 case that it would be paying $460,000 a month to reimburse Lehman for its professional fees.
The remainder of Innkeepers’ plan would have secured creditors, owed $825 million, to receive $550 million in fixed-rate mortgages on the 45 properties that are their collateral. There are another $206 million in mortgages on seven properties that would be reduced by the plan to $150 million.
Innkeepers’ general unsecured creditors are to receive $500,000 cash.
The plan where Lehman would take the new equity is opposed by the holders of the $825 million debt.
In total, Palm Beach, Florida-based Innkeepers has 72 hotels with 10,000 rooms in 20 states. Apollo acquired the company in July 2007 in a $1.35 billion transaction. The Innkeepers petition listed assets of $1.5 billion against debt totaling $1.52 billion.
Midland Loan Services Inc. is the servicer for the $825 million in mortgage debt.
The case is In re Innkeepers USA Trust, 10-13800, U.S. Bankruptcy Court, Southern District New York (Manhattan).
The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding under the Securities Investor Protection Act for the brokerage operation is Securities Investors Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District New York (Manhattan).
Third-Party Releases Becoming Limited in New York Cases
A small case is about to make big law limiting the circumstances when bankrupt companies can preclude creditors and shareholders from suing officers and directors in a Chapter 11 reorganization in New York.
U.S. Bankruptcy Judge Martin Glenn at a hearing in June refused to approve the disclosure statement for American Mortgage Acceptance Co. because the proposed reorganization plan would have given a blanket release to officers and directors prohibiting suits by shareholders and creditors.
Glenn had two problems with releasing officers and directors. He cited a 2005 decision from the 2nd U.S. Circuit Court of Appeals in Manhattan named Metromedia Fiber Network Inc. which says that so-called third-party releases are proper only in “truly unusual circumstances.”
Before even reaching the question of whether there are the necessary “unusual circumstances,” Glenn said that the reorganizing company first must establish that the bankruptcy court has jurisdiction or power to prevent suits against third parties.
On the question of jurisdiction or power, Glenn referred to opinions from the 2nd Circuit in the long-completed reorganization of John Manville Corp. where the appeals court explained when a bankruptcy court lacks jurisdiction to give releases to third parties. To read about the Manville opinion, click here for the March 23 Bloomberg bankruptcy report.
In the American Mortgage case, Glenn told the lawyer for the company, “Don’t assume that the bankruptcy court will approve a third-party nondebtor release and injunction, even if it is unopposed.”
At the hearing on June 23, Glenn also put the brakes on efforts by a reorganizing company to indemnify officers, directors and employees. Before the bankrupt business can pick up defense costs and pay judgments against officers and directors, Peck said there must be an underlying insurance policy that’s property belonging to the company. Or, there must somehow be property of the Chapter 11 company at risk.
On the related question of giving indemnification to creditors who participated in the plan-crafting process, Glenn told American Mortgage’s lawyer, “You’re going to have to persuade me that exculpation can extend to creditors, even if they participated in the plan process.”
Glenn didn’t slam the door entirely because he noted how other bankruptcy judges in New York allow preventing lawsuits against participants in the plan process so long as there was no gross negligence or willful misconduct.
Glenn gave American Mortgage a chance to revise the plan and disclosure statement to limit third-party release in line with his reading of the law.
Glenn cited two other bankruptcy judges in New York, Stuart M. Bernstein and Allan Gropper, who are also developing policies limiting release for third parties.
If the judges in New York become stingy with releases for directors, officers and third parties, Delaware could become a more favorable forum unless the judges in Wilmington develop similar policies.
American Mortgage was a real estate investment trust that had $666 million of assets in 2007. It now has two creditors. To read about the plan, click here for the May 14 Bloomberg bankruptcy report.
The case is In re American Mortgage Acceptance Co., 10-12196, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Body Armor Maker Point Blank Has Shareholders’ Panel
The committee appointed on July 27 includes Privet Fund Management LLC, Prescott Group Capital Management, Bahrat Capital LLC, and Tiburon Capital Management LLC.
Bankruptcy law allows the U.S. Trustee to form additional official committees, such as an equity committee, if she believes one is proper under the U.S. Bankruptcy Code. Ordinarily, additional committees are formed when the Trustee declines to appoint one and the spurned shareholders prevail on the bankruptcy judge to overrule the Trustee’s judgment.
Point Blank is working under a loan agreement that requires selling the business. Assuming the judge adopts the proposed schedule at an Aug. 3 hearing, there must be a letter of intent by Sept. 15 and a motion by Sept. 30 to approve an asset-purchase agreement. Alternatively, Point Bank could file a Chapter 11 plan and disclosure statement by Sept. 30.
At the Aug. 3 hearing the creditors’ committee will be arguing in favor of the appointment of a Chapter 11 trustee. The company characterized the committee’s motion as based on “reckless accusations with no factual basis whatsoever.”
Point Blank has a plant and head office in Pompano Beach, Florida, and a second plant in Jacksboro, Tennessee. Revenue in 2009 was more than $153 million. The petition listed assets of $64 million against debt totaling $68.5 million. Debt included a $10.5 million secured loan to be paid off by financing for the Chapter 11 case. Point Blank said it also owes $28.2 million to trade suppliers. Three former officers were indicted on charges of securities fraud.
The case is In re Point Blank Solutions Inc., 10-11255, U.S. Bankruptcy Court, District of Delaware.
Gems TV Has Plan with Near Full Payment to Creditors
Gems TV (USA) Ltd., once a television retailer of gemstone jewelry products, filed a liquidating Chapter 11 plan along with a disclosure statement telling unsecured creditors with $28 million in claims that they can expect a recovery between 95 percent and 100 percent. The hearing for approval of the disclosure statement is set for Aug. 31.
Holders of subordinated notes with claims of $93 million are in line for a 2.1 percent recovery, the disclosure statement says.
The plan and almost full payment to some creditors results from a settlement where DirecTV (DTV) Inc. will waive its claims.
The company expects to have $25.85 million cash on hand in October and eventually generate $31.5 million. There should be $28.05 million available for distribution to unsecured creditors, with $1.97 million remaining for subordinated claims, the disclosure statement says.
There are no remaining secured claims.
Reno, Nevada-based Gems TV shut down the business before filing under Chapter 11 on April 5. The petition said assets are less than $50 million while debt is expected to exceed $100 million.
The case is In re Gems TV (USA) Ltd., 10-11158, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Abitibi Refines Disclosure for Approval Hearing Today
AbitibiBowater Inc., the largest newsprint maker in North America, prepared for today’s renewed hearing by fine-tuning the reorganization plan and the explanatory disclosure statement. The changes in part refine the $500 million backstopped rights offering.
The disclosure statement, up for approval at today’s hearing, tells creditors of each of the more than 40 affiliated companies how much they stand to recover.
While secured claims are paid in full, unsecured creditors of AbitibiBowater Inc. are expected to recover 0.8 percent on their $746 million in claims. The recovery by unsecured creditors of Abitibi subsidiaries will range from 100 percent for Augusta Woodlands LLC to nothing at Abitibi-Consolidated Alabama Corp., where $649 million is owing.
Among the larger Abitibi subsidiaries, the recovery ranges from 0.4 percent to 37.4 percent. The predicted recovery on $656 million in claims against Abitibi-Consolidated Corp. is 12 percent.
For subsidiaries of Bowater, some are to see no recovery for their creditors. Among the Bowater subsidiaries with larger creditor bodies, the predicted recovery ranges from 0.9 percent to 36.5 percent. Creditors with claims of $2.75 billion against Bowater Inc. are expected to take home 48.4 percent, the revised disclosure statement says.
The plan prohibits creditors with claims against several affiliates from receiving more than full payment.
AbitibiBowater was formed in October 2007 through a merger between Montreal-based Abitibi-Consolidated Inc. and Greenville, South Carolina-based Bowater Inc. Abitibi is a producer of newsprint, uncoated mechanical paper and lumber. Bowater also makes newsprint along with papers, bleached kraft pulp and lumber.
The Montreal-based company began reorganizing with 24 pulp and paper mills plus 30 wood-product plants. Revenue in 2008 was $6.8 billion. In Chapter 11 petitions filed in April 2009, the combined AbitibiBowater companies listed assets of $9.9 billion and debt totaling $8.8 billion as of September 2008.
The case is AbitibiBowater Inc., 09-11296, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Trade Secret Creditors Oppose Quick Sale to Regis
The creditors’ committee of Trade Secret Inc. is opposing the sale of the 612-store beauty-supply retailer to the former owner, Regis Corp. (RGS), and an affiliate of the Luborsky family that purchased the business in January 2009.
If the sale goes ahead as the company plans, the committee says the possibility of a recovery by unsecured creditors would be a “virtual nullity.” At a hearing today, the committee will oppose Trade Secret’s proposed auction and sale procedures.
Because there was no marketing of the business before the Chapter 11 filing July 6, the committee contends that a sale in less than two months will insure there is no other buyer.
At another hearing Aug. 5, the committee will oppose the terms on which Trade Secret intends on using cash that’s collateral for the $32 million owing to Regis. Allowing use of cash for only 75 days, in the judgment of the committee, will make the sale to Regis and the Luborsky family a “fait accompli.”
The committee doesn’t want Regis to be allowed to bid for the assets with its secured debt until there has been an investigation into the sale of the business in January 2009.
Edina, Minnesota-based Regis is offering to pay $45 million for the business. The price would be composed of a $32 million credit using secured debt and the assumption of $13 million in debt.
Markham, Canada-based Trade Secret wants the bankruptcy judge to require other bids by Aug. 20 and an auction on Aug. 25, followed the next day by a hearing to approve the sale.
Trade Secret also operates under the names Beauty Express, BeautyFirst and Pure Beauty. The stores are mostly in shopping malls. Revenue for the fiscal year ended in January was $220 million.
The Luborsky family also owns Premier Salons Inc. Neither Premier nor any of its 340 stores are in bankruptcy.
The case is In re Trade Secret Inc., 10-12153, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Medical Staffing Auction Set for August 19
Medical Staffing Network Holdings Inc., a Boca Raton, Florida-based provider of temporary nursing services, will hold an auction on Aug. 19 to learn whether anyone aside from the secured lenders is interested in buying the business.
Under procedures the court approved last week, other bids are due Aug. 17. The hearing for approval of the sale will take place Aug. 20.
The company filed under Chapter 11 on July 2 after already nailing down agreement for sale of the business to first-lien lenders in exchange for $84.12 million of the $98.2 million they’re owed. The lenders didn’t request a breakup fee if they’re outbid at auction.
Holders of 90 percent of the $26.8 million in second-lien debt consented to the sale, the company said in court papers. The buyers are providing the $15 million in financing for the Chapter 11 case. General Electric Capital Corp. is the agent for the senior lenders. NexBank SSB is agent for the junior secured lenders.
Warburg Pincus Private Equity VIII LP owns 45 percent of the equity of Medical Staffing, which was created through 30 acquisitions since founding in 2008.
The petition listed assets of $87.8 million against debt totaling $140.9 million. Revenue of $341 million in 2009 resulted in an operating loss of $34.3 million. Revenue of $72 million in the first quarter of 2010 threw off a $1.3 million operating loss. Projected revenue for 2010 is $302 million.
The case is In re Medical Staffing Network Holdings Inc., 10-29101, U.S. Bankruptcy Court, Southern District Florida (West Palm Beach).
Homebuilder Gemcraft Has Aug. 5 Disclosure Hearing
Gemcraft Homes Inc., a homebuilder based in Forest Hill, Maryland, scheduled an Aug. 5 hearing in U.S. Bankruptcy Court in Baltimore for approval of a disclosure statement explicating the Chapter 11 plan.
On filing under Chapter 11 in November, Gemcraft owed $131 million to secured lenders. For lenders who haven’t worked out agreements with Gemcraft, they will be given their collateral.
Unsecured creditors are being offered 10 percent in cash up to a maximum aggregate distribution of $350,000. Other unsecured creditors are relegated to recoveries from a litigation trust that’s not expected to bring in more than $500,000.
Mechanic’s lien holders will be treated as unsecured creditors unless the bankruptcy court rules that a mechanic’s lien comes ahead of a lender’s mortgage.
Closely held Gemcraft sold 770 homes in 2006. Revenue shrank to $83 million in 2009.
The case is In re Gemcraft Homes Inc., 09-31696, U.S. Bankruptcy Court, District of Maryland (Baltimore).
Chapter 11 Recoveries Near Record Low, Moody’s Says
Recoveries by creditors of companies in Chapter 11 during the current recession “have been at record lows,” according to a July 21 report by Moody’s Investors Service.
In contrast, recoveries by creditors in 14 so-called distressed exchanges were 70.9 percent since the recession began, Moody’s said. A distressed exchange occurs when all or some creditors take less than full payment out-of-court to avoid a Chapter 11 filing.
For the 43 companies that emerged from Chapter 11 reorganizations, the recovery was 45.6 percent for companies with so-called prepacks and 41.2 percent in freefall cases. A prepackaged Chapter 11 is one where the plan is negotiated before the company goes to bankruptcy court. A freefall case occurs when there isn’t agreement on a plan before the Chapter 11 filing.
When the distressed exchanges are combined with the prepacks and freefall reorganizations, the overall recovery rate since the recession has been 50.9 percent, compared with 54.7 percent overall since 1988, Moody’s said.
Moody’s commented that the distressed exchanges “did not materially increase overall credit quality for these companies.” Moody’s believes that in some cases the distressed exchanges will only serve to postpone bankruptcy.
Bankrupt Brunell Signs with New York Jets for Two Years
Mark Brunell, who had been the backup quarterback for this year’s Super Bowl-winning New Orleans Saints, signed a two-year contract with the New York Jets. Brunell filed for Chapter 11 reorganization on June 25 in Jacksonville, Florida, near his $3.1 million home in Ponte Vedra Beach. Brunell had been a free agent.
Before the Saints, Brunell played for the Washington Redskins, Jacksonville Jaguars and Green Bay Packers. He was named to the Pro Bowl in 1998 and 2002. He listed assets of $5.52 million and debt totaling $24.73 million.
The case is Mark A. Brunell, 10-05550, U.S. Bankruptcy Court, Middle District Florida (Jacksonville).
National Mentor Downgraded to B- on ‘Cloudy’ Rates
National Mentor Inc. and its parent, NMH Holdings Inc., were demoted yesterday from a B to a B- corporate rating by Standard & Poor’s.
The Boston-based provider of home and community-based psychological, neurological and psychiatric services has a $98 million maturity in 2012 at the holding company. S&P also said the reimbursement picture is “cloudy.”
The pay-in-kind notes at the holding company were demoted one grade to CCC.
National Mentor is controlled by New York-based Vestar Capital Partners.
Chrysler Creditors’ Suit, Tribune Bonds, A&P, WaMu: Audio
The possibility that unsecured creditors of old Chrysler will receive nothing after losing a lawsuit to Daimler AG (DAI); trading in Tribune Co. bonds following the examiner’s report; financial obstacles facing Great Atlantic & Pacific Tea Co.; and Joshua Hochberg, the new examiner for Washington Mutual Inc. (WM), are covered in the latest bankruptcy podcast on the Bloomberg terminal and Bloomberglaw.com. To listen, click here.
Recording Tax Deed is Date of Transfer, 7th Circuit Holds
The 7th U.S. Circuit Court of Appeals in Chicago ruled in favor of individual bankrupts in the course deciding a case the panel characterized as a “fascinating intersection” between federal bankruptcy law and Illinois state tax law. The case involved how long someone can wait before filing bankruptcy to preserve the ability to unwind the sale of a tax deed.
The case involved state law where a county conducts a so-called tax sale when real estate taxes are unpaid. After the tax sale, the purchaser must wait two years before applying for a deed to the property. In the meantime, the owner has the right to redeem the property by paying the tax, plus interest and penalties.
After two years, the purchaser applies for a tax deed which is typically issued some months later. The individuals filed Chapter 13 bankruptcy more than two years after the tax sale although less than two years before the tax deed was recorded.
The homeowners filed a lawsuit in bankruptcy court to void the tax deed as a fraudulent transfer. The bankruptcy court, affirmed by the district court, dismissed the suit, saying the two-year lookback period in bankruptcy law began to run from the tax sale, not the recording of the deed.
The 7th Circuit, in an opinion by Judge John D. Tinder, reversed the lower courts, concluding that the transfer didn’t occur for bankruptcy purposes until the tax deed was recorded. He therefore reinstated the complaint to void the tax deed as a fraudulent transfer.
The case is Smith v. SIPI LLC (In re Smith), 08-2880, 7th U.S. Circuit Court of Appeals (Chicago).
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