MF Global, Patriot, Kodak, Legends, Goddard: Bankruptcy

Commodities customer Sapere Wealth Management LLC, undaunted by defeats in bankruptcy court and federal district court, is in the U.S. Court of Appeals arguing that Jon S. Corzine and other officers and directors of MF Global Holdings Ltd. have no right for defense costs to be paid from the liquidating broker’s directors’ and officers’ liability insurance policies.

A victory by Sapere would take money away from Corzine, the former Democratic Governor of New Jersey, and other MF Global executives while delivering insurance proceeds more quickly to customers whose money disappeared when $1.6 billion in supposedly segregated cash was mishandled.

Creditors proposing the reorganization plan for the MF Global parent filed papers on March 8 laying out exactly who wins and who loses, and by how much, as a result of a settlement with JPMorgan Chase Bank NA, as agent for banks owed about $1.17 billion.

MF Global has $225 million of directors’ and officers’ insurance coverage for the policy year May 2011 to May 2012, with another $150 million in errors and omissions insurance. In April 2012 the bankruptcy judge in New York ruled that Corzine and other MF Global executives were entitled to use part of the insurance policies to cover costs of defending several class lawsuits filed by customers, including Sapere.

Sapere appealed to the court in Manhattan after the district court upheld the bankruptcy court in November.

In a brief filed at the end of last week, Matthews, North Carolina-based Sapere argued that the bankruptcy judge abused his discretion by allowing MF Global executives to use insurance policies for defense. Because there is an admitted $1.6 billion shortfall in money segregated for customers, Sapare says the lower courts made mistakes when they didn’t recognize that customers have an immediate right to policy proceeds even though they are yet to win a judgment.

U.S. Bankruptcy Judge Martin Glenn said that “settled case law” provides that “individual insureds cannot be denied contractually provided insurance protection” simply because “others may have claims on the policies as well.”

Sapere previously said it had a $90.2 million claim for money that should have been held by MF Global in its customer account.

The MF Global Holdings parent and the commodity brokerage subsidiary MF Global went into separate bankruptcies on Oct. 31, 2011, after discovery of the shortfall in customers’ property. The trustee for the holding company together with several creditors proposed a Chapter 11 plan that comes up for approval at an April 5 confirmation hearing.

An impediment to plan approval was removed by a compromise reached through mediation with JPMorgan. MF Global filed papers on March 8 asking Glenn to authorize sending supplemental disclosure materials to creditors for use while they vote on the plan. The hearing to approve supplemental disclosure will take place tomorrow.

The creditors’ disclosure statement previously predicted a recovery of 13.4 percent to 39.1 percent for holders of $1.134 billion in unsecured claims against the parent holding company. With the settlement, the recovery is now 11.4 percent to 34.4 percent. Bank lenders would have the same recovery on their $1.174 billion claim against the holding company.

As a consequence of the settlement, the predicted recovery is now 18 percent to 41.5 percent for holders of $1.19 billion in unsecured claims against the finance subsidiary, one of the companies under the umbrella of the holding company trustee. Previously, the predicted recovery was 14.7 percent to 34 percent on bank lenders’ claims against the finance subsidiary.

The appeal is Sapere Wealth Management LLC v. Freeh (In re MF Global Holdings Ltd.), 12-4797, 2nd U.S. Circuit Court of Appeals (Manhattan). The holding company’s Chapter 11 case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-bk-02790, in the same court.


Mine Workers Oppose Bonuses for Patriot Coal Managers

The $7 million in bonuses that Patriot Coal Corp. proposes for salaried workers are either prohibited retention bonuses or inequitable in view of concessions being imposed on current and retired mine workers, the union and two retirement plans said in papers filed last week with the bankruptcy court in St. Louis.

Although Patriot’s top six executives won’t participate in the bonuses, the mine workers’ union is nonetheless opposed. The bankruptcy judge will consider approving the bonuses at a March 18 hearing.

As for those that are explicitly retention bonuses, the union faults Patriot for not giving the eligible executives’ job descriptions and responsibilities to determine if they fall into the category of “insiders” for whom Congress prohibits retention bonuses.

As for so-called incentive bonuses, the union contends they are “thinly disguised retention bonuses.”

The union says the bonuses are improper when workers are losing their guarantee of lifetime health care.

Patriot is one of the largest coal producers in the U.S. In the July Chapter 11 petition in Manhattan, Patriot listed assets of $3.569 billion and debt of $3.072 billion as of May 31. The bankruptcy was moved from New York to St. Louis in December at the behest of the U.S. Trustee.

Patriot’s $200 million in 3.25 percent senior convertible notes due 2013 traded at 11:10 a.m. on March 11 for 13 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes declined 10 percent since Nov. 13. The $250 million in 8.25 percent senior unsecured notes due 2018 last traded on March 8 for 50.75 cents on the dollar, down about 4 percent since Nov. 13, Trace reported.

The case in Missouri is In re Patriot Coal Corp., 12-bk-51502, U.S. Bankruptcy Court, Eastern District of Missouri (St. Louis).

Legends Casino Wants Bonuses to Fend Off Competitors

The aborted sale and operating losses aren’t the only problem confronting casino operator Legends Gaming LLC. A competing casino is to open soon in Bossier City, Louisiana, the primary market.

The owner of the DiamondJacks casinos in Bossier City and Vicksburg, Mississippi, should have completed a Chapter 11 reorganization financed by a sale of the properties to an affiliate of the Chickasaw Nation for $125 million. The buyer pulled out, claiming operations deteriorated to the extent the purchase could be canceled.

The casinos reported a $477,000 operating loss in January on net revenue of $7.2 million. The net loss was $4.5 million, including $3.8 million of interest expense.

The casinos are asking the bankruptcy court in Shreveport, Louisiana, to approve a $780,000 bonus program to keep existing employees from quitting. The program includes $91,000 for executives who would receive a 3 percent bonus like everyone else.

The casinos are concerned that without bonuses, some workers will be hired away when the competitor opens in town.

Creditors were voting on a reorganization plan when the sale fell apart. The buyer and the seller sued each other in bankruptcy court in early February.

Legends previously filed for reorganization in March 2008 in Shreveport and emerged from Chapter 11 under a confirmed plan in September 2009. Legends bought the two casinos from Isle of Capri Casinos Inc. for $240 million and began operations in July 2006.

The new case is In re Louisiana Riverboat Gaming Partnership, 12-bk-12013, U.S. Bankruptcy Court, Western District of Louisiana (Shreveport).

Kodak Reports $1.38 Billion Net Loss in 2012

Eastman Kodak Co. reported a $1.38 billion net loss in 2012 in yesterday’s regulatory filing. The loss would have been $308 million were it not for the cost of the Chapter 11 reorganization begun more than a year ago, the company said.

Revenue last year was $4.11 billion, producing a loss from continuing operations of $1.56 billion. In 2011, the operating loss was $609 million. Reorganization costs in 2012 totaled $843 million.

The net loss would have been larger if not for $257 million in tax benefits.

Rochester, New York-based Kodak sold digital imaging technology for $527 million and intends to emerge from bankruptcy focusing on the commercial printing business. Kodak said it expects to file a Chapter 11 plan in April.

Kodak’s $400 million in 7 percent convertible notes due in 2017 last traded on March 11 for 12.75 cents on the dollar, up from 10.5 cents on Dec. 12, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Kodak filed for Chapter 11 reorganization in January 2012, 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-bk-10202, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

No Bids against Apollo, Metropoulos for Hostess Snack Cakes

Hostess Brands Inc. received no bids to compete with the $410 million offer for the snack cake business made by affiliates of Apollo Global Management LLC and C. Dean Metropoulos & Co.

The auction was canceled that would have been held tomorrow. The hearing to approve sale will take place March 19. Assuming Hostess overcomes opposition from the bakery workers’ union, next week’s hearing is also to approve selling most of the bread business, including the Wonder bread brand, to Flowers Foods Inc. for $360 million. Mexican bread maker Grupo Bimbo SAB won the auction for the Beefsteak rye bread business with an offer of $31.9 million.

The major sales will finish on March 15 with an auction for some of the remaining bread businesses and the Drakes cakes operation. The opening bids at that auction will total $56.35 million.

Now based in Irving, Texas, Hostess filed under Chapter 11 for a second time in January 2012, listing assets of $982 million against liabilities totaling $1.43 billion. Brand names include Wonder, Hostess, Merita, Dolly Madison, Drake’s and Butternut.

The new case is In re Hostess Brands Inc., 12-bk-22052, U.S. Bankruptcy Court, Southern District of New York (White Plains).

Former Howrey Partners Sued for Fraudulent Transfers

The trustee liquidating Howrey LLP filed lawsuits in bankruptcy court this week against six of the defunct law firm’s former partners. The suits contend the former partners are liable to give up profits they made at new firms in finishing business begun at Howrey.

From three of the partners, the suits are seeking $3.75 million in distributions the firm made after June 2010, when the trustee believes Howrey became insolvent. The trustee contends the payments to the partners were fraudulent transfers because there were no profits available for distribution to partners.

The suits to recover profits from unfinished business are based on what’s known as the Jewel doctrine, named after a California decision holding former partners liable to give up profits made at their new firms. Courts are split on whether the Jewel doctrine is good everywhere.

The issue is now in the U.S. Court of Appeals in Manhattan arising from the liquidation of Coudert Brothers LLP.

Federal district judges in Manhattan are split on whether profits at a new firm must be given up. In September U.S. District Judge William H. Pauley III ruled in a case involving Thelan LLP that hourly fees earned on unfinished business by a new law firm aren’t property of the defunct firm. Pauley disagreed with a decision in May by U.S. District Judge Colleen McMahon who ruled in the Coudert liquidation that fees earned on unfinished business belong to the liquidated firm.

The decision by the appeals court in New York won’t be binding on the court in California in the Howrey bankruptcy.

The Howrey partners lost control of the liquidation when the bankruptcy court authorized appointment of a Chapter 11 trustee in September 2011. The firm, once known for expertise in antitrust and intellectual property law, filed under Chapter 11 in June 2011 following an involuntary filing in April 2011.

The bankruptcy is in San Francisco where the firm had one of its 19 offices around the world. The firm shut down in March 2011. Howrey’s main office had been in Washington. It previously was known as Howrey & Simon and Howrey Simon Arnold & White LLP. At one time, the firm had more than 700 lawyers.

The case is In re Howrey LLP, 11-bk-031376, U.S. Bankruptcy Court, Northern District of California (San Francisco).

New Filing

Goddard Elementary School Files in White Plains, New York

The operator of the Goddard private elementary school in Yorktown Heights, New York, filed a petition for Chapter 11 reorganization yesterday in White Plains, New York, vowing to “rehabilitate the operation of the business” with income expected in a “relatively short period of time.”

Revenue for the school was $500,000 in 2012. The closely owned franchise in Yorktown Heights is one of 400 Goddard schools, according to the website.

Court papers listed assets of $3.4 million and liabilities totaling $1.8 million. The principal asset is the franchise valued at $3 million. Liabilities include $1.5 million owing to secured creditors.

The case is In re TGAG LLC, 13-bk-22403, U.S. Bankruptcy Court, Southern District of New York (Manhattan).


Playboy Downgraded to CCC+ on June Covenant Violation

Playboy Enterprises Inc. “will likely” violate a covenant in a loan agreement for the year ended in June, according to a report yesterday from Standard & Poor’s.

Although the owners have a right to provide $10 million of equity to eradicate the covenant violation, S&P lowered the corporate rating by one step to CCC+. S&P says that liquidity is “less than adequate.”

The company “expects to address this technical issue before that time and has several options for doing so,” Playboy said in an e-mailed statement.

Playboy is moving away from video and print where there is “availability of free adult content on the Internet,” S&P said. The company is “transforming into a primarily brand management and licensing company,” according to S&P.

Playboy was acquired in March 2011 by Icon Acquisition Holdings LP in a transaction valued at $217 million, with equity and debt financing provided by Rizvi Traverse Management LLC and Jefferies & Co. Hugh Hefner retained an ownership interest and remained editor-in-chief.

Advance Sheets

Chapter 13 Circuit Split Set for March 19 Argument

Whether a split will remain among circuit courts of appeal on a question involving individual bankrupts in Chapter 13 will be decided when 11 judges on the U.S. Court of Appeals in San Francisco hear argument on March 19 in a case decided on Aug. 31 in a split opinion by a panel of three judges.

The question is whether an individual in Chapter 13 with no “projected disposable income” can propose a plan shorter than the five year “applicable commitment period” stated in Section 1325(d) of the Bankruptcy Code. In the 2-1 decision in August, the panel concluded that the plan needn’t be five years. Two other circuit courts ruled that a five-year plan can’t be avoided.

The issue in the Ninth Circuit in San Francisco traces its roots to a 2008 case called Maney v. Kagenveama. The appeals court ruled that a shorter plan duration was permissible. On another issue in the same opinion, the Ninth Circuit ruled that the calculation of projected disposable income was an immutable function of the bankrupt’s pre-bankruptcy income.

The U.S. Supreme Court decided a case in June 2008 called Hamilton v. Lanning which ruled against Kagenveama on the second issue regarding the calculation of projected disposable income. Hamilton v. Lanning cast doubt about whether the other holding in Kagenveama, about the length of a plan, remained good law in the Ninth Circuit.

The question left open in Kagenveama returned to the Ninth Circuit in a case that was argued in May and decided at the end of August. Writing for himself and a circuit judge, U.S. District Judge Edward M. Chen, sitting by designation on the appeals court, concluded that Hamilton is not “clearly irreconcilable” with Kagenveama and thus was not “implicitly overruled” by the Supreme Court on the issue of how long a plan must remain open.

Chen said in his 33-page opinion that Hamilton didn’t consider the question of “applicable commitment period,” thus not undercutting Kagenveama. He also reasoned that the rationale of Kagenveama on the duration of a plan is consistent with Hamilton.

Chen concluded that a bankruptcy court erred in requiring a plan to remain open for five years even for a bankrupt with no projected disposable income. The bankruptcy court believed, incorrectly in Chen’s opinion, that Kagenveama had been overruled by the Supreme Court in all respects.

Circuit Judge Susan Graber dissented in a four-page opinion. She said Kagenveama was irreconcilable with Hamilton v. Lanning.

Two other circuit courts in cases called Tennyson and Baud decided the same question regarding the duration of Chapter 13 plans. They both reached the opposite result, ruling that a plan must stay alive five years. To read about Tennyson and Baud, click here and here for the July 19, 2010, and Feb. 7, 2011, Bloomberg bankruptcy reports. To read about Hamilton v. Lanning, click here for the June 8, 2010, Bloomberg bankruptcy report.

The bankrupt in the Baud case sought review in the U.S. Supreme Court, contending there was a split of circuits that the high court should resolve. The Supreme Court declined to hear the case.

The Ninth Circuit has almost 30 active judges. Unlike other circuits where rehearing is held before all active judges, so-called en banc rehearings in the Ninth Circuit are heard by a panel of 11, including the chief judge and 10 other circuit judges chosen at random.

The case is Danielson v. Flores (In re Flores), 11- 55452, 9th U.S. Circuit Court of Appeals (San Francisco).

UCC Financing Statement Invalid for Lack of Periods

A financing statement filed to perfect a security interest is defective for lack of periods and spaces after initials in the borrower’s corporate name.

The proper name for a company that went into bankruptcy was “C. W. Mining Co.,” with periods and spaces after the initials. A lender filed a financing statement under the Uniform Commercial Code in the name “CW Mining Co.,” without periods or spaces following the initials.

On appeal, U.S. District Judge Ted Stewart in Salt Lake City upheld the bankruptcy court and ruled that the lack of periods and spaces made the UCC financing statement “seriously misleading” and therefore ineffective to perfect a security interest.

Stewart said a majority of courts are “unforgiving” and find financing statements inadequate even for “minimal errors.”

Stewart returned the case to the bankruptcy court for a determination as to whether agreements created a security interest in coal produced from the mine or transferred title to the lender immediately when the coal was severed from the coal seam.

Because the agreements were ambiguous, Stewart said it was an error not to hold a trial and hear evidence on whether the parties intended to transfer title or create a security interest.

Although there isn’t a valid security interest, the lender still might win if the bankruptcy court decides the agreement transferred title.

The case is Rushton v. Utah American Energy Inc. (In re C.W. Mining Co.), 10-cv-00271, U.S. District Court, District of Utah (Salt Lake City).

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