Supreme Court Doesn’t Help Madoff Trustee: Bankruptcy

The Bernard Madoff trustee, who will try to reinstate hundreds of lawsuits through an appeal to be argued March 5 in Manhattan, had his chances of success dealt a blow last week when the U.S. Supreme Court decided a case involving R. Allen Stanford’s Ponzi scheme.

Madoff trustee Irving Picard is appealing a federal district court decision barring him from suing to recover transfers made more than two years before bankruptcy. Were Picard to succeed on appeal, he might eventually be able to pay defrauded customers in full. Customers’ recoveries currently are in the 56 percent range.

In last week’s decision, called Chadbourne & Parke LLP v. Troice, the Supreme Court ruled in favor of defrauded customers, allowing them to sue firms and individuals who helped sell Stanford’s fraudulent securities. At first blush, Troice seems to help the Madoff trustee because the high court allowed defrauded investors to sue. Looking at the Troice opinion in detail, though, it’s at best unhelpful for Picard and customers who are suing third parties to recover their losses.

The issue in the Madoff case is the so-called safe harbor in Section 546 of the Bankruptcy Code, which bars some types of suits when they involve transactions in securities. Picard contends the safe harbor doesn’t apply because Madoff never bought a single security with customers’ money.

Troice didn’t deal with the safe harbor. Instead, it turned on the 1998 Securities Litigation Uniform Standards Act, or SLUSA. That statute bars class suits under state law based on a misrepresentation “made in connection with a prior sale of a covered security.” A “covered security” is defined as a security traded on a national exchange.

In the Troice case, Stanford sold investors certificates of deposit issued by an offshore bank. The customers were told the bank would use their money to invest in covered securities.

The U.S. Court of Appeals in New Orleans allowed the Stanford suit to proceed because the customers bought certificates of deposit, which aren’t covered securities.

The Madoff and Stanford cases are similar in that customers’ money wasn’t used to purchase securities. Unfortunately for the Madoff trustee, the Supreme Court’s rationale for allowing the Stanford suits to proceed isn’t helpful.

The Supreme Court said SLUSA didn’t apply to Stanford because “no person actually believed he was taking an ownership position” in a covered security. With Madoff, the customers were told they were buying covered securities, and that’s what their fictitious account statements showed. Indeed, the district judge said the safe harbor was applicable because investors believed they were buying securities.

The Troice decision is possibly the death knell for a lawsuit by investors in feeder funds who in turn invested with Madoff. The investors contend JPMorgan Chase & Co. and Bank of New York Mellon Corp. were aware of Madoff’s fraud and should be held liable because they continued to provide him with banking services. The district court dismissed the suits under SLUSA.

In September, a three-judge panel of the U.S. Court of Appeals in New York invoked SLUSA and upheld dismissal. The investors sought a rehearing by all active judges on the court.

In October, the appeals court said a decision on rehearing would await the Troice decision. Now that the Supreme Court said that SLUSA applies if investors thought they were buying covered securities, Troice suggests Madoff investors have slim a chance of winning rehearing and having their suits reinstated.

During oral argument in the Supreme Court in October in the Troice case, the justices several times asked questions showing an awareness that their ruling would affect Madoff cases working their way up the appellate ladder, in which judges said the ability to sue was curtailed by SLUSA.

This week’s appeal by Picard primarily involves the safe harbor, not SLUSA. The trustee wants the appeals court to focus on how investors’ money was actually invested, not what they were told.

Picard could argue that Troice has no bearing on his appeal because his issue is governed by the safe harbor, where courts may not give the same definition to securities as in SLUSA. He also can contend that just as customers’ expectations about buying securities didn’t carry the day in Troice, they shouldn’t govern in the Madoff case, where no securities ever were bought.

The Madoff firm began liquidating in December 2008 with the appointment of Picard as trustee under the Securities Investor Protection Act. Madoff individually went into an involuntary Chapter 7 liquidation in April 2009, and his case was later consolidated with the investment firm’s liquidation.

He’s serving a 150-year prison sentence following a guilty plea. So far, Picard has recovered about $9.5 billion, or some 56 percent of customers’ investments.

The Supreme Court decision is Chadbourne & Parke LLP v. Troice, 12-00079, U.S. Supreme Court (Washington). Picard’s appeal to be argued this week is Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Investment Securities LLC), 12-02557, U.S. Court of Appeals for the Second Circuit (Manhattan). The Madoff appeal up for rehearing in the circuit court is Trezziova v. Kohn (In re Herald, Primeo, and Thema), 12-00156, U.S. Court of Appeals for the Second Circuit. The Madoff liquidation in bankruptcy court is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-bk-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).

New Filing

Sorenson Files for Debt Swap with Second-Lien Notes

Sorenson Communications Inc., a provider of telephone services for hearing-impaired individuals, filed a Chapter 11 petition today in Delaware, a plan already negotiated with holders of $735 million in 10.5 percent second-lien notes due next year.

Salt Lake City-based Sorenson listed assets of $645 million and debt totaling $1.4 billion. Financial problems were caused by lower government reimbursement and regulatory requirements for greater levels of service the company said it may be “infeasible” to provide.

Creditors already began voting on the reorganization plan negotiated with holders of 77 percent of the second-lien notes. The company plans to have an April 10 confirmation hearing for court approval of the plan.

The plan calls for paying off the $545.9 million first-lien term loan with a new facility backstopped by some of the second-lien noteholders. In addition, there will be a $25 million revolving credit after bankruptcy.

The second-lien noteholders are to receive 87 percent of the new stock plus $77.2 million in cash, $375 million in new secured notes, and 95 percent of $300 million in unsecured notes to be issued by the holding company.

The disclosure statement pegs the second-lien noteholders’ recovery between 55 percent and 94 percent. General unsecured creditors will be paid in full.

Existing shareholders are to receive 13 percent of the new stock plus 5 percent of the new holding company notes.

Revenue was $526.4 million in 2013. The company projects sales will decline to $419.6 million in 2018 as a result of regulatory changes.

The company is owned by GTCR Golder Rauner LLC and Madison Dearborn Partners LLC.

The second-lien notes last traded on Feb. 21 for 87.282 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The case is In re Sorenson Communications Inc., 14-bk-10454, U.S. Bankruptcy Court, District of Delaware (Wilmington).


Judge Disbands Official Detroit Creditors’ Committee

Detroit will proceed through municipal bankruptcy without an official creditors’ committee.

U.S. Bankruptcy Judge Steven Rhodes wrote a 13-page opinion on Feb. 28 ruling that bankruptcy law gave the U.S. Trustee no authority to appoint an official creditors’ committee in a Chapter 9 municipal bankruptcy.

After the U.S. Trustee appointed the committee in December, Detroit objected and asked Rhodes to disband the panel. That’s what the judge did at the end of last week.

Adopting arguments proffered by Detroit, Rhodes relied on Section 1102(a)(1) of the Bankruptcy Code, which calls for appointment of a committee automatically in Chapter 11 corporate reorganizations. That section is applicable in municipal bankruptcies by Section 901(a).

Despite the seeming requirement for having a committee, Rhodes pointed out how Section 1102(a)(1) includes language saying that the U.S. Trustee must appoint a committee after initiation of a Chapter 11 case. Rhodes said that language precludes appointment of a committee in Chapter 9.

For the same reason, Rhodes also said the Justice Department’s bankruptcy watchdog lacks the right to appoint a committee as an exercise of discretion.

Rhodes admitted that committees were appointed in two other municipal bankruptcies. He said there is no indication that the judges in those cases examined the statute to determine if there was power to name a committee.

Rhodes also disbanded the committee as an exercise of his discretion. He said there was “lack of value” flowing from a committee, which would add substantial cost.

In part, Rhodes rested his decision on the committee’s lawyer’s statement that the panel wouldn’t participate in court-mandated mediation. That refusal to mediate “is extraordinary in its manifest disrespect for the importance of mediation in this Chapter 9 case,” Rhodes said.

Rhodes rejected the committee’s argument that the court has no power to disband a committee. Rhodes decided he had the right to curtail the group under Section 105 of the Bankruptcy Code giving the judge the ability to make “any order” furthering the bankruptcy.

Rhodes interpreted other parts of Section 1102 to mean that only the judge has the right to exercise discretion and appoint a committee in a municipal bankruptcy.

Rhodes confirmed how he had the power earlier in the case to appoint an official committee representing retirees, because the Bankruptcy Code requires a committee when the bankrupt intends on reducing retiree benefits.

The now-disbanded five-member committee included two retirement systems, Financial Guaranty Insurance Co., Wilmington Trust Co. as trustee for lenders funding the pension systems, and an individual with a personal-injury claim.

After disbanding the committee, Rhodes further limited the powers of the U.S. Trustee in municipal bankruptcies.

Section 307 of the Bankruptcy Code gives U.S. Trustee the right to appear and be heard on any matter in a bankruptcy case. Rhodes said that section was not made applicable by Congress in municipal bankruptcies.

As a result, Rhodes said the U.S. Trustee does not have what’s called general standing to be heard on every issue in a municipal bankruptcy. Nonetheless, Rhodes said the U.S. Trustee did have the right to be heard about disbanding the committee “in defending its own actions.”

Detroit filed a debt-adjustment plan in February and scheduled a hearing for approval of the disclosure statement to take place April 14. The confirmation hearing beginning June 16 will deal with objections to the plan based on disputed issues of fact.

The plan provides full payment for holders of secured general obligation bonds. Holders of what Detroit contends are unsecured general obligation bonds will have a 20 percent recovery from receiving new bonds.

Retired city workers are to have pensions cut 4 percent to 26 percent, if they accept the compromise contained in the plan. For details on the plan, click here for the Feb. 24 Bloomberg bankruptcy report.

Detroit initiated the 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 of 700,000 has 100,000 creditors and 20,000 retirees.

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

Lehman Repo Customers Don’t Have Customer Claims

Creditors holding repurchase agreements with the brokerage subsidiary of Lehman Brothers Holdings Inc. don’t have customer claims, according to a Feb. 26 ruling by U.S. District Judge Denise Cote upholding a June opinion by the bankruptcy judge.

The opinion was in a test case involving Hudson City Savings Bank and the Federal Deposit Insurance Corp. as receiver for a failed bank, among others. The outcome is important because customers of the Lehman brokerage are being paid in full. With nothing other than general unsecured claims, parties to repurchase agreement may never receive anything.

James Giddens, the trustee for the Lehman brokerage liquidating under the Securities Investor Protection Act, prevailed in his argument that the creditors didn’t have any securities held by the Lehman broker at the time of bankruptcy and therefore don’t have customer status.

From Lehman’s point of view, the transactions were so-called reverse repos, with the creditors delivering securities to Lehman under an agreement where they were obligated to repurchase the securities at a later date at a specified price. The agreements didn’t require Lehman to hold or segregate the securities. Lehman was allowed to use the securities for its own purposes until the repurchase date.

Lehman’s right to use the securities as its own was the linchpin to Cote’s decision on Feb. 26. Citing a 1974 case from the U.S. Court of Appeals in New York called Baroff, Cote said that fiduciary relationships with brokers are the indicia of customer claims.

The repo customers had only contractual rights akin to a debtor-creditor relationship, she said, not rights arising from a fiduciary relationship.

Cote said a repo agreement is like a secured loan, not a customer’s claim for securities.

If the repo were viewed as a purchase and sale of securities, she said, it was even less like a customer claim with an underlying fiduciary duty.

Similar to former U.S. Bankruptcy Judge James M. Peck’s opinion, Cote said “customer” must be given a narrow interpretation.

Lehman and its brokerage unit began separate bankruptcies in September 2008. The Chapter 11 plan for the Lehman companies other than the brokerage was confirmed in December 2011 and implemented in March 2012, with four distributions since.

The brokerage is being liquidated under the Securities Investor Protection Act. Giddens is yet to make a first distribution to non-customers, although customers are being paid in full.

The repo appeal is Carval Investors UK Ltd. v. Giddens (In Lehman Brothers Inc.), 13-5381, U.S. District Court, Southern District of New York (Manhattan).

The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-bk-13555, while the liquidation proceeding under the Securities Investor Protection Act for the brokerage operation is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-bk-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Lyondell, Coal Supplier Object to Optim Financing

Two creditors of Optim Energy LLC will object when the owner of three power plants near Houston is in the Delaware bankruptcy court on March 6 for final approval of $115 million to finance the Chapter 11 reorganization begun Feb. 12.

Walnut Creek Mining Co., Optim’s sole supplier of coal, said in a court filing on Feb. 27 that the entire purpose of the bankruptcy is either to sell the facility quickly or use Chapter 11 to reduce the price of coal.

The coal supplier warned the judge not to permit undue control over the proceedings by Optim’s owner Cascade Investment LLC, which is also now the secured lender because it was required to pay off $713 million owing to Wells Fargo Bank NA.

Cascade makes investments for the Bill & Melinda Gates Foundation. Bill Gates is co-founder of Microsoft Corp.

Lyondell Chemical Co., itself a veteran of bankruptcy reorganization, also filed a limited objection to the financing on Feb. 28. Lyondell points out that the cost of obtaining $115 in new credit was granting more collateral to secure the $713 million loan now owing to Cascade.

Lyondell and Walnut Creek both urge caution because there will be no official creditor’s committee, given a lack of interest in the creditor body.

With a claim of $7 million, Walnut Creek said it’s the single-largest creditor five times over. Walnut Creek is ultimately owned by Peter Kiewit Sons Inc., according to Bloomberg data.

Based in Silver Spring, Maryland, Optim’s three plants have combined capacity of 1,455 megawatts. Two plants burn natural gas and the third uses coal.

The petition shows assets worth less than $500 million and debt exceeding $500 million.

The case is In re Optim Energy LLC, 14-bk-10262, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Franklin Bond Funds Oppose Stockton’s Municipal Plan

Franklin Resources Inc. says the municipal debt restructuring proposed by Stockton, California, is fatally defective because its high-yield bond funds would receive a “miniscule” payment of $94,000 on $35 million in debt when other creditors are to be paid 52 percent to 100 percent over 40 years.

Franklin filed papers last week in anticipation of a May 12 confirmation hearing for approval of the city’s plan. Franklin is the only major creditor in opposition.

Since it receives “essentially no recovery,” Franklin contends the plan violates bankruptcy law’s good faith requirement because the city’s “massive” pension liability will be paid in full. Franklin says the city could pay “vastly more” toward its debt in future years, as opposed to the small one-time cash payment on confirmation.

The principal issue in May will be the different treatment of creditors, a question U.S. Bankruptcy Judge Christopher M. Klein didn’t answer in June when he wrote an opinion finding Stockton eligible for Chapter 9 municipal bankruptcy. Stockton says enough other creditors support the plan so it can be approved over Franklin’s opposition.

As a result of mediation by another bankruptcy judge, Stockton reached an agreement with all major creditors other than Franklin. Stockton said its citizens support the plan because they voted in favor of a sales tax increase included in the proposal.

With a population of 300,000, Stockton was the largest U.S. city to pursue municipal bankruptcy until Detroit filed for Chapter 9 protection in July.

The case is In re City of Stockton, California, 12-bk-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

Ergen Must Give Documents to LightSquared Secured Lenders

LightSquared Inc. secured lenders can obtain more documents from Dish Network Corp. Chairman Charles Ergen to help make the lenders’ case that Ergen was engaged in a “bait and switch” when he made an offer to buy LightSquared for $2.2 billion.

The allegations were made in court papers resulting in a ruling on Feb. 28 by the bankruptcy judge that Ergen must turn over more documents.

The lenders contend he bought $1 billion in LightSquared debt, intending to drop his buyout offer unless another bidder appeared at auction offering more.

Had there been a higher offer, Ergen could have made a profit from the debt he bought. If there were no other offer and he withdrew, LightSquared could have been forced to liquidate where he or Dish might have purchased the frequency spectrum at a lower price.

For the Bloomberg story, click here.

The developer of a satellite-based wireless communications system, LightSquared ended up in bankruptcy because regulators wouldn’t permit use of the frequency spectrum fearing it would disrupt navigation systems using global-positioning satellites.

A confirmation hearing will commence on March 17 for approval of the latest Chapter 11 plan for LightSquared, this one advertised as not being contingent on approval to use frequency licenses.

Ergen is objecting to the plan and how it treats his secured claim worse than similarly situated creditors. For details on the plan and how it would be financed, click here for the Feb. 18 Bloomberg bankruptcy report.

LightSquared filed for bankruptcy reorganization in May 2012, listing assets of $4.48 billion and debt totaling $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).

Dots Secured Lenders Settle with Creditor Committee

Even if the liquidation of retailer Dots LLC doesn’t fully pay secured claims, the lenders agreed to carve out some sale proceeds to pay claims and expenses of the Chapter 11 effort that began Jan. 20.

Last week, the bankruptcy court approved hiring liquidator Gordon Brothers Retail Partners LLC to run going-out-of-business sales at locations operated by the 400-store women’s-wear retailer. The liquidator guarantees Dots will recover 48.5 percent of the retail value of the merchandise, based on an assumption that the inventory ranges between $65 million and $75 million.

After the inventory sells for enough to cover the guaranteed amount, expenses of the sale and a 2 percent fee, Gordon Brothers will share the excess 50-50 with Dots. As a result of an auction, Gordon Brothers increased the guaranteed amount by 8 percent.

Up for approval on March 25 in U.S. Bankruptcy Court in Newark, New Jersey, the settlement bars any preference suits against creditors once financing for the bankruptcy is paid in full. Consequently, suppliers won’t face being called on to give back payments received within 90 days of bankruptcy.

In addition, a fund will be created into which secured creditors will deposit 1.5 percent of sale recoveries of $35 million or less. The percentage grows to 5 percent for recoveries of more than $45 million.

The fund will be used to pay expenses and professional fees in the Chapter 11 case. Once those costs are covered in accordance with priorities in bankruptcy law, the surplus will be available for unsecured creditors. Secured lenders waive deficiency claims they otherwise could make against the fund.

In return for the settlement, unsecured creditors agree not to challenge the validity of secured lenders’ claims.

With stores in 28 states, Dots targeted price-conscious 25-to 35-year-old women. It was acquired in January 2011 by Irving Place Capital Management LP.

Glenwillow, Ohio-based Dots has $36 million in bankruptcy financing from pre-bankruptcy lender Salus Capital Partners LLC. The loan required selling or liquidating the business by early March.

When bankruptcy began, Dots owed Salus $14.5 million on a revolving credit and $16.1 million on a secured term loan. Affiliates of Irving Place were owed $17 million on a second-lien loan.

Dots said there was $47 million in unsecured obligations, including $13.8 million owed to trade suppliers. Sales shrank to an estimated $293.7 million in 2013 from $346 million in 2011, according to a court filing.

The bankruptcy petition showed assets of less than $50 million and liabilities under $100 million.

The case is In re Dots LLC, 14-bk-11016, U.S. Bankruptcy Court, District of New Jersey (Newark).

Milwaukee Church Wins Appeal on Sexual-Abuse Claims

Using the Archdiocese of Milwaukee as a backdrop, the U.S. Court of Appeals in Chicago wrote an opinion last week that reads like a treatise on when a settlement can be revoked years later on the grounds of fraudulent inducement.

Although the opinion on Feb. 25 by U.S. Circuit Judge Diane Sykes will aid the archdiocese in reducing sexual-abuse claims and fashioning a plan to exit Chapter 11, last week’s ruling may be less important than two upcoming decisions from the Seventh Circuit appeals court in Chicago.

The Roman Catholic archdiocese filed a petition for Chapter 11 reorganization in January 2011 and filed a proposed Chapter 11 plan in February with $4 million earmarked for abuse victims. The case decided by the appeals court last week involved a claimant who settled his abuse claim in early 2007 for $100,000.

The same claimant filed a claim in the bankruptcy, saying his 2007 settlement should be rescinded because it was procured by fraudulent inducement. He said the church’s negotiator didn’t answer truthfully when asked if there were other allegations of abuse against the same priest.

The bankruptcy judge dismissed the claim without holding a trial and was upheld on a first appeal in federal district court. Sykes reached the same result, although on different grounds.

Sykes said the pivotal question was whether the alleged misrepresentation was “objectively material.” Although the Wisconsin Supreme Court hasn’t written its own opinion on when a misrepresentation induces a settlement, she said the state’s highest court has always followed the Restatement of Contracts, the leading treatise on contract law.

To rescind a settlement for fraud, the Restatement requires showing that the plaintiff actually relied on the misrepresentation and was justified in doing so. In turn, the misrepresentation must “substantially contribute” to the decision to settle, although it need not be the “predominant reason,” Sykes said.

Next, Sykes said a misrepresentation has both objective and subjective elements. She said the abuse claimant couldn’t show it was a “substantial factor” in early 2007 because state law at the time was against him. Consequently, taking $100,000 was principally motivated by adverse state law as it existed then.

Later in 2007, the Wisconsin Supreme Court reversed decisions by lower courts, expanding the ability of plaintiffs to sue for abuse occurring long before the statute of limitations otherwise would have run out.

In the church’s proposed Chapter 11 plan, claimants who settled before bankruptcy would have no new claims. Last week’s decision will aid the church in knocking out claims settled before July 2007.

There is another and potentially more important case already pending in the Chicago appeals court. It involves a decision by the bankruptcy court saying that Wisconsin law precludes introducing evidence about occurrences in mediation. Should the church win that appeal as well, claimants who already settled will have even more difficulty in showing new and valid claims in bankruptcy.

The Seventh Circuit will soon hear argument on another appeal, dealing with $55 million allegedly transferred to a cemetery trust to evade sexual-abuse claims. The $55 million would be the single largest source of recovery. The district court held that claimants are barred from clawing back the money.

For discussion of the archdiocese’s Chapter 11 plan, click here for the Feb. 13 Bloomberg bankruptcy report.

When the Roman Catholic archdiocese filed a petition for Chapter 11 reorganization in January 2011, it was the eighth diocese to seek bankruptcy protection from sexual-abuse claims. The Milwaukee church listed assets of $98.4 million and total liabilities of $35.3 million.

The Chapter 11 case is In re Archdiocese of Milwaukee, 11-bk-20059, U.S. Bankruptcy Court, Eastern District of Wisconsin (Milwaukee).

Le-Nature’s Creditors in Line for First Distribution

Secured creditors of Le-Nature’s Inc. will be paid in full and general unsecured creditors will receive a 4 percent recovery as the result of a $23.8 million settlement with the law firm K&L Gates LLP approved on Feb. 28 by the U.S. Bankruptcy Court in Pittsburgh.

The settlement was negotiated by the creditors’ trust created under Le-Nature’s liquidating Chapter 11 plan approved by a confirmation order in February 2008. It brings total recoveries by the trust to $125.3 million.

The trust sued the law firm in September 2009 in Pennsylvania state court. The trial court dismissed the suit. On appeal, the trustee won. After the suit was reinstated, the settlement emerged from mediation. The suit was based on the law firm’s service to a special Le-Nature’s board committee.

Chief Executive Officer Gregory J. Podlucky, the mastermind of the Le-Nature’s fraud, is serving 20 years in prison. The fraud cost lenders, shareholders and others $684.5 million, the government said when Podlucky was being sentenced.

The fraud came to light after the Delaware Chancery Court appointed a custodian for Le-Nature’s in October 2006. The custodian began the Chapter 11 reorganization the next month in Pittsburgh. For details on the Chapter 11 plan, click here for the July 11, 2008, Bloomberg bankruptcy report.

The custodian concluded that Latrobe, Pennsylvania-based Le-Nature’s had two sets of books and that annual revenue could have been as low as $32 million in 2005 when audited financials showed $275 million. A Chapter 11 trustee took over in January 2007 and operations halted. The two plants were sold.

The case is In re Le-Nature’s Inc., 06-bk-25454, U.S. Bankruptcy Court, Western District of Pennsylvania (Pittsburgh).

Peabody Hotel’s Belz Sets Hearing for Plan Approval

Martin S. Belz, president and chairman of Peabody Hotel Group, is hoping to emerge from his individual Chapter 11 case shortly after an April 16 confirmation hearing for approval of his plan.

Belz filed a petition for Chapter 11 protection in late December in Memphis, Tennessee, his hometown, after a creditor attached securities accounts. The plan up for approval in April is supported by more than two-thirds of creditors, whose claims total $84.7 million.

A hotelier and real-estate developer, Belz listed assets valued at $58.9 million in disclosure material explaining the plan. The disclosure statement was approved last week, allowing creditors to vote on the plan.

Guarantees that are only contingent, because there hasn’t been a default to touch off his individual liability, will remain in place.

Creditors holding guarantees where there has been a default are to receive 40 percent of their claims in cash.

Peabody is a division of Belz Enterprises Inc., the owner of more than 25 million square feet of developed real property, according to a company website. The Peabody Hotel in Memphis achieved notoriety for the Peabody ducks, who parade to and from a lobby fountain each day.

The case is In re Martin S. Belz, 13-bk-33888, U.S. Bankruptcy Court, Western District of Tennessee (Memphis).

Active Boarder is Approved to Buy Altrec in Oregon

Altrec Inc., an Internet retailer of outdoor apparel and equipment, won authority last week from the bankruptcy court in Portland, Oregon, to sell the business for $3.25 million to Active Boarder Corp.

There was no competing bidder, so an auction was canceled.

The company filed for Chapter 11 protection in early January. Active Boarder became the so-called stalking horse when Remington Outdoor Co. canceled an agreement to buy the business at the same price.

The contract calls for the bankrupt estate to retain $250,000, with the remainder going to secured creditors.

Remington provided bankruptcy financing and got the right to recover as much as $250,000 in expense reimbursement in return for continuing to provide the loan.

Redmond, Washington-based Altrec generated $59 million in sales on its website in 2011. Revenue fell after a denial-of-service cyber attack during the 2011 Christmas season and a possible theft of customer information by a hacker.

Altrec owed $5.7 million to secured lenders.

Altrec had revenue of $20.1 million during the first 11 months of 2011, producing a net loss of $5.1 million. Assets are on the books for $5.7 million against debt totaling $24.2 million.

The case is In re Altrec Inc., 14-bk-30037, U.S. Bankruptcy Court, District of Oregon (Portland).

Nirvanix Liquidating in Chapter 7 After Settlement

Nirvanix Inc., a cloud-based data-storage provider, had its Chapter 11 case converted to liquidation in Chapter 7 on Feb. 27, one month after the U.S. Bankruptcy Court in Delaware approved a settlement with secured lenders creating a trust exclusively for unsecured creditors.

The company and creditors concluded there was no ability to cobble together even a liquidating Chapter 11 plan. In the settlement, the lenders set aside between $100,000 and $200,000 for the trust.

The lenders, who got potential lawsuits as some of their collateral, also turned the suits over to the creditors for them to prosecute. On account of their deficiency claims, the lenders won’t participate in what the trust collects.

In November, Nirvanix won court approval to sell intellectual property to Acme Acquisition LLP for $2.8 million in cash, plus assumption of specified liabilities.

San Diego-based Nirvanix submitted official lists showing assets with a value of $4.2 million and debt totaling $25.1 million, including $23.4 million in secured debt.

Venture-capital investor Khosla Ventures IV LP owned more than 70 percent of the preferred stock, along with 15.5 percent of the common stock.

A venture-capital unit of Intel Corp. held more than 20 percent of the common stock and some of the preferred equity. Valhalla Partners II LP owns about 25 percent of the common stock, and Mission Ventures III LP has about 24 percent.

The case is In re Nirvanix Inc., 13-bk-12595, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Sale of Lily Group Coal Mine Is Formally Approved

Lily Group Inc., the developer of an open-pit coal mine in Greene County, Indiana, got formal permission on Feb. 28 from the U.S. Bankruptcy Court in Terra Haute, Indiana, to sell the facility to an affiliate of secured lender Platinum Partner’s Credit Opportunities Master Fund LP in exchange for debt.

Also last week, the lender filed a lawsuit in bankruptcy court seeking a declaration that its lien comes ahead of suppliers who claim to have mechanics’ liens.

The buyer is using some of its $18 million secured claim rather than cash to buy the business. The price includes a $9 million credit bid, plus another $9 million credit bid in the form of production payments as coal is taken out of the ground in upcoming years.

Lily filed for Chapter 11 protection in September, showing assets of $2.6 million and debt of $39 million. Liabilities include $25.6 million in secured claims.

The company said that a $5 million lien on mining equipment was invalid.

Lily has mineral rights on 2,800 acres, according to the website, and claims to have all necessary permits.

The case is In re Lily Group Inc., 13-bk-81073, U.S. Bankruptcy Court, Southern District of Indiana (Terre Haute).

Bianchi Orchards System Converting to Liquidation

Bianchi Orchard Systems Inc. didn’t last long in Chapter


The producer of harvesting equipment filed a Chapter 11 reorganization petition on Jan. 29 in Sacramento, California, and submitted papers last week voluntarily converting the reorganization to liquidation in Chapter 7 where a trustee will be appointed to sell the assets.

The petition listed assets of $6.1 million and liabilities totaling $6.5 million, including $2.67 million of secured debt.

The case is In re Bianchi Orchard Systems Inc., 14-20795, U.S. Bankruptcy Court, Eastern District California (Sacramento).

Other New Filing

Smoky Shadows Conference Center Back in Chapter 11

Smoky Shadows Motel, Tower & Conference Center near an entrance to the Great Smoky Mountain National Park is back in Chapter 11, once again in Knoxville, Tennessee.

The property filed for Chapter 11 reorganization originally in May 2011. The owners kept control by confirming a plan in March 2012 where the mortgage was recast and unsecured creditors were to be paid fully in installments over two years.

The hotel went back into Chapter 11 on Feb. 26, this time listing assets of $11.4 million and debt totaling $8.7 million. Secured claims aggregate $7.5 million, according to court papers.

The property generated $1.4 million of revenue in a year ended March 2013. From April 2013 until now, revenue was $940,000.

The new case is In re Smoky Mountain Motels Inc., 14-30557, U.S. Bankruptcy Court, Eastern District Tennessee (Knoxville). The prior case was In re Smoky Mountain Motels Inc., 11-32571, U.S. Bankruptcy Court, Eastern District Tennessee (Knoxville).


Hellman & Friedman’s Kronos Downgraded on Dividend

Kronos Inc., a software provider for workforce management, is making its fourth debt-finance dividend to shareholders.

Consequently, Standard & Poor’s issued a downgrade on Feb. 27, lowering the corporate rating by one level to B-, matching the action taken in November by Moody’s Investors Service for the same reason.

The company is issuing $490 million of incremental debt to fund the dividend.

S&P said that Blackstone Group LP and GIC Special Investments Pte. Ltd. are paying $750 million for 42 percent of Kronos. GIC is an investment fund for the government of Singapore.

Chelmsford, Massachusetts-based Kronos was a leveraged buyout in 2007 led by private-equity investor Hellman & Friedman LLC.

Kronos Inc. shouldn’t to be confused with Kronos Worldwide Inc., a Dallas-based producer of titanium dioxide pigments, which was downgraded in February.

Boart Longyear Downgraded to B3 on Low Metal Prices

Boart Longyear Ltd., a provider of contract drilling services for the mining industry, was downgraded for the third time inside eight months by Moody’s Investors Service when the corporate rating slipped another peg on Feb. 26 to B3.

The new Moody’s rating is one step below the downgrade issued in September by Standard & Poor’s.

The downgrades were caused by lower metal prices resulting in less drilling by mining companies. Rig utilization slipped to a new low of 30 percent in the last quarter of 2013, Moody’s said.

Moody’s expects demand for the South Jordan, Utah-based company’s services will continue to lag with continued weakness in precious and base metal prices for the next 12 to 18 months.

Bank Failures

First Virginia Bank Failure in Over Three Years

Millennium Bank NA from Sterling, Virginia was taken over by regulators on Feb. 28. The two branches were absorbed by WashingtonFirst Bank of Reston, Virginia.

It was the first Virginia bank to fail in more than three years.

Vantage Point Bank from Horsham, Pennsylvania, also failed on Feb. 28. The one branch was taken by First Choice Bank of Mercerville, New Jersey.

Millennium had $121.7 million in deposits at the year’s end. Its failure is estimated to cost the Federal Deposit Insurance Corp. $7.7 million. Vantage Point had assets of $62.5 million, and the estimated cost to the FDIC is $8.5 million.

There have been five bank failure so far this year.

In 2013, there were 24 bank failures, about half the number from 2012. Last year’s failures were the fewest since 2007, when there were three. Failed banks last year had a combined $6 billion in assets.

In terms of number of bank takeovers, 2010 had the most since 1992 with 157 failures. Measured by assets, the most was $371 billion in 2008, when there were 25 failures.

Watch List

Warren Buffett Says Energy Future to File This Year

Energy Future Holdings Corp. will “almost certainly” file for Chapter 11 reorganization this year, Warren Buffett said in his annual letter to Berkshire Hathaway Inc. shareholders.

Buffett, chairman of Berkshire, said his company’s investment in Energy Future resulted in a pretax loss of $873 million on its $2 billion debt investment that was sold last year. For the Bloomberg story, click here.

Energy Future was named TXU Corp. before the $43.2 billion leveraged buyout in October 2007 by KKR & Co. and TPG Inc. It is the largest unregulated electric provider in Texas.

Sbarro Said to File Chapter 11 Again in Coming Weeks

Sbarro Inc., the operator and franchiser of more than 1,000 fast-food Italian restaurants in 40 countries, will file another Chapter 11 petition in coming weeks, according to people familiar with the situation.

Last month, Sbarro announced it was closing 155 company-operated locations in North America. In January, Standard & Poor’s said Sbarro has an “unsustainable” capital structure and is “likely” to need a restructuring of the balance sheet.

Unless Sbarro continues paying rent in the closed stores, it may need to file in Chapter 11 sooner rather than later if landlords start lawsuits to recover past-due rent and rent that would have come due in future months and years. In bankruptcy, rent claims, including damages for breach of lease, become general unsecured claims.

Sbarro completed a Chapter 11 reorganization in November 2011, reducing debt by 70 percent. The plan gave nothing to unsecured creditors with as much as $173 million in claims. For details on the plan, click here for the Oct. 10, 2011, Bloomberg bankruptcy report.

Sbarro, based in Melville, New York, owned or franchised 1,045 restaurants in 42 countries when the bankruptcy began. Of the total, 472 were owned at the time.

For other Bloomberg coverage, click here.

The previous bankruptcy was In re Sbarro Inc., 11-bk-11527, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Advance Sheets

Default Interest Not Owing Under Section 1123(d)

Whether interest is owing at the higher default rate is a question answered entirely by Section 1123(d) of the Bankruptcy Code, not Section 365(b)(2)(D), according to a Feb. 26 opinion by U.S. District Judge Robin Rosenbaum in Miami.

The case came up on appeal from a decision by U.S. Bankruptcy Judge A. Jay Cristol. It involved a corporate reorganization where there had been a payment default long before the Chapter 11 filing.

The plan provided that the secured lender would be paid in full with whatever interest the court decided was required. The lender claimed entitlement to $5.1 million in so-called default interest on top of interest at the contractual rate the lender had been paid throughout.

Cristol determined that the lender wasn’t entitled to default interest. His conclusion was upheld by Rosenbaum, albeit on different grounds.

Cristol found no entitlement to default interest because notice of default hadn’t been given to the borrower’s lawyer as required by the loan agreement. Rosenbaum differed with the conclusion, finding that that default interest kicked in automatically on the occurrence of default, without need for notice.

Rosenbaum agreed with Cristol’s ultimate conclusion because she said Florida law requires the lender make an election between receiving default interest or fees and charges resulting from default. Because the lender had been billing and receiving payment of charges and fees, she said the secured creditor waived entitlement to default interest.

Rosenbaum’s opinion is significant for its conclusion that Section 1123(d) alone governs whether a lender is entitled to default interest. That section says that when a contract is cured under a plan, the cost of cure is determined by the contract and non-bankruptcy law. She said that Section 365(b)(2)(D), which was added to the Bankruptcy Code at the same time as Section 1123(d), plays no role in deciding if default interest is owing.

Cristol also had ruled that Section 1123(d) alone governs. Rosenbaum differed with courts in the Ninth Circuit making it easier to knock out default interest charges.

The case is In re Sagamore Partners Ltd., 13-bk-20708, U.S. Bankruptcy Court, Southern District of Florida (Miami).

Voiding Mortgage Under State Law Is No Stern Problem

Considering the validity of a mortgage exclusively under state law doesn’t divest the bankruptcy court of power to render a final decision under the doctrine of Stern v. Marshall, Chief U.S. District Judge Christina Reiss from Burlington, Vermont, ruled on Feb. 28.

A husband and wife bought a home years before filing in Chapter 13. The husband didn’t sign the mortgage.

In bankruptcy, the couple dealt with the mortgage as a claims-allowance issue. Neither they nor the trustee attacked the mortgage using avoiding powers.

The bankruptcy judge ruled under Vermont law that the mortgage was unenforceable. Consequently, the couple’s plan, which the judge confirmed, allowed then to retain the home free of the mortgage because it was worth less than the $125,000 Vermont homestead exemption.

On the Stern issue, Reiss said the bankruptcy court had both statutory and constitutional power because the mortgage issue, as part of the claims-allowance process, was a “necessary integral, and indivisible part of the bankruptcy proceedings.” She cited Stern for saying that deciding an issue under state law doesn’t undercut constitutional power because the Supreme Court focused on “whether the claim was central to the bankruptcy process.”

On the merits, Reiss reversed the bankruptcy court and remanded for consideration of whether Vermont’s doctrine of equitable estoppel would permit the bank to have a secured claim even though the mortgage was defective.

The bankrupt couple evidently didn’t attack the mortgage using avoiding powers because the lien could have been preserved for the benefit of the estate. Were that the case, creditors would have benefited from mortgage invalidity, not the bankrupt couple.

The case is GMAC Mortgage LLC v. Orcutt, 13-cv-00083, U.S. District Court, District of Vermont (Burlington).

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