Puerto Rico Debt Law Briefing Dates Set: Bankruptcy

Aug. 14 (Bloomberg) -- The judge asked to consider the constitutionality of a new Puerto Rico law that allows government-owned entities to restructure debt outside of federal bankruptcy court wants each side to make its case by October.

Saying the new law depressed the value of $1.6 billion in power utility debt they hold, bond funds affiliated with Franklin Resources Inc. and Oppenheimer Rochester Funds sued Puerto Rico in June, contending the Public Corporation Debt Enforcement and Recovery Act violates the U.S. Constitution.

The law would let a commonwealth court restructure debt in a process akin to Chapter 11 of the U.S. Bankruptcy Code. Puerto Rico has asked U.S. District Judge Francisco A. Besosa in San Juan Besosa to dismiss the suit and declare the law constitutional.

The bond funds filed a so-called summary judgment motion this week, taking the position that undisputed facts require Besosa to declare the law void, regardless of the specific circumstances under which it’s applied.

The judge told Puerto Rico to file papers by Sept. 12 supporting its claim that the law is constitutional. The bond funds are to file opposing papers by Oct. 6.

The bond funds said the law violates the Constitution’s Bankruptcy Clause, Takings Clause and Contracts Clause, as well as their right to litigate federal claims in a federal court.

On its face, the Contracts Clause seems to say that only the federal government can impair rights under contracts. Looking to law made a hundred years ago, Puerto Rico said the constitution isn’t as absolute as first appears.

That means Besosa may be reading decisions from the early 20th century dealing with railroad debt-restructurings carried out through equity receiverships before Congress adopted modern reorganization laws. Puerto Rico may also cite precedents that arguably allow state or municipal governments to ensure the continuation of services even if creditors aren’t fully paid.

For the bond funds’ theories, click here for the Aug. 13 Bloomberg bankruptcy report. For Puerto Rico’s arguments, click here for the July 22 report.

The lawsuit is Franklin California Tax-Fee Trust v. Commonwealth of Puerto Rico, 14-cv-01518, U.S. District Court, District of Puerto Rico (San Juan).


Lehman $8.6 Billion Litigation With JPMorgan to Move Quickly

Creditors of Lehman Brothers Holdings Inc., JPMorgan Chase & Co. and U.S. District Judge Richard J. Sullivan differ over how much paper is necessary to decide an $8.6 billion lawsuit.

Lehman sued JPMorgan in May 2010, contending the bank “abused the power of its position to improperly extract billions in incremental collateral and other concessions” just days before Lehman’s bankruptcy in September 2008. Lehman’s creditors told Sullivan the soon-to-be bankrupt investment bank at the time didn’t owe JPMorgan anything.

According to the creditors, JPMorgan used its “life or death leverage” to force Lehman into handing over $8.6 billion in “desperately needed” cash the week before bankruptcy. New York-based JPMorgan, in turn, applied the cash against “dramatically inflated” derivatives and clearing claims, the Lehman creditors said.

Sullivan two years ago said the case should stay in bankruptcy court until the parties were ready to ask him for so-called summary judgment. When the suit finally made its way to the district judge, he asked the parties to come up with a timetable.

In a ruling this week, Sullivan said the two sides wanted a “staggering motion schedule” entailing more than 600 pages of briefs over seven months and an “unlimited quantity of exhibits.” The judge refused to sanction what he called a “sort of trial on written submission.”

He told both sides to submit their first briefs, of not more than 40 pages, by Sept. 15. In addition, they can each have as many as 40 pages of exhibits. They can each submit another 40 pages of opposing briefs by Oct. 15, and 20 pages of reply briefs by Oct. 31.

Sullivan can only grant victory to one side or the other if he finds no disputed factual issues in the summary judgment motions. Otherwise, he will hold a trial, absent a settlement.

The Lehman creditors didn’t want the summary judgment motion before Sullivan. They said many district courts let bankruptcy judges make suggested rulings on suits such as this, where the bankruptcy court doesn’t have the right to make final rulings.

Lehman said the $8.6 billion suit is one of three unresolved disputes with JPMorgan. Still in bankruptcy court are a contested $2.3 billion claim on derivatives and a multibillion-dollar dispute over clearing claims.

Lehman’s creditors already saw some of their claims fall by the wayside in April 2012. The bankruptcy judge dismissed claims for recovery of preferential transfers and so-called constructively fraudulent transfers. He said the bank was protected from those claims by the bankruptcy’s “safe harbor,” under which transactions in securities can’t be set aside.

The suit survived based on actual fraud and 25 other theories intended to force JPMorgan to disgorge payments taken from Lehman in the days before bankruptcy.

For a summary of the April 2012 opinion and details on the lawsuit, click here for the April 20, 2012, Bloomberg bankruptcy report. For details on Sullivan’s ruling in September 2012 leaving the case in bankruptcy court, click here for the Oct. 22, 2012, report.

Lehman Brothers Holdings Inc. and its brokerage unit began separate bankruptcies in September 2008. The parent’s reorganization plan was approved in December 2011 and implemented in March 2012. In April, the parent made its fifth distribution.

The suit in district court is Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank NA (In re Lehman Brothers Holdings Inc.), 11-6760, U.S. District Court, Southern District of New York (Manhattan). The lawsuit in bankruptcy court is Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank NA (In re Lehman Brothers Holdings Inc.), 10-03266, U.S. Bankruptcy 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 is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Buccaneer Energy Creditors Get $10 Million in Settlement

Buccaneer Energy Ltd., the official creditors’ committee and AIX Energy LLC, the company’s proposed buyer and secured lender, reached a global settlement putting to rest objections to sale and a Chapter 11 plan.

In July, the bankruptcy court preliminarily approved disclosure materials allowing creditors to vote on the plan. Meanwhile, creditors opposed a sale to AIX, calling it a “shell company” and instrumentality of Buccaneer’s largest shareholder, Meridian Capital International Fund, which holds 19.99 percent of the voting stock.

Buccaneer, an Australian oil and gas exploration and production company, filed a petition for Chapter 11 reorganization on May 31 in Victoria, Texas. The creditors said they were being required to vote on a plan “without any knowledge of what distributions, if any, they may realize.”

The settlement, to be considered for approval by the bankruptcy judge at an Aug. 25 hearing, carves out a minimum of $10 million to be placed in a trust for unsecured creditors.

There will be an auction, where AIX can bid using its secured claim rather than cash. The claim is estimated to be $63.8 million. Even if the auction doesn’t bring enough to pay AIX in full, the unpaid portion of its claim will be waived, and AIX won’t receive anything from the creditors’ trust.

Any assets not covered by AIX’s lien go to the trust, along with sale proceeds in excess of the amount required to pay the secured claims in full.

Creditors will have the right to bring lawsuits, including against company mangers.

On top of the $10 million, $2.3 million is set aside for the committee’s professionals. Buccaneer and AIX can’t object to paying the committee’s fee requests of as much as $2.3 million.

The parties to the settlement agreement will waive claims against one another. A motion for formal approval of the settlement is to be filed by Aug. 15.

The bankruptcy judge set aside approval of the disclosure statement. The parties agreed to have a revised plan approved “as quickly as possible.”

Buccaneer’s assets include operations in Alaska’s Kenai Loop. Although traded on the Australian Securities Exchange until voluntarily delisted in February, the company is based in Texas and Alaska. Operations are onshore in Texas and Louisiana, offshore in the Gulf of Mexico, and onshore and offshore in the Cook Inlet in Alaska.

The case is In re Buccaneer Resources LLC, 14-bk-60041, Southern District of Texas (Victoria).

Stockton, Calpers Justify Paying Pension in Full

Stockton, California and supporters of the city’s municipal debt-adjustment plan provided the court with a “more focused analysis” on the question of whether the California Public Employees’ Retirement System has the equivalent of a $1.6 billion lien justifying payment in full.

At a July hearing, U.S. Bankruptcy Judge Christopher M. Klein asked Stockton and Calpers to explain the lien’s enforceability and the ability of the California legislature to modify federal bankruptcy law.

If Stockton intends on retaining key employees, particularly those essential to public health and safety, its only option is to pay pensions in full, said the city in court papers filed Aug. 11.

Stockton said it decided not to “play chicken” with its workforce, citing evidence showing that its employees have job options outside of Stockton and would be incentivized to leave quickly to maximize their future pension benefits.

Whether the city can legally impair pensions, however, is a “purely academic question,” according to Stockton.

While it’s unnecessary for the court to determine whether the city has the legal ability to impair pensions and whether the lien imposed upon termination of a Calpers pension plan survives in Chapter 9, such rulings would only potentially impact whether the plan is proposed in good faith and whether creditors have been properly classified, according to the city.

The city’s decision not to impair its pension obligations, even in light of a potential ruling that impairment is permissible, was made in the utmost good faith because impairing pensions would result in termination of the city’s Calpers contract, a $1.6 billion termination liability that would swamp other claims, an exodus of city employees and the unwinding of the city’s negotiated deals with other creditors, including its nine unions, according to court papers.

As to the classification of claims, any decision regarding Calpers’ status wouldn’t necessitate a re-classification with regard to either Franklin Resources Inc. or the pension claims, the city said.

Arguments in opposition from Franklin, which hasn’t suggested any feasible alternative, are “half-hearted” and “hollow,” according to the city.

Calpers filed two briefs, each more than 40 pages in length, in support of the plan and the enforceability of specific provisions of California’s Public Employees’ Retirement Law, or PERL.

Like Stockton, Calpers asked the court to refrain from deciding these issues because doing so is unnecessary to confirmation of the city’s plan.

If the court must decide the issues, there is only one conclusion, according to Calpers: a municipal debtor’s obligations to Calpers can’t be impaired or adjusted in a hypothetical Chapter 9 bankruptcy case and the PERL is not preempted by the Bankruptcy Code.

Some of the city’s unions and the official committee of retirees also filed briefs in support of confirmation of the plan. The confirmation hearing for approval of the plan began in July and will continue Oct. 1.

The city initiated a Chapter 9 municipal bankruptcy in June 2013. With a population of 300,000, it was the largest U.S. city to pursue municipal bankruptcy before Detroit.

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

Ambient Hearing on Sale Approval to Ericsson Set for Sept. 26

Ambient Corp., a telecommunications company, filed a petition for Chapter 11 protection on July 28 in Delaware and is seeking court approval to sell its business to Ericsson Inc. absent a better offer at auction on Sept. 24.

The Newton, Massachusetts-based company got court approval of auction and sale procedures on Aug. 11. Competing bids are due Sept. 22, followed by the auction and a hearing for sale approval on Sept. 26.

The sale schedule is identical to procedures the company sought at the outset of the Chapter 11 effort. Ambient said it was being forced to sell quickly by strained liquidity.

Unless outbid, Ericsson will pay $7.5 million, including $2.5 million financing Ambient’s operations through the sale. The buyer also will assume specified liabilities.

In fiscal 2013, Ambient had a pre-tax net loss of about $17.7 million on net sales of approximately $11.4 million. Its petition listed assets and debt of less than $10 million each.

Vicis Capital LLC, through its Vicis Capital Master Fund, owns about 57.8 percent of the company’s stock, according to court papers.

The case is In re Ambient Corp., 14-bk-11791, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Kid Brands Selling ‘Sassy’ Business Unit for $14 Million

Kid Brands Inc., a designer and distributor of infant and juvenile products, got the green light to sell almost all assets of the ‘Sassy’ business to Sassy 14 LLC.

The buyer’s parent is Angelcare Monitors Inc., according to the sale contract. Montreal-based Angelcare makes baby monitors and other juvenile products, according to its website.

A bankruptcy judge in Newark, New Jersey, signed an order Aug. 12 approving the sale without an auction, although competing bids could have been submitted at the hearing.

The buyer is paying $14 million plus quantified amounts to cover specified contract, employee and other costs and will assume specified liabilities, according to court papers. Kid Brands and the buyer also entered into a transition services agreement.

No trademarks, intellectual property or related interests owned by William Carter Co. or Disney Consumer Products Inc. will be transferred in the sale, according to the court order.

Carter’s and Disney-branded inventory held by Kid Brands may be transferred to the buyer, provided that it can’t be sold until Carter’s and Disney grant licenses to the buyer or there is further court action, according to the order.

Kid Brands products are sold under the Kids Line, CoCaLo, LaJobi and Sassy names.

Rutherford, New Jersey-based Kid Brands reported a $31.7 million net loss in the first quarter on net sales of $38 million. Sales plunged 26 percent in this year’s first quarter compared with the same period last year. The operating loss in the quarter was $30.6 million.

Kid Brands filed a Chapter 11 petition on June 18, listing assets of $32.4 million and debt totaling $109.2 million. Unsecured liabilities totaled $54 million, including about $25.8 million owing to trade suppliers.

The case is In re Kid Brands Inc., 14-bk-22582, U.S. Bankruptcy Court, District of New Jersey (Newark).

Elephant Bar Restaurant Chain Has Going-Concern Buyer

Elephant Bar, a chain of 29 restaurants in seven states, will be sold to an affiliate of Chalak Mitra Group, pending approval by the bankruptcy court in Santa Ana, California, at a hearing on Aug. 22.

Originally, the buyer was to be Cerberus Business Finance LLC, as agent for the pre-bankruptcy and post-bankruptcy lenders. Cerberus bowed out when Chalak Mitra Group’s CM7 Capital Partners LLC offered to sign a contract and operate the chain.

Chalak Group Inc., based in Dallas, owns and operates 260 restaurants, including the 100-unit Genghis Grill chain, according to its website.

The buyer will pay about $1.25 million in cash to fund wind-down payments and pay specified priority claims and transfer taxes, according to the sale contract. The buyer will also pay designated claims to vendors and assume specified liabilities.

Included among assumed liabilities is an exit financing credit agreement, under which Cerberus will lend as much as $18.3 million to finance operations. Cerberus will be agent, according to the exit financing term sheet.

Elephant Bar, which filed for Chapter 11 on June 16, has financed the bankruptcy with a $3.3 million loan from Cerberus and with cash representing collateral for the secured lenders’ claims.

Liabilities of the Costa Mesa, California-based company total about $46.1 million, including approximately $27.4 million outstanding as of the filing on a first-lien credit with Cerberus as agent. For second-lien debt of about $12.7 million as of the filing, Fidus Mezzanine Capital LP is agent. Both credits were in default last year. The company owed $6 million to trade vendors as of the filing.

The 77 percent owner is SKM Equity Fund III LP, according to court papers.

The case is In re S.B. Restaurant Co., 14-bk-13778, U.S. Bankruptcy Court, Central District of California (Santa Ana).

Watch List

Kior Says It Runs Out of Cash in September

Kior Inc., a producer of motor fuel from plant material, said this week in a regulatory filing that it needs new debt or equity financing to fund operations after Sept. 30.

The Pasadena, Texas-based company failed to make a $1.88 million loan payment on June 30 and hired financial advisers to help with a restructuring or sale.

The development-stage company had assets of $58.3 million and liabilities of $261 million on the June 30 balance sheet. For six months ended in June, revenue of $312,000 resulted in a $39.7 million loss from operations and a $55 million net loss.

Kior closed the plant in Columbus, Mississippi, for upgrading in January and is generating no income.

In October Kior received $100 million from Vinod Khosla and Gates Ventures LLC. Khosla is a founder of Sun Microsystems Inc.

The stock reached a peak of $21.55 on Sept. 29, 2011. Yesterday, the stock plunged 28 percent, closing at 18 cents in New York trading.


Highstar’s ADS Waste Demoted to B3 Corporate

ADS Waste Holdings Inc., a commercial and residential waste collection and disposal company, has a B3 corporate rating following the one-step downgrade issued yesterday by Moody’s Investors Service.

Moody’s pegged the downgrade on low growth and “company-specific challenges.”

Ponte Vedra, Florida-based ADS is controlled by New York-based private-equity investor Highstar Capital LP.

For the March quarter, ADS reported a $19.3 million net loss on revenue of $321.2 million. Last year, $1.319 billion in revenue resulted in a $117.8 million net loss.

Briefly Noted

Detroit’s Plan Hearing Delayed Eight Days

Detroit’s trial on approval of the city’s debt-adjustment plan, scheduled to begin Aug. 21, was pushed back eight days to know whether holders of $5 billion in water and sewer bonds will have accepted the city’s exchange offer.

Bondholders have until Aug. 21 to accept the offer. For the Bloomberg story, click here.

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

Energy Future Creditors Can Investigate Valuation

Unsecured creditors of Energy Future Holdings Corp., the Texas-based electric generator and distributor, got authority from the bankruptcy judge at yesterday’s hearing requiring other parties to turn over documents regarding the company’s value.

The creditors contend that Energy Future managers colluded with senior lenders to undervalue the business under the reorganization plan the company since has abandoned.

At the hearing, the judge told the U.S. Trustee either to appoint an official committee for unsecured creditors of the parent company, expand the existing committee or file papers explaining why neither is necessary. An indenture trustee for parent-company bondholders filed papers asking the judge for another official committee.

For the Bloomberg story on yesterday’s hearing, click here.

The case is In re Energy Future Holdings Corp., 14-bk-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Madoff’s Sons Oppose Trustee’s Expanded Complaint

Bernard Madoff’s surviving son and the estate for the son who committed suicide filed papers opposing an attempt by the trustee for Bernard L. Madoff Investment Securities LLC to add new claims in a lawsuit filed almost five years ago.

The trustee wants to add claims that they took out bogus loans and deleted e-mails to fend off an investigation by regulators in 2005.

Madoff trustee Irving Picard alleges that the sons helped facilitate the Ponzi scheme. For the Bloomberg story, click here.

The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Advance Sheets

No Unconstitutional Taking from Larger Homestead Exemption

A bankrupt is entitled to utilize the state’s enlarged homestead exemption to void a judgment lien created before the law was amended, the U.S. Court of Appeals in Manhattan ruled on Aug. 1.

Of more significance, U.S. Circuit Judge Richard C. Wesley ruled in his opinion for the three-judge court that using the larger exemption wasn’t a taking of property prohibited by the Takings Clause in the Fifth Amendment, made applicable to the states by the Fourteenth Amendment.

In 2005, the New York legislature raised the state homestead exemption from $10,000 to $50,000. A creditor obtained a judgment which became a lien on an individual’s property before the law changed and she filed bankruptcy.

In bankruptcy, the judge voided the judgment lien using the $50,000 exemption. The creditor appealed and lost.

Wesley had little difficulty in deciding that the amended statute applies retroactively to judgments entered before the law changed. He devoted most of his opinion to the constitutional issue.

He first concluded the issue involved a regulatory taking, not a physical taking. As such, he defined the issue an involving the extent to which the revised statute “upset the claimant’s investment-backed expectations.”

Wesley said there was no unconstitutional taking because any judgment lien is subject to the “implied limitation of a homestead exemption that predictably and necessarily must be adjusted from time to time to account for changing values of homes.”

The case is 1256 Hertel Ave. Associates LLC v. Calloway, 12-1603, U.S. Second Circuit Court of Appeals (Manhattan).

Unfinished-Business Suit Finished Off by Second Circuit

Saying profit on unfinished business isn’t the property of a bankrupt law firm, the U.S. Circuit Court of Appeals in Manhattan upheld dismissal of a lawsuit brought against Seyfarth Shaw LLP by the trustee for defunct Thelen LLP.

The decision was the product of a circuitous appellate process. In the liquidations of Thelen and Coudert Brothers LLP, federal district judges reached different conclusions.

The Thelen judge ruled unfinished business isn’t property of a bankrupt firm under New York law. The Coudert judge reached the opposite result, finding that the firm’s trustee had a valid case for fraudulent transfer. Both cases were appealed together.

Rather than answer a tangled question of New York law, the appeals court referred the question to the state’s highest court. That tribunal on July 1 said there’s no property in hourly unfinished business because it’s “too contingent in nature and speculative to create a present or future property interest.”

For discussion of the state court’s opinion, click here for the July 2 Bloomberg bankruptcy report.

Having previously said the state high court’s opinion would control, the federal appeals panel tersely upheld dismissal of the Thelen suit on Aug. 6. It has yet to act on the Coudert appeal, giving the parties until Aug. 25 to comment on how the state-court ruling bears on the appeal.

The New York state court reached the same result as a federal district judge in San Francisco, who decided in June that a lawyer who leaves a failed firm can retain fees earned at the new firm in completing unfinished business.

The question of unfinished business arose from Jewel v. Boxer, a 1984 intermediate appellate court decision in California. The court said profit earned after dissolution belongs to the “old” firm, not to the newly formed firm that completed the work. As the San Francisco judge said, the Jewel doctrine had been uncritically accepted as gospel ever since.

To read about the California case, click here for the June 13 Bloomberg bankruptcy report. For the decision to send the question to New York state court, click here for the Nov. 18 report. For lower court opinions in Thelen and Coudert, click here for the Sept. 6 report.

The Thelen opinion in federal court is Geron v. Seyfarth Shaw LLP (In re Thelen LLP), 12-4138, U.S. Court of Appeals for the Second Circuit (Manhattan). The Coudert appeal in federal court is Development Specialists Inc. v. DeFoestraets (In re Coudert Brothers LLP), 12-4916.

The Thelen and Coudert cases in the New York high court are Geron v. Seyfarth Shaw LLP (In re Thelen LLP), and Development Specialists Inc. v. K&L Gates LLP (In re Coudert Brothers LLP, Nos. 136 and 137, New York State Court of Appeals (Albany).

Insurance Agent Held Not Liable for Preference

The U.S. Circuit Court of Appeals in Richmond, Virginia, was confronted with a case with a twist on the familiar principle that a “mere conduit” isn’t liable for receiving a preference.

The case involved payment on an insurance policy within 90 days of bankruptcy. The payment first went to the agent and then to the insurance company. The bankruptcy trustee sued the agent and lost in bankruptcy court.

On a first appeal, the district court reversed and held the agent liable for the preference. In an opinion by Circuit Judge Henry F. Floyd, the three-judge panel for the Fourth Circuit reversed the district court by finding the agent had no liability.

The case turned on the contract between the agent and the insurance company. It provided that premiums collected by the agent were held in trust for the insurance company. Both of the lower courts and the parties agreed that the agent was a conduit.

The district judge reasoned that the agent’s contingent liability to pay the premium to the insurance company meant it was a party for whose benefit the transfer was made. On that basis, the district court held the agent liable for the preference.

Floyd disagreed. He said status as a conduit was controlling. Otherwise, the judge said, conduits almost always would be liable for preferences despite having no dominion and control over the money at issue.

The case is Guttman v. Construction Program Group (In re Railworks Corp.), 13-1931, U.S. Fourth Circuit Court of Appeals (Richmond).

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net

To contact the editors responsible for this story: Andrew Dunn at adunn8@bloomberg.net David Glovin

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