Hedge Fund, Brokers Lose Claims Against Lehman: Bankruptcy

Co-underwriters with Lehman Brothers Inc. don’t have so-called contribution claims against the liquidated investment bank related to offerings in which it was the lead underwriter in the sale of its own securities.

Also as the result of a Sept. 5 ruling by a federal district judge in New York, hedge funds in effect won’t have claims when Lehman, acting as a prime broker, failed to carry out trades in its own securities.

U.S. Bankruptcy Judge James M. Peck ruled in January that hedge fund manager Claren Road Asset Management LLC and underwriters ANZ Securities Inc. and USB Financial Services Inc. in substance didn’t have claims to be paid in the Lehman brokerage’s liquidation under the Securities Investor Protection Act. Peck’s opinion was upheld Sept. 5 by U.S. District Judge Shira A. Scheindlin in Manhattan.

The underwriters filed contribution claims, claiming that the bankrupt brokerage was liable to them for its share of costs of defense and settlement on being sued for misstatements when Lehman was the lead underwriter of its own securities. ANZ claimed $78 million, while UBS wanted $250 million.

Claren Road submitted an $8.5 million claim, contending Lehman was its prime broker and failed to execute a trade in Lehman securities.

Scheindlin said the appeal revolved around Section 510(b) of the Bankruptcy Code, which says a claim for damages arising from the purchase or sale of securities of a bankrupt “or of an affiliate” will be subordinated to claims of unsecured creditors.

The same section provides that claims for contribution are similarly subordinated.

Scheindlin rejected the creditors’ arguments based on a close reading of the statutory language. To uphold Peck, she focused more on the purpose of the subordination provision “to ensure that creditors receive their distribution ahead of investors.” Following the reference in the statute to affiliates’ securities, she said it didn’t matter that the securities being sold were issued by the Lehman parent, not by the brokerage.

Scheindlin said subordination under Section 510 isn’t limited to claims by shareholders for securities-law violations. She also said the creditor “need not be an actual security holder.” Similarly, she said subordination kicks in even in the “absence of an actual purchase or sale.”

In the Lehman brokerage liquidation, there’s little likelihood that unsecured creditors will be paid in full. Consequently, subordinating the claims to unsecured creditors functionally means they won’t be paid.

Lehman Brothers Holdings Inc. and the brokerage unit began separate bankruptcies in September 2008. The New York-based parent’s reorganization plan was approved in December 2011 and implemented in March 2012. In April, the company made a fifth distribution of $17.9 billion.

For details on Lehman’s most recent Chapter 11 distribution, showing how different groups of creditors receive different recoveries, click here for the March 28 Bloomberg bankruptcy report.

In the liquidation of the brokerage, the trustee has paid customers in full. The trustee also paid secured and priority creditors 100 percent. He won bankruptcy court approval to make a distribution on Sept. 10 of almost $3.5 billion to general unsecured creditors with $20.4 billion in approved claims.

Scheindlin’s opinion is In re Lehman Brothers Inc., 14-cv-1742, U.S. District Court, Southern District of New York (Manhattan).

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

New Filings

Trump Atlantic Casinos in Bankruptcy a Third Time

The Trump Taj Mahal Casino Resort and the Trump Plaza Hotel & Casino in Atlantic City, New Jersey, filed petitions for Chapter 11 protection for a third time this morning in Delaware.

The 906-room Trump Plaza previously announced it will close Sept. 16. The Taj Mahal, with more than 2,000 rooms, will close around Nov. 13, absent labor concessions, according to court filings.

The casinos were in bankruptcy twice before. A Chapter 11 filing in 2004 culminated in emergence from reorganization the next year. The second filing in 2009 resulted in a confirmed Chapter 11 plan in 2010 where second-lien creditors became the primary shareholders, leaving Donald J. Trump with 5 percent of the stock, according to court papers. For details on the 2010 plan, click here for the April 13, 2010 Bloomberg bankruptcy report.

The casinos blamed the third bankruptcy on the faltering economy and competition. The Trump properties lost more revenue in the last two years that competitors, according to the filing. Earnings before interest, taxes, depreciation and amortization were a negative $5.1 million last year, according to the papers.

In 2013, revenue for the Taj Mahal was $257.9 million. At Trump Plaza, 2013 revenue was $76.3 million.

The casinos don’t have an agreement to finance the Chapter 11 effort with a loan. Instead, they intend to operate by obtaining court permission to use cash representing secured lenders’ collateral.

Liabilities include $285.6 million in first-lien debt and $13.5 million owing to trade suppliers. The petition shows assets and liabilities both exceeding $100 million.

The case is In re Trump Entertainment Resorts Inc., 14-12103, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Associated Wholesalers Files for Sale to C&S

Associated Wholesalers Inc., the parent of the White Rose grocery distribution business, filed a Chapter 11 petition early this morning in Delaware having signed an agreement for C&S Wholesale Grocers Inc. to buy the business absent a higher offer at auction.

Robesonia, Pennsylvania-based Associated describes itself as a regional cooperative food distributor.

Keene, New Hampshire-based C&S is the largest wholesale grocer in the U.S., according to the company.

By early this morning, no papers had been filed laying out terms of the C&S acquisition. The petition shows Associated as having assets of more than $100 million.

The case is In re Associated Wholesalers Inc., 14-12093, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Updates

Budd Drops Second Settlement with Parent ThyssenKrupp

Budd Co., which sold or closed most of its operations in 2006, decided it won’t go ahead with the second of two settlements to complete separation from the parent, ThyssenKrupp AG.

When Budd filed under Chapter 11 in late March, the Chicago-based company had implemented an agreement under which Essen, Germany-based Thyssen released $390 million cash to Budd. That allowed Budd to file bankruptcy with $384 million cash, which the company said was the only remaining substantial asset. Thyssen acquired Budd in 1978.

There was a second settlement, negotiated before bankruptcy, where Thyssen would give Budd $10.3 million more cash and assume liability for Budd’s pension plans, which have unfunded benefit liabilities of $197 million, the company said.

Encountering opposition, Budd assigned its chief restructuring officer and independent board member the task of evaluating the merits of the second settlement. On Sept. 6, Budd announced that it won’t seek approval of the settlement agreement “in its present form.”

Budd’s restructuring officer said that a 2002 tax-sharing agreement with Thyssen “may be valuable.”

Consequently, Budd canceled a hearing that would have been held on Oct. 6 for approval of the settlement. Instead, there will be a status conference on that date. Investigations and examinations under oath were suspended.

Budd currently has no operations and no employees. At the outset of the Chapter 11 case, Budd said it would propose a Chapter 11 plan providing a “fair and equitable treatment to all its creditors.”

The case is In re Budd Co., 14-bk-11873, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

Judge Threatens Freedom Industries With Chapter 7 Conversion

The chief restructuring officer for Freedom Industries Inc., whose leaking chemical tank made much of West Virginia’s water undrinkable early this year, could be ousted by the month’s end in favor of a liquidating trustee under Chapter 7, according to an opinion handed down on Sept. 5 by U.S. Bankruptcy Judge Ronald G. Pearson in Charleston, West Virginia.

The occasion for Pearson’s written opinion was a request by Freedom to expand the company’s exclusive right to file a liquidating Chapter 11 plan into November, now that reorganization has been abandoned. Pearson said some expenses of the Chapter 11 effort “appear to be beyond any reasonable basis.” The judge said he also has “great concern with respect to continuing this case under the guidance of this or any chief restructuring officer.”

Pearson on his own canceled a hearing that would have been held on Sept. 9 for approval of $456,000 in professional fees incurred during July. Instead, he called for a hearing on Sept. 23 to discuss whether the case could “proceed more fairly and efficiently” were it “converted to Chapter 7 and a trustee appointed.”

The judge is concerned that $2 million in professional fees may leave Freedom unable to complete an environmental cleanup demanded by state regulators. He said remediation “is not being given the priority it demands.”

Pearson also halted movement toward adoption of a Chapter 11 plan, because the proposal didn’t give him assurance the cleanup will be completed. The judge pointed to a provision in disclosure materials saying Freedom might walk away from the contaminated site if state authorities demand more work than the company can afford.

After determining reorganization wasn’t possible, Charleston-based Freedom decided to liquidate and filed a plan on Aug. 18 with input from the official unsecured creditor’s committee. For details on the plan, click here for the Aug. 20 Bloomberg bankruptcy report.

Freedom is demolishing the tank farm that caused the spill. The judge approved selling a 79-tank blending plant in Nitro, West Virginia, for $575,000.

The case is In re Freedom Industries Inc., 14-bk-20017, U.S. Bankruptcy Court, Southern District of West Virginia (Charleston).

Stockton Acts as a Template for Detroit’s Debt Plan

For the Detroit and Stockton, California, municipal bankruptcies, a looming question is whether retirees and their pensions can be treated better than bondholders and unsecured creditors.

Since U.S. Bankruptcy Judge Christopher M. Klein in California is likely to answer the question first, Bankruptcy Judge Steven Rhodes in Michigan will find the Stockton opinion helpful or a challenge to distinguish if he reaches an opposite result.

Franklin Resources Inc.’s high-yield bond funds argue that the Stockton court can’t confirm a plan with full payment of the city’s “massive” pre-bankruptcy liability for unfunded pensions while approving a plan that “crams down” a sub-1 percent payment on Franklin.

Franklin contends the plan improperly discriminates because other unsecured creditors get recoveries ranging from 52 percent to 100 percent.

At confirmation hearings for approval of the Stockton plan held in July, Klein asked both sides to file briefs. The city’s came in last month, with Franklin’s last week. The plan-approval hearing picks up again Oct. 1.

Whether or not Stockton has valid business reasons for preserving pensions, the Bankruptcy Code affords no preferential or exalted position to a municipal bankrupt’s unfunded pension liabilities, Franklin argued in a 64-page brief filed Sept. 3 opposing approval of the Stockton debt-adjustment plan.

The Bankruptcy Code mandates fair, equitable, and non-discriminatory creditor treatment and baseline recoveries that are in the best interests of all creditors, even those with whom the debtor has failed to reach agreement, according to Franklin.

Franklin said Stockton is prohibited from picking and choosing among its creditors, paying some in full and then “pleading poverty” as a justification for paying others virtually nothing.

The city must either treat Franklin fairly by paying its claim from “ample” revenues that will become available over time or impose on all its creditors the same “draconian” and unjustified impairment that the city has reserved for Franklin, it said.

According to Stockton, pension claims are not substantially similar to Franklin’s unsecured claim and, even if they were, the city may classify them separately so long as it can demonstrate there’s a business or economic justification for doing so. For details on Stockton’s arguments in support of its plan, click here for the Aug. 14 Bloomberg bankruptcy report.

Stockton 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).

Dewey & LeBoeuf Executives Can’t Appeal During Criminal Trial

The three former top executives at Dewey & LeBoeuf LLP, the defunct law firm, won’t know until after their criminal trial is over whether they must also stand trial in a civil suit brought by Aviva Life & Annuity Co., a Des Moines, Iowa-based insurance company.

Aviva sued in December 2012, alleging that Steven Davis, Dewey’s former chairman, Stephen DiCarmine, the former executive director, and Joel Sanders, the ex-finance chief, induced it to buy $35 million in secured notes in April 2010. Aviva said the law firm represented it was “financially sound” when there was $100 million in “undisclosed debt to certain highly compensated partners.”

All three men were indicted by a Manhattan grand jury this year, charged with a “blatant” $200 million fraud that spurred the largest law firm bankruptcy in history. They pleaded not guilty.

In July the Iowa district judge denied the former firm executives’ motion to dismiss the civil suit, based on an argument that Aviva no longer owned the right to sue because it sold the underlying claim against Dewey.

The district judge decided the issue was important and wrote an opinion recommending that the U.S. Court of Appeals in St. Louis allow an appeal although federal procedural rules otherwise don’t allow an appeal at this stage.

Last week, the St. Louis appeals court refused to allow an appeal, without giving a reason. Aviva had opposed permitting a so-called interlocutory appeal.

The civil suit in Iowa won’t be progressing in the meantime. The district judge stayed the civil suit until the criminal prosecution is finished. The three defendants and the Manhattan district attorney all sought to halt the civil suit.

Dewey, which once had 1,300 lawyers, filed for Chapter 11 protection in May 2012 and implemented a liquidating plan in March 2013. The plan created a trust to bring lawsuits and eliminate claims. The firm estimated that midpoint recoveries for secured and unsecured creditors under the plan would be 58.4 percent and 9.1 percent, respectively.

At the outset of bankruptcy, there was secured debt of about $225 million and accounts receivable of $217.4 million, the firm at one time said. The petition listed assets of $193 million and liabilities of $245.4 million.

The Iowa lawsuit is Aviva Life & Annuity Co. v. Davis, 12-cv-00603, U.S. District Court, Southern District of Iowa (Des Moines). The attempted appeal was Aviva Life & Annuity Co. v. Davis, 14-8016, U.S. Eighth Circuit Court of Appeals (St. Louis). The bankruptcy case is In re Dewey & LeBoeuf LLP, 12-bk-12321, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

LDR Industries Gets Interim Loan from JPMorgan Chase

LDR Industries LLC, an importer, distributor, and wholesaler of plumbing products, filed a Chapter 11 petition on Sept. 2 in Chicago and got interim authority from the bankruptcy judge last week to borrow $1.25 million from a promised revolving credit of $2 million.

The loan is provided by pre-bankruptcy secured lender JPMorgan Chase Bank NA, owed about $18.5 million as of the bankruptcy filing, according to court papers.

Chicago-based LDR filed bankruptcy because it was unable to post a bond covering a $4.5 million bill from U.S. Customs for allegedly-owed duties. The final hearing for approval of the entire loan will take place Sept. 25.

LDR is trying to sell the business and has a preliminary offer for most of assets, according to court papers.

LDR buys products from both foreign and U.S. companies and distributes to retailers like Home Depot Inc. and Sears Holdings Corp. The company had net sales of $65 million in 2013, according to court papers.

General unsecured claims total about $2.3 million, not including the U.S. Customs claim, according to court papers.

The petition lists both assets and liabilities of less than $50 million. LDR’s affiliates in Taiwan and Beijing didn’t file petitions, according to court papers.

The case is In re LDR Industries LLC, 14-bk-32138, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

Kid Brands ’Kids Line’ and ’CoCaLo’ Fetch $8 Million

Kid Brands Inc., a designer and distributor of infant and juvenile products, got the green light to sell almost all assets of its ’Kids Line’ and ’CoCaLo’ businesses and specified intellectual property assets of ’LaJobi’ to TG Valentine LLC for $8 million, subject to adjustment, plus assumption of specified liabilities.

The bankruptcy judge in Newark, New Jersey, signed an order yesterday approving the sale.

The buyer’s owner is the former president of Kids Line and CoCaLo, according to court papers. He is currently employed by Kid Brands but isn’t an “insider,” according to the court order.

No Disney Consumer Products Inc. inventory is being sold to the buyer, according to the court.

No trademarks, intellectual property, or related interests owned by The William Carter Company will be transferred in the sale. Any Carter’s-branded inventory currently held by Kid Brands may be transferred to the buyer, provided that it can’t be sold until Carter’s grants a license or consents in writing, according to the order.

Before the competing offer from TG Valentine was received, Kid Brands had sought to sell a narrower package of Kids Line and CoCaLo assets to Crown Crafts Infant Products Inc. for $1.35 million plus the assumption of debt.

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

The company received approval in August to sell almost all assets of the ’Sassy’ business to Sassy 14 LLC for $14 million plus assumption of liabilities.

Rutherford, New Jersey-based Kid Brands filed a Chapter 11 petition on June 18, listing assets of $32.4 million and debt totaling $109.2 million. Unsecured liabilities were shown as totaling $54 million, including approximately $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).

Simplexity Committee Wants to Sue Lender Fifth Third Now

Simplexity LLC, at one time the largest independent online activator of mobile phones, should either sue lender Fifth Third Bank or allow the official creditors’ committee to do so, the panel said in court papers on Sept. 4.

The committee wants the exclusive right to sue Fifth Third because the bank acted with “hostility” toward the Chapter 11 process to the detriment of unsecured creditors.

Allowing the company’s officers, directors, and managers and indirect owner Versa Capital Management LLC to lead settlement negotiations with Fifth Third is “manifestly improper,” the committee said. The creditor group said company managers and Versa are “principal litigation targets.”

“It is now time to take the reins from the hopelessly conflicted parties currently in control and hand them over to the disinterested constituency that is the real party in interest,” said the committee, which believes the claims against Fifth Third will likely provide a recovery for its constituents.

The vast majority of cash generated during the bankruptcy, including $10 million paid by Wal-Mart Stores Inc. for most of the assets, isn’t covered by Fifth Third’s liens, according to the committee. Among other things, the committee said Fifth Third’s liens and claims should be equitably subordinated, or paid only after unsecured claims.

Claims against Fifth Third are the “fulcrum” of the bankruptcy because it will resolve threshold issues necessary for plan approval and provide “seed money” to fund litigation against other targets identified by the committee, the group said.

While the committee asked to be heard on Sept. 18, Fifth Third and Simplexity don’t want a hearing before Oct. 16, according to court papers.

Fifth Third said there is “nothing exigent” about the request, which is the committee’s attempt to “scuttle” an ongoing and previously agreed-upon process.

Pursuant to the final bankruptcy financing order, the committee can “initiate” an action only if notified that the company doesn’t intend to prosecute or settle, according to Fifth Third.

U.S. Bankruptcy Judge Kevin Gross won’t hear the committee’s motion on an expedited basis, according to a court order entered yesterday. Gross directed Simplexity and Fifth Third to “promptly” include the committee in settlement discussions.

Based in Reston, Virginia, Simplexity filed for Chapter 11 protection in March, approximately four days after shutting down operations and firing all workers.

Simplexity is indirectly owned by affiliates of Versa, a Philadelphia-based private-equity firm.

The case is In re Simplexity LLC, 14-bk-10569, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filing

Lenco Mobile Technology Marketer Files in Seattle

Lenco Mobile Inc. and affiliate Archer USA Inc., global providers of mobile marketing technology, filed Chapter 11 petitions in Seattle on Sept. 6.

The companies intend to strengthen the balance sheet and simplifying the capital structure, according to a statement.

Calling itself an early-stage business in the mobile engagement industry, Lenco had a $2.9 million operating loss on revenue of $7.9 million for six months ended June 30, according to a regulatory filing. The net loss for the period before preferred stock dividends was $3.5 million.

The June 30 balance sheet listed assets of $6.6 million against liabilities totaling $32.6 million, according to the filing.

The cases are In re Lenco Mobile Inc., 14-bk-16660, and In re Archer USA Inc., 14-bk-16659, U.S. Bankruptcy Court, Western District of Washington (Seattle).