By Bill Rochelle
(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates with Madoff and Point Blank in Updates.)
March 24 (Bloomberg) -- Lehman Brothers Holdings Inc. filed a motion for authority to carry out its end of an agreement for the bankruptcy reorganization of Innkeepers USA Trust, a real estate investment trust that owns 72 extended-stay hotels.
After Lehman’s original concept of a plan for Innkeepers was shot down by the trust’s bankruptcy judge, the parties came up with another structure where Lehman will receive half of the new Innkeepers equity and $26.2 million cash in exchange for about $200 million in mortgages on 45 of the properties.
Five Mile Capital Partners LLC is to acquire the other half of Innkeepers’ new equity in return for $174.1 million cash. Five Mile and Lehman are to buy 65 of the 72 properties.
Lehman anticipates that a third party will pay $70 million for 20 percent of the Innkeepers equity, meaning Lehman will end up with 40 percent of the equity and $61 million for what was originally $238 million in mortgages.
The hearing for approval of Lehman’s participation in the Innkeepers plan will take place in bankruptcy court on April 13.
Earlier this month, the judge in the Innkeepers case approved the Lehman-Five Mile proposal as the first bid at a May 2 auction to test if there is a better offer. Lehman says Innkeepers intends to file its reorganization plan by April 8 and confirm the plan not later than June 30. For a rundown on other aspects of the May auction, click here for the March 14 Bloomberg bankruptcy report.
Lehman filed a motion asking for authority to invest $25 million in property it intends on foreclosing and developing in lower Manhattan. For Bloomberg coverage, click here.
The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold office buildings and the North American investment banking business to Barclays Plc one week later. The Lehman brokerage operations went into liquidation on Sept. 19, 2008, in the same court.
The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding under the Securities Investor Protection Act for the brokerage operation is Securities Investors Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Innkeepers case is In re Innkeepers USA Trust, 10-13800, in the same court.
Updates
Customers Demand Removal of Madoff Trustee
A group of customers of Bernard L. Madoff Investment Securities Inc. filed papers yesterday urging the bankruptcy judge at a March 30 hearing to remove the trustee and his lawyers on the theory they were “deliberately concealing material information” about a $220 million settlement in early 2010.
The customers’ motion filed in February alleges that “stunning” facts came to light last month indicating the Madoff trustee settled too cheaply when he took $220 million from the estate of deceased New York real estate investor Norman F. Levy.
The trustee answered the motion this month, saying all the supposedly stunning facts were already known to him when he agreed to settle. The trustee said the $220 million was the most he could recover in a lawsuit because other claims were cut off by the statute of limitations.
Without addressing the trustee’s contention that he already knew the facts, the customers say the settlement with Levy was a “sweetheart deal.” In addition to removing the Madoff trustee and his attorneys, the customers want an independent investigator appointed to investigate the trustee’s conduct throughout the liquidation.
At the hearing on March 30, the bankruptcy judge will rule on the customers’ motion to set aside the settlement last year.
In other Madoff news, the owners of the New York Mets baseball club could be in default of their bank loans if they agree to a large enough settlement of the lawsuit by the Madoff trustee.
According to the trustee’s complaint, a settlement for more than $50 million or $100 million, depending on the circumstances, would be an event of default on the bank loans. Similarly, a non-appealable judgment in a large enough amount would be a default also.
Fred Wilpon and Sterling Equities Inc. restructured bank loans after the Madoff firm went into liquidation. For Bloomberg coverage, click here.
The Madoff trustee is suing Wilpon, Sterling, the owners of the New York Mets baseball club, and Wilpon’s friends, family and associates for $1 billion, including $700 million in principal repayments and $300 million in what the trustee calls fictitious profits. The Wilpon group filed a motion this month contending the allegations in the trustee’s 373-page suit are legally insufficient and should be dismissed.
The Madoff firm began liquidating on Dec. 11, 2008, with the appointment of the trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009. His bankruptcy case was consolidated with the firm’s liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.
The Wilpon lawsuit is Picard v. Katz, 10-5287, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, 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).
Zell Pressures Tribune Committee to Drop Claims
Sam Zell is pressuring the Tribune Co. creditors’ committee to drop parts of the lawsuit filed against him in November. The committee filed the lawsuit to insure claims against Zell wouldn’t be lost arising from the $13.7 billion leveraged buyout for Tribune that he carried out in 2007.
Zell says that three counts in the complaint don’t have any basis in Delaware law. On a fourth count for piercing the corporate veil, Zell says the complaint is “bereft of any factual allegations.”
Zell filed papers this week asking the bankruptcy court for permission to initiate a process that could end in sanctions against the creditors’ committee or its lawyers if the objectionable counts are later dismissed by the court.
Under Rule 9011 of the bankruptcy rules of procedure, a party can demand that part or all of a complaint be withdrawn. If they aren’t, the party who doesn’t withdraw can be saddled with monetary sanctions if the claims are later dismissed by the court.
When the committee filed the complaint last year, it was to stop time from running out on the claims. The bankruptcy judge signed an order saying the lawsuit would be stayed pending the outcome of the plan-confirmation process. The lawsuit would go ahead if a plan isn’t confirmed that settles the claims against Zell.
Zell wants the bankruptcy court to declare that he can serve his demands for partial withdrawal under Rule 9011 without offending the order that the lawsuit is stayed.
The bankruptcy judge held two weeks of trial to decide whether to confirm the Tribune plan or the competing plan from creditor Aurelius Capital Management LP. The trial will resume April 11. The company’s plan is co-sponsored by the official creditors’ committee and senior lenders Oaktree Capital Management LP, Angelo Gordon & Co. LP, and JPMorgan Chase & Co.
The Tribune plan would largely impose settlements with regard to claims arising from the LBO. The Aurelius plan would allow the LBO lawsuits to proceed after the plan is confirmed.
Tribune is the second-largest newspaper publisher in the U.S. It listed $13 billion in debt for borrowed money and assets of $7.6 billion in the Chapter 11 reorganization begun in December 2008. It owns the Chicago Tribune, Los Angeles Times, six other newspapers and 23 television stations.
The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).
SEC, U.S. Trustee Want Chapter 11 Trustee for West End Financial
The Securities and Exchange Commission and the U.S. Trustee together are asking the bankruptcy judge in New York to appoint a Chapter 11 trustee for West End Financial Advisors LLC, the adviser for dozens of funds.
The bankruptcy judge scheduled a hearing on March 30 to determine if there should be a trustee.
Raymond J. Heslin, who is currently managing West End, put the company into Chapter 11 on March 15 along with 15 affiliates, shortly after the U.S. District Court appointed a monitor at the behest of the SEC.
The SEC says that Heslin, although not involved in fraud allegedly occurring during prior management, is receiving “an exorbitant salary with benefits and paying his counsel approximately $2.5 million in fees over the past 18 months.” The Commission says Heslin has a “debilitating conflict of interest” resulting from his $2.5 million investment in one of the funds.
The Commission accuses Heslin of favoring “certain chosen investors.”
The U.S. Trustee, the Justice Department’s bankruptcy watchdog, said that Heslin’s annual salary is $500,000.
Before bankruptcy, West End was accused by the SEC of committing securities fraud and misusing client funds. Heslin was originally brought in as general counsel and said he disclosed improper conduct by prior management to the SEC 10 weeks after starting work.
Founder William Landberg has been arrested for securities fraud, the U.S. Trustee said in a court filing. West End’s two principal funds made so-called hard money loans on real estate and loans to food-service franchises.
West End listed $55.4 million in assets. Secured debt totals $189.9 million while there are $4.5 million in unsecured claims, a court filing says.
Secured creditors with the largest claims are DZ Bank ($118.1 million), West LB ($41 million), Iberia Bank ($11.3 million), and Suffolk County National Bank ($8.3 million).
The case is In re West End Financial Advisors LLC, 11-11152, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Point Blank Former CEO’s Brother Sues Current Chief
The brother of the convicted former chief executive officer of Point Blank Solutions Inc. sued the current acting CEO for $7 million in state court in New York. Point Blank, a manufacturer of soft body armor for police and military, is in Chapter 11 reorganization.
Jeffrey Brooks, brother of David H. Brooks, contends he was damaged because James Henderson hasn’t had an audit performed for the company in two years and is having the stock deregistered. Having an audit certified would be difficult to impossible because David Brooks was convicted of causing Point Blank to conduct a financial fraud.
To avoid violating an agreement with the Securities and Exchange Commission requiring the filing of certified financial statements, Point Blank is deregistering the stock and intends to be a private company after emerging from Chapter 11 reorganization.
Henderson may attempt to move the suit to bankruptcy court on the theory that the allegations impinge on his ability to manage the company in Chapter 11. To read Bloomberg coverage, click here.
Point Blank had been intending to sell new stock to creditors as part of the financing for a Chapter 11 plan. The company dropped the idea when the SEC charged there was no registration exemption for the stock sale that would violate securities laws.
Instead, the company now intends to garner some of the needed financing through a direct subscription agreement with Lonestar Partners LP, Privet Fund Management LLC, and Prescott Group Capital Management. For details on the prior plan, click here for the Dec. 14 Bloomberg bankruptcy report.
Based in Pompano Beach, Florida, Point Blank has two plants. Revenue in 2009 exceeded $153 million. The former chief executive officer and chief operating officer were convicted in September of orchestrating a $185 million fraud.
The Chapter 11 petition in April 2010 listed assets of $64 million against debt totaling $68.5 million. Debt included a $10.5 million secured loan paid off by financing for the Chapter 11 case. Point Blank said it also owes $28.2 million to trade suppliers.
The case is In re Point Blank Solutions Inc., 10-11255, U.S. Bankruptcy Court, District of Delaware.
New Stream Has $4 Million Interim Loan Approval
New Stream Capital LLC received bankruptcy court approval on March 22 for $4 million in secured funding for the Chapter 11 case. At a final financing hearing on April 1, borrowing authority would increase to $56.8 million.
The funding is for paying premiums on the portfolio of life insurance policies. The lender is an affiliate of McKinsey & Co., which is under contract to buy the portfolio for $127.5 million. Before bankruptcy, the lender advanced $41.8 million on a secured basis for the payment of policy premiums.
New Stream, which calls itself a fund manager specializing in “non-traded private debt,” filed under Chapter 11 on March 13 with a prepackaged plan it says was accepted in advance by three classes of creditors.
The plan is being opposed by creditors in U.S. and Cayman Islands funds who say they invested more than $90 million. They contend they were promised treatment the same as investors in New Stream’s Bermuda fund. Instead, they say they are being offered a “pittance.” New Stream says the investors’ arguments were rejected already by a federal judge and an arbitrator.
The investors filed involuntary Chapter 11 petitions against three New Stream funds not among those who filed the prepackaged petitions.
Ridgefield, Connecticut-based New Stream to a large extent invested in the so-called life settlement market, where life insurance policies are purchased for less than the death benefit from owners of policies on individuals’ lives.
The prepackaged case is In re New Stream Secured Capital Inc., 11-10753, U.S. Bankruptcy Court, District of Delaware (Wilmington). The first-filed involuntary case is In re New Stream Secured Capital Fund (U.S.) LLC, 11-10690, in the same court.
UAW Caves to AAI Demand on Ending Workers’ Pensions
The United Auto Workers’ union caved in to demands for termination of the existing pension plan and contends Alabama Aircraft Industries Inc. no longer has a basis for insisting on termination of the existing collective bargaining agreement.
AAI, a provider of scheduled maintenance for U.S. military aircraft, sought Chapter 11 protection on Feb. 15 and filed a motion in bankruptcy court less than a month later seeking to terminate the union contract. The motion is on the calendar for a hearing today in U.S. Bankruptcy Court in Delaware.
Since the motion was filed, the union agreed to termination of the pension plan, subject to a ratification vote by workers. The union said in a court filing that the demands for “draconian labor cost reductions” aren’t “necessary” for a successful reorganization, the standard that must be shown under bankruptcy law.
If not denied outright, the union wants the motion adjourned so the parties can negotiate further. The company’s remaining requests include a 15 percent reduction in wages and the elimination of a cost-of-living wage adjustment. The pension plan is under-funded by $31.4 million, the motion says.
Previously known as Pemco Aeroplex Inc., AAI operates under a long-term lease at the Birmingham International Airport in Alabama. It mainly maintains and repairs transport, tanker and patrol aircraft.
The Pension Benefit Guaranty Corp. was listed as having the largest unsecured claim at $68.5 million. A fund affiliated with Tennenbaum Capital Partners LLC is owed $2.5 million on a note.
A court paper said assets were on the books for more than $32 million in September.
The case is In re Alabama Aircraft Industries Inc., 11-10452, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Colonial Pegs FDIC’s Claim at $1, Not $2.2 Billion
Bank holding company Colonial BancGroup Inc. contends the Federal Deposit Insurance Corp. is entitled to vote a claim of only $1, not $2.2 billion as the FDIC claims. The vote is being taken in anticipation of the May 11 confirmation hearing for approval of Colonial’s Chapter 11 plan.
As part of the confirmation process, the bankruptcy judge must put a temporary value on the FDIC’s claim only with regard to voting.
The FDIC, according to Colonial, has contended from the outset that it owns almost all the holding company’s assets. The FDIC is appealing a ruling in January that it didn’t have the right to offset an account with $38 million toward payment of about $900 million the Colonial holding company allegedly owes for capital insufficiency at the failed bank.
Colonial’s chief assets are the $38 million cash that’s subject to disputed ownership. There are also $252 million in claimed tax refunds where FDIC asserts ownership.
FDIC is also appealing an August ruling by the bankruptcy judge who concluded that the holding company hadn’t made an enforceable agreement to make up a $900 million capital deficiency at the bank subsidiary.
Colonial filed under Chapter 11 in August 2009 after the bank subsidiary was taken over by regulators. The Colonial holding company, based in Montgomery, listed assets of $45 million and debt of $380 million.
Colonial provided loans to mortgage loan originators to tide them over until mortgages could be packaged and sold to investors in securitizations. The holding company was being investigated with regard to accounting practices and the warehouse loan operation.
The case is In re Colonial BancGroup Inc, 09-32303, U.S. Bankruptcy Court, Middle District of Alabama (Montgomery).
Fiddler’s Creek Amended Plan Confirmation Scheduled for May 26
Fiddler’s Creek LLC scheduled a May 26 confirmation hearing for approval of the reorganization plan after the bankruptcy judge in Fort Myers, Florida, signed an order yesterday approving the explanatory disclosure statement.
Fiddler’s Creek, a developer of a master-planned community in Naples, Florida, proposed the revised plan after reaching agreement with the official creditors’ committee, an ad hoc group of homeowners, and two lenders, Regions Bank NA and Fifth Third Bank.
Fiddler’s Creek filed for bankruptcy reorganization in February 2010, saying assets and debt both exceeded $100 million. At completion, the project is to have 100 communities situated on almost 4,000 acres. Colonnade said Fiddler’s Creek has $98 million in other secured debt.
The case is In re Fiddler’s Creek LLC, 10-03846, U.S. Bankruptcy Court, Middle District Florida (Fort Myers).
Advance Sheets
Abstention Mandatory Despite Post-Plan Jurisdiction
The extent to which bankruptcy jurisdiction narrows after plan confirmation has divided the country’s federal courts. U.S. District Judge Gregory K. Frizzell from Tulsa, Oklahoma, came down on the side of favoring a broader notion of jurisdiction, rejecting the narrower version espoused by the U.S. Court of Appeals in Philadelphia in a 2004 case called Resorts International.
Frizzell’s case involved a lawsuit brought by the trustee of the litigation trust created under the confirmed Chapter 11 plan of SemGroup LP. The trustee sued the company’s pre- bankruptcy auditor in state court for professional malpractice. The accountants had the suit transferred to U.S. District Court.
The trustee moved to remand the case to state court and won.
Frizzell followed the line of cases finding a broader notion of “related to” jurisdiction following confirmation. He said the suit was by a trust created under the plan and would benefit creditors in the Chapter 11 case.
Although there was jurisdiction, Frizzell sent the case back to state court under the doctrine of mandatory abstention under Section 1334(c)(2) of the Judiciary Code. He said the case involved a state-law claim that could not have been brought before bankruptcy in federal court. If it weren’t mandatory, Frizzell said he also would abstain under the doctrine of permissive abstention.
The law on post-confirmation jurisdiction was surveyed in January by a U.S. district judge in Kentucky. To read about the opinion in McKinstry v. Sergent, click here for the Jan. 14 Bloomberg bankruptcy report.
The Oklahoma case is Whyte v. PricewaterhouseCoopers LLP, 10-485, U.S. District Court, Northern District Oklahoma (Tulsa).
--With assistance from Pamela MacLean in San Francisco; Dawn McCarty and Michael Bathon in Wilmington, Delaware; and Linda Sandler, Karen Freifeld, Oshrat Carmiel and Tiffany Kary in New York. Editors: Glenn Holdcraft, Peter Blumberg
To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net
To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net
