Cascade Investment LLC, which invests for the Bill & Melinda Gates Foundation, should be treated as the owner, not a secured lender, of bankrupt Optim Energy LLC, according to the energy company’s largest unsecured creditor.
Optim, a power-plant owner indirectly owned by the Gates foundation, filed for Chapter 11 protection in Delaware in February and has final approval for $115 million in financing from Cascade. The bankruptcy required Cascade to make good on a guarantee and pay off $713 million owed to Wells Fargo Bank, stepping into the bank's shoes as lender in the process.
Unsecured creditor Walnut Creek Mining, Optim’s sole supplier of coal, said in a court filing this week that the Wells Fargo loan was unsecured. When Cascade took it over, it became secured under a pre-existing agreement to use the assets as collateral in the event of a call on the guarantee.
The mining company alleged an “inequitable scheme” through which Cascade transformed itself “from a mere equity holder to the secured lender.”
Cascade’s secured status allows it to claim payment from the estate before other parties, leaving little or nothing for unsecured creditors. Equity holders, on the other hand, are paid after most other claimants. So converting Cascade’s claim into equity would leave more money for creditors such as Walnut Creek.
Walnut Creek asked the bankruptcy court to let it sue Cascade on behalf of all creditors, saying that Silver Spring, Md.-based Optim itself waived the right to sue by obtaining financing from Cascade.
Claims for recharacterization of debt as equity, equitable subordination and damages for breach of fiduciary duty could all be raised, according to Cascade, which said there’s no creditors’ committee to do so.
Lindsee P. Granfield, an attorney for Cascade, said she couldn’t comment on a matter in litigation.
Optim owns three plants with combined capacity of 1,455 megawatts. Two plants burn natural gas and the third uses coal. The company's petition listed assets of less than $500 million and debt exceeding $500 million.
Bill Gates, the world's richest man, is co-founder of Microsoft.
The case is In re Optim Energy LLC, 14-bk-10262, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Global Geophysical Settles Chapter 11 Loan Dispute
Global Geophysical Services, the provider of seismic data for the oil and gas drilling industry, reached a settlement regarding financing for its Chapter 11 case that gives the company abundant time to reorganize.
Based in Missouri City, Texas, GGS found itself in Chapter 11 on March 25, a week after admitting that financial statements had to be revised. In bankruptcy, the company was facing a so-called priming fight because unsecured noteholders were offering a $60 million loan that had to be secured ahead of existing secured lenders.
At an ensuing hearing, the bankruptcy judge sided with the company by granting interim approval for a $25 million loan coming ahead of secured lenders. U.S. Bankruptcy Judge Richard J. Schmidt in Corpus Christi, Texas, concluded that secured lenders had a sufficient “equity cushion” so they wouldn’t be harmed by a loan with first dibs on collateral.
To avoid a bigger fight at an April 25 hearing for final approval of the $60 million loan, everyone settled.
The unsecured noteholders will pay off in full the $91.9 million owing to the secured lenders, who agreed to knock $9.3 million off their claim.
Including the amount to be used for paying off secured lenders, the noteholders will provide a $151.8 million loan that has $60 million in fresh cash. The noteholders’ loan will mature more than a year from now, not forcing GGS to sell as quickly as so many other bankrupt companies.
Secured lenders being paid off include TPG Specialty Lending and Tennenbaum Capital Partners.
The new loan is being made by some holders of $250 million on two issues of 10.5 percent senior unsecured notes, with Bank of New York Mellon Trust Co. as indenture trustee. Noteholders offering the new financing include Third Avenue Focused Credit Fund, Credit Suisse Loan Funding and Candlewood Special Situations Master Fund.
Global said on filing under Chapter 11 that it intends to reorganize on its own or with additional capital. It listed assets of $468.7 million and liabilities totaling $407.3 million on Sept. 30 balance sheets.
Global said it had a cash crisis as a result of working capital demands arising from new business requiring large initial expenses. The secured lenders accelerated the debt when a forbearance agreement expired on March 24, Global said in a court filing. The restatement is the result of what the company called “accounting errors” going back to 2009.
The $200 million in 10.5 percent senior unsecured notes traded at 3:33 p.m. on Tuesday for 54.2 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes are down from their post-bankruptcy high of 63.5 cents on April 2.
The case is In re Autoseis Inc., 14-bk-20130, U.S. Bankruptcy Court, Southern District of Texas (Corpus Christi).
GM Soon to Raise Bankruptcy Shield against Lawsuits
General Motors Co., sometimes referred to as new GM after purchasing the bankrupt automaker's business, said it “shortly will file” papers with the U.S. Bankruptcy Court in New York for a declaration that personal-injury claims are barred by the order in July 2009 under which it purchased the assets.
New GM made the statement April 11 in one of the 19 lawsuits where it’s being sued for personal injuries resulting from allegedly faulty ignition switches in Cobalt models. New GM wants the judge to put the suit on hold until the bankruptcy court decides whether the bankruptcy order shields the company from personal-injury suits.
Under the 2009 sale agreement, new GM accepted liability for product recalls and responsibility for repairing the Cobalts. The company contends that personal-injury claims are barred.
People injured or killed in Cobalt accidents must overcome several obstacles to mount valid claims against new GM.
To sue new GM, plaintiffs could try arguing that bankrupt General Motors Corp., or old GM, knew about the defects and kept quiet. If old GM knew about the defects and didn’t give car owners notice to file claims, a plaintiff could argue they were denied due process with the result that their claims weren’t wiped out in bankruptcy.
Still, a ruling that the claims survive by itself won’t give rise to a claim against new GM because it’s a different company, protected by the sale-approval order. Consequently, Cobalt plaintiffs might try to argue that new GM is a “successor” to old GM and therefore liable for personal-injury or death claims.
Old GM filed for reorganization under Chapter 11 on June 1, 2009. It listed assets of $82.3 billion against debt totaling $172.8 billion. The sale to new GM was completed the next month.
One of the personal-injury cases is Maciel v. General Motors, 14-cv-01339, U.S. District Court, Northern District of California (San Francisco).
The GM Chapter 11 case is In re Motors Liquidation Co., 09- bk-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Detroit Settles on Police and Fire Department Pensions
Detroit reached an agreement converting retired police and firefighters into supporters of the city's proposed debt-adjustment plan.
Before the settlement, the city said it would cut police and fire pensions by 6 percent. The settlement avoids cuts and restores half of the cost-of-living adjustments that would have been eliminated under the city’s proposed plan.
The settlement only works if the court approves settlements with the state and private philanthropies providing $816 million to prevent sale of the city’s art collection.
U.S. Bankruptcy Judge Steven Rhodes is interviewing five candidates to be the court’s own independent expert witness to evaluate whether the city’s municipal debt-adjustment plan is feasible and based on reasonable assumptions.
The judge called for having his own expert in March, saying he has “an independent duty” to determine whether the plan is feasible, “even if no party objects to plan confirmation.”
The judge’s statement implies that he might disapprove the plan even if all creditor groups settle.
That’s what happened when U.S. Bankruptcy Judge Bruce Markell, now a law professor, initially refused to approve a plan for Las Vegas Monorail Co., even though all creditors were in support.
Detroit began the largest-ever Chapter 9 municipal bankruptcy in July with $18 billion in debt.
The Chapter 9 case is City of Detroit, Michigan, 13- bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
Martifer Solar Plans to Auction Business by Mid-June
Martifer Aurora Solar, a builder of solar power projects, filed a Chapter 11 petition in January in Las Vegas and intends to emerge from reorganization by mid-July by selling the business.
The Los Angeles-based company said it hopes to have a so- called stalking-horse bidder signed to a contract in time for an auction in mid-June.
Martifer intends to file a proposed plan and disclosure statement before the end of April, so disclosure materials can be approved before the end of May. The company is seeking a confirmation hearing to approve the plan before June is over.
The company entered bankruptcy with 35 workers and is now down to 27. To stem departures, Martifer proposed an incentive- bonus plan for 18 workers. It would cost a maximum of $460,000.
Two-thirds of the workers would have a bonus equal to 5 percent to 10 percent of a year’s wages. For the others, the maximum would be 45 percent.
Martifer is asking the bankruptcy judge to hold a hearing by April 30 to approve the bonus program.
Martifer is the U.S. side of the Portuguese solar power developer Martifer Solar SA. The lender precipitated bankruptcy by freezing bank accounts and moving to appoint a receiver.
The U.S. company listed assets of $33.7 million and liabilities totaling $35.1 million. Debt includes $6.7 million owing to Cathay Bank. There are $14 million in loans to the parent.
Revenue shrank to $42.6 million in 2012 from $71.3 million in 2011, resulting in a $7.9 million loss. Lack of working capital in 2013 depressed revenue to $16 million, producing a $17 million loss.
The Martifer parent entered the U.S. market in 2008 by acquiring A&M Home Improvement Inc., which later changed its name. The U.S. company installed solar power projects with an aggregate capacity of 45 megawatts.
The case is In re Martifer Aurora Solar LLC, 14-bk-10355, U.S. Bankruptcy Court, District of Nevada (Las Vegas).
Event Rentals Lenders Give Creditors $600,000 to Settle
The Event Rentals Inc. creditors’ committee negotiated a settlement where secured lenders will release $600,000 in cash so creditors won’t oppose selling the business to the lenders in exchange for debt.
The largest event-rental provider in the U.S. filed a Chapter 11 petition in mid-February planning on a sale to secured lenders in exchange for $124 million in secured debt. The official committee contended there were defects in pre- bankruptcy loan documents undercutting the ability to bid using debt rather than cash.
If the creditors don’t use the entire budget for their fees, as much as $150,000 more can go into the pot for creditors.
In settlement, the committee dropped its opposition to the sale. The settlement comes to court for approval on April 29.
Known as Classic Party Rentals, the Inglewood, Calif.-based company, will hold an auction April 21 to determine if the secured lenders’ offer is the best. A hearing on sale approval is set for April 29.
The lenders already agreed to provide as much as $7.2 million in cash to wind down the bankruptcy.
The company serves 22 markets and generated $242.1 million of revenue in 2013. Assets were listed for $148 million, with debt totaling $246 million.
Quad-C Partners VII LP is a 71 percent owner. S.A.C. Offshore Capital Funding Ltd. has 16 percent of the equity.
The case is In re Event Rentals Inc., 14-bk-10282, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Atlantic Club Casino Confirms Liquidating Plan
The one-time owner of the Atlantic Club Casino Hotel in Atlantic City got bankruptcy court approval this week for a liquidating Chapter 11 plan.
Unsecured creditors with claims of $8.7 million will recover nothing to 28 percent, according to the disclosure statement.
The casino filed a Chapter 11 petition in early November and sold slot machines to Tropicana Atlantic City for $8.4 million. Caesars Entertainment Operating Co. bought the building for $15 million. Since neither buyer would operate the facility, it closed.
There were no secured claims left to deal with in the plan.
Atlantic Club’s facility had 801 rooms, 75,000 square feet of gaming space and seven restaurants, generating revenue of $103.8 million last year.
The official lists showed assets of $17.8 million against debt totaling $16.8 million, including $8.1 million in secured debt.
The case is In re RIH Acquisitions NJ LLC, 13-bk-34483, U.S. Bankruptcy Court, District of New Jersey (Camden).
Fletcher’s Settlement With Skadden Arps Law Firm Approved
The trustee for the Fletcher International Ltd. master fund got approval of a liquidating Chapter 11 plan in late March and yesterday won court endorsement of a settlement under which law firm Skadden Arps Slate Meagher & Flom LLP pays $4.25 million for a release of claims the trustee might have pursued.
Skadden said there was no basis for liability, contending that its representation was limited to certain proceedings in Delaware state court.
According to Richard J. Davis, the Chapter 11 trustee, Fletcher “did not make a single profitable investment after Aug. 31, 2007.” The company was founded by Alphonse “Buddy” Fletcher.
Davis was appointed as trustee in September 2013 when the company was in a fight for control between investors and Fletcher’s asset management company.
According to Davis, four public pension funds that invested $125 million will receive 90 percent of all recoveries. The disclosure statement listed about $120 million in unsecured claims to share equally in lawsuit recoveries.
Fletcher initially listed assets of $52.5 million and liabilities totaling $23.8 million.
The Chapter 11 case is In re Fletcher International Ltd., 12-bk-12796, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Cooper-Booth Has May 14 Confirmation for 100 Percent Plan
Cooper-Booth Wholesale Co., a convenience-store wholesaler, is scheduled to have a confirmation hearing in bankruptcy court on May 14 to seek approval of a Chapter 11 plan that pays all creditors in full.
A bankruptcy judge in Philadelphia approved the disclosure statement explaining the workings of the plan. The creditors’ committee supports the plan.
The plan will be financed with a new $35 million credit provided by AloStar Business Credit and Susquehanna Bank, according to the disclosure statement.
The new loan will pay off $5.5 million owing to PNC Bank NA on a secured loan and a $7.5 million claim of Zurich Insurance Group AG incurred in paying taxing authorities for tax stamps under a surety bond.
Unsecured creditors with claims totaling $4.4 million also will be paid in full, with interest.
The owners can retain the equity because everyone is paid in full, with interest.
Mountville, Pennsylvania-based Cooper-Booth sought Chapter 11 protection in May following the seizure of company property on the commencement of criminal forfeiture proceedings pointed toward a third party.
Closely held Cooper-Booth initially listed $62.4 million in assets and debt of $33.5 million, including $22.8 million in unsecured trade payables.
The case is In re Cooper-Booth Wholesale Co. LP, 13- bk-14519, U.S. Bankruptcy Court, Eastern District of Pennsylvania (Philadelphia).
Allonhill and Aurora Will Complete Appeal on Judgment
Allonhill LLC, formerly a provider of due diligence services for mortgage investors, agreed with Aurora Commercial Corp. that an appeal can be completed to decide whether Aurora was entitled to the $25.8 million judgment it won for breach of contract and fraud on a project where Allonhill performed an independent foreclosure review.
The agreement allows the appeals court to determine whether the judgment is valid. Aurora won’t be allowed to jump ahead of other creditors if it wins.
Denver-based Allonhill sold its business in August to Stewart Information System Corp. under a contract whose terms the company is barred from disclosing. It filed for Chapter 11 protection in late March in Delaware.
The petition listed assets of $50 million and liabilities totaling about $30 million, including $2.4 million in secured debt. Apart from the Aurora judgment, other liabilities include $1.7 million owing to trade suppliers.
Allonhill is appealing the Aurora judgment. The company said it’s “likely” money will be left over from the Stewart contract to pay shareholders, who include some of the company’s former employees.
The case is In re Allonhill LLC, 14-bk-10663, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Sufficient Liquidity Portends No Increase in Defaults
The junk-bond default rate declined in the first quarter to 1.7 percent among non-financial U.S. companies, compared with a default rate of 2.2 percent at the end of 2013, according to a report this week from Moody’s Investors Service.
The first quarter had seven defaults: five bankruptcies and two so-called distressed exchanges.
Defaulted debt totaled $3 billion in the first quarter, compared with $7 billion in defaults by nine companies in the first quarter of 2013. The largest single default so far this year was by Sorenson Communications Inc. with debt of $1.3 billion.
Moody’s ascribed the low default rate to “issuer-friendly credit markets” allowing companies with B3 or Caa1 ratings to refinance maturing debt.
Liquidity remains strong even among junk-rated companies. Moody’s liquidity-stress index, measuring the percentage of companies with the weakest liquidity, stood at 4.4 percent at the close of the first quarter, below the 7 percent average since 2002.
At quarter’s end, there were 37 companies in the category of most-likely-to-default, with default probability ratings of Caa2 or lower. The number was unchanged since December.
Moody’s predicted that the junk default rate will rise to 2.4 percent by the end of 2014 before declining once again to 2.4 percent a year from now. The long-term average default rate is 4.5 percent. The highest was 14 percent in late 2009.
Bain Capital’s Air Medical Demoted to Moody’s B3
Air Medical Holdings, the world’s largest operator of air ambulances, received a downgrade yesterday from Moody’s Investors Service lowering the corporate rating by one step to B3.
Moody’s action was based on rising operating costs resulting from increased requirements from the Federal Aviation Administration.
The downgrade was also influenced by last year’s $200 million debt-funded dividend to the owners.
Boca Raton, Fla.-based Air Medical is majority-owned by Bain Capital Partners, according to Moody’s. The company has 253 aircraft operating from 211 bases in 31 states.
Beverly Hills Bancorp Files to Preserve Tax Losses
Beverly Hills Bancorp, former owner of First Bank of Beverly Hills, filed a petition for Chapter 11 protection yesterday in Delaware as a forbearance agreement was expiring in connection with $25.8 million in trust-preferred securities.
The bank subsidiary was taken over by regulators in April 2009. All other subsidiaries are inactive.
The balance sheet has assets of $8.5 million and debt totaling $40.9 million, mostly on account of trust-preferred securities. Assets include $6 million in cash, including some that may be restricted to support indemnification obligations running in favor of former executives who were sued.
The company has $116.2 million in net operating tax losses, which, if properly handled, could create value for a Chapter 11 plan by shielding future net income from taxation. Consequently, the company is asking the bankruptcy judge to bar large sales of claims so tax benefits aren’t lost.
The company had been deferring payments on the trust- preferred securities until March 7, when the deferral period ran out. Before the bankruptcy filing, the company had been talking with creditors about a reorganization to preserve and utilize the NOLs.
The case is In re Beverly Hills Bancorp Inc., 14-bk-10897, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Energy Future Misses Deadline for Filing 10-K
Texas power-plant owner Energy Future Holdings Corp. didn’t file it 10-k on time, thereby violating loan covenants. If given notice, the company would have 30 days to cure the shortcoming before it’s an event of default.
The company didn’t make a $109 million debt payment due March 31. The grace period runs out May 1.
Negotiations with creditors on a prepackaged Chapter 11 filing continue.
The company 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.
Court Apportions Burdens of Proof in Asbestos Cases
Although a bankruptcy court confirmed a Chapter 11 plan dealing with asbestos liability, the trust created to compensate creditors for their claims bore the ultimate burden of showing settlements are reasonable.
The case involved Porter Hayden Co. and its Chapter 11 plan approved with a confirmation order in 2006. Insurance companies withdrew their objection to the plan when the company agreed they wouldn’t lose any of their state-law rights.
The insurance companies sued in federal district court in Baltimore, alleging that settlements made by the asbestos trust were unreasonable in amount and violated the “voluntary obligation” provision in the insurance policies.
U.S. District Judge Catherine B. Blake cited the insurance companies’ refusal to participate in the claims-resolution process as a waiver of the voluntary obligation provision under Maryland law. The insurers nonetheless retained the right to object to the reasonableness of settlements, Blake ruled.
Blake’s opinion March 31 is significant for how it apportions the burdens of proof under Maryland law. She said insurance companies have the initial burden of producing enough evidence to raise a “triable issue with regard to the reasonableness of settlement,” which she referred to as the “initial burden of production.”
Assuming the insurers shoulder their burdens, the asbestos trust has “the ultimate burden of persuasion to show that the settlements are reasonable.”
The case is National Fire Insurance Co of Pittsburgh v. Porter Hayden Co., 03-cv-3408, U.S. District Court, District of Maryland (Baltimore).
Vexatious Litigant Determined by Objective Standard
A “vexatious litigant” can’t be let off the hook because her feelings were “heartfelt,” the U.S. Bankruptcy Appellate Panel in San Francisco ruled on April 11 in reversing a decision by a bankruptcy judge.
The case involved a woman whose Chapter 11 plan was set aside in the court of appeals. Her case was converted to a Chapter 7 litigation where she fought the trustee for five years, opposing almost every initiative and repeatedly appealing or seeking rehearing.
Frustrated, the trustee went to the bankruptcy judge and sought a ruling denying her standing, or the right to appear in any matter that didn’t involve her directly. The bankruptcy judge denied the motion, and the trustee appealed.
The unsigned opinion by the three-judge Appellate Panel reversed the bankruptcy judge, saying he should have used powers under Section 1651(a) of the Judiciary Code, known as the All Writs Act, to enjoin the bankrupt from filing papers without first obtaining court approval.
The bankruptcy judge declined to enjoin vexatious litigation because he said he believed her filings were “heartfelt.” The Appellate Panel said that was an error because motive is determined on an objective basis.
The bankruptcy judge “abused its discretion and clearly erred” by not enjoining five years of vexatious litigation, the panel said.
The case is Richardson v. Melcher (In re Melcher), 13-1168, U.S. Bankruptcy Appellate Panel for the Ninth Circuit (San Francisco).