By Bill Rochelle
(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Washington Mutual, Lehman, Inspirada, Friendly, Point Blank, Alexander Gallo and Capmark in Updates.)
Oct. 7 (Bloomberg) -- Suits the trustee for Bernard L. Madoff Investment Securities LLC filed against hundreds of customers to recover fictitious profits could all be dismissed if a customer named James Greiff succeeds with a motion filed on Oct. 5 to dismiss the lawsuit now before U.S. District Judge Jed Rakoff in Manhattan.
Rakoff took the suit out of bankruptcy court to decide two issues: Do the profits shown on account statements represent valid debt to counter a fraudulent transfer claim? Second, Rakoff told Greiff and the Madoff trustee to explain whether a provision in bankruptcy law known as the safe harbor bars suits because they stem from trades in securities.
Rakoff already answered the second question when he ruled last month in a separate suit involving Fred Wilpon and the owners of the New York Mets that the safe harbor precludes the trustee from recovering any payments more than two years before bankruptcy.
On the first issue, Greiff’s lawyer, Helen Davis Chaitman, argues in her brief that the Madoff firm “was not a Ponzi scheme.” She says it was “a legitimate trading business which operated a fraudulent investment business on the side to fund the trading operation.” Consequently, she contends the trustee isn’t entitled to the presumption that the Madoff firm was a Ponzi scheme and that payments it made to customers were fraudulent.
Chaitman argues that the trustee has no right to sue because money paid to customers didn’t belong to the Madoff firm in the first place. She says that the money was stolen from other customers and under law was held in trust. Consequently, it was trust funds the customers received, not Madoff firm property the trustee is entitled to recover.
Greiff’s lawyer makes another technical argument when she says that only equity investors in Ponzi schemes can be compelled to pay back fictitious profits. She says that payments by a Ponzi on account of legitimate debt can’t be recovered in bankruptcy.
Securities and state law both give customers the right to property listed in their account statements, Chaitman argued. Consequently, she believes customers can’t be sued for receiving fraudulent payments when they were only receiving money to which they were entitled.
If Rakoff rules that customers are required to give back fictitious profits received within two years of bankruptcy, Chaitman argues that any deposits customers made into their accounts in the last two years should be offset against anything they’re required to give back. In that respect, she points to part of the Wilpon decision in September where Rakoff said it was undecided how to calculate how much a customer might be required to pay back.
In last month’s decision, Rakoff ruled that the trustee can only seek to recover fictitious profits going back two years. Unless the Wilpon decision is reversed on appeal, it means that the trustee’s recovery from Greiff and other so-called innocent customers can’t go back six years as the trustee is seeking in his complaints.
Although he didn’t decide the issue in the Wilpon case, Rakoff wrote a footnote in his opinion saying the trustee “might well prevail on summary judgment seeking recovery of the profits.” As a result, the trustee, when he files papers on Oct. 26, might ask for judgment against Greiff for profits taken out in two years. For details on the Wilpon opinion, click here for the Sept. 28 Bloomberg bankruptcy report.
The trustee filed suit yesterday to recover $229 million from financial institutions who invested with Madoff through offshore feeder funds.
The trustee’s lawsuits include $110 million sought from KBC Investments Ltd., $50.1 million from Caceis Bank Luxembourg, $21.5 million from Nomura International Plc, and $25.5 from ABN Amro Bank NV.
The trustee alleges the moneys were invested in the Madoff firm and taken out through feeder funds such as Fairfield Sentry Ltd. and Harley International (Cayman) Ltd.
The Madoff firm began liquidating in December 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 Greiff case in district court is Picard v. Greiff, 11- 03775, U.S. District Court, Southern District of New York (Manhattan). The Wilpon suit in district court is Picard v. Katz, 11-03605, U.S. District Court, Southern District New York (Manhattan). The liquidation in bankruptcy court in 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). The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court, Southern District of New York (Manhattan).
Updates
WaMu Blocked from Holding Quick Confirmation Hearing
Washington Mutual Inc. failed yesterday to persuade the bankruptcy judge to schedule a near-term confirmation hearing on a modified reorganization plan while mediation goes ahead on a parallel track.
When U.S. Bankruptcy Judge Mary F. Walrath for a second time disapproved WaMu’s plan, she directed the parties in her Sept. 13 opinion to mediate. WaMu wanted only to mediate disputes between noteholders and equity holders while moving ahead with confirmation.
Walrath said “no.” Telling the parties they must also try to settle disputes regarding the plan, the judge said she doesn’t want to conduct another contested confirmation hearing “without trying” to reach a truly global settlement. Although the mediator is yet to be selected, the mediator’s initial report will be due Nov. 7, Walrath said yesterday. For Bloomberg coverage of the hearing, click here.
For details on Walrath’s opinion rejecting the plan a second time, click here for the Sept. 14 Bloomberg bankruptcy report. For details on Walrath’s opinion early this year rejecting the prior version of the plan, click here for the Jan. 10 Bloomberg bankruptcy report. For details on the plan as revised after the January ruling, click here for the Feb. 14 Bloomberg bankruptcy report. For details on later changes, click here for the March 21 Bloomberg bankruptcy report.
The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank, once the sixth-largest depository and credit- card issuer in the U.S., was the largest bank failure in the country’s history.
The holding company filed formal lists of assets and debt showing property with a total value of $4.49 billion against liabilities of $7.83 billion.
The holding company Chapter 11 case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Lehman Sues Goldman Sachs for Breaching Court-Approved Deal
Lehman Brothers Holdings Inc. started a lawsuit yesterday against an affiliate of Goldman Sachs Group Inc. for breaching a contract the bankruptcy court approved in August.
The contract called for Lehman to sell its 78.5 percent interest in a 3 million-square-foot commercial real estate project in Rosslyn, Virginia, for $385 million.
The intended buyer was an entity in which a Goldman Sachs affiliate is the general partner.
Lehman contends in its complaint that Goldman Sachs refused to complete the transaction and terminated the contract for “pretextual” reasons. Lehman wants the bankruptcy judge either to compel Goldman Sachs to complete the transaction or pay $100 million for what are known as liquidated damages.
In other Lehman developments, a U.S. district judge in New York dismissed a lawsuit against former company officers for “imprudently” failing to protect the Lehman Brothers Savings Plan when they knew the business was failing.
The lawsuit, under the federal Employee Retirement Income Security Act, was brought on behalf of Lehman workers. For Bloomberg coverage, click here.
Lehman creditors are voting on the Chapter 11 plan leading to a Dec. 6 confirmation hearing. 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 remnants of the Lehman brokerage operations went into liquidation on Sept. 19, 2008, in the same court, with a trustee appointed under the Securities Investor Protection Act.
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 Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).
New Inspirada Settlement Opens Door for Plan Confirmation
The Chapter 11 plan covering South Edge LLC, the owner of the 2,000-acre Inspirada residential development in Henderson, Nevada, stands a better chance of approval at the Oct. 17 confirmation hearing now that the largest remaining dispute was settled.
Focus Group South LLC was claiming to have a lien on about $26 million cash and was opposing approval of the reorganization plan. The secured bank lenders were contending that the cash was their collateral.
The settlement calls for the banks to receive $21 million in cash, while Focus takes $5 million from the disputed funds. In addition, other builders behind the South Edge project will buy out Focus’s interest for $35.5 million.
The plan implements a settlement negotiated in May by South Edge’s Chapter 11 trustee with KB Home and other homebuilders who represented 92 percent of the ownership interests in the project. For details on the settlement to be carried out through the Chapter 11 plan, click here for the June 17 Bloomberg bankruptcy report.
KB has 49 percent of the project. Other owners joining in the settlement include Coleman Toll LP with 10.5 percent, Pardee Homes Nevada Inc. with 4.9 percent, and Beazer Homes USA Inc. with 2.6 percent, a KB regulatory filing said.
Bankruptcy began with an involuntary petition filed by secured lenders. The U.S. district court in April upheld a decision from February by the bankruptcy judge to put South Edge in bankruptcy involuntarily and simultaneously appoint a trustee.
The project ultimately was to cost $1.25 billion and have 8,500 homes. The lenders were to provide $595 million in financing. Other financing includes $102 million in public bonds for improvements.
The Chapter 11 case is In re South Edge LLC, 10-32968, U.S. Bankruptcy Court, District of Nevada (Las Vegas).
Friendly Ice Cream Approved for $50.6 Million Interim Loan
Friendly Ice Cream Corp., the owner and franchiser of about 490 restaurants, filed for Chapter 11 reorganization on Oct. 5 and the next day received interim approval to borrow $50.6 million.
At a final financing hearing Oct. 24, Friendly will request raising the borrowing limit to $71.3 million.
In addition to closing 63 stores, Friendly arranged an Oct. 24 hearing for approval of auction procedures to sell the business. Absent better offers, an affiliate of the existing owner Sun Capital Partners Inc. will buy the operation in exchange for debt.
Affiliates of Boca Raton, Florida-based Sun Capital are also holders of second-lien debt. For details on the sale, click here for the Oct. Bloomberg bankruptcy report.
Included among the 424 stores to remain in operation are 230 that are franchised by Wilbraham, Massachusetts-based Friendly. The company said that debt totals $297 million, with Pension Benefit Guaranty Corp. being the creditor with the largest unsecured claim.
Wells Fargo Capital Finance Inc. is the first-lien revolving credit lender owed $21.5 million.
The case is In re Friendly Ice Cream Corp., 11-13167, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Point Blank Approved to Auction Business on Oct. 27
On the third attempt, Point Blank Solutions Inc. may succeed in selling the business. The bankruptcy court in Delaware approved sale procedures on Oct. 5.
Bids for the manufacturer of soft body armor for police and military are due Oct. 26, followed by an auction on Oct. 27 and a hearing to approve the sale on Oct. 28.
An affiliate of the Gores Group LLC named Barrier Acquisition LLC is under contract to pay $20 million. Secured lenders can bid their debt in lieu of cash, although they must provide $750,000 in cash in addition.
Unable to extricate itself from Chapter 11 otherwise, Point Blank is selling to overcome opposition from the official equity committee to confirmation of a reorganization plan.
Point Blank filed under Chapter 11 in April 2010. Based in Pompano Beach, Florida, Point Blank has two plants. Revenue in 2009 exceeded $153 million.
The Chapter 11 petition 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 (Wilmington).
Alexander Gallo Auction on Nov. 7 to Test Bayside Bid
The sale of Alexander Gallo Holdings LLC, a provider of court-reporting and litigation-support services, is proceeding on schedule.
Yesterday, the bankruptcy judge in Manhattan authorized holding an auction on Nov. 7, followed the next day by a hearing to approve the sale. Anyone intending to compete with an affiliate of Bayside Capital Inc. must initially submit a bid by Nov. 4.
The bankruptcy judge also gave final approval yesterday for $20 million in financing from a Bayside affiliate.
Bayside is obligated to buy the business under a contract valued at $88 million. The buyer will pay off first-lien debt, forgive second-lien obligations, and forgive $20 million in financing for the Chapter 11 case. Bayside also will pay the cost of curing contract defaults.
Before bankruptcy, Bayside acquired the $22 million in second-lien debt.
Gallo, based in Marietta, Georgia, listed assets of $208 million and debt totaling $258 million. Liabilities include $47 million on a first-lien revolving credit and term loan with Wells Fargo Bank NA as agent.
In addition to the second-lien debt held by Bayside, there are $33 million in junior unsecured subordinated notes owing to Harvest Equity Partners LLC plus another $148 million in junior unsecured subordinated notes owing to insider Gallo Holdings LLC.
The case is In re Alexander Gallo Holdings LLC, 11-14220, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Capmark Consummates Confirmed Chapter 11 Plan
Capmark Financial Group Inc., a bank holding company, on Sept. 30 implemented the Chapter 11 plan that the bankruptcy court in Delaware approved by signing a confirmation order on Aug. 24.
Capmark is reorganizing around its non-bankrupt bank subsidiary. Creditors are receiving $900 million cash, $1.25 billion in new secured notes, and new stock.
Secured creditors were paid in full when the bankruptcy judge approved a settlement in November. They received 91 percent in cash on the $1.1 billion they were owed, plus interest and reimbursement of fees spent in the Chapter 11 case. For details on the settlement and the judge’s reasons for approving, click here for the Nov. 2 Bloomberg bankruptcy report.
Based in Horsham, Pennsylvania, Capmark was called GMAC Commercial Holding Corp. before control was sold in 2006. It had been GMAC’s servicing and mortgage-banking business.
Originally, Capmark’s debt included a $1.5 billion term loan secured by all assets except Capmark’s bank’s assets, $234 million under a bridge loan, a $4.6 billion senior credit, $2.34 billion in notes and a $250 million junior subordinated debt. The bank had assets of $11.1 billion and deposits of $8.39 billion, according to a court filing.
The case is In re Capmark Financial Group Inc., 09-13684, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Settlement Reached Saving Hoboken University Hospital
Hudson Healthcare Inc., the non-profit operator of the Hoboken University Medical Center in Hoboken, New Jersey, negotiated a settlement among the Hoboken hospital authority, the official creditors’ committee, and the City of Hoboken to permit sale of the facility to HUMC Holdco LLC.
The settlement was facilitated in part by the state’s agreement to contribute $5 million toward payment of bonds.
The settlement was advertised as saving New Jersey’s oldest operating hospital.
The hospital filed under Chapter 11 on Aug. 1 with agreement already in hand to sell the facility for $68 million plus assumption of specified debt. The hospital itself is owned by an authority established by the city of Hoboken when it took over the facility in early 2007. Hudson Healthcare is the operator of the hospital.
There are two issues of revenue bonds, one for $51.6 million sold in 2007 and a second for $9l.72 million in 2009. Hudson Healthcare is not obligated on the bonds.
The petition said assets and debt are both less than $50 million.
The case is In re Hudson Healthcare Inc., 11-33014, U.S. Bankruptcy Court, District of New Jersey (Newark).
National Envelope Seeks Final Exclusivity Extension
National Envelope Corp., once the largest closely held envelope manufacturing company in the U.S., for a last time is requesting an extension of the exclusive right to file a liquidating Chapter 11 plan.
A hearing is set for Nov. 8 to consider the exclusivity motion. If granted, no one else could file a plan until Dec. 10. By then, the company will have been in bankruptcy for 18 months, the maximum Congress allows for companies to retain exclusive plan-filing rights.
Most of the assets sold, the company says it’s looking for a buyer to take over a plant in Union, New Jersey, along with attendant environmental liability.
NEC sold the business in September 2010 to Gores Group LLC under a contract at an advertised price of $208 million, including cash of $149.85 million. NEC settled disputes with Gores over adjustments in the price.
Based in Uniondale, New York, NEC filed under Chapter 11 in June 2010, saying assets and debt were both less than $500 million. Liabilities included $74.3 million on a secured term loan, $70.6 million on a secured revolving credit, and $89 million owing on unsecured debts to trade suppliers.
The case is In re NEC Holdings Corp., 10-11890, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Health Care for Life Ends for Central Falls Commander
The receiver for the City of Central Falls, Rhode Island, filed papers in bankruptcy court this week to terminate an agreement the city made in April to provide health insurance benefits for life to a retired police commander named Rudolph Legenza.
The receiver said in papers that Legenza’s benefits exceed those of all other city workers who are now required to take Medicare benefits on reaching age 65. Legenza turned 65 in August.
The receiver is negotiating new contracts with unions representing city workers. The receiver filed a proposed debt adjustment plan for the city in September. It won’t affect bondholders. For details on the proposal, click here for the Sept. 23 Bloomberg bankruptcy report.
The receiver, Robert G. Flanders Jr., is a former justice of the Rhode Island Supreme Court. The city, population 18,000, filed for municipal reorganization under Chapter 9 on Aug. 1. Along with the petition, Flanders filed papers to terminate three union contracts.
The case is In re City of Central Falls, 11-13105, U.S. Bankruptcy Court, District of Rhode Island (Providence).
New Filing
Sagamore Hotel in South Beach Files in Miami
The owner of the Sagamore Hotel in the South Beach section of Miami Beach, Florida, filed for bankruptcy protection yesterday, saying assets and debt both exceed $10 million.
Also known as the Art Hotel, the property has 93 suits, the website says.
The filing in U.S. Bankruptcy Court in Miami was a so- called bare-bones petition where little accompanied the printed form aside from a list of creditors.
The case is In re Sagamore Partners Ltd., 11-37867, U.S. Bankruptcy Court, Southern District of Florida (Miami).
Daily Podcast
Friendly Ice Cream, Chef Solutions, WaMu: Bankruptcy Audio
The two latest food industry Chapter 11 filings by Friendly Ice Cream Corp. and Chef Solutions Inc. are the first topics covered on the bankruptcy podcast with Bloomberg News bankruptcy columnist Bill Rochelle and Bloomberg Law’s Lee Pacchia. Rochelle explains the bankruptcy judge’s risk of committing reversible error if she sides with Washington Mutual Inc. by ruling that the reorganization plan can be revised and confirmed without giving creditors a chance to revise their prior ballots. To listen, click here.
Advance Sheets
Debt of Dissolved Company Not Discharged for Owners
Shareholders who dissolve a corporation to avoid paying a judgment against the business end up with a non-dischargeable debt in their personal bankruptcies, according to an Oct. 5 opinion by Cecelia G. Morris in Poughkeepsie, New York.
The corporation was saddled with a $350,000 judgment. While the judgment was on appeal, the two shareholders dissolved the corporation and continued operating the business. Morris said that the shareholders “dissolved their corporation in secrecy to those creditors who they did not see fit to pay.”
Morris parsed New York corporate law and explained how shareholders who dissolve a corporation without notice to creditors are said to hold the assets of the business “in trust for the benefit of creditors.”
Morris held that the former owners, now in Chapter 7 bankruptcy, are personally liable for the judgment against the business. She also held that the debt was obtained by false pretenses and thus wasn’t dischargeable in the individuals’ bankruptcies under Section 523(a)(2)(A) of the Bankruptcy Code.
The case is Esposito v. Hartley (In re Hartley), 19-9055, U.S. Bankruptcy Court,
Madoff, WaMu, Lehman, Inspirada, Point Blank: Bankruptcy
Southern District New York (Poughkeepsie).
--With assistance from Dawn McCarty, Steven Church and Michael Bathon in Wilmington, Delaware. Editors: John Pickering, Mary Romano
To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net.
To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.
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