WAMU, PACIFIC ETHANOL, LEHMAN, XERIUM: BANKRUPTCY UPDATE

Although Washington Mutual Inc. isn’t venturing a guess yet about the percentage recovery for its various classes of creditors, CRT Capital Group LLC told customers in a report that WaMu’s $4.13 billion in senior notes and $1.67 billion in senior subordinated notes should be paid in full with interest under the Chapter 11 plan filed March 26.

Starke also calculates that the recovery on WaMu’s $7.5 billion in preferred equities will see no distribution in the worst case, and up to a 10 percent recovery in the best case.

WaMu’s plan, designed to distribute at least $7 billion, carries out a settlement announced on March 12 to end disputes with JPMorgan Chase & Co. over who is entitled to $4 billion of WaMu’s money on deposit at WaMu’s bank subsidiary when the bank was taken over by regulators and sold to JPMorgan.

Senior bondholders at the WaMu bank said yesterday that they side with the FDIC and oppose aspects of the settlement where WaMu and the JPMorgan split up $5.4 billion to $5.8 billion in income tax refunds. While WaMu is to receive between $1.8 billion and $2 billion, the bank’s bondholders contend that JPMorgan isn’t entitled to $1.4 billion of the refunds. They believe the refunds should go to the bank’s receiver instead.

For details on the plan, click here to see the March 29 Bloomberg bankruptcy report. The plan includes a backstopped $50 million equity rights offering where holders of the PIERS preferred securities can buy stock in the ongoing WaMu business. The WaMu businesses to continue are WMI Investment Corp. and WM Mortgage Reinsurance Co. Evidently to utilize a tax-loss carryforward, the business is continuing rather than being liquidated entirely.

The rights offering is being backstopped by affiliates of Appaloosa Management LP, Centerbridge Partners LP, Owl Creek Asset Management LP and Aurelius Capital Management LP.

The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank was the sixth-largest depository and credit-card issuer in the U.S. and 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 $4.485 billion against liabilities of $7.832 billion.

The holding company Chapter 11 case is Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filings

Xerium File Prepack, Shareholders Retain Some Stock

Xerium Technologies Inc., a manufacturer of consumable products for paper manufacturers, filed a prepackaged Chapter 11 reorganization this morning in Delaware that has what the company called “overwhelming support” from the secured lenders.

The plan is to convert $620 million of debt into 82.6 percent of the new stock, $10 million cash, and $410 million in new term loans to mature in 2015.

Existing shareholders can retain 17.4 percent of the stock while being given warrants for another 10 percent.

Xerium solicited votes on the plan prior to today’s filing in bankruptcy court.

The Raleigh, North Carolina-based company listed assets of $693.5 million against debt totaling $813.2 million.

For nine months ended Sept. 30, the net loss was $15.2 million on net sales of $368 million. For the three quarters, interest expense of $48.9 million exceeded $43 million of income from operations.

The case is In re Xerium Technologies Inc., 10-11031, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Alabama’s Dunhill Petroleum Storage Files in Mobile

Dunhill Entities LP, the owner of two petroleum storage facilities in Alabama, filed a Chapter 11 petition on March 26 in Mobile, Alabama, along with affiliates.

One terminal, in Chickasaw, Alabama, has a capacity of 650,000 barrels. The second, in Mobile, has an 850,000-barrel capacity.

Dunhill has a contract to sell the assets for $40.5 million to Arc Terminals LP. All except $500,000 of the purchase price will be paid by exchange for secured debt.

Dunhill wants the bankruptcy judge to require other bids by May 10, followed by an auction on May 12.

A court filing blames bankruptcy on cost overruns and delays in a construction contract. A construction loan matured in late 2008.

The petition says assets are less than $50 million while debt exceeds $50 million.

The case is In re Dunhill Entities LP, 10-01342, U.S. Bankruptcy Court, Southern District Alabama (Mobile).

Updates

Pacific Ethanol Plan Gives Ownership to Lenders

Four ethanol plants owned by Pacific Ethanol Inc. filed a Chapter 11 plan and disclosure statement on March 26 converting $293.5 million of secured debt into the new stock and $115 million in new debt obligations.

Secured lenders owed $244.5 million under the pre- bankruptcy credit agreement are to receive 73 percent of the equity in a new company being created to own the plants. The pre-bankruptcy lenders will also receive a new $48.8 million term loan. The disclosure statement is scheduled for approval at an April 23 hearing.

As an inducement for lenders to provide a $15 million revolving credit and term loan to finance an exit from Chapter 11, the lenders will receive 27 percent ownership of the plants plus a new $18.2 million term loan.

Financing for the reorganization in the amount of $24 million will be repaid from proceeds of a new term loan. Pre- bankruptcy debt that was converted to a post-bankruptcy secured loan will be exchanged for a new term loan.

Unsecured creditors, owed $300,000, should be paid in full or almost so.

The ultimate owner of the plants, Pacific Ethanol, isn’t itself in Chapter 11 nor is the marketing affiliate Kinergy Marketing LLC. Pacific Ethanol won’t retain any of the equity in the plants under the plan.

Pacific Ethanol said in a statement yesterday that it will continue to operate the plants for the new owners under a management agreement. Pacific Ethanol also said it’s negotiating with the lenders about acquiring some of the new equity in the plants.

The Sacramento, California-based company wasn’t operating three plants when the reorganization began in May. One was returned to service. At full production, annual capacity would be more than 200 million gallons.

At the outset of Chapter 11, debt included $270 million owing to the secured creditors on a term loan, revolving credit, construction financing, and other liabilities.

The case is Pacific Ethanol Holding Co. LLC, 09-11713, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Lehman Makes Preliminary Breakdown on Filed Claims

Lehman Brothers Holdings Inc. filed a preliminary report yesterday on the claims resolution process.

From 65,000 claims for approximately $820 billion, not including claims with amounts unspecified, Lehman said in yesterday’s regulatory filing that the total drops to $650 million by eliminating “clear errors, duplications and non controversial corrections.” Ultimately, Lehman projects that claims against the holding company will be reduced to approximately $260 billion.

Lehman sees the major debts of the holding company as including $99 billion in noteholder claims and $2 billion in accounts payable.

Lehman affiliates will end up being owed almost $43 billion, according to the projection. The company sees claims on guarantees issued by Lehman as aggregating $115 billion.

Lehman filed a liquidating Chapter 11 plan this month and is scheduled to file a disclosure statement by April 14. To read about the plan, click here for the March 16 Bloomberg bankruptcy report.

Lehman’s plan puts creditors of the holding company and subsidiaries into more than 130 different classes where the assets of each company will be distributed to creditors of each company according to the priorities contained in bankruptcy law. Lehman is proposing to cap the claims of creditors asserting guarantees against the holding company.

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 London-based Barclays Plc one week later.

The Lehman brokerage operations went into liquidation on Sept. 19, 2008, in the same court. The brokerage is in the control of 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 Investors Protection Corp. v. Lehman Brothers Inc., 08-01420, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Judge Corrects Himself, Reinstates Claims Against Redstone

U.S. Bankruptcy Judge Kevin Gross recognized a mistake of his own before he was reversed on appeal. As a result, Gross corrected an opinion he issued in late January dismissing most of a lawsuit by the official creditors’ committee of Midway Games Inc. against former owner Sumner Redstone and companies he controls.

“Judges are not infallible and it is clear that this judge erred,” Gross said.

In his original opinion on Jan. 29, Gross dismissed most of the suit because he concluded that controlling law in Delaware doesn’t recognize a claim for so-called deepening insolvency. Gross allowed claims to survive where the committee is attempting to recharacterize parts of the transaction as secured lending rather than so-called true sales. Likewise, preference claims were to survive until disposition of the recharacterization claims.

In reversing himself, Gross reinstated claims for so-called constructive fraudulent transfer if the committee succeeds in recharacterizing the transaction.

Gross also last week extended Midway’s exclusive right to propose a plan until May 14.

Redstone was sued for what the committee called a “disastrous and ill-advised” $90 million transaction in February 2008 that saddled Midway with $70 million in new debt it “had no ability to satisfy.” For details on the January opinion, click here to see the Midway item in the Feb. 3 Bloomberg bankruptcy report.

Last week Gross approved the disclosure statement explaining Midway’s liquidating Chapter 11 plan. The confirmation hearing for approval of the plan will be held May 21. For details about the plan, click here and see the Midway item in the Feb. 23 Bloomberg bankruptcy report.

Chicago-based Midway filed under Chapter 11 in February 2009, listing assets of $168 million and debt of $281 million. Including foreign subsidiaries not in bankruptcy, the asset and liability totals were $178 million and $337 million.

Midway sold assets to generate $43 million cash, leaving no substantial secured claims unpaid. Most of the assets were purchased in July by a subsidiary of New York-based Time Warner Inc. for $33 million plus accounts receivable. The non-bankrupt European subsidiaries were sold in August for nominal consideration.

Midway’s debt originally included $150 million in convertible notes, $29 million on a secured term loan and revolving credit, $40 million on a secured loan facility and $20 million on a subordinated loan. Unsecured claims by suppliers totaled $96 million, the company said in a court filing at the outset.

The case is In re Midway Games Inc., 09-10465, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Majestic Star Sues to Stop Suit Against Company Officers

Casino operator Majestic Star Casino LLC wants the bankruptcy judge in Delaware to stop a lawsuit filed against its officers and directors in Indiana state court by the City of Gary, Indiana. Majestic Star contends the lawsuit is precluded by the so-called automatic stay in bankruptcy.

The suit stems from a long-standing dispute regarding development agreements covering Majestic Star’s two riverboat casinos in Gary.

The company contends the city violated its obligations to develop property at the site, thereby relieving the casinos of the obligation to make payments based on gaming revenue.

The dispute was already in arbitration when Majestic Star filed under Chapter 11 in November. The casinos contend that the city filed suit against the officers and directors because it knew any action against the company itself would violate the so- called automatic stay.

The company contends that the suit against the individuals is a “deliberate and obvious attempt to avoid the automatic stay.”

Majestic Star is hoping the bankruptcy court will schedule a hearing on April 7 to decide if the city is precluded from suing the individuals.

The official creditors’ committee contends that the lenders didn’t properly perfect liens on the two riverboat casinos in Indiana.

Majestic Star, with four casinos in total, has hotels with 806 rooms serving the two riverboat casinos in Gary. The other casinos are in Tunica, Mississippi, and Black Hawk, Colorado.

Debt includes $79.3 million owing on the senior secured credit facility, with Wells Fargo Foothill Inc. as agent. Senior secured noteholders with a second lien are owed $300 million.

Majestic Star owes $200 million on unsecured senior notes and $63.5 million on discount notes. Assets were $406 million and debt was $750 million in the quarterly report for the period ended June 30.

The case is In re Majestic Star Casino LLC, 09-14136, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Advance Sheets

Bankruptcy Lawyer Taken Off the Hook for Sanctions

The U.S. Court of Appeals in Washington reversed an award of sanctions against a bankruptcy lawyer who permitted a client to file a bankruptcy petition without having first received credit counseling from an accredited counseling agency.

The opinion, filed on March 26, establishes a standard for sanctioning attorneys generally, not just in bankruptcy cases.

Before filing the Chapter 13 petition, the lawyer asked the soon-to-be bankrupt if she had received required credit counseling. She said she attempted although she wasn’t successful. The lawyer did not ask if the counselors she consulted were approved agencies as bankruptcy law requires.

Later, it turned out that the groups from whom she sought counseling were not approved counselors. A secured creditor filed a motion for monetary sanctions which the bankruptcy judge imposed on the lawyer. The bankruptcy judge believed the lawyer should have inquired about whether the counseling agencies were accredited. The district court affirmed on the first level of appeal.

The Court of Appeals in Washington reversed on March 26, saying that the lawyer relied on a case from another district that arguably permitted attempting to secure counseling from a non-accredited counseling agency.

The circuit court reversed the grant of sanctions because the lawyer’s interpretation of the statute was not “frivolous.”

The case is Burns v. George Basilikas Trust, 09-7045, U.S. Circuit Court of Appeals for the District of Columbia.

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