Commercial Bankruptcies: Bankruptcy Issues

The items below are excerpted from the Business Bankruptcy News Bulletin. A full issue contains information on dozens of troubled companies, as well as informational and analysis highlights. Please visit the insideARM bookstore for information on subscribing to the Bulletin.

In a Chapter 11 bankruptcy filing, communication is imperative between unsecured creditors and the debtor. When a debtor refuses to cooperate, however, the creditors do have a number of remedies. They can join any efforts of secured creditors, even if it includes forcing the closing of the business. Unsecured creditors can attempt to shift the expense of any tactics to the debtor by working through representatives whose fees can be taxed as expenses of administration. Unsecured creditors can attack preferences and transfers, as well as priorities, using the right of committee to sue in the name of the debtor if the bankrupt firm fails to file suit on behalf of the estate.

Prepetition Administrative Expenses

In the Garden Ridge Corp. case, the U.S. Bankruptcy Court in Delaware addressed whether to allow professional fees as an administrative expense when the employment of the professional services in question had not been previously approved by the court. The debtors had retained the services of a real-estate consultant prior to filing for bankruptcy. After the company filed for bankruptcy, the debtor sought to retain the same consultant. However, creditors objected to the fees. As a result, the bankrupt firm decided to hire another real-estate consultant. The initial consultant tried to recover its expenses, claiming they were an administrative expense of the estate. The U.S. Bankruptcy Court denied the administrative expense application, claiming that by allowing such professional fees it would negate the intent of the bankruptcy law that professionals be approved prior to providing services to the estate.

Some Basic Requirements Of a Reorganization Plan

While the U.S. Bankruptcy Code does not specify how much a Chapter 11 debtor must pay its creditors, it does contain certain requirements relating to both the form and content of the reorganization plan. Typically, the plan must classify both the claims and interests and it must also specify how each class of creditors will be treated. The plan should also provide for full payment of priority claims, if possible, and should also specify whether each executory contract is being assumed or rejected. Further, the reorganization plan should allow creditors receiving stock to have voting rights as well as a fair share of power within the reorganized firm. The reorganization plan should describe the means by which the firm intends on achieving the payment outlined in the plan.

Advanta Corp., Spring House, Pa., filed Chapter 11 in the U.S. Bankruptcy Court in Delaware. The firm listed assets and liabilities of between $100 million and $500 million each. The filing was under case number 09-13931. Also filing were Advanta Service Corp. under case number 09-13932 and Advanta Advertising Inc. under case number 09-13943 as well as nine other affiliated companies. For more information contact the court at 302-252-2560.

CapMark Financial Group Inc., one of the nation’s largest commercial real estate lenders which recently filed Chapter 11 under case number 09-13684, has seen the U.S. Bankruptcy Court in Delaware set a hearing date of 11/24 to consider the sale of the company’s MSB Business.  For more information call the court at 302-252-2560.

Philadelphia Newspapers LLC, the bankrupt owner of the Philadelphia Inquirer and the Daily News, has seen a U.S. District Court reverse a bankruptcy court ruling that would not allow the company from barring creditors, that are owed more than $300 million, from bidding the amount of their claims in order to obtain control of the bankrupt firm.  An auction is scheduled for 11/18 regarding the company’s plan, under which the firm would be sold to a local investor group.  Also under the plan creditors would receive $92 million of their $500 million in outstanding debt.

Six Flags Inc., the bankrupt New York amusement park operator whose original reorganization plan would have transferred nearly all of its stock to senior lenders in exchange for reducing its debt, has revised that plan.  The new plan, submitted as a result of proposals by a group led by Avenue Capital Management, includes selling nearly $450 million in new stock–a move that should make more monies available for creditors.  The plan however leaves in place more than $5 million in bonuses to be paid to the company’s top executives once it emerges from Chapter 11.

Tribune Co., the Chicago, Il. newspaper firm which filed Chapter 11 late last year, announced it will be paying back $170 million of the $225 million in DIP financing it previously secured as well as close out a $150 million term loan and pay back $20 million it had drawn on a $75 million credit line.