Ally nears bankruptcy deal with Residential Capital creditors: source

DETROIT, Tue May 8, 2012 – Ally Financial and creditors of the lender’s Residential Capital unit are in general agreement on a plan to put the mortgage subsidiary into bankruptcy in a deal that could speed up and ease the process, a person familiar with the matter said.

Details of the agreement are still being worked out, the source said on Tuesday. A deal with creditors would help the lender file for a pre-packaged Chapter 11 bankruptcy that expedites a reorganization.

ResCap, as the unit is called, has been considering filing for bankruptcy by May 14 when it must repay a portion of its debt. A filing could come as soon as Sunday.

Ally spokeswoman Gina Proia declined to comment.

Ally, formerly known as GMAC and which was bailed out by the U.S. government during the financial crisis, is 74 percent owned by the government and owes taxpayers about $12 billion.

ResCap has been pummeled over the last few years by mortgage problems and has been at the heart of Ally’s woes. A ResCap bankruptcy is seen as the best way for Ally, whose core business is auto loans, to move ahead.

Ally has been negotiating with a group of creditors who hold more than 45 percent of junior secured notes at ResCap, sources have said previously.

Billionaire Warren Buffett’s Berkshire Hathaway holds another 45 percent of the junior secured notes and also holds a significant portion of ResCap’s unsecured notes that mature in May, sources have said previously.

American Airlines plans to cut 1,200 non-union jobs to save costs

FORTH WORTH, Thu Apr 19, 2012 — American Airlines plans to eliminate another 1,200 jobs as part of its plan to cut costs in bankruptcy, the company said in a letter to employees.

Affected jobs include non-union passenger and cargo agents, sky caps, and baggage service workers at smaller airports, including Memphis, Reno, Sacramento and Portland, Oregon.

American previously announced plans to eliminate 13,000 union jobs, or roughly 15 percent of its workforce, as part of an overall drive to save roughly $1.25 billion in annual labor costs.

The latest cuts would come on top of that, the company said.

As part of Wednesday’s announcement, No. 3 American said it would also close its southwestern reservations center in Tucson. Those workers, however, will be offered jobs elsewhere or set up as home-based employees.

American will also close its Admirals Clubs at Washington Dulles and Kansas City.

The latest changes, which do not require approval of the New York bankruptcy court, are expected to take place within the next few months, American said.

Other major rivals also cut thousands of jobs when they restructured in bankruptcy several years ago, emerging as leaner and tougher competitors.

AMR, the parent of American Airlines, filed for bankruptcy in November.

The company has also sought permission from the court to void union contracts, including those covering pilots, flight attendants and ground workers.

A hearing on that motion is scheduled for Monday.

Regional carrier Pinnacle Airlines flies into bankruptcy

MEMPHIS, Mon Apr 2, 2012 – Pinnacle Airlines Corp. filed for bankruptcy protection late on Sunday, as the U.S. regional airline fell victim to high fuel prices and dampened travel demand that has negatively impacted some of the major players in the industry.

In the past, upon facing financial trouble, United Continental Holdings Inc’s. United Airlines and Delta Air Lines Inc. have taken the Chapter 11 route to cut costs and later found merger partners. AMR Corp., the parent of American Airlines, had also filed for bankruptcy late last year.

In a filing with a U.S. bankruptcy court, Pinnacle said it seeks to resolve its operational and financial difficulties through the Chapter 11 process. It also seeks to implement a turnaround plan by cutting costs and restructuring certain agreements with major airlines.

Pinnacle is a regional airline headquartered in Memphis, Tennessee that provides transportation between hubs and smaller outlying cities for passengers ticketed by major carriers.

At present, Pinnacle’s primary customer is Delta Air Lines, with additional flying currently provided to United Airlines and, to a much lesser extent, US Airways.

In light of high fuel costs and weak travel demand, Pinnacle said major carriers have aggressively cut costs and decreased capacity.

“The result has been a race to the bottom, as the debtors and other regional airlines have been forced to bid ever-lower rates and accept increasingly unfavorable contract terms to win the business of major carriers,” Pinnacle said in the filing.

The regional airline said it had received a commitment for $74.3 million of debtor-in-possession financing from Delta Air Lines that would help it to carry out normal operations.

As part of the bankruptcy plan, Pinnacle said it would restructure its key operating agreements with Delta Air Lines and would wind down its operations with United Airlines.

Sprint shares down, analyst cites bankruptcy risk

OVERLAND PARK, Kan., Mon Mar 19, 2012 – Shares in Sprint Nextel fell more than 4 percent after an analyst report said there is an increasing risk that the No. 3 U.S. mobile provider could end up filing for bankruptcy as the debt-laden company faces steep costs due to factors such as its iPhone deal with Apple Inc.

Bernstein analyst Craig Moffett downgraded Sprint shares to “underperform” from “market-perform” saying that the company will face “new and larger risks” if Apple launches a high-speed iPhone later this year based on a technology that Sprint’s bigger rivals have installed more widely than Sprint.

“To be clear, we are not predicting a Sprint bankruptcy. We are merely acknowledging that it is a very legitimate risk. And notwithstanding a recent rally in Sprint shares, we believe that risk is rising,” Moffett said in a research note.

A Sprint spokesman was not immediately available to comment.

Sprint shares were down 13 cents, or 4.5 percent, to $2.76 in late morning trading on the New York Stock Exchange after the report was released.

Government seeks bankruptcy trustee for Dynegy Holdings

HOUSTON  – Mon Mar 12, 2012: United States Trustee Tracy David filed a motion with a bankruptcy court late Sunday night seeking the appointment of a Chapter 11 trustee in the ongoing Dynegy Holdings bankruptcy proceeding.

In her motion, David said, “The mismanagement of the debtors by their current management to the financial detriment of the debtors’ creditors provides cause for the appointment of an independent fiduciary to manage the affairs of these debtors.”

A bankruptcy trustee is often appointed when it may serve the bankruptcy estate’s best interest, or when company executives are suspected of wrongdoing.

On Friday, Susheel Kirpalani, the court-appointed examiner in the case said Dynegy Inc. harmed creditors by fraudulently transferring some coal-powered plant assets to itself before putting Dynegy Holdings into bankruptcy, and urged that the transfer be reversed.

Examiners work for the benefit of creditors, shareholders and the bankruptcy estate, and may investigate such allegations as dishonesty, fraud, incompetence and mismanagement.

“Current management is not in a position to assess the findings and conclusion of the examiner, and to pursue any and all of the appropriate remedies. Only a Chapter 11 trustee will have the statutory authority to do so,” David said in her motion.

Dynegy Holdings, a unit of independent power producer Dynegy Inc., filed for bankruptcy in November to restructure expensive leases on power plants and lighten its debt load.

Lehman Brothers emerges from bankruptcy

NEW YORK – Tue Mar 6: Lehman Brothers Holdings Inc’s. record $639 billion bankruptcy ended on Tuesday, clearing the way for it to start distributing about $65 billion to creditors starting on April 17, court documents show.

Lehman has said that it expects that first group of payments to creditors to be at least $10 billion.

Lehman, now a small fraction of its former size, collapsed on September 15, 2008 with $639 billion in assets, rocking the foundations of the global financial markets and catalyzing the Great Recession.

Exactly 1,268 days later, the legal end to the case enables Lehman to start paying back the creditors, which include Wall Street firms like Goldman Sachs Group Inc and hedge fund investors such as Paulso & Co, which together had asserted more than $300 billion in claims.

But Lehman Brothers will live on for some time as a sliver of its former self, selling assets and continuing to operate in its midtown Manhattan headquarters, where it is down to two floors.

The company, whose assets include $35 billion in cash, is due to make a second payment in September and then will continue to make periodic distributions in the future as it sells off its remaining holdings.

Grubb & Ellis files bankruptcy; to be sold to BGC

NEW YORK – Grubb & Ellis Co. filed for bankruptcy protection amid a slower-than-expected recovery in the commercial property market, and agreed to sell nearly all its assets to the financial services brokerage BGC Partners Inc.

Howard Lutnick, chief executive of BGC and also of the boutique investment bank Cantor Fitzgerald LP, said in a statement the purchase reflects BGC’s desire to “build a premier position” in real estate services.

BGC in October bought Newmark Knight Frank, a New York real estate services company that employs more than 7,000 people.

Founded in 1958, Grubb & Ellis said it manages in excess of 250 million square feet (23.2 million square meters) of property, and employs more than 3,000 people.

Its services include tenant representation, property leasing and sales, commercial property and corporate facilities management, appraisals and commercial mortgage brokerage.

Chief Financial Officer Michael Rispoli said in a court filing Grubb & Ellis was hurt by its merger with real estate investment management company NNN Realty Advisors Inc in December 2007, which in retrospect “couldn’t have come at a worse time.”

He said losses piled up during the financial crisis, and that the Santa Ana, California-based company was further hurt by the sluggish real-estate market. Rispoli said Grubb & Ellis does not have enough cash to make it through the end of March.

An expedited sale through the bankruptcy process “is the only remaining way to allow Grubb & Ellis to preserve its business as a going concern, protect jobs, and maximize the value of the debtors’ estates,” Rispoli wrote.

MF Global judge to examine insurance for ex-executives

NEW YORK – The U.S. judge overseeing MF Global’s bankruptcy plans a closer review before deciding whether any of an estimated $190 million of insurance coverage for former company executives should instead go to customers.

Opponents of the plan to cover former executives, including at least four customer groups, believe the funds should not go to people they hold responsible for the collapse of the futures brokerage. The $190 million includes at least $120 million covering the period surrounding the company’s demise.

MF Global Holdings Ltd, which was run by former New Jersey governor and U.S. senator Jon Corzine, filed for bankruptcy protection on Oct. 31.

U.S. Bankruptcy Judge Martin Glenn at a Thursday hearing in Manhattan also authorized the hiring of several law and consulting firms to assist Louis Freeh, MF Global’s bankruptcy trustee and a former FBI director, and James Giddens, the bankruptcy trustee for the MF Global Inc broker-dealer unit.

The judge nonetheless expressed “concern about the proliferation of professionals” involved in the parent’s bankruptcy case.

The $190 million would be reserved to pay legal and other costs for onetime executives of the brokerage.

Kodak employee sues company directors over stock

ROCHESTER, N.Y. – An Eastman Kodak employee filed a civil lawsuit against Kodak’s board members and other fiduciaries of the photography companies’ retirement plans, saying they breached their duties as the company was spiraling toward bankruptcy.

Mark Gedek, who continues to work at Kodak, said in the suit that he is a participant in the Kodak Employees Savings and Investment Plan as well as the Kodak Employee Stock Ownership Plan. The board members and directors of those plans continued to sell shares to employees and invest in them ahead of the bankruptcy, he said.

Kodak filed for bankruptcy in mid-January, saying it would use the bankruptcy court process to try to sell patents and shed other assets to bring costs and revenue in line. Typically in bankruptcy, shareholders’ equity is worth nothing.

Kodak shares, which trade for 34 cents on the pink sheets, were trading at 55 cents on January 18 before the company filed for bankruptcy.

Legal matters to consider in tough economic times

Douglas Landrum, Shareholder, Member of the Corporate Practice Group, Jackson DeMarco Tidus Peckenpaugh

Steve Dettmann, Senior Counsel, Real Estate Practice Group, Jackson DeMarco Tidus Peckenpaugh

While the light of economic recovery may be appearing on the horizon, many sectors of the economy continue to suffer slow growth and persistent or periodic struggles with liquidity as a result of low demand for goods and services. Until consumers determinatively shake off the historically low levels of confidence and reverse the current trends of debt reduction and increased savings rates, some businesses will fall on hard times.

A struggling business and its leaders (e.g., directors and officers of corporations, or managers of limited liability companies) seeking to avoid the entity’s failure as it experiences liquidity challenges or insolvency need to heed some legal rules that may not be readily apparent.

Smart Business spoke to Steve Dettmann and Douglas Landrum of Jackson DeMarco Tidus Peckenpaugh about a few common legal matters for those businesses, and their principals (and guarantors), to consider when the business experiences difficult times.

Management may be liable to creditors

Normally, the duties of the directors of a corporation and the managers of a limited liability company are owed to the equity holders of the business. However, if a business has insufficient equity or is insolvent, management personnel may become personally liable for approving distributions to shareholders or other equity owners. For a Delaware business entity, the Delaware Supreme Court has held that when a corporation is actually insolvent, fiduciary duties arise for the benefit of creditors in the place of shareholders — under the theory that the creditors of an insolvent corporation become the beneficiaries of any increase in value and suffer the detriment of further decreases in value of the corporation’s remaining assets. Thus directors and managers should ascertain an accurate financial understanding of proposed actions of struggling businesses.

Not all guaranties are the same

Another area where principals become exposed to personal liability for obligations of the business is by executing guaranties. In many lending circumstances involving small and medium-sized business entities, lenders will require guaranties of varying types from principal equity owners. These guaranties come in many forms — some absolute, some limited and some contingent. Some guaranties are unconditional and others may limit the lender’s recourse to a specific set of assets or circumstances. Most guaranties contain a set of waivers pursuant to which the guarantor waives statutory suretyship defenses — some ironclad and others suffering notable deficiencies. Understanding the difference is key.

In commercial real estate lending, the borrower’s principals are frequently induced to give the lender a “springing” guaranty (sometimes referred to as a “recourse carve-out” guaranty) under which the lender’s right to seek recovery beyond the borrower or the specific secured collateral arises only upon the occurrence of specified events. These events typically include “bad boy” acts of the borrower (notwithstanding that only certain of the acts are inherently “bad”) including, among others, fraud, misrepresentation, commission of waste, prohibited transfers, failure to pay real estate taxes or failure to properly apply security deposits, reserves or insurance proceeds. The spring on some guaranties is sprung (i.e., the recourse obligation arises) when the borrower, during times of financial difficulties, seeks legal protection from its creditors through the filing of a petition in bankruptcy — even though the bankruptcy petition may be later dismissed (i.e., like bells that cannot be unrung, certain springs cannot be unsprung). Therefore, if a commercial real estate enterprise is failing, guarantors having influence over the actions of the borrower should consult with counsel to ascertain the potential consequences of a borrowing entity’s proposed actions before those actions are taken, and to carefully navigate through potential foreclosure of real property security so as to avoid, where possible, the triggering of liability under a guaranty.

Completion guaranties are commonly used as credit enhancements for construction financing, but the remedies available to a lender are uncertain. Generally, recovery under a completion guaranty is limited to the increase in value of the collateral that completion would offer; and where a lender on an underwater project cannot demonstrate that the value upon completion would exceed the as-is value, then the completion guaranty may be worthless.

Knowing which type of guaranty binds the principal, and whether there may exist a partial or complete defense to recovery, is essential to determining what actions should be taken or decisions should be made on behalf of the business.

Filing bankruptcy may not be a good idea

While a debtor-in-possession (DIP) usually acts as the trustee upon the filing of a bankruptcy petition under Chapter 11 of the United States Bankruptcy Code, if the business cannot present or implement a viable plan to reorganize in a Chapter 11 bankruptcy, under certain circumstances, the bankruptcy case can be converted to a Chapter 7 liquidation upon request of the creditors. Independent U.S. Trustees appointed by the court in Chapter 7 bankruptcy liquidations are compensated based upon what they are able to collect on behalf of the estate for payment to the creditors of the bankrupt entity. With this motivation, the trustees frequently look into the pre-petition acts of management and equity holders to determine whether the bankruptcy estate may have causes of action that could bring a recovery. A Trustee may therefore act in a manner opposed to management and equity holders, as they look for evidence of insider transactions, misuse of corporate assets for personal benefit, distributions to equity holders at or near the time of insolvency or breaches of duties that could provide access to policies of directors and officers liability insurance.

Accordingly, if a struggling business is unlikely to be able to reorganize in bankruptcy, then it may be a better course for management to wind-up the business and distribute assets to creditors (similar to a bankruptcy liquidation) without filing a case with the United States Bankruptcy Court. Negotiating with creditors for a liquidation of the company’s assets without a bankruptcy case may avoid the appointment of a trustee who turns out to be the worst enemy of former management or owners.

Remember tax obligations

One of the knee-jerk reactions of management in a difficult business setting is to use funds withheld from employee wages (income tax, social security tax or Medicare withholdings) for liquidity purposes instead of paying over the funds to the IRS and other tax authorities. This is one of the worst methods that management could employ to prop up the business as it begins to fail, as any “responsible person” of the business (meaning the individual or group of individuals within an organization who, individually or collectively, has sufficient authority to pay over withholding taxes) may be held personally liable by the IRS for a Trust Fund Recovery Penalty — a 100 percent tax penalty — for failing to pay over taxes withheld from the employee.

Conclusion

If a business is struggling, management and equity holders must be mindful of the many traps that exist from which could arise personal liability, and a small investment in consultation with legal counsel before actions are taken may be essential to avoiding unnecessary loss.

Steve Dettmann is Senior Counsel, Real Estate Practice Group and Douglas Landrum is a Shareholder and a Member of the Corporate Practice Group at Jackson DeMarco Tidus Peckenpaugh. Reach them at [email protected] and [email protected], respectively.