American airlines settles 99% of creditor claims

American Airlines resolved 99 percent of about 22,000 creditor claims filed in the Chapter 11 reorganization that concluded in November in a merger with US Airways to form American Airlines Group Inc.

Known as AMR Corp. while it was in bankruptcy, the airline on Aug. 13 asked a court for more time to resolve about 240 remaining claims asserting about $2.7 billion in liability.

If the requested extension is granted by U.S. Bankruptcy Judge Sean H. Lane at a hearing scheduled for Aug. 27 in Manhattan, the new claims-objection deadline will be Jan. 30.

After Fort Worth, Texas-based AMR filed for bankruptcy reorganization in November 2011, creditors filed claims asserting about $307.4 billion in liabilities, according to court papers. The remaining claims largely include those with more complex legal questions or facts, according to the company.

Without an extension, the company said it would need either to forgo meritorious objections, creating a windfall for holders of the remaining claims, or to file prophylactic objections before the current Sept. 5 deadline.

AMR listed assets of $24.7 billion and debt totaling $29.6 billion in its Chapter 11 filing. It entered bankruptcy with 600 aircraft in the mainline fleet and another 300 with American Eagle, the feeder airline.

The case is In re AMR Corp., 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Updates

Bill Gates's Optim Reports $9.3 Million Operating Profit in June

Optim Energy LLC, which owned three power plants before selling its Twin Oaks coal-fired facility this month, reported a $9.3 million operating profit in June on revenue of $29.8 million.

Optim had a net profit of $5.8 million for the month, according to an operating report filed Aug. 8 with the U.S. Bankruptcy Court in Delaware. Reorganization costs in June totaled about $3.5 million, compared with $3.1 million in May.

The bankruptcy court approved on Aug. 7 the sale of the Twin Oaks station to Blackstone Group LP's Major Oak Power LLC for $126 million, according to court papers.

Owner and lender Cascade Investment LLC agreed to amend the bankruptcy financing agreement by extending to Sept. 26 the deadline for Optim to give the lenders either an acceptable draft plan of reorganization and disclosure statement or an acceptable sale proposal, according to court papers filed Aug. 12.

Cascade makes personal investments for Bill Gates, the world's richest man and co-founder of Microsoft Corp.

The company filed a Chapter 11 petition in Delaware on Feb. 12, listing assets of less than $500 million and liabilities exceeding $500 million.

The case is In re Optim Energy LLC, 14-bk-10262, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Jindal Aroused No Competition to Purchase PSL Pipe

PSL - North America LLC, a producer of large-diameter pipe for the water- and gas-transmission industries, is due in court today to seek a judge's approval to sell its business to "stalking horse," or lead bidder, Jindal Tubular USA LLC.

An auction was canceled when no competing bids were filed by the Aug. 11 deadline.

To address an objection by pre-bankruptcy lender Standard Chartered Bank, Jindal Tubular previously agreed to increase the cash component of the purchase price by $4 million to $104 million, according to a court order. PSL said all but one objection to the sale has been resolved.

Bay St. Louis, Mississippi-based PSL is a partly owned subsidiary of PSL Ltd., India's largest maker of steel pipe. Financial problems resulted in part from a $30 million loss on a project in Florida, according to court papers.

PSL filed a Chapter 11 petition on June 16 in Delaware, listing assets of less than $100 million. As of the filing, the company had $130 million in debt obligations. Liabilities included about $4.4 million in unsecured notes and about $13.1 million owing to trade suppliers, according to court papers.

The case is In re PSL - North America LLC, 14-bk-11477, U.S. Bankruptcy Court, District of Delaware (Wilmington).

CSX Transportation Opposes Essar Steel's Delaware Chapter 15

CSX Transportation Inc. is seeking to use the bankruptcy of Essar Steel Algoma Inc. to challenge the use of Chapter 15 to halt all creditor actions in the U.S. when the non-U.S. bankruptcy only deals with some creditors' claims.

Essar, Canada's second-largest integrated steel producer, filed a petition for Chapter 15 protection in Delaware in mid- July, immediately after initiating a reorganization under Canada's Companies' Creditors Arrangement Act. The dual bankruptcies were designed to effectuate an agreement with unsecured noteholders on a consensual restructuring.

The Canadian proceeding is intended to deal with more than $1.2 billion in debt for borrowed money. Other claims, such as those by suppliers, aren't to be affected.

Soon after the cases began, the bankruptcy judge in Delaware signed an interim order halting all creditor actions in the U.S. On Aug. 20 that judge will hold another hearing on whether Canada should be recognized as home to the "foreign main proceeding." Such a finding would permanently halt all creditor actions in the U.S.

CSX, the Jacksonville, Florida-based rail freight carrier, said Essar owes $8.4 million for shipping goods. The Canadian bankruptcy isn't intended to impair the collection of that debt, the railroad said in a court filing this week.

CSX said the Canadian bankruptcy isn't a "collective proceeding" because it doesn't deal with all of Essar's debt. On that basis, CSX asked the Delaware judge to bar use of Chapter 15.

Alternatively, the Delaware court could modify the stay at the Aug. 20 hearing by allowing the railroad to proceed with a pending lawsuit to collect the $8.4 million, CSX said.

Essar's reorganization calls for unsecured noteholders to receive 32.5 percent of the claim in cash when the Canadian plan is implemented. In addition, the holders would be given new secured notes for 55 percent of the old debt.

Secured debt is to be refinanced.

Mumbai-based Essar Global Fund Ltd. acquired the company in 2007. The plan calls for EGFL to inject $300 million in new equity, including $100 million before the plan is approved.

The company listed assets of C$1.84 billion ($1.69 billion) and liabilities of C$2.23 billion on the Dec. 31 balance sheet.

The case is In re Essar Steel Algoma Inc., 14-bk-11730, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Ecotality Opposes Competing Plan From Car Charging Group

Ecotality Inc., the developer charging systems for electric vehicles, joined with the creditors' committee in opposing a request from a buyer for permission to file a competing Chapter 11 plan.

The business was sold in October to an affiliate of Blink UYA LLC. Blink wants to file a plan that would preserve Ecotality's tax losses. Blink's parent is Car Charging Group Inc.

The committee and the company both oppose the Blink's proposal, which comes up for hearing on Aug. 18 in U.S. Bankruptcy Court in Phoenix. For eight months, they said, they have been asking Blink to provide financial information showing how the reorganized company would generate taxable income to enable use of tax losses.

The committee and San Francisco-based Ecotality also said Blink never told them how much of the tax savings would go to creditors.

The company and the committee jointly filed a liquidating Chapter 11 plan. They are set to ask the judge to approve disclosure materials at the Aug. 18 hearing so remaining cash can be distributed to creditors soon.

Ecotality's liquidating plan should generate an estimated recovery for general unsecured creditors of as much as 8 percent, subject to "material change," according to the explanatory disclosure statement. General unsecured creditors are the only class entitled to vote. Secured creditors will be fully paid, and shareholders get nothing.

Blink said its proposed plan would offer unsecured creditors at least $1 million in additional distributions.

Car Charging fell less than a cent yesterday to 49.8 cents in over-the-counter trading. It reported a $4.1 million first- quarter loss from operations on revenue of $355.7 million.

Its balance sheet on March 31 listed assets of $20.8 million and total liabilities of $24.3 million. In 2013, Car Charging reported a $19.4 million loss from operations on total revenue of $466.4 million.

Ecotality filed for Chapter 11 protection in September and sold most of its business in October for about $3.3 million. Two other buyers purchased other assets for $1 million in total.

Ecotality filed for bankruptcy protection with no secured debt. Part of pre-bankruptcy financing came with a $100 million cost-sharing grant from the U.S. Energy Department.

On March 31, 2013, assets were listed as $50.8 million, compared with liabilities of $37.6 million.

The case is In re Electric Transportation Engineering Corp., 13-bk-16126, U.S. Bankruptcy Court, District of Arizona (Phoenix).

Gallup, New Mexico, Diocese Searches for Insurance Coverage

The Diocese of Gallup, New Mexico, the ninth Catholic diocese to seek bankruptcy protection, for a second time is asking for an extension of its exclusive right to propose a Chapter 11 plan to address sexual-abuse claims.

With what it called limited financial resources, the diocese hired an "insurance archaeologist" to determine whether the church had insurance policies that cover abuse claims.

The church also said it's working with the official creditors' committee to identify sources for funding.

A hearing was set for Sept. 15 on the exclusivity motion, which would push the outside date for submitting a plan to May 12.

After the diocese filed for Chapter 11 protection in November, the committee selected Pachulski Stang Ziehl & Jones LLP to serve as its lawyers. Pachulski Stang has a near monopoly on representing claimants in sexual-abuse bankruptcies, having been counsel for creditors in eight prior Catholic church Chapter 11 cases.

The Gallup diocese covers American Indian reservations for seven tribes in northwest New Mexico and northeast Arizona. It's the poorest diocese in the U.S., according to court papers.

The abuse mostly occurred in the 1950s and early 1960s, the bishop said. For early years there's no insurance. Although there was coverage for 1965 to 1977, that insurance company became insolvent and was placed in receivership.

The diocese listed assets of $647,000 against debt totaling $667,000, not including claims for sexual abuse.

The case is In re Roman Catholic Church of the Diocese of Gallup, 13-bk-13676, U.S. Bankruptcy Court, District of New Mexico (Albuquerque).

Commack Hospitality's Do or Die Hearing on Oct. 1

Commack Hospitality LLC, owner of a former Wingate hotel in Brentwood, New York, hopes the bankruptcy court will approve its reorganization plan at an Oct. 1 hearing, in the process rejecting an attempt by the secured lender to dismiss the Chapter 11 case or allow foreclosure.

U.S. Bankruptcy Judge Alan S. Trust in Central Islip, New York, approved the adequacy of disclosure materials explaining the reorganization plan on Aug. 8. The facility is now leased by the Long Island Women's Empowerment Network.

At the same Oct. 1 hearing, secured lender Stabilis Master Fund III LLC will ask Trust to dismiss the case or allow foreclosure. Stabilis also wants the judge to terminate so- called exclusivity so that it can file a competing plan, according to court papers filed Aug. 7.

Stabilis said it's owed about $12.6 million as the holder of a mortgage on the property.

Under the proposed plan, Stabilis would get paid over five years with 4.5 percent interest from proceeds of lease payments from LIWEN. Available cash would be paid to Stabilis to reduce the claim, according to the disclosure statement. The lender is entitled to vote on the plan.

Stabilis believes the plan is speculative, not feasible, and unconfirmable because, among other reasons, it's based solely upon a "leap of faith" that LIWEN will get government grants allowing it to renew the lease and operate for four additional years, enabling Commack to either sell or finance the property in order to make a balloon payment to the lender.

Under the proposed plan, holders of general unsecured claims, also entitled to vote, would get half of what's owed on account of their allowed claims over time, with the possibility of full payment under certain circumstances, according to the disclosure statement.

The case is In re Commack Hospitality LLC, 14-bk-70931, U.S. Bankruptcy Court, Eastern District of New York (Central Islip).

Downgrades

New York Sports Club Parent Downgraded on Weaker Results

Town Sports International Holdings Inc., an operator of about 160 fitness clubs located primarily in urban markets through the Northeast, was downgraded Aug. 12 by Standard & Poor's on weaker-than-expected operating performance in the first half of the year.

S&P cut the corporate credit rating on New York-based TSI and the issue-level rating on the company's $325 million senior secured term loan B due 2020 to B from B+.

TSI is the largest owner and operator of fitness clubs in the Northeast and mid-Atlantic regions, according to S&P. In the New York market, the clubs operate under the New York Sports Club brand.

Earnings before interest, taxes, depreciation, and amortization fell about 40 percent in the first half of the year from the comparable period in 2013, said S&P, which expects that figure to drop about 35 percent for the full year.

The negative outlook reflects S&P's view that TSI's strategy for converting 20 underperforming clubs to a new high- value, low-price concept presents a high level of execution risk.

Competition from new low-cost operators and boutique studios, combined with higher than anticipated club conversion expenses in 2014 and 2015, will result in a "meaningful" drop in 2014 Ebitda, S&P said.

SeaWorld Parks & Entertainment Cut to BB- on Earnings Drop

SeaWorld Parks & Entertainment Inc., the Florida-based theme park operator, was downgraded Aug. 14 by Standard & Poor's on weaker-than-expected operating performance in the first half of the year.

S&P cut the corporate credit rating to BB- from BB and the issue-level rating on the company's $1.6 billion senior secured credit facility to BB from BB+.

Earnings before interest, taxes, depreciation, and amortization fell 20 percent in the first half of the year, in part because of a 4.3 percent decrease in attendance, according to the report.

Although bad weather and school calendars contributed to a portion of the overall weakness, negative reports about the company's use of orca whales for entertainment are more significant, according to S&P.

Revenue will remain weak through the remainder of 2014, according to S&P. This weakness, coupled with higher advertising and marketing expenses in 2014 as the company combats bad publicity and lower attendance, will lead to the decline in 2014 Ebitda, S&P said.

The negative outlook reflects S&P's belief that the company faces significant challenges regarding reputational risk and operating performance improvement beyond 2014.

Blackstone Group LP bought SeaWorld from Anheuser-Busch InBev NV in 2009 for $2.3 billion. Blackstone has 22.5 percent of the stock, according to data compiled by Bloomberg.

Advance Sheets

Liquidating Trustee Can't Pursue Tax Refund, Appeals Court Says

The bankruptcy court lacks jurisdiction to compel the government to pay a refund sought by the trustee of a liquidating trust, the U.S. Court of Appeals in New York ruled Aug. 13.

A company confirmed a Chapter 11 plan that created a liquidating trust. The right to pursue tax refunds was an asset specifically transferred to the trust.

After the liquidating trustee initiated proceedings under Section 505(a) of the Bankruptcy Code, the bankruptcy judge directed the Internal Revenue Service to pay a $3.8 million refund.

Writing for a three-judge appeals panel, U.S. Circuit Judge Dennis Jacobs reversed that decision, saying the bankruptcy court lacked jurisdiction.

Although Section 505(a) gives bankruptcy courts power to determine tax liability and refunds, subsection (b) doesn't permit a bankruptcy court to act until "120 days after the trustee properly requests such refund."

Jacobs said Section 106 of the Bankruptcy Code waives the government's sovereign immunity with regard to proceedings under Section 505. Critically, however, Section 505 pertains to requests by a "trustee," and a liquidating trustee isn't a "trustee" within the meaning of that word in the Bankruptcy Code.

While a bankruptcy trustee by statutory definition includes a debtor-in-possession, it doesn't include a liquidating trustee. Therefore, Congress prohibited the bankruptcy court from presiding over proceedings under Section 505 "unless they were initiated by a debtor or a trustee in bankruptcy," Jacobs said.

The appellate judge was careful to say that his decision isn't at odds with opinions by other courts allowing "a plan- appointed representative to bring avoidance actions."

Still, the liquidating trustee can pursue a claim directly in federal district court, Jacobs said

The case is U.S. v. Bond, 12-48903, U.S. Court of Appeals for the Second Circuit (Manhattan).

Second Circuit Goes Easy on Keeping Books, Records in Fee Case

The failure to keep books and records before bankruptcy, resulting in a default judgment in state court, by itself doesn't bar discharge in a later bankruptcy, the U.S. Court of Appeals in New York ruled in a July 25 opinion.

A law firm referred clients to another lawyer in return for an agreement to be paid 40 percent of the fees the lawyer collected. The firm sued the lawyer in state court.

When it turned out that the defendant lawyer hadn't maintained records to show how much he should owe, the state court in substance entered a default judgment. The parties later settled, with the lawyer agreeing to pay $1.4 million.

After the lawyer filed for bankruptcy, the firm sought to deny him a discharge under Section 723(a)(3) of the Bankruptcy Code for failure to keep books and records. The bankruptcy judge granted a discharge, a ruling district judge upheld.

U.S. Circuit Judge Robert D. Sack, writing for the three- judge panel, went along with the lower courts, saying discharge provisions are to be construed liberally in favor of the bankrupt.

Sack said the discharge rules are intended to sanction misconduct that undermines the administration of bankruptcy. The statute "does not exist to police the debtor's legal and ethical obligation more generally," he said.

The lawyer was entitled to discharge because the firm produced no evidence showing the lawyer failed to keep records such that the court couldn't ascertain his financial condition at the outset of bankruptcy "or for a reasonable time before." Reliance only on the sanction by state court wasn't enough.

The case is Berger & Associates PC v. Kran (In re Kran), 13-1931, U.S. Court of Appeals for the Second Circuit (Manhattan).

Contempt Actions Not Halted by Automatic Stay, Court Says

Contempt proceedings in state court to collect a sanction are not enjoined by the so-called automatic stay, the U.S. Bankruptcy Appellate Panel in San Francisco ruled, following a 1977 decision by the Ninth Circuit Court of Appeals.

The decision could be read as politely asking the circuit court to re-examine whether the 1977 case remains good law.

An individual was hit with $6,000 in sanctions for disregarding discovery obligations in state court. The state court scheduled a hearing to decide if the individual should be held in contempt for failure to pay the sanction.

Before the contempt hearing in state court, the individual filed bankruptcy. The creditor attempted to proceed with the hearing in state court.

The bankruptcy judge ruled that the creditor violated the automatic stay for attempting to go ahead with the contempt action despite the so-called automatic stay that halts proceedings in other courts. The bankruptcy judge imposed a $1,500 sanction for stay violation.

On appeal, the three-judge appellate panel said it was compelled to reverse, based on a 1977 case from the circuit court called David v. Hooker.

Setting aside the $1,500 contempt citation, U.S. Bankruptcy Judge Ralph Kirscher said he was bound by Hooker, which said that contempt proceedings aren't halted by the automatic stay unless designed to collect the ultimate obligation or were intended to harass.

Kirscher admitted that Hooker has been criticized by several courts and commentators.

Bankruptcy Judge Meredith Jury, one of the three judges on the panel, went a step further in a concurring opinion. She said the "judicially-created rule" in Hooker is "not consistent with the modern breadth of the automatic stay" and is "at odds with the plain language of Section 362(b).

Kirscher ruled, under Ninth Circuit authority, that the bankruptcy court had exclusive jurisdiction to decide if the automatic stay applied to the contempt action. He said state court didn't even have concurrent jurisdiction.

The case is Yellow Express LLC v. Dingley (In re Dingley), 13-1261, U.S. Ninth Circuit Bankruptcy Appellate Panel (San Francisco).

Trustee Earns Fees on All Payments in Dismissed '13'

When a Chapter 13 case is dismissed, the standing trustee is entitled to fees based on all amounts paid out, Chief District Judge Jerome M. Simandle in Newark, New Jersey, ruled in the process of trying to harmonize Section 586 of the U.S. Judiciary Code with Section 1326 of the Bankruptcy Code.

Simandle said that courts have reached different conclusions trying to harmonize the two sections. He said that Section 586 ''means what it says: the standing trustee's percentage fee is to be calculated based on all payments received by the trustee, including amounts intended to cover the trustee's percentage fee."

Although the two sections are "clear enough" when read separately, there is ambiguity when read together, he said.

To reach a result, Simandle said he must make the two statutes harmonious. Upholding the bankruptcy judge, he therefore decided that the percentage fee is "mandatory on all payments received, including cases dismissed before confirmation."

The case is Nardello v. Balboa (In re Nardello), 13-6564, U.S. District Court, District of New Jersey (Newark).

Knowledge of Case No Substitute for Proper Service

If a creditor neither files a claim nor participates in a bankruptcy case, the bankrupt court without proper service of process won't have personal jurisdiction over the creditor even though the creditor knows about the case and has a copy of the pleadings.

That was the July 31 ruling by the U.S. Bankruptcy Appellate Panel in San Francisco, in a case where a bankrupt company filed a claim on behalf of a creditor when the creditor didn't.

The bankrupt company filed the claim because the creditor had initiated a $4.5 million lawsuit, in violation of the automatic stay, contending she had been harassed into leaving her apartment in the building owned by the bankrupt company.

Later, the company served an objection to the claim by mailing a copy of the papers to the apartment from which it knew the creditor had been evicted. The bankruptcy judge threw out the claim filed on behalf of the creditor. She appealed successfully.

Writing for the three-judge appellate panel, Bankruptcy Judge Frank L. Kurtz said the creditor admitted having notice of the bankruptcy and copies of the papers objecting to her claim. Those facts were sufficient to reject her argument that she was denied constitutional due process when her claim was dismissed.

That didn't end the case, however.

He went on to rule in the creditor's favor, reversing the bankruptcy court, because she hadn't filed a claim or participated in the bankruptcy. Kurtz said she engaged in no conduct that could be construed as consent to personal jurisdiction.

Because service of process was defective, the bankruptcy court never got personal jurisdiction over the creditor to expunge her claim.

The case is Keyes v. 701 Mariposa Project LLC (In re 701 Mariposa Project LLC), 13-1329, U.S. Ninth Circuit Bankruptcy Appellate Panel (San Francisco).

--With assistance from Sherri Toub and Steven Ludsin in New York and Dawn McCarty and Michael Bathon in Wilmington, Delaware.

To contact the reporter on this story: Bill Rochelle in New York at wrochellebloomberg.net To contact the editors responsible for this story: Andrew Dunn at adunn8bloomberg.net David Glovin