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May 06, 2011, 7:47 AM EDT

More From Businessweek

• RBS Review, Wells Fargo Settlement, Avon Probe: Compliance
• JPMorgan, HSBC, Barclays, Stanford, Lawson in Court News
• Madoff, Vitro, Viceroy, TerreStar, Blockbuster: Bankruptcy
• UBS, Deutsche Bank, HSBC, Rajaratnam, K1 in Court News
• Thornburg, Lehman, Vitro, Nortel, Viceroy: Bankruptcy

By Bill Rochelle

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Statistics section, Madoff in Updates and DS Waters in Downgrade.)

May 6 (Bloomberg) — Vitro SAB, Mexico’s largest glassmaker, argued in a court filing on May 4 that its Chapter 15 case should remain in New York because the bankruptcy judge in Fort Worth, Texas, is ill.

Separately, Vitro’s official creditors’ committee is asking for a delay in the hearing scheduled to begin today in Texas on a motion to approve sale procedures for the four U.S. Vitro subsidiaries that put themselves into Chapter 11 in the face of involuntary petitions filed in November.

To retain top-level managers, Vitro also is proposing a bonus program.

Holders of some of the $1.2 billion in defaulted bonds filed a motion to transfer the Chapter 15 case to Texas. Vitro filed its second Chapter 15 petition in New York on April 14 after a judge in Mexico reinstated the previously dismissed Mexican reorganization.

Under bankruptcy law, the court in Texas with the first- filed case has the right to decide if it will take a later case filed elsewhere.

Vitro says that the judge in New York, who had no prior familiarity with Vitro, is in the same position as the other Texas judges because U.S. Bankruptcy Judge Russell Nelms, who originally heard Vitro cases, will be off the bench temporarily.

Fintech Investments Ltd., calling itself a substantial creditor, supports Vitro’s bid to keep the Chapter 15 case in New York.

With regard to selling the U.S. companies, the committee is asking the judge for a one-week adjournment of the hearing for approval of auction procedures.

In the meantime, the creditors’ panel wants to look into a higher offer and investigate the “independence of the stalking horse bidder.”

A union pension plan supports the creditors and says there is no reason for a quick sale.

Click here for the May 5 Bloomberg bankruptcy report and a discussion about whether there may be an undisclosed relationship between Vitro and the proposed buyer.

Click here for the May 5 Bloomberg bankruptcy report and details on the unsolicited bid topping the offer from Vitro’s proposed buyer.

Vitro filed a motion on May 4 for approval of bonus programs for 17 top executives.

The chief executive officer and chief financial officer would benefit from an incentive program that would cost $1.02 million at most.

To qualify, the U.S. companies must be sold for more than $44 million, the price in the contract already in hand.

If the sale is more than $44 million and less than $50 million, the bonus would be 3.75 percent of the amount above $44 million. The executives would receive 4.5 percent of the price above $50 million. The maximum bonus would be earned at a sale price of about $74.6 million.

For 15 high-level mangers, Vitro is proposing a bonus pool of $267,700. To qualify for payment equaling 12.5 percent of a year’s salary, the managers must still be employed when the sale of the business is completed.

The Vitro parent is in a reorganization in Mexico. It seeks to use the Chapter 15 case to enforce whatever reorganization a judge in Mexico approves.

A group holding more than 60 percent of Vitro’s $1.2 billion in defaulted bonds is opposed to the Mexican reorganization. The bondholders say it would be a misuse of Chapter 15 because Vitro intends to cram a plan down on noteholders by using votes arising from $1.9 billion in inter- company claims.

In the Mexican reorganization, Vitro is offering noteholders what it said would be a recovery of as much as 73 percent by exchanging existing debt for cash, new debt and convertible bonds. Bondholders claim Vitro is worth enough to pay them in full. For a summary of Vitro’s reorganization and the suits between Vitro and the noteholders, click here for the Dec. 15 Bloomberg bankruptcy report.

The Chapter 11 case in Texas is In re Vitro Asset Corp., 11-32600, U.S. Bankruptcy Court, Northern District of Texas (Fort Worth). The new Chapter 15 case in New York is Vitro SAB, 11-11754, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Statistics

April Bankruptcies Pull Back from March Increase

The increase in bankruptcy filings in March may have been an aberration. In April, the 129,700 bankruptcies of all types represented a 3 percent decline from the daily rate in March and a 7 percent drop compared with April 2010.

If the pace of filings in the first four months of the year continues, 2011 would end up with 1.46 million total bankruptcies, or 6 percent fewer than the 1.56 million in 2010.

As in previous months, commercial filings are dropping faster. April’s 6,800 commercial bankruptcies were 16 percent less than in the same month in 2010, according to data compiled from court records by Epiq Systems Inc.

Commercial Chapter 11 filings are off a similar 16 percent in April from last year, Epiq reported. Epiq uses proprietary software to distinguish company Chapter 11s from those filed by individuals who must file in Chapter 11 because they don’t quality for Chapters 7 or 13. Larger companies use Chapter 11 to reorganize or sell their assets.

April still had the second-most filings so far this year. Last month’s bankruptcies would be in the middle of the pack when compared with the 12 months in 2010.

Bankruptcies are down in 48 states. Only Utah and New Jersey have reported more total bankruptcies this year when compared with the average rate in 2010. Filings have risen 6 percent in Utah and 2 percent in New Jersey.

The 1.56 million total bankruptcy filings in 2010 were a 7.8 percent increase from 2009. The 1.45 million filings in 2009 were 32.1 percent more than 2008.

Last year had the most filings since 2005, with its record 2.1 million bankruptcies. Americans that year were rushing into bankruptcy court ahead of the effective date of new laws making it more difficult for individuals to escape debt. In the two weeks before the law changed, 630,000 American sought bankruptcy protection.

This year’s decline in bankruptcies may result in part from the slowdown in home-mortgage foreclosures resulting from lenders’ back-office paperwork.

Updates

Second Madoff Trustee’s Suit Stripped from Bankruptcy Court

JPMorgan Chase Co. won the first round fending off the $6.4 billion lawsuit brought by the trustee liquidating Bernard L. Madoff Investment Securities Inc.

U.S. District Judge Colleen McMahon ruled on May 4 that the lawsuit belongs in district court, not in bankruptcy court. She will delve into the heart of the case immediately by holding a hearing on July 28 where JPMorgan will seek dismissal.

McMahon said she would file a written opinion later explaining why the case is properly in district court. For now, she directed the bank to file its dismissal motion on June 3.

The trustee will file his answering papers by July 15, in advance of the July 28 hearing.

McMahon’s ruling is the second time in two weeks that a district judge decided to take all or part of a lawsuit by the Madoff trustee out of the bankruptcy court. U.S. District Judge Jed S. Rakoff filed an opinion on April 25 explaining why he would decide whether to dismiss five counts in the Madoff trustee’s $9 billion suit against HSBC Holdings Plc.

JPMorgan, based in New York, argued that transferring to district court was mandatory, not discretionary, because the case involves “novel and unsettled” issues of non-bankruptcy federal law that “fall well beyond” the expertise of a bankruptcy judge. For arguments on both sides, click here for the March 31 Bloomberg bankruptcy report. For details on JPMorgan’s so-called withdrawal-of-the-reference motion, click here for the Feb. 14 Bloomberg bankruptcy report. For other Bloomberg coverage, click here.

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 JPMorgan lawsuit in district court is Picard v. JPMorgan Chase Co., 11-00913, U.S. District Court, Southern District of New York (Manhattan). The lawsuit in bankruptcy court is Picard v. JPMorgan Chase Co., 10-04932, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 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).

Montana Says Timothy Blixseth Admits Owing Taxes

The state of Montana filed papers on May 4 opposing the motion by Timothy Blixseth for dismissal of the involuntary Chapter 7 petition filed against him by three states a month earlier.

Blixseth, the founder of Yellowstone Mountain Club LLC in Montana, argued that Montana’s tax claim is disputed, precluding the state from being one of the three required involuntary petitioners. The state responded by pointing to papers Blixseth filed in state court admitting to owing $219,000.

Montana also answered the argument that there are no longer three petitioners because the states of California and Idaho settled with Blixseth after the involuntary petition was filed and were to be paid more than $1.9 million to drop out as petitioners. The settlements represented 85 percent of what the two states were claiming, Montana said.

Montana says that paying off a creditor who files an involuntary bankruptcy petition doesn’t deprive the bankruptcy court of the right to declare someone involuntarily bankrupt. Montana said the two settlements show that there were undisputed taxes owed to California and Idaho.

The bankruptcy court in Las Vegas is scheduled to hold a hearing on May 18 to rule on Blixseth’s motion to dismiss. Montana points to unpaid state and federal taxes to show that Blixseth isn’t paying his legitimate creditors.

The bankruptcy trustee for the Yellowstone Mountain Club supports having Blixseth in bankruptcy. The trustee cited his unsatisfied $40 million judgment against Blixseth as an additional reason for being in bankruptcy. The trustee also said he had “concern about Blixseth’s history of fraudulent transfers.”

Blixseth is asking the bankruptcy judge to impose sanctions against Montana and its lawyers for filing an improper involuntary petition. The state says it isn’t bad faith to use the bankruptcy court to collect debt.

The taxing authorities filed the involuntary petition in Las Vegas because the closely held business that represents most of Blixseth’s assets was created under Nevada law. Yellowstone Mountain Club is a 13,600-acre property just outside Yellowstone National Park.

The resort filed under Chapter 11 in November 2008 and confirmed a Chapter 11 plan in June 2009. The plan incorporated a settlement from May 2009 with the secured lender Credit Suisse Group AG, the creditor’s committee and the proposed buyer, a private-equity investor named CrossHarbor Capital Partners LLC.

The settlement was reached after the bankruptcy judge ruled that Credit Suisse’s $309 million secured claim should be subordinated to specified unsecured claims.

In November, Blixseth won on appeal and confirmation was set aside.

The involuntary case against Blixseth is In re Blixseth, 11-15010, U.S. Bankruptcy Court, District of Nevada (Las Vegas). The Chapter 11 case is In re Yellowstone Mountain Club LLC, 08- 61570, U.S. Bankruptcy Court, District of Montana (Butte). The appeal from confirmation was Blixseth v. Yellowstone Mountain Club LLC, 09-0047, U.S. District Court, District of Montana (Butte).

Berkline Wins Court Approval for Liquidation by Hilco

Berkline/BenchCraft Holdings LLC, a furniture manufacturer 90 percent-owned by private-equity investor Sun Capital Partners Inc., filed under Chapter 11 on May 2 and two days later received approval for liquidator Hilco Merchant Resources LLC to sell the inventory.

The maker of Berkline reclining sofas conducted an auction before the Chapter 11 filing where six liquidators bid for the right to sell the inventory. For details on Hilco’s winning bid, click here for the May 4 Bloomberg bankruptcy report.

On May 4, the bankruptcy court in Wilmington, Delaware, also gave interim approval to use the secured lender’s cash collateral. A final hearing on the use of cash and approval of the Hilco agreement will take place on May 23.

Berkline, based in Morristown, Tennessee, decided to liquidate in March.

Wells Fargo Capital Finance LLC is the first-lien lender owed $4.29 million. The collateral is worth slightly more than the debt, according to a court filing. For the $140 million second lien, Goldman Sachs Group Inc. was syndication agent.

There are $12.5 million in unsecured subordinated notes, mostly held by affiliates of Boca Raton, Florida-based Sun Capital.

The case is In re Berkline/BenchCraft Holdings LLC, 11- 11369, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Island One Confirms Plan in Orlando Bankruptcy Court

Island One Inc., the developer and operator of 10 time- share vacation communities in Florida and the Virgin Islands, filed under Chapter 11 in September and persuaded the bankruptcy judge in Orlando, Florida, at a hearing on May 4 to sign a confirmation order approving the reorganization plan.

In return for $13 million, a group formerly associated with Bay Harbour Management LC bought the equity. The plan provides for different treatment for the secured lenders and unsecured creditors at each of the properties.

At the outset of the case, Island One said in a court filing that Bay Harbour was negotiating to buy the company. Island One blamed the filing on the “fall of the real estate market” and the “general downturn in the economy.”

Nine of the communities are in Florida.

Textron Financial Corp. was a secured creditor owed $99.1 million. Branch Banking Trust Co. had a $39.1 million secured claim. Liberty Bank was a secured creditor originally listed as being owed $7.9 million.

Gross revenue in 2009 was about $50.6 million, according to a court filing.

The case is In re Island One Inc., 10-16177, U.S. Bankruptcy Court, Middle District of Florida (Orlando).

Downgrade

DS Waters of America’s Loans Maturing over 18 Months

DS Waters of America Inc., an Atlanta-based bottled-water provider, was downgraded yesterday by two notches to a CCC+ corporate rating from Standard Poor’s.

The downgrade is a result of the company’s need to refinance $900 million in the next 18 months, SP said.

Maturing debt includes the revolving credit coming due in October, a $300 million term loan maturing in March 2012, a $225 million pay-in-kind note that must be refinanced in April 2012, and a term loan coming due in October 2012, SP said.

SP described the maturities as representing a majority of the consolidated capital structure.

Waters has 25 facilities serving customers in 40 states.

Daily Podcast

Caribe, Vitro, Berkline, Inverness: Bankruptcy Audio

The Chapter 11 reorganization by yellow-page publisher Caribe Media Inc. leads off the Bloomberg bankruptcy podcast by explaining how the Chapter 11 filing preserved fraudulent transfer claims against parent company Local Insight Regatta Holdings Inc. and affiliates that have been in bankruptcy since November. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle cover two cases involving Sun Capital Partners Inc. One involves a new Chapter 11 case; in the other a company Sun Capital bought in bankruptcy a year ago aims to buy U.S. subsidiaries of Mexican glassmaker Vitro SAB. Rochelle asks whether the bankruptcy judge will question whether movie distributor Inverness Distribution Ltd. can properly claim that its “foreign main” bankruptcy proceeding is in Bermuda. The podcast concludes with an obituary for retired Bankruptcy Judge Thomas Hartley Kingsmill from New Orleans. Rochelle explains why bankruptcy judges once were known as bankruptcy referees. To listen, click here.

Advance Sheets

Insurers’ Standing Enlarged in 3rd Circuit Opinion

Insurance companies have greater standing to object to Chapter 11 plans in some asbestos cases as the result of a May 4 opinion by the U.S. Court of Appeals in Philadelphia in a case involving Global Industrial Technologies Inc.

The case is important for several reasons. First, it gives insurance companies a more prominent seat at the table in negotiations over asbestos plans. Second, it was a so-called en banc ruling by all 10 active judges on the 3rd Circuit.

Third, it was a split decision, with four judges in dissent. Fourth, the opinion narrows or modifies the 3rd Circuit’s 2004 decision involving Combustion Engineering Inc., an asbestos case where insurance companies were found not to have standing.

The opinion is also important because the 3rd Circuit’s law governs Chapter 11 cases in Delaware, where many of the country’s asbestos cases are filed. The appeals court decided on its own to have the case argued before all active judges instead of the usual panel of three.

The majority of circuit judges, in an opinion by Circuit Judge Kent A. Jordan, reversed rulings by both the bankruptcy court and the district court by holding that insurance companies had the right to appear in bankruptcy court and oppose confirmation of the Chapter 11 plan.

The appeals court didn’t rule on the separate question of whether the insurance companies should have the right to appeal. Instead, the circuit court sent the case back to the bankruptcy judge to make rulings on whether there was collusion between the bankrupt company and lawyers for claimants alleging injury from silica.

On an issue that may provide a basis for an attempted appeal to the U.S. Supreme Court, the majority said that standing under Article III of the Constitution and under the Bankruptcy Code are “effectively co-extensive.”

The majority said that the insurance companies had the right to oppose the plan in bankruptcy court because they could show specific, identifiable potential injury because the proposed plan increased their exposure on silica claim “by more than 27 times.” Unlike other cases, the majority weren’t convinced that the plan was “insurance neutral,” even though the insurers retained all rights to object to silica claims.

In a dissenting opinion joined by three other circuit judges, Senior Circuit Judge Richard L. Nygaard accused the majority of making “a departure from the well-established requisite of an injury in fact.” The bankruptcy court should have been upheld, he said, in part because the plan tracked the language from Combustion Engineering in making the asbestos trusts “insurance neutral.”

The case involved a Chapter 11 case begun in 2002 and a plan confirmed in November 2007. The plan would create trusts to deal with asbestos and silica claims.

The case is Global Industrial Technologies Inc., 08-3650, U.S. 3rd Circuit Court of Appeals (Philadelphia).

–With assistance from Linda Sandler in New York; and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: Stephen Farr, Peter Blumberg

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