United States: Top 10 Bankruptcies Of 2012

In 2012, unlike in many previous years, when bank holding and financial-services companies undone by the financial crisis dominated the Top 10 List for public-company bankruptcy filings, only a single financial-services company and two banking entities made the year's Top 10. The remainder of the list was populated by companies in the imaging, energy, publishing, aircraft, and shipping industries. Each company on the Top 10 List checked into chapter 11 with both assets and liabilities exceeding $1 billion.

Minneapolis, Minnesota-based real estate finance company Residential Capital, LLC ("ResCap") grabbed the brass ring for the largest public bankruptcy case in 2012 when it filed for chapter 11 protection on May 14 in New York with $15.7 billion in assets and $15.3 billion in debt. ResCap is a wholly owned subsidiary of GMAC Mortgage Group, LLC, which in turn is wholly owned by Ally Financial Inc. ("Ally"), the former finance arm of General Motors Co. once known as GMAC. As one of the biggest subprime-mortgage lenders in the country, ResCap was hit especially hard by the financial crisis. The fallout from the crash swamped both ResCap and Ally with mortgage liabilities to the extent that Ally is now 74 percent owned by the U.S. government after a series of bailouts and failed the most recent round of bank stress tests conducted by the U.S. Federal Reserve.

ResCap's long-awaited bankruptcy filing was intended to alleviate that pressure (and enhance the prospects for taxpayer recovery) by effecting a sale of the company's mortgage business and loan portfolio. On November 21, 2012, the bankruptcy court approved the sale of ResCap's mortgage business to Ocwen Financial Corp and Walter Investment Management Corp., which agreed to pay $3 billion in an auction. It also approved the sale of a ResCap loan portfolio to Warren Buffett's Berkshire Hathaway Inc., which agreed to pay $1.5 billion for a package of 50,000 loans. U.S. taxpayers are still owed nearly $12 billion from the Ally bailout.

Santa Ana, California-based coal, natural gas, and wind power producer Edison Mission Energy ("Edison Mission") surged into the No. 2 position on the Top 10 List for 2012 when it filed a prenegotiated chapter 11 case in Illinois on December 17 with $8.3 billion in assets. Through its subsidiaries, Edison Mission sells or trades energy from coal-fired generating facilities, natural gas-fired generating facilities, and renewable energy facilities, including one of the largest portfolios of wind projects in the U.S. The company has suffered financial losses amid low energy prices, high fuel costs, relatively weak power demand, and low power generation at coal-fired plants run by Midwest Generation, an Illinois-based subsidiary. Edison Mission is a subsidiary of Edison International, which did not file for bankruptcy. Prior to the chapter 1 1 filing, Edison International reached an agreement with Edison Mission and the majority of Edison Mission's noteholders whereby ownership of Edison Mission will be transferred to creditors, subject to bankruptcy-court approval.

The No. 3 spot on the Top 10 List for 2012 was captured by iconic imaging pioneer Eastman Kodak Company ("Kodak"), which filed for chapter 11 protection in New York on January 19, 2012, with $6.24 billion in assets and $7.3 billion in debt. At the time of the filing, the Rochester, New York-based company was running short of cash and unable to sell 1,100 digital-imaging patents that could have forestalled a bankruptcy filing. Kodak, the company that invented the digital camera nearly 40 years ago and whose late 19th-century rise to prominence and later ubiquity were owing to the technical and marketing genius of founder George Eastman, never successfully transitioned from its reliance on the photographic-film business, despite the increasing dominance of newer imaging technologies. Kodak had 17,000 employees worldwide and 8,000 in the U.S. (principally in Rochester) at the time of the filing. At its peak in the early 1980s, the company employed 62,000 people in Rochester and 130,000 worldwide. On January 11, 2013, the bankruptcy court approved the sale of Kodak's 1,100 digital-imaging patents for $527 million to a consortium that included Apple Inc., Microsoft Corp., Google Inc., Adobe Systems Inc., Research In Motion Ltd., Samsung Electronics Co., Fujifilm Corp., and Facebook Inc. The sale is a key element of the company's plans to shift its focus to commercial packaging and printing from photography.

Overseas Shipholding Group Inc. ("OSG"), one of the world's largest publicly traded tanker owners, berthed in the No. 4 position on the Top 10 List for 2012 when it foundered into chapter 11 in Delaware, along with 180 affiliates, on November 14, 2012, listing more than $4 billion in assets and $2.7 billion in debt. OSG owns or operates 111 vessels that transport oil, refined products, and natural gas worldwide. OSG and other crude oil shippers have been buffeted in recent years by slowing demand for oil, combined with a sharp fall in shipping rates for international crude and product vessels. In addition, OSG has ongoing tax problems that rendered its last three years of financial statements unreliable and created a potential for default under its loan agreements.

St. Louis, Missouri-based Patriot Coal Corp. ("Patriot") excavated its way into the No. 5 spot on the Top 10 List for 2012 when it filed for chapter 11 protection on July 9, 2012, together with 98 affiliates in New York, listing $3.8 billion in assets and $3.1 billion in debt. Patriot produces and markets coal products in the eastern U.S., with operations and coal reserves in the Appalachian and Illinois Basin coal regions. The company struggled in recent years because of decreased demand for coal, due largely to an increase in natural gas and other energy sources. At the same time, Patriot's liabilities increased because of rising costs due to "more burdensome environmental and other regulations" as well as "unsustainable labor-related legacy liabilities." In addition, due to an adverse court ruling, Patriot is obligated to build water-treatment facilities that will cost hundreds of millions of dollars. On November 27, 2012, the bankruptcy court in New York ordered venue of Patriot's chapter 11 cases to be transferred to Missouri, where Patriot's corporate headquarters and executive offices are located.

Houston, Texas-based ATP Oil & Gas Corporation ("ATP"), which acquires, develops, and produces oil and natural gas assets in the Gulf of Mexico, the North Sea, and the Mediterranean, drilled its way into the No. 6 position on the Top 10 List for 2012 when it filed for chapter 11 protection in Texas on August 17, 2012, listing $3.4 billion in assets and $3.1 billion in debt. Prior to its bankruptcy filing, ATP had estimated net proved reserves of 118.9 million barrels of crude oil equivalent and 241.5 billion cubic feet of natural gas. ATP stated that it filed for chapter 11 to manage debt it incurred because of the five-month moratorium on most U.S. offshore drilling after the deadly 2010 Gulf of Mexico oil spill.

First Place Financial Corp. ("FPF"), the bank holding company for First Place Bank, was deposited into the No. 7 position on the Top 10 List for 2012 when it filed for chapter 11 protection in Delaware on October 28, 2012. Based in Warren, Ohio, First Place Bank was a federally chartered stock savings association with more than 40 branches in Ohio, Michigan, Indiana, and Maryland. On October 26, 2012, FPF entered into an agreement to sell First Place Bank to Talmer Bancorp ("Talmer") as a means of complying with certain directives issued by the Office of the Comptroller of the Currency and the Office of Thrift Supervision ("OTS") (which merged on July 21, 2011). The bankruptcy court approved the sale of First Place Bank to Talmer on December 14, 2012. Although FPF's most recent public financial statements showed $3.2 billion in assets, the company listed only $175 million in assets and $64.5 million in debt in its bankruptcy filings.

Hawker Beechcraft, Inc. ("Hawker") crash-landed into the No. 8 spot on the Top 10 List for 2012 when it filed for chapter 11 protection in New York on May 3, 2012, with $2.8 billion in assets and $3.7 billion in debt. Wichita, Kansas-based Hawker manufactures business, special mission, and trainer/attack aircraft as well as parts and aviation products. At the time of the filing, the company had 5,400 employees and 100 service centers supporting a fleet of 34,000 aircraft. Hawker was formed in 1994 when Raytheon Company merged its Beech Aircraft Corporation and Raytheon Corporate Jets units. In 2006, Raytheon sold Hawker to Goldman Sachs and Onex Corporation, leaving the company with a heavy debt burden that it struggled to support from the 2008 economic crisis onward. Hawker filed for chapter 11 protection after defaulting on interest payments.

In July 2012, the Chinese company Superior Aviation Beijing offered to purchase Hawker for $1.79 billion, but the deal fell through in October 2012 due to a combination of regulatory concerns and labor issues. In early November 2012, Hawker announced that it would lay off more than 400 of its remaining workers, close various service facilities, and trim its business operations to concentrate on its core manufacturing and maintenance activities. Hawker later filed a chapter 11 plan proposing a restructuring pursuant to which it would emerge from bankruptcy under a new name, Beechcraft Corporation, with significantly scaled-back operations and $525 million in exit financing.

Textbook publisher Houghton Mifflin Harcourt Publishing Company ("Houghton Mifflin") booked position No. 9 on the Top 10 List for 2012 when it and 20 affiliates filed prenegotiated chapter 11 cases in New York on May 21, 2012, listing $2.7 billion in assets and $3.5 billion in debt. Boston-based Houghton Mifflin publishes textbooks used at all grade levels. It also publishes novels, nonfiction books, children's books, and reference works, including such classics as J.R.R. Tolkien's The Lord of the Rings and H.A. and Margret Rey's Curious George books for children. The company's educational software unit developed popular computer games such as "The Oregon Trail." Houghton Mifflin struggled financially for years, laden with debt taken on when Education Media and Publishing Group, an Irish private-equity concern, borrowed heavily to finance the acquisitions of Houghton Mifflin in 2006 and Harcourt in 2007. Venue of the chapter 11 cases was transferred to Massachusetts, but only after the bankruptcy court in New York confirmed a chapter 11 plan for Houghton Mifflin on June 21, 2012, effectively ending the company's 32-day stay in bankruptcy. Under the plan, Houghton Mifflin swapped its existing bank and bond debt for 100 percent of the equity in the restructured company.

The final spot on the Top 10 List for 2012 belongs to United Western Bancorp, Inc. ("UW Bancorp"), a Denver-based holding company that owned United Western Bank until January 21, 2011, when the Federal Deposit Insurance Corporation was appointed receiver for the bank by OTS and oversaw the sale of the bank's eight branches to First-Citizens Bank & Trust Company of Raleigh, North Carolina. UW Bancorp responded by suing OTS, claiming that the seizure was an abuse of power. UW Bancorp filed for chapter 11 protection in Colorado on March 2, 2012. Although the company's most recent public financial statements listed $2.5 billion in assets, UW Bancorp scheduled assets valued at no more than $10 million in its bankruptcy filings.

Other notable debtors (public and private) in 2012 included:

Hostess Brands, Inc. ("Hostess"), the iconic baker of Wonder Bread, Twinkies, and HoHos, which filed for chapter 11 protection for the second time in a decade (Hostess was known as Interstate Bakeries at the time of its 2004 chapter 11 filing) in New York on January 11, 2012, citing soaring costs and weakened demand for its products. Founded in 1937 and based in Irving, Texas, privately held Hostess had 18,500 employees, 33 bakeries, 565 distribution centers, and nearly $1 billion in assets at the time of the filing. On November 16, 2012, one week after one of its biggest unions went on strike to protest a labor contract, 82-year-old Hostess announced plans to wind down operations and sell its portfolio of well-known brands.

LightSquared Inc. (f.k.a. SkyTerra Communications), a privately owned telecommunications company that filed for chapter 11 protection in New York on May 14, 2012, listing $4.5 billion in assets after its plan to deliver high-speed wireless to as many as 260 million people ran afoul of U.S. regulators.

Houston, Texas-based Dynegy Inc., a privately owned company whose subsidiaries produce electric energy from 16 coal- and gas-fired power facilities located in six states, which filed for chapter 11 protection on July 6, 2012, in New York, listing $4.1 billion in assets. The filing was part of a settlement agreement with creditors involving a merger of Dynegy, Inc., with its largest subsidiary, Dynegy Holdings (which had filed for chapter 11 on November 7, 2011), and the sale of Dynegy, Inc.'s remaining assets to satisfy creditor claims.

Arcapita Bank BSC (f.k.a. First Islamic Investment Bank) ("Arcapita"), a Bahrain-based privately owned manager of Islamic-compliant (Shari'ah-compliant) investments with $7 billion under management, which filed for chapter 11 protection in New York, listing $3 billion in assets and $2.6 billion in debt after failing to reach an agreement with creditors on the refinancing of a $1.1 billion syndicated Shari'ah-compliant loan. In December 2012, the bankruptcy court overseeing Arcapita's chapter 11 case authorized the first-ever Shari'ah-compliant debtor-in-possession financing.

Pinnacle Airlines Corp., a Memphis-based regional air carrier that operates a jet and turboprop fleet under agreements with Delta Air Lines, Inc., United Continental Holdings, Inc., and US Airways Group, Inc., which filed for chapter 11 protection on April 1, 2012, in New York, listing $1.5 billion in assets and $1.4 billion in debt.

The City of Stockton, California, which became the largest city in U.S. history to seek bankruptcy protection when it filed a chapter 9 petition on June 28, 2012, in California to manage a $26 million budget deficit. The filing came after a breakdown in negotiations with creditors in compliance with A.B. 506, a newly effective California law that allows municipalities in financial distress to negotiate with creditors to restructure debts and agreements to avoid filing for bankruptcy. In its bankruptcy filings, Stockton listed assets of more than $1 billion and liabilities of more than $500 million.

The City of San Bernardino, California, 65 miles east of Los Angeles and home to about 210,000 residents, which became the third California city to file for bankruptcy protection in 2012 when it filed a chapter 9 petition on August 1, listing assets and liabilities in excess of $1 billion. In late July, San Bernardino reported that it had $56 million in debt payable from its general fund, including payments on a $50 million pension bond. The city also had $195 million in unfunded pension obligations, $61 million in unfunded retiree health care, and $40 million in workers' compensation and general liabilities.

A123 Systems Inc. ("A123"), a manufacturer of electric-car batteries and the recipient of nearly $250 million in U.S. government grants, which filed for chapter 1 1 protection on October 16, 2012, in Delaware, listing $626 million in assets, with a plan to sell its auto-business assets to auto-parts maker Johnson Controls Inc. ("Johnson"). However, previous suitor Wanxiang America Corp., the U.S. arm of Chinese auto-parts conglomerate Wanxiang Group, outbid Johnson, offering $257 million for the assets more than doubling Johnson's initial offer. The bankruptcy court approved the sale to Wanxiang on December 11, but Johnson appealed. A123's defense-related business assets will be sold separately for $2.25 million to Navitas Systems.

Dewey & LeBoeuf ("Dewey"), a private law firm crippled by financial miscues and partner defections, which filed for chapter 11 protection on March 28, 2012, in New York, punctuating the largest law-firm collapse in U.S. history. Dewey unraveled after lower-than-expected profits and debt mountainous by law-firm standards forced it to slash partners' salaries. Already owed millions from previous years, the partners became concerned about Dewey's finances and eventually began a mass exodus that destroyed the firm. At its peak, Dewey employed more than 2,500 people, including roughly 1,400 lawyers in 26 offices across the globe.

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Mark G. Douglas
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