Trups Trustee Surprisingly Vocal in Bankruptcy Case

Article excerpt

Byline: Robert Barba

As a key trustee for pooled trust-preferred securities, Bank of New York Mellon Corp. has often been accused of inaction.

That has not been the case for Builders Financial Corp.'s bankruptcy proceeding. Last summer the struggling Chicago bank holding company filed for bankruptcy protection with the intention of reducing the debt on its $40 million of trust-preferred securities to $4.5 million, which would be paid over the next 10 years. The plan would preserve the equity of Mitchell Saywitz, the company's chief executive and sole shareholder. No immediate plans are in the offing for more capital to flow into the company.

Bank of New York Mellon, the trustee for half of the securities, voted against the reorganization plan. Then last week, after the $337 million-asset company Builders attempted to invalidate the trustee's vote as a creditor, Bank of New York Mellon filed an objection. On Thursday, Bruce Black, a judge for the U.S. Bankruptcy Court for the Northern District of Illinois, continued the case to March 17.

Several lawyers said Builders Financial's bankruptcy plan is thin and that getting it completed would be very difficult.

"I think it is interesting what they are trying to do, but it doesn't appear to make good economic sense except for the equity holder," said Chip MacDonald, a partner at Jones Day in Atlanta. "For the creditors, there is hardly any reason for them to take this. It doesn't guarantee any new capital."

Bank holding company bankruptcies have had a lot of buzz since December, when the $1.5 billion-asset AmericanWest Bancorp of Spokane, Wash., successfully navigated the process, saving its bank from seizure by selling it in a court auction. Builders Financial's bankruptcy plan does not call for such an auction.

In recapitalizations, trustees of pooled trust-preferred securities have been a powerful blockade, as they have asserted that their role is merely administrative. The allure of bankruptcy, lawyers said, is that it compels the trustee to act.

"Trust-preferreds remain a huge obstacle to the recapitalization of distressed banks. The holders have a habit of just saying 'no' and sometimes you can't even identify who is holding the debt," said Van Durrer, a partner at Skadden Arps, which represented SKBHC Holdings LLC , the bank holding company that successfully bid on AmericanWest's bank.

"Like it or not, bankruptcy forces the issue, and allows a sale and recapitalization transaction to proceed provided it is supported by business judgment and presented in good faith," Durrer said.

Bankruptcy lawyers said that in the Builders Financial case, it appears the company wants relief from its trust-preferred debt, but was hoping the trustees would not show up.

Builders Financial and Bank of New York Mellon declined to comment. In an objection filed Feb. 14, Bank of New York Mellon claimed the bankruptcy was filed in bad faith. The trustee claimed that, on the eve of the bankruptcy filing, Builders Financial borrowed $40,000 from three creditors, with Saywitz personally guaranteeing the loans.

In court documents, Builders Financial said the $40,000 is being used to fund operations, such as financing the bankruptcy. Bankruptcy lawyers said the amount is possibly enough for a retainer. …