WILMINGTON, Del., Nov 9 (Reuters) - A U.S. judge on Monday rejected a Chapter 11 plan for Boomerang Tube, a pipe maker for the oil industry, in a bankruptcy that shed light on the aggressive tactics of its private equity owner and hedge fund lender.
The bankruptcy pitted the company’s owner, billionaire Leonard Blavatnik’s Access Industries, and hedge fund lender against its unsecured creditors, who attacked the strategies often used in debt restructurings.
In a court filing, the unsecured creditors accused debt investor Black Diamond Capital Management of joining with Access Industries to use bankruptcy to grab control of the company and protect themselves from potential lawsuits.
The unsecured creditors convinced U.S. Bankruptcy Judge Mary Walrath in Wilmington, Delaware, that Boomerang Tube was undervalued, priced at a historic trough in the oil industry that company serves. They argued that low valuation was used to justify paying them virtually nothing.
“The debtor’s plan as currently written is not confirmable,” said Walrath. She said she expected the parties to begin negotiating a new plan to replace the one she rejected, which would have cut Boomerang’s debt by more than $200 million.
The win was unusual because bankrupt companies generally craft Chapter 11 plans with broader creditor support, and judges rarely send companies back to the drawing board to write a new plan.
Lawyers for Boomerang had no comment at Monday’s hearing where Walrath read the opinion. Access and Black Diamond did not immediately respond to requests for comment.
Boomerang’s unsecured creditors alleged that the Chesterfield, Missouri-based company had originally planned to file for bankruptcy with a proposal that would have paid them in full.
Hedge funds that invest in financially distressed companies often use debt to direct a restructuring, and on the eve of bankruptcy, Black Diamond became the biggest holder of Boomerang’s $214 million loan. It used that role to dictate terms, according to the unsecured creditors.
Black Diamond demanded a new plan that paid unsecured creditors next-to-nothing for the $37 million they were owed. The new plan also converted the loan into ownership post-bankruptcy and shut down a process to test Boomerang’s market value, according to the unsecured creditors committee.
Walrath also rejected the bankruptcy plan in part because it would have shielded Access and Black Diamond from lawsuits stemming from Boomerang Tube’s bankruptcy.
Unsecured creditors have said Access could potentially be sued for the way it financed Boomerang, including a 2010 loan of $123 million at 23 percent.
“Why would a private equity owner impose such onerous terms and extract such excessive prepayment fees from its own portfolio company?” the unsecured creditors asked in court papers. (Reporting by Tom Hals in Wilmington, Delaware; Editing by Lisa Shumaker)