The WSJ Bankruptcy Beat reports that local investors are helping out bankrupt businesses in California and Wisconsin.

In California – a state flush with debt but low on cash - the Pasadena Playhouse will be resurrected by its patrons. The Playhouse filed its Chapter 11 plan of reorganization late last week.  The plan calls for patron donations to pay off the priority, administrative, and secured claims in full. Since the Playhouse has a storied history in California and is beloved by local theatre-goers, this plan might just work.  Moreover, since local and state government’s have little interest in supporting the arts, this is perhaps the only way a plan to save the Playhouse would work.  The stage has been dark since February, and this high school drama geek hopes that new productions will soon bring back light and life to the stage.

In the upper Midwest, struggling businesses need a candyman. It appears that one in Wisconsin has found just that.

The bankruptcy court in Milwaukee has approved the sale of Quality Candy and Buddy Squirrel to local investors.  The investors have promised to keep the candy operation up and running (to the delight of dentists).  A win-win for Wisconsin sweet tooths and the bankrupt company. I just wonder what is a “Buddy Squirrel” – maybe it’s better not to ask.

The blog is back in business – aiming to put out more content due to subscriber demand.

The New York Times reports that Bankruptcy Judge Lifland ruled that the individual investors’ losses should be defined as the difference between the cash paid into a Madoff account and the amount withdrawn before the fraud collapsed in mid-December 2008.

This ruling decidedly disadvantages the investors who argued that their claims should be valued on the balances shown on their final account statements. The result is a significantly reduced claim amount that duped investors might be able to recover.

It is a harsh result, but the reasoning makes some sense. Ultimately, this is a Ponzi scheme, which by its nature is a fraudulent endeavor. Because of this, the final account statements upon which investors relied cannot reflect legitimate “securities positions” for claim valuation.

The trustee and the investors/creditors do not have the same goal in the Madoff case. The trustee has a duty to maximize the value of the bankrupt estate for the benefit of all creditors. The individual creditors are, rightly so, motivated by their self-interest. The trustee is looking to bring as much property into the estate as possible, and remedies are only as good as the evidence. At the end of the day, the existence of a Ponzi scheme thwarts investor efforts.

In the Madoff case, the bankruptcy trustee calculated investor losses to determine whether an investor had a valid claim in the bankruptcy or whether there are funds that can be recovered by the estate.  Such determinations not only positioned the mob of unsecured creditors against each other (old investors with potentially legitimate profits vs. new investors who bought in when the scheme was in full swing), but also left the trustee with few allies in the quest for assets.

Indeed, while investor “restitution” in many Ponzi schemes uses the  “cash in, cash out” method, Madoff isn’t the average Ponzi scheme.  Ponzi schemes do not have an average shelf-life to measure; the Madoff scam spanned more than a decade (and perhaps dates as far back as the 1980s) and came to a crashing end with an estimated $65 billion in losses. Madoff’s approach involved the purchase of blue-chip stocks and then taking options contracts on them to limit losses.  Madoff did not promise unmatched profits to the countless investors who placed money with his investment firm. Rather, he offered more modest and consistent gains to elite clients usually at a rate of 10%.  Many Ponzi schemes promise to deliver returns of 20% or more, but Madoff’s more restrained output contributed to the fraud’s longevity.  This strategy of steady returns was often described as “too complicated for outsiders to understand,” since Madoff was reluctant to give details on how the investments worked.

Judge Lifland acknowledged that “the complex and unique facts of Madoff’s massive Ponzi scheme” defied any simple analysis. “It would be simply absurd to credit the fraud and legitimize the phantom world created by Madoff” when determining victim losses, he said.

No doubt the issue will wind its way up to the Second Circuit – the investors are many and they are angry. A case can run with that momentum almost indefinitely.

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Mesa requested permission from the bankruptcy court to abandon the Beechcraft 1900D turboprop planes, giving way for Raytheon, which holds the security interest in the collateral, can foreclose on the planes.  The planes (which secured a loan from Raytheon) must, under the terms of the agreement, be returned in “airworthy condition.”

Such language is standard in loan agreements, but Raytheon claims that several of the planes are “missing one or both of their engines.” If the allegations are true, it begs the questions: (a) why did Mesa remove the engines; and (b) what does the defunct regional carrier plan to do with them?

In any event, I would love to see Raytheon put a couple of Beechcrafts up on blocks in front of corporate headquarters.

Last August, notable celebrity photographers Markus Klinko and Indran (and their company Double Exposure Studios LLC)  filed for Chapter 11 bankruptcy protection when a creditor’s lawsuit proved to be too much. Rather than snapping pricey celeb pics, however, the pair took cover under the automatic stay, a move that apparently enabled them to devote their free time to creating a show for Bravo. 

I guess that Klinko was also too busy to be bothered with his bankruptcy case, since the court dismissed it in December for failing to attend required meetings and share his financial documents with the court.  Indrani’s case and the case of their photo studio, Double Exposure Studios LLC, remain pending.

Bravo at least knew on some level that the pair had some serious financial issues when they announced the show in March 2009.  Bravo billed the new reality show as “two former lovers working together 18 hours a day in incredibly high-stress environments, filled with deadlines, stretched budgets…” As the WSJ Bankruptcy Beat points out, it remains to be seen whether the bankruptcy filings will be a prominent plot line in the show.

Frankly, I wouldn’t be shocked that if Bravo explores (read: exploits) the bankruptcy twist to enhance the drama.  It’s like watching Blagoveich on the next installment of The Apprentice. You know the train wreck is inevitable, but it’s just so addictive and you can’t look away.  Schadenfreude translates to ratings. A network would be silly to ignore it (unless it’s NBC).

In my opinion, Klinko and Indran can rebound by snapping shots of the cast of Bravo-generated celebrities. It’s not a hard formula:  accessible clients eager to have their photos taken, take pictures, sell to Us Weekly.

The new law is still in its infancy, with many of the provisions in flux. One proposal would give the Federal Deposit Insurance Corp the authority to dismantle large troubled financial services firms.  The new regulations, authored by lame-duck Connecticut Senator Christopher Dodd are designed to avoid a bailout and force insolvent financial institutions down the road of bankruptcy. 

First reports indicate that the bill would drive troubled financial firms to bankruptcy first.  If the bankruptcy option fails, then the “nuclear” option appears to be placing the bank into receivership with the FDIC as receiver (conflict of interest, anyone?) Moreover, there are few details related this special court. At first blush, however, the notion of a “special court” dilutes the bankruptcy process altogether.  With this bill, Dodd aims to stick it the banks and ”make resolution a very painful process.”  But is he also sticking it those who face personal bankruptcies?

Funny that the guy who accepted the “friends and family” mortgage rate from banks is suddenly anti-bank. I suppose it’s only right, considering Congress made bankruptcy a painful process for the broken consumer in 2005.  Bankruptcy would be equal opportunity - debtors’ prison for all, and Congress holds the keys. I’m not advocating bank bailouts over bankruptcy, but Congress has not exactly given me confidence in its ability to overhaul bankruptcy for the better.

In 2008, when Sharper Image became part of a long list of retail failures it first proposed not to honor any gift cards.  Later, it agreed to honor them, but only if consumers spent twice the amount of the gift card in the store. Well, there’s one way to secure DIP financing: extort it from your customers. It’s also a foolproof way to alienate and agitgate customers. The blogs and chat rooms lit up with angry missives aimed at SI.

Ski Market has about $200,000 in outstanding gift cards.  The first time around, when the company decided not to honor the gift cards, it blamed the Bankruptcy Code – claiming that the Code did “not allow” the company to honor customer redemption of the cards. News flash to Ski Market: you might want to check with your bankruptcy lawyer before you make that statement. The Code allows it, provided that you seek approval from the bankruptcy court.

If the company does move for permission and the bankruptcy court does approve Ski Market’s request, New England ski bunnies will be able to use those gift cards (albeit at half value) from Jan. 16 to Jan. 24.  Of course, at the time of this blog, the company had to file such a motion.

The Miami Herald

Of course, the Feds are well aware of the Rothstein’s massive point total – and they’re after it. In a novel strategy, the feds are looking to take possession of those points and use them to help pay back Rothstein’s victims.

Once the points translate into merchandise or cold hash cash, it still won’t come close to the estimated $1.2 billion that Rothstein bilked investors out of.

Rothstein racked up 20,920,701 rewards points on his Amex card — and the feds want to grab them all to help pay back his victims. No definitive word yet on what purchases were made with the card, but it seems likely suspects include: one gold toilet seat, some bling, Miami Vice-ish powerboats, and a collection of sports cars. In addition, Rothstein probably used the card for travel expenses associated with his fraudulent scheme. And he did pay the bills using those Ponzi “proceeds.” Considering that AMEX awards one point for every dollar spent, that’s a lot of spending – even if Rothstein picked up some bonus points along the way.

It’s been a bad week for Rothstein. The feds want his AMEX points, they discovered his Swiss bank account, and now a federal judge ruled that his life insurer can dump him for not revealing that his stated income came from a criminal enterprise.

AMEX needs a new ad:

• Gold Toilet Seats and sports cars: you’re our kind of customer
• Fancy jewelry and fast boats: we’ve got you covered
• Accumulating massive points without  questions: priceless

But for all of your criminal endeavors, there’s only one card: Visa.

The new infusion of cash comes on the heels of nearly $13.5 billion the government already doled out to GMAC since December 2008.  The government hopes thats that additional funds will bring the auto and mortgage lender to profitability in the first quarter of 2010. Moreover, the move is aimed at keeping GMAC’s mortgage lending arm – Residential Capital – out of bankruptcy.

The new bailout doesn’t come without strings. The Treasury upped its stake in GMAC to 56% (it had been at 35%).  Given the struggling state of other U.S.-backed mortgage lenders (Fannie and Freddie), however, GMAC is likely to follow its troubled siblings’ examples.  First, if commercial real estate is in fact the next bubble waiting to pop, then GMAC may be on shaky ground given that it’s a 21% stakeholder in Capmark Financial – a leading commercial real estate lender – filed for bankruptcy at the end of 2009.  Second, much of GMAC’s business is wrapped up in auto lending, and despite the fact that it showed some signs of life in late 2009, that may have been a one-time-only surge prompted by the “cash for clunkers” program. In the absence of such incentives, projections for growth in auto purchases (and consequently auto lending) may fall below expectations.

Nonetheless, GMAC has been relentless in targeting new customers. Ally Bank (formerly GMAC Bank) has been offering “high” interest rates to generate new accounts. Ally’s holdings amount to about 29 percent of GMAC’s assets (By the way, did anyone else miss the line in the onslaught of Ally Bank commercials that it was the new incarnation of troubled GMAC?)

So, what becomes of that 56% stake the government now has in GMAC? Is it a sound investment in a future profit? A look at the numbers would make even the most novice investor hesitate: In November 2009, it reported a quarterly loss of $767 million – an improvement over 4Q 2008 – but homeowners continue to default, and if unemployment continues to hover around 9 or 10%, it could mean more defaults. I’m going to call this one a lump of coal for the time being.

Although the prior post deals with the unfortunate end of the Honolulu Symphony, I am posting a shout-out to my brother’s new score for the ballet “The Casket Girls.”

Cory Gabel wrote, performed, produced and recorded all the music for this Vampire Ballet. You can check it out at: http://corygabelcomposing.com/thecasketgirls/casketgirls_downloads.htm. Download the complete score or just a few numbers before this becomes the iTunes viral hit it is destined to be.

-JDG