Two bankrupt Bear Stearns Cos. hedge funds got a little more breathing room on Wednesday after a bankruptcy court judge agreed to stay an earlier ruling that had blocked their bid for chapter 15 bankruptcy protection, Bankruptcy Law360 reported yesterday. Bankruptcy Judge Burton R. Lifland signed off on the order on Wednesday, putting his Aug. 30 decision not to allow the chapter 15 filing on the shelf pending an appeal by the hedge funds. The stay will keep the hedge funds’ creditors at bay for now. Under the terms of the order, the hedge funds must also deposit in U.S. bank accounts all funds that originated from the United States after Aug. 1. Within 10 business days, the hedge funds must deposit $4 million for each hedge fund—$8 million total—into the accounts. The liquidators of the two failed Bear Stearns hedge funds filed notice earlier this month that they were appealing Judge Lifland’s decision that the Cayman Island-registered hedge funds were ineligible for chapter 15 bankruptcy protection.

The Department of Treasury released a report yesterday that put the cost of the gap between what Social Security is expected to need to pay out in benefits and what it will raise in payroll taxes in coming years at $13.6 trillion, the Associated Press reported yesterday. It said that delaying necessary changes reduces the number of people available to share in the burden of those changes and is unfair to younger workers. “Not taking action is thus unfair to future generations. This is a significant cost of delay,” the report said. In another key finding, the report said that “Social Security can be made permanently solvent only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax increases.”

Harry Stinson, the Toronto real estate developer who was in competition with Donald Trump to build the city’s highest residential building, placed four of his businesses in bankruptcy and, according to the receiver running the operations, violated a court order by doing so, Bloomberg News reported today. Stinson operated The Suites at 1 King West, a luxury condominium-hotel, through his company Stinson Hospitality Inc., one of the four companies placed in bankruptcy yesterday. He had also proposed to build twin towers, the highest at 81 stories, surpassing a 70-story condominium Trump had planned a block away. Trump’s tower proposal has been scaled down to 57 stories, while Stinson’s Sapphire Tower has been shelved, with Sapphire Tower Development Corp. having been placed in bankruptcy protection July 20. At today’s hearing, Joseph Latham, lawyer for the receiver, Ira Smith Trustee & Receiver Inc,. also asked the judge to order Stinson to return financial statements and computer drives taken from 1 King West. He said Stinson removed two computers Aug. 24 and a box of documents on Labor Day, material that should have stayed in the possession of the receiver.

Bnkruptcy Judge James Marlar issued a rebuke yesterday to Tucson, Ariz.-based First Magnus Financial Corp. for filing an initial request to pay its roughly 5,500 laid-off employees, the Arizona Daily Star reported yesterday. In the interest of protecting secured creditors, Judge Marlar said that he was forced to deny the company’s request to pay former employees when funds became available through financing or the sale of assets, which postponed the wage payments until the company’s finances are sorted out through court proceedings. First Magnus representatives responded that the company was unable to pay its employees because it lost access to the lines of credit it used to fund its loans.

Movie Gallery Inc. said yesterday it will not make timely interest payments on certain debt and likely face default notices from lenders, as the nation’s second-largest video rental chain teeters on the verge of bankruptcy, the Associated Press reported yesterday. Movie Gallery, which is struggling to fend off online competitors, said in a regulatory filing that it does not think it is in default because the tardy payments are covered by forbearance notices it agreed to with certain lenders. The company said in July it was considering various strategic options, including a possible sale of the company. It has struggled with debt since buying rival Hollywood Entertainment Corp. for $1 billion in 2005.
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Bankruptcy Judge Peter Walsh approved Custom Food’s bankruptcy plan Monday at a confirmation hearing in Wilmington, Del., the Associated Press reported yesterday. The approval came several months after resolution of a bitter dispute with a group of unsecured creditors over the company’s purchase by hedge fund Contrarian Financial Services. Contrarian this summer bought the assets of the Carson, Calif.-based company out of bankruptcy in a deal valued around $35 million. Custom Food filed for bankruptcy in April after Contrarian backed out of a deal to provide $22.5 million to finance expansion of the company, causing it to default on loans. Creditors alleged in court filings that the company’s bankruptcy and the proposed sale amounted to an attempt by Contrarian to acquire Custom Food on the cheap.

Lou Pearlman, creator of the boy bands Backstreet Boys and ‘N Sync, is losing homes in Florida and New Jersey in bankruptcy proceedings as he faces separate charges of defrauding a bank out of $20 million, the Associated Press reported on Friday. Pearlman remains jailed after being indicted on three counts of bank fraud and single counts of mail and wire fraud. Florida investigators allege that Pearlman defrauded more than 1,000 individual investors out of more than US$315 million. Several banks say he collectively owes them more than $120 million, according to bankruptcy court documents.

Bankrupt lender Quality Home Loans will be acquired by entrepreneur and hedge fund manager Michael B. Klein, Bankruptcy Law360 reported yesterday. Quality Home Loans, which bills itself as the largest residential hard money lender in the U.S., is distinct from typical floundering subprime lenders because Quality’s loans are protected by “ample equity” in the underlying real estate, according to the company. Quality Home Loan’s business is “surging” because of the dearth of alternatives currently available to borrowers, says Quality. On Aug. 23, two days after filing for bankruptcy, Quality Home Loans laid off 158 of its 191 employees, and as of July 31 the debtors had about $222 million in assets and about $160 million in liabilities.

Senate Banking Chairman Chris Dodd (D-Conn.) introduced legislation yesterday designed to curb lending abuses that have roiled the subprime mortgage market, CongressDaily reported yesterday. The bill would place requirements on mortgage brokers by clarifying their fiduciary duty to borrowers. The measure also would expand the protection for those who assume a high-cost loan under the 1994 Home Ownership and Equity Protection Act (HOEPA). Dodd argues that many brokers and lenders have avoided HOEPA triggers that have allowed them to continue to offer questionable products to borrowers. Under his bill, HOEPA loans would include a practice known as yield spread premium in determining whether the mortgage is a high-cost loan. The bill would prohibit a loan originator from steering a borrower to a costlier loan. For example, if a borrower qualifies for a prime loan, a broker or lender could not give them a subprime loan. Loans that do not qualify for HOEPA but are not considered prime would receive new protections that include no prepayment penalties, yield spread premiums and mandatory requirement of documentation of the borrower’s income.

Rising defaults on subprime home loans are boosting the inventory of unsold homes and driving sale prices lower, which is cutting into housing-related revenues from building-permit fees, taxes on contracting and recording property transfers, and even sales taxes, the Wall Street Journal reported today. As a result, legislators in Florida, which was at the forefront of the housing boom, plan a special session this month to consider deep budget cuts to offset a projected $1.5 billion funding gap. California forecasts a shortfall of at least $5 billion in next year’s budget. And Chicago faces a $217 million gap in its $5.6 billion budget for 2008. In many cases, budget officials knew that the fast pace of housing-related revenue growth in recent years wasn’t sustainable, but they claim that the extent of the slowdown has sometimes surprised them. Among other effects, the housing slump has caused a decline in revenue from real estate transaction taxes, which are based on sales prices.
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